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, 2000
|_| 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 Identification No.)
incorporation or organization)
500 Halls Mill Road, Freehold, New Jersey 07728
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(Address of principal executive offices))
Registrant's telephone number: (732) 308-3000
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock ($.08 par value)
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 the 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 September 29, 2000 the aggregate market value of the Common Stock of the
registrant held by non-affiliates of the registrant was $1,689,594.
The number of shares of Common Stock outstanding as of September 29, 2000 was
2,091,092.
The registrant's Proxy Statement for its 2001 annual meeting of shareholders is
hereby incorporated by reference into Part III of this Form 10K.
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IVC INDUSTRIES, INC.
TABLE OF CONTENTS
Annual Report on Form 10-K
For the Fiscal Year ended July 31, 2000
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 ....................... 20
Item 9 Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure ............................... 20
PART III
Item 10 Directors and Executive Officers of the Registrant................ 21
Item 11 Executive Compensation............................................ 21
Item 12 Security Ownership of Certain Beneficial Owners and Management.... 21
Item 13 Certain Relationships and Related Transactions.................... 21
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 22
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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, 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.
The Company 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 ("softgels"). The Company manufactures virtually all of its products.
On July 8, 1999, the shareholders of the Company approved an eight-for-one
reverse split of the common stock of the Company. 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, the Company 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 the
Company'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. The Company'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 the Company 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 the Company'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.
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.
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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, Ginko Biloba, Saw Palmetto and Ginseng and various
multivitamin combinations. The Company has the capacity to produce millions of
tablets per day using technologically advanced high-speed manufacturing
equipment. The Company's fully automated packaging lines are capable of
packaging in excess of 200,000 bottles per shift, per day. Intergel, the
Company's soft gelatin encapsulation division, has the capacity to produce in
excess of 2 billion softgel capsules annually.
The Company'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 the Company'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. The Company 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
The Company owns and leases facilities located in Freehold, New Jersey.
Its manufacturing and packaging facility is equipped with large-volume blending,
tableting 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, 2000, the Company shut down its Portland
Oregon facilities and those operations were integrated into the Freehold
facility. 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 softgel operations
are located in leased facilities in Irvington, New Jersey. The Company 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.
Soft Gelatin 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,
softgels. Factors contributing to the popularity of softgels over tablets
include the fact that softgels 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.
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Intergel, the Company's soft gelatin encapsulation division, produces
softgels in various shapes and sizes. Among the new vitamin and nutritional
supplements produced by Intergel in softgel form are Saw Palmetto, Lycopene,
Green Tea, Kava Kava, Ginseng and various multivitamin formulations. 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 is able to internally manufacture all
its own softgel requirements, and to supply softgels to a variety of customers,
as well as to custom formulate unique softgel products targeted towards
nutritional and other applications. The Company's strategic business decision to
manufacture softgel products will allow it to better control its own supply,
quality and cost of such products, and pursue the opportunities of marketing
softgel products to third parties.
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 has a multi-product development agreement with Block
Drug Company, Inc., a major multinational pharmaceutical company, to jointly
develop softgel encapsulated OTC products and has made softgels a major focus in
all international business development areas.
Softgel nutritional and herbal products manufactured by Intergel are
marketed as LiquaFil Softgels under the Company's Fields of Nature, Synergy Plus
and private label brands. As new softgel 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 softgel
nutritional and herbal products. The Company has secured additional distribution
through customers including Costco Wholesale, Eckerd Drug, Fred Meyer, Ralphs,
Bi-Mart, Phar-Mor, Smart & Final, Price Chopper, American Stores and Kerr Drug
with softgels 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, the Company's strategy is to build relationships with
national and regional drug store, supermarket and mass merchandising retail
chain customers. The Company believes that partnerships with mass retailers,
coupled with new product introductions, gives the Company the ability to react
to changing market conditions more rapidly.
In addition, the Company is working with its customers to develop their
store branded product category management programs. All supply agreements are
reviewed with customers to ensure the development of a comprehensive sales and
marketing program. Since the cost to a retailer of the Company'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 the Company'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.
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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. The Company 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, the
Company's marketing department and creative arts group develop 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, the Company's health food store brand, is expecting to
capitalize on distribution opportunities created by dynamic changes within the
health food market through new marketing strategies and recent label changes.
The industry has seen several leading brands make the transition into mass
channels thus creating 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. The Company believes that in response to this the 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.
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 Africa, Europe and
the Pacific Rim.
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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. Current 52 week trends ending August 2000, however, show an increase
of approximately 3% in vitamins/supplements while showing a decline of
approximately 7% for herbs.
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 the Company'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. The Company 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.
Source and Availability of Raw Materials
The Company 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 implemented a new Material Requirement Planning (MRP) system. These steps
have allowed the Company 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 19% of the total purchases in
2000 and 25% in 1999, 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 the Company's raw material purchases.
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Major Customers
The Company's active customer base approaches 2,000 accounts. The
Company's ten largest customers accounted for 83% of sales during fiscal 2000
with one individual customer, Costco Wholesale accounting for 47% of sales.
During fiscal 1999, the Company's ten largest customers accounted for
approximately 78% of sales, with one customer, Costco Wholesale accounting for
48% of sales. A high priority has been placed on efforts to diversify
distribution. Major accounts currently not supplied have been identified and
contacted with marketing and sales programs being produced for presentation to
potential new customers.
Quality Control
The Company'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 the Company'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, the
Company'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 softgels 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, the Company's Fields of
Nature, LiquaFil, and Nature's Wonder brands compete with numerous brands of
larger vitamin distributors and manufacturers, such as NBTY, Inc., Rexall
Sundown, Inc., Leiner Health Products Group, Inc. and Pharmavite Corp. These
manufacturers are also the Company's competitors for private label business. In
addition, the Company competes with the more heavily advertised national brands,
which have been marketed by major over-the-counter manufacturers. The
marketplace for private label business is extremely price sensitive with service
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. The Company also derives a competitive advantage from being one of
the few vertically integrated tablet and softgel manufacturers, thereby having
the ability to manufacture and package all of its vitamin and nutritional
supplement products. This affords the Company the flexibility to respond rapidly
to the shifting demands of the marketplace.
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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 the Company's
products are sold. In addition, the Company manufactures and markets certain of
its products in compliance with the guidelines promulgated by the 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 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 completed significant facility renovations that 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.
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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
The Company 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. The Company
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. The Company vigorously protects its trademarks
against infringement.
Research and Development
Historically, the Company has not conducted primary research for the
development of new ingredients. Instead, the Company's research efforts were
solely focused on developing new products in response to market trends and
consumer demands. This method of product development is still employed by the
Company. The Company's staff continually reformulates existing products in
response to changes in nationally advertised brand formulas in order to maintain
product comparability.
The Company 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 and softgel formulation departments
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. 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
At July 31, 2000 the Company employed 422 employees, of which 29 were in
sales and marketing, 244 were in manufacturing and packaging, 62 were in quality
control and regulatory compliance departments, 44 were in warehousing and 43
were in executive and administrative positions. The Company believes that it has
a satisfactory relationship with its employees. The Company and its employees
are not currently parties to any collective bargaining agreement.
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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
Irvington, NJ Manufacturing and
Administration 35,000 Leased
Irvington, NJ Warehousing and Distribution 43,000(2) Leased
Surrey, British Warehousing, Distribution
Columbia, Canada and Administration 8,000 Leased
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(1) The Company subleases approximately 30,000 square feet of this facility to
a third party.
(2) 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 the Company, 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
The Company 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
the Company 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 the Company's financial position or operations.
Item 4 Submission of Matters to a Vote of Security Holders
On June 5, 2000, shareholders of the Company at a special meeting of
shareholders, approved an amendment to the Company's Certificate of
Incorporation to decrease the authorized number of shares of the Company's
common stock from 25,000,000 to 4,500,000 and of the Company's preferred stock
from 2,000,000 to 250,000 shares. Of the 2,088,092 shares eligible to vote at
the meeting, 1,280,865 shares voted for and 5,544 shares voted against the
proposal and 5,520 shares abstained.
12
<PAGE>
PART II
Item 5 Market For Common Equity and Related Shareholder Matters
The Company's 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 2000
First Quarter $ 5.88 $3.50
Second Quarter 5.88 4.75
Third Quarter 6.94 3.50
Fourth Quarter 4.75 2.66
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
The Company 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 the Company. 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 the Company and other factors deemed
relevant by the Board of Directors.
As of September 29, 2000, there were approximately 90 holders of record of
the Company'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 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,
--------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
Net sales $ 85,868 $ 107,339 $ 119,775 $ 108,531 $ 104,159
Income (loss) from operations (4,985) (8,502) 3,484 4,423 1,540
Net income (loss) 5,074 (7,041) $ 1,147 $ 1,346 $ 296
Net income (loss) per share - Basic $ 2.43 $ (3.28) $ .54 $ .63 $ .14
Net income (loss) per share - Diluted $ 2.43 $ (3.28) $ .53 $ .63 $ .14
<CAPTION>
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
FINANCIAL POSITION
Total assets $60,248 $65,241 $81,254 $68,210 $68,675
Long term obligations - less current portion 25,560 31,034 10,588 31,430 28,656
Shareholders' equity 15,607 10,540 17,760 16,417 15,041
</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)
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,
--------------------
2000 1999 1998
----- ----- -----
Net sales 100.0% 100.0% 100.0%
Cost of sales 74.8 75.6 76.2
----- ----- -----
Gross profit 25.2 24.4 23.8
Selling, general and administrative expenses 31.0 25.8 20.9
Special and unusual charges -- 3.1 --
Loss on sale of retail subsidiary -- 2.2 --
Shutdown of manufacturing facility -- 1.2 --
----- ----- -----
Income (loss) from operations (5.8) (7.9) 2.9
Recovery, price fixing settlement 19.0 -- --
Other expenses-net (2.8) (2.3) (1.3)
----- ----- -----
Income (loss) before income taxes 10.4 (10.2) 1.6
Income tax expense (benefit) 4.5 (3.6) .6
----- ----- -----
Net income (loss) 5.9% (6.6%) 1.0%
===== ===== =====
15
<PAGE>
Year Ended July 31, 2000 Compared to the Year Ended July 31, 1999
Net Sales. Net sales for the year ended July 31, 2000 were $85,868, a
decrease of $21,471 or 20.0% compared to $107,339 for the year ended July 31,
1999. This decrease was principally related to the cancellation of sales
contracts with several customers which did not meet the Company's gross margin
targets, resulting in lower branded and private label sales approximating
$11,000. Sales of certain vitamins and minerals were down approximately $4,000
as a result of being discontinued at a major account. The current year's sales
were also lower because the prior year included $2,684 in sales by the Vitamin
Specialties business, which was sold in July 1999. In addition, the overall
market for vitamins, herbs and supplements softened during the second half of
the year, leading to lower overall sales.
Costs and Expenses. Cost of sales for the year ended July 31, 2000 was
$64,246, a decrease of $16,943, or 20.9% as compared to $81,189 for the year
ended July 31, 1999. As a percentage of net sales, cost of sales decreased .8%
from the preceding year to 74.8%. The decrease in cost of sales was primarily
related to reduced raw material costs at the Freehold, New Jersey plant and
minimal amortization of long-term contracts, which were renegotiated. These
decreases were offset by increased production costs incurred at the Portland
packaging facility, as the plant was being phased out during the early part of
the year and also an increase in the provision for rent at the Portland Oregon
manufacturing facility, due to a revision in the subleasing assumptions for the
facility. Another item offsetting the decrease in cost of sales was an allowance
of $850 established against barter credits of $1,000 obtained early in the year
in exchange for excess inventory items, and which the Company believes may be
unusable due to the financial condition of the barter vendor. In addition, the
prior year included one-time charges related to the Company's restructuring
including charges for the shutdown of the Portland, Oregon facilities, the
implementation of the Enterprise Resource Planning system, capacity
underutilization and label write-off.
Selling, general and administrative expenses for the year ended July 31, 2000
were $26,607, a decrease of $1,051 or 3.8% as compared to $27,658 for the year
ended July 31, 1999. The fiscal year ended July 31, 1999 included one-time
charges related to the Company's restructuring amounting to $4,673. Without
these charges, selling, general and administrative expenses for the current year
increased $3,622. This increase is primarily related to shifting to higher
promotional costs, simultaneously with a decrease in amortization of contract
costs, resulting from the renegotiations of long-term contracts, in addition to
higher advertising costs and higher freight and delivery costs. These were
offset by decreases in bad debts, sales commissions paid to brokers, and a
decrease in administrative personnel costs due to the shutdown of the Portland,
Oregon facility and management changes. In addition, Vitamin Specialties Corp.
was sold at the end of the last fiscal year, reducing selling, general and
administrative expenses during the current year.
Recovery, Price Fixing Settlement. Recovery, price fixing settlement
represents amounts received from price fixing settlements with various
suppliers.
Other Expenses-Net. Other expenses-net decreased $64 for the year ended
July 31, 2000. Interest expense totaled $2,589, which was virtually flat as
compared to the prior year. Although the average amount borrowed was lower,
interest rates were higher.
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
16
<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 $107,339, a
decrease of $12,436 or 10.4% compared to $119,775 for 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 $8,000 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
$81,189, a decrease of $10,067, or 11% as compared to $91,256 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 cost 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 gelatin 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 administrative expenses for the year ended July 31,1999
were $27,658, an increase of $2,623 or 10.5% over the $25,035 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 include the cost of management severance
agreements and write-off of 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.
17
<PAGE>
Liquidity and Capital Resources
At July 31, 2000, the Company had working capital of $19,169 compared to $20,239
at July 31, 1999, a decrease of $1,070.
Net cash provided by operating activities totaled $9,434. Approximately $10,000
was generated by net income, which included the after tax proceeds from price
fixing settlements of $9,783, plus non-cash depreciation and amortization and
deferred taxes. These were offset by funds utilized to pay down accounts payable
and accrued expenses of $4,291.
In addition, during the year the Company spent $3,500 on additions to property,
plant and equipment.
On October 16, 2000 the Company entered into a new credit agreement with
Congress Financial Corporation, a subsidiary of First Union Corporation, to
replace a previously existing credit agreement. The agreement matures on October
16, 2003. The Company can borrow up to $25,000 under a revolving credit
commitment and $5,500 under a term loan commitment, subject to borrowing base
limitations, as defined. Borrowings under the revolving credit commitment bear
interest at either .75% above First Union's "prime rate" or, at the Company's
option, a rate of 2.75% above the adjusted Eurodollar rate used by the bank. The
interest rate on the term loan is .25% higher than the revolving loan rates
outlined above. The notes are collateralized by substantially all of the
Company's assets.
The agreement requires the Company to maintain minimum tangible net worth and
contains various restrictions customary in such financial arrangements,
including limitations on the payment of cash dividends.
In addition the Company has a lease financing agreement which it entered into in
August 1998 with a bank for up to $2,000 for acquisitions of machinery and
equipment. At July 31, 2000, $1,100 was available for additions.
The Company believes that its existing cash balance, internally generated funds
from operations and available financing will provide the liquidity required to
satisfy its working capital needs and anticipated capital expenditures for the
next year.
In the past, a major supplier of raw materials to the Company has conditioned
certain sales to the Company upon the limited guarantee of the Company's Chief
Executive Officer. Although the supplier disputes the issue, the Company's Chief
Executive officer asserts that this guarantee has now terminated.
Item 7A Quantitative and qualitative disclosure about Market Risk
The Company's principal financial instrument is long-term notes payable under a
secured revolving credit agreement. The Company is affected by market risk
exposure primarily through the effect of changes in interest rates on amounts
payable by the Company under this credit agreement. Changes in these factors
cause fluctuations in the Company's net income and cash flows. The Company does
not utilize derivative financial instruments to hedge against changes in
interest rates or for any other purpose.
18
<PAGE>
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.
19
<PAGE>
Item 8 Financial Statements and Supplementary Data
Index to Financial Statements
Independent Auditors' Reports.......................................F-1
Consolidated Balance Sheets
As of July 31, 2000 and 1999....................................F-2
Consolidated Statements of Operations for the Years Ended
July 31, 2000, 1999 and 1998....................................F-3
Consolidated Statements of Cash Flows for the Years Ended
July 31, 2000, 1999 and 1998....................................F-4 to F-5
Consolidated Statements of Changes in Shareholders'
Equity for the Years Ended July 31, 1998, 1999 and 2000.........F-6
Notes to Consolidated Financial Statements..........................F-7 to F-29
Item 9 Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
20
<PAGE>
PART III
Item 10 Directors and Executive Officers of the Registrant
Information called for by Item 10 will be set forth under the heading
"Election of Directors" in the Company's Proxy Statement for the annual
meeting of stockholders to be held in January 2001 (the "2000 Proxy
Statement"), which is incorporated herein by this reference.
Item 11 Executive Compensation
Information called for by Item 11 will be set forth under the heading
"Executive Compensation" in the 2000 Proxy Statement, which is
incorporated herein by this reference.
Item 12 Security Ownership of Certain Beneficial Owners and Management
Information called for by Item 12 will be set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management" in the
2000 Proxy Statement, which is incorporated herein by this reference.
Item 13 Certain Relationships and Related Transactions
Information called for by Item 13 will be set forth under the heading
"Certain Relationships and Related Transactions" in the 2000 Proxy
Statement, which is incorporated herein by this reference.
21
<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 Amendment to Certificate of Incorporation of IVC Industries, Inc.
3.2 Restated Certificate of Incorporation of IVC Industries, Inc.
3.3 Amended and Restated By-laws of IVC Industries, Inc. (1)
4.1 Common Stock Specimen (2)
4.2 Rights Agreement, dated as of May 15, 2000 between IVC Industries,
Inc, and American Stock Transfer and Trust Company, as Rights Agent
and all exhibits attached thereto (3)
10.1 Credit Agreement, dated as of October 16, 2000, between IVC
Industries, Inc., and Congress Financial Corporation
10.2 Agreement, dated as of June 2, 1998, by and between IVC Industries,
Inc. and The Navesink Group (4)
10.3 Lease Agreement between The Navesink Group and IVC Industries, Inc.
(4)
10.4 Settlement Agreement, dated September 17, 1999 with Hoffman La-Roche
Inc. and Roche Vitamins Inc. (5)
10.5 Employment Agreement with E. Joseph Edell (6)
10.6 Amendment to Employment Agreement with E. Joseph Edell (4)
10.7 Severance Agreement with Arthur S. Edell (4)
10.8 International Vitamin Corporation 1993 Stock Option Plan (7)
10.9 International Vitamin Corporation 1995 Stock Option Plan (7)
22
<PAGE>
10.10 Non-Employee Directors' Stock Option Plan
10.11 Employment Agreement with Michael Durso (8)
10.12 Employment Agreement with William Lederman (8)
10.13 Employment Agreement with Thomas Bocchino
11 Earnings Per Share Computation (Page E-1)
27.1 Financial Data Schedule
Foot Notes
----------
(1) Incorporated herein by reference to the Current Report on Form 8-K
filed on May 14, 1996, as amended on August 9, 1996.
(2) Incorporated herein by reference to the Annual Report on Form 10-K
filed by the Company for the year ended July 31, 1999.
(3) Incorporated herein by reference to the Registration Statement on
Form 8-A filed on May 19, 2000.
(4) Incorporated herein by reference to the Annual Report on Form 10-K
filed by the Company for the year ended July 31, 1998.
(5) Incorporated herein by reference to the Current Report on Form 8-K
filed on September 24, 1999.
(6) Incorporated herein by reference to Form 10-QSB filed by the Company
for the quarterly period ended April 30, 1995.
(7) Incorporated herein by reference to the Company's Registration
Statement on Form S-8 filed on January 11, 2000.
(8) Incorporated herein by reference to the Quarterly Report on Form
10-Q filed by the Company for the quarter ended April 30, 2000.
23
<PAGE>
(B) Reports on Form 8-K
A report on Form 8-K was filed on May 22, 2000 with respect to a dividend
distribution of preferred stock purchase rights.
A report on Form 8-K was filed on May 30, 2000 with respect to the
Company's response to a letter dated May 24, 2000 to the members of the
Board of Directors of the Company, attached as an exhibit to the schedule
13D filed by American Claims Evaluation Inc. with the SEC on May 25, 2000.
24
<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 27, 2000 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.
Signature Title Date
--------- ----- ----
/s/ E. Joseph Edell Chairman of the Board of October 27, 2000
----------------------------- Directors Chief Executive ----------------
E. Joseph Edell Officer and President
/s/ Thomas E. Bocchino Vice President, Chief October 27, 2000
----------------------------- Financial Officer and ----------------
Thomas E. Bocchino Secretary
/s/ Andrew M. Pinkowski Director October 27, 2000
------------------------------ ----------------
Andrew M. Pinkowski
/s/ Arthur S. Edell Director October 27, 2000
------------------------------ ----------------
Arthur S. Edell
/s/ David Popofsky Director October 27, 2000
------------------------------ ----------------
David Popofsky
25
<PAGE>
/s/ Dr. Mark S. Gold Director October 27, 2000
------------------------------ ----------------
Dr. Mark S. Gold
/s/ Marc Z. Edell Director October 27, 2000
------------------------------ ----------------
Marc Z. Edell
/s/ Erwin Lehr Director October 27, 2000
------------------------------ ----------------
Erwin Lehr
/s/ Samuel Potenza Director October 27, 2000
------------------------------ ----------------
Samuel Potenza
26
<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, 2000 and 1999 and the related consolidated
statements of operations, cash flows and shareholders' equity for each of the
years ended July 31, 2000, 1999 and 1998. 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, 2000 and 1999, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 2000
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.
Date: October 26, 2000
Edison, New Jersey
F-1
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except as Noted or Per Share Information)
ASSETS
July 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents $ 648 $ 287
Accounts receivable, net 6,330 7,296
Inventories 27,133 27,374
Deferred taxes 1,751 4,673
Prepaid expenses 252 671
Refundable income taxes 1,123 2,117
Other current assets 120 483
-------- --------
Total current assets 37,357 42,901
Property, plant and equipment, net 20,578 19,839
Due from related parties 493 1,339
Deferred taxes 1,163 571
Other assets 657 591
-------- --------
Total assets $ 60,248 $ 65,241
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,365 $ 2,697
Current portion of capital lease payable 230 180
Current portion of deferred gain on building sale 112 104
Accounts payable 10,039 14,785
Accrued expenses 5,351 4,896
Income taxes payable 91 --
-------- --------
Total current liabilities 18,188 22,662
Long-term debt - less current portion 22,653 27,898
Capital lease obligation 2,907 3,136
Deferred gain on building sale 893 1,005
-------- --------
Total liabilities 44,641 54,701
-------- --------
Shareholders' equity:
Preferred stock, $.01 par, 250,000 and 2,000,000
shares authorized, respectively -- --
Common stock, $.08 par value, 4,500,000 and
25,000,000 shares authorized, respectively;
2,088,092 issued and outstanding 167 167
Additional paid-in capital 11,553 11,499
Foreign currency translation adjustment (263) (202)
Retained earnings (deficit) 4,150 (924)
-------- --------
Total shareholders' equity 15,607 10,540
-------- --------
Total liabilities and shareholders' equity $ 60,248 $ 65,241
======== ========
See notes to consolidated financial statements.
F-2
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
For The Years Ended July 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $ 85,868 $ 107,339 $ 119,775
Cost of sales 64,246 81,189 91,256
----------- ----------- -----------
Gross profit 21,622 26,150 28,519
Selling, general and administrative expenses 26,607 27,658 25,035
Special and unusual charges -- 3,360 --
Loss on sale of retail subsidiary -- 2,343 --
Shutdown of manufacturing facility -- 1,291 --
----------- ----------- -----------
Income (loss) from operations (4,985) (8,502) 3,484
Recovery, price fixing settlement 16,305 -- --
Other expenses, net 2,365 2,429 1,572
----------- ----------- -----------
Income (loss) before income taxes 8,955 (10,931) 1,912
Income tax expense (benefit) 3,881 (3,890) 765
----------- ----------- -----------
Net income (loss) $ 5,074 $ (7,041) $ 1,147
=========== =========== ===========
Net income (loss) per share - basic $ 2.43 $ (3.28) $ .54
=========== =========== ===========
Net income (loss) per share - diluted $ 2.43 $ (3.28) $ .53
=========== =========== ===========
Weighted average shares - basic 2,088,092 2,148,143 2,143,191
Weighted average shares - diluted 2,090,506 2,148,909 2,154,365
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
For The Years Ended July 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 5,074 $ (7,041) $ 1,147
-------- -------- --------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 2,689 2,370 2,594
Deferred income taxes provision (benefit) 2,330 (3,216) 156
Stock distributed to employee savings plan -- -- 226
Stock options issued to non-employee directors 54 138 55
(Gain) loss on sale of assets (172) 2,343 (683)
Deferred gain on sale of assets (104) -- --
Changes in assets - (increase) decrease:
Accounts receivable 966 4,429 (3,445)
Inventories 241 8,781 (6,204)
Prepaid expenses and other current assets 1,776 895 (664)
Other assets 780 801 1,196
Changes in liabilities - increase (decrease):
Accounts payable and accrued expenses (4,291) (9,326) 9,847
Income taxes payable 91 -- --
-------- -------- --------
Total adjustments 4,360 7,215 3,078
-------- -------- --------
Net cash provided by operating activities 9,434 174 4,225
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for notes receivable -- -- 56
Additions to property, plant and equipment (3,549) (1,614) (3,715)
Proceeds from sale of assets 293 -- 3,874
Purchase of retail subsidiary -- -- (86)
Retirement of common stock -- (317) --
-------- -------- --------
Net cash provided by (used in) investing activities (3,256) (1,931) 129
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on borrowings (10,731) (8,162) (6,343)
Proceeds from borrowings 5,154 8,737 3,500
Principal payments on capital lease (179) (135) --
-------- -------- --------
Net cash provided by (used in) financingactivities (5,756) 440 (2,843)
-------- -------- --------
Foreign currency translation adjustment (61) -- (86)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 361 (1,317) 1,425
CASH AND CASH EQUIVALENTS - BEGINNING 287 1,604 179
-------- -------- --------
CASH AND CASH EQUIVALENTS - ENDING $ 648 $ 287 $ 1,604
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 2,589 $ 2,466 $ 2,210
======== ======== ========
Taxes $ 686 $ 682 $ 1,436
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Non Cash Financing and Investing Activities
During the year ended July 31, 1998, the Company entered into a capital lease
obligation for a 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, 1998, 1999 and 2000
(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 Translation
(Shares) (Shares) Stock Stock Capital (Deficit) Adjustment Total
--------- -------- ------- -------- ---------- --------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 (loss) -- -- -- -- -- (7,041) -- (7,041)
Foreign currency translation
adjustment -- -- -- -- -- -- -- --
--------- ------- ------- ------- ------- ------- ------- -------
Balance - July 31, 1999 2,088,092 -- $ 167 $ -- $11,499 $ (924) $ (202) $10,540
Issuance of options to non-employee
Directors -- -- -- -- 54 -- -- 54
Net Income -- -- -- -- -- 5,074 -- 5,074
Foreign currency translation
adjustment -- -- -- -- -- (61) (61)
--------- ------- ------- ------- ------- ------- ------- -------
Balance - July 31, 2000 2,088,092 -- $ 167 -- $11,553 $ 4,150 $ (263) $15,607
========= ======= ======= ======= ======= ======= ======= =======
</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 - Liquidity
IVC Industries, Inc. (the "Company) continues to implement its long-term
restructuring strategy. This strategy is intended to (i) control expenses
and manage assets, (ii) refine processes and systems and (iii) focus on
the Company's core business.
Customer accounts were reevaluated and renegotiated or cancelled when they
did not meet the Company's gross margin targets. Overall, net sales were
reduced, due to this, by approximately $11,000 and resulted in part of the
gross margin improvement.
The Company completed the integration of the Portland, Oregon facility
into its Freehold, New Jersey facilities, which were expanded and
upgraded. These facilities were certified to be in compliance with Good
Manufacturing Practices as they appear in the United States Pharmacopoeia.
During the last quarter of the year ended July 31, 2000, the Company took
action to align general and administrative expenses to the reduced sales
volume, and also negotiated certain favorable arrangements with major
vendors.
In October, 2000 the Company entered into new financing arrangements which
increased its borrowing availability. (See Note 18.)
In the opinion of management cash flow will be sufficient to fund
operations for the upcoming year.
Note 2 - Organization and Summary of Significant Accounting Policies:
Organization
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 during 2000 consist of domestic sales of 84%,
Canadian sales of 13% and export sales 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 on July 13, 1999. All material intercompany transactions and
balances have been eliminated.
F-7
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 2 - Summary of Significant Accounting Policies - (continued):
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 $480 and $489 in 2000 and 1999,
respectively, representing deposits held by trustees in connection with
payments for the current portion of long-term debt and interest thereon.
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.
Accounts Receivable
Accounts receivable are stated at their net values. Included in net
accounts receivable is an allowance for doubtful accounts. At July 31,
2000 and 1999, the allowance for doubtful accounts was $431 and $580,
respectively.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, accounts receivable, accounts
payable, short-term borrowings 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. Effective for the
year ended July 31, 2000 the Company elected to change from the LIFO
("Last In, First Out") method to the FIFO ("First In, First Out") method
for the cost of the material components. There was no effect as a result
of this change. The labor and overhead components continue to be
determined on the FIFO method.
F-8
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 2 - Summary of Significant Accounting Policies - (continued):
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 and was written off in conjunction with
the sale of the VSC in 1999.
Other Assets
Other assets include trademarks, security deposits, a covenant not to
compete, deferred financing costs and prepaid vendor credits which will be
used over a four year period. 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.
Intangible Assets
The Company periodically reviews its intangible assets to assess
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, 2000 and 1999.
Revenue Recognition
Revenues are recognized when a product is shipped. Such revenues are
recorded net of estimated sales returns, discounts and allowances.
F-9
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 2 - Summary of Significant Accounting Policies - (continued):
Stock-Based Compensation
Statement of Financial Accounting Standards 123 "Accounting for Stock
Based Compensation" ("SFAS 123) allows a company to adopt a fair value
based method of accounting for its stock-based compensation plans or
continue to follow the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees". The Company accounts for stock-based compensation in
accordance with the provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" and complies
with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". Under APB No. 25, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
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
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
Comprehensive income is the total of net income and all other non-owner
changes in equity and is not material.
Reclassifications
Certain amounts in the 1999 statements have been reclassified to conform
with the 2000 presentation.
F-10
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 2 - 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, 2000, 1999 and 1998 were $9,300, $7,500 and
$4,800, respectively.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. The
Company believes its revenue recognition policies do not significantly
differ from SAB 101.
In June 1998, the Financial Accounting Standards ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. As amended by SFAS No. 138,
SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 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 3 - Vitamin Specialties Disposition:
On July 13, 1999, the Company completed the sale of its Vitamin
Specialties Corp. ("VSC") subsidiary. VSC was engaged, among other things,
in 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 $1,800, which will be paid in monthly installments equal
to 5% of VSC's gross sales until such time as the aggregate payments total
$1,800; provided, however, that for each of the first 36 months following
the closing, the buyer must pay to the Company the greater of $10 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 $2,300.
On June 13, 1997, the Company had acquired VSC's operations from
HealthRite, Inc. for $2,800. The acquisition was accounted for as a
purchase and accordingly, goodwill of $1,900 was recorded on the books of
the Company. The operations of VSC have been included in the financial
statements from the date of acquisition until its disposal.
F-11
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 4 - Details of Balance Sheet:
Inventories: July 31,
--------------------
2000 1999
-------- --------
Finished goods $ 7,579 $ 9,427
Bulk and work in process 11,864 9,789
Raw materials and packaging components 7,690 8,158
-------- --------
Total inventory $ 27,133 $ 27,374
======== ========
Property, Plant and Equipment: July 31,
--------------------
2000 1999
-------- --------
Land $ 1,451 $ 1,451
Buildings and improvements 8,908 7,936
Capital lease building 2,761 3,106
Leasehold improvements 514 743
Machinery and equipment 20,909 19,518
Furniture and fixtures 568 667
Computer Equipment 2,609 2,100
Transportation Equipment 253 253
-------- --------
Sub-Total 37,973 35,774
Accumulated depreciation and amortization (17,395) (15,935)
-------- --------
Net property, plant and equipment $ 20,578 $ 19,839
======== ========
In July 1998, the Company entered into a sale-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 15), 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 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)
Note 4 - Details of Balance Sheet - (continued):
Accrued Expenses: July 31,
---------------
2000 1999
------ ------
Accrued payroll and related $ 758 $ 884
Accrued interest 188 189
Income taxes payable 354 381
Accrued for plant shut down 498 1,291
Accrued brokerage 76 175
Accrued advertising and promotion 1,799 310
Accrued severance 722 964
Other 956 702
------ ------
Accrued Expenses $5,351 $4,896
====== ======
Note 5 - Long-Term Debt:
July 31,
-----------------
2000 1999
------- -------
Notes payable to bank, under revolving line of credit $14,157 $22,322
Term loan payable to bank 4,382 --
Bonds payable, New Jersey Economic Development
Authority, interest at the floating tax-free
rate (4.20% at July 31, 2000), due May 1, 2003 2,120 2,840
Bonds payable, New Jersey Economic Development
Authority, interest at 6.90%, due June 30, 2007 3,425 3,850
Various equipment financing agreements,
interest at 7.17% - 8.50% 934 1,379
Other -- 204
------- -------
Total 25,018 30,595
Less current portion 2,365 2,697
------- -------
Long-Term Debt - Less current portion $22,653 $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 5 - Long-Term Debt - (continued):
Notes Payable to Bank
Effective September 24, 1999, and amended June 14, 2000, 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 $18,000 under a revolving credit commitment and
$5,200 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% 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 3.00% based on the Company's CLR.
Borrowings under the term loan commitment bear interest at the Bank's ABR
plus a spread ranging from 1.25%-1.75%, based upon the Company's CLR, or
LIBOR plus 3.25%, 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, 2000 and 1999. The Company was in violation of
these covenants which have been satisfied by a new loan agreement. See
Note 18.
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
effective September 24, 1999.
Bonds Payable
The New Jersey Economic Development Authority tax exempt bond issue had an
outstanding balance of $2,120 as of July 31, 2000. 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 3% per annum.
F-14
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 5 - Long-Term Debt - (continued):
The bonds payable to the New Jersey Economic Development Authority of
$3,425 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 $300 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.
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, 2000). 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, 2000 and
1999, the outstanding balances were $0 and $204, respectively.
The aggregate amount of long-term debt maturing in each of the five years
subsequent to July 31, 2000 and thereafter is as follows:
2001 $ 2,365
2002 2,403
2003 17,876
2004 734
2005 702
Thereafter 938
---------
Total $ 25,018
=========
F-15
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 6 - Special and Unusual Charges:
During fiscal 1999, the management team led by 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 7 - 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. As of July 31, 2000 the remaining balance was
$370.
F-16
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 8 - Income Taxes:
The income tax provision (benefit) consisted of the following for the
periods ended:
July 31,
-----------------------------
2000 1999 1998
------- ------- -------
Current tax expense (benefits):
Federal $ 1,158 $ (776) $ 356
State 68 (73) 63
Foreign 325 175 191
------- ------- -------
1,551 (674) 610
------- ------- -------
Deferred tax expense (benefit):
Federal 2,040 (2,904) 3
State 290 (312) 152
Foreign -- -- --
------- ------- -------
2,330 (3,216) 155
------- ------- -------
Income tax provision (benefit) $ 3,881 $(3,890) $ 765
======= ======= =======
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:
July 31,
--------------------------
2000 1999 1998
------- ------- -------
Provision at statutory rate $ 3,045 $(3,716) $ 650
Increases (reductions) in taxes resulting from:
State income taxes 358 (320) 42
Foreign taxes 325 -- --
Effect of foreign income not subject to
federal income tax (217) (3) 28
Nondeductible costs 7 123 45
Increase in valuation allowance -- 250 --
Reversal of prior tax accruals 363 (224) --
------- ------- -------
Income tax provision (benefit) $ 3,881 $(3,890) $ 765
======= ======= =======
F-17
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 8 - Income Taxes - (continued):
Deferred tax attributes resulting from differences between financial
accounting amounts and tax basis of assets and liabilities as follows:
July 31,
---------------------
2000 1999
------- -------
Current assets and liabilities
Allowance for doubtful accounts $ 237 $ 99
Inventory valuation (IRC 263A) 403 448
Accrued expenses 256 345
Net operating loss carryforward -- 3,086
Inventory valuation allowance 811 945
AMT credit carryforward 294 --
------- -------
2,001 4,923
Valuation allowance (250) (250)
------- -------
Net current deferred tax asset $ 1,751 $ 4,673
======= =======
Non-current assets and liabilities
Deferred gain on sale of land $ 430 $ 417
Installment contract (206) (207)
Property and equipment 130 124
Other 339 124
Accrued expenses 470 113
------- -------
1,163 571
Valuation allowance -- --
------- -------
Net non-current deferred tax
(liability) $ 1,163 $ 571
======= =======
The valuation allowance relates to utilization of AMT credit
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 9 - Recovery, price fixing settlement:
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 exchange for the Company's release and agreement to opt out of any
settlement in a class action suit, the Company received a settlement
compensation package comprised of the following: (i) a $10,000 cash
payment; (ii) a price discount of 5% on future purchases up to $1,000 per
year over three years; and (iii) an advance of $2,700 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 class
action suit was settled and the settlement amount that would have been
received thereunder exceeded $12,700, the supplier agreed to make
additional payments to the Company based on, and subject to certain
adjustments to, the amounts recovered by the plaintiffs in the class
action suit. The Company received a cash payment of $12,700 on September
24, 1999 and an additional payment of $872 in April 2000 from this
supplier. In addition, the company received $2,733 from two other
suppliers in April 2000.
Note 10 - Other Expenses, Net:
July 31,
-----------------------------------
2000 1999 1998
------- ------- -------
Interest expense $ 2,589 $ 2,682 $ 2,555
Rental income -- -- (220)
Interest income (66) (75) (209)
Gain on sale of land -- -- (683)
Other (158) (178) 129
------- ------- -------
Other expenses, net $ 2,365 $ 2,429 $ 1,572
======= ======= =======
Interest expense for the years ended July 31, 2000, 1999 and 1998,
excludes capitalized interest of approximately $0, $37 and $75,
respectively, relating to the renovation program at the Freehold facility.
Note 11 - Shareholders' Equity:
Stock Options
In July 1995, the Board of Directors adopted the 1995 Stock Option Plan
(the "1995 Option Plan") pursuant to which 125,000 shares of the Company's
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 1995 Option 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 11 - Shareholders' Equity - (continued):
In January 2000, the shareholders approved amendments to the 1995 Stock
Option Plan to increase the number of shares subject to the Plan to
500,000 shares, to provide the Compensation Committee of the Board with
greater discretion with respect to the exercisability of options under the
Plan, and to provide that options granted under the Plan will become
immediately exercisable in full upon a change in control of the Company.
In April 1998, the shareholders approved the Non-Employee Directors' Stock
Option Plan, pursuant to which 62,500 shares of the Company's 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 the Company's common
stock to each of the Company's non-employee directors.
In January 2000, the shareholders approved amendments to the Non-employee
Directors' Stock Option Plan to increase the number of shares subject to
the Plan to 125,000 shares, to increase the number of shares granted
annually to each non-employee director to 3,125 shares and to provide that
upon the death or retirement of a non-employee director, options granted
under the Plan shall remain exercisable for the remaining term of the
options.
In May 2000, the Board of Directors of the Company amended the
Non-Employee Directors' Stock Option Plan to decrease the number of shares
granted annually to each non-employee director to 2,000 shares. This
amendment was effected in connection with the approval of an annual grant,
beginning in September 2000, of $5 in common stock to each non-employee
director, payable on a quarterly basis, based on attendance at regular
board meetings.
Reverse Stock Split
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.
Dividend Distribution
On May 15, 2000, the Board of Directors declared a dividend distribution
of one preferred stock purchase right (a "right") for each outstanding
share of the Company's common stock. Each right entitles the registered
holder to purchase from the Company one-thousandth of a share of Series A
Preferred Stock, par value $0.01 per share (the "Preferred Stock"), of the
Company at a price of $21 per one-thousandth of a share of Preferred Stock
(the "Purchase Price"), subject to adjustment.
F-20
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 11 - Shareholders' Equity - (continued):
The rights generally will be exercisable only after (i) the close of
business on the tenth business day following the date a person or group of
affiliated or associated persons has acquired beneficial ownership of 15%
of more of the outstanding shares of the Company's common stock or (ii)
the close of business on the tenth day after the commencement, or
announcement of an intention to make a tender offer or exchange offer, by
any person or group, the consummation of which would result in the person
or group becoming the beneficial owner of 15% or more of the Company's
common stock. The earliest of such dates being called the distribution
date.
The dividend was paid to the shareholders of record on May 24, 2000 (the
"Record Date") and with respect to shares of common stock issued
thereafter until the distribution date.
The Rights Agreement provides that until the distribution date the rights
will be transferred with and only with the shares of common stock.
The Rights are not exercisable until the distribution date and will expire
at the close of business on May 15, 2010, unless redeemed earlier by the
Board.
In the event any person or group becomes the beneficial owner of 15% or
more of the common stock, a "Flip-In Event" will be deemed to have
occurred. Following the occurrence of a Flip-In Event each of the rights
(other than Rights held by the Acquiring Person) becomes a discount right
entitling the holder to acquire, upon payment of the Purchase Price,
common stock having a value equal to twice the Right's Purchase Price.
If following the date a person or group becomes the beneficial owner of
15% or more of the common stock, the Company engages in a merger or other
business combination in which the Company does not survive or the common
stock is changed or exchanged, or transfers more than 50% of the Company's
assets or earning power (on a consolidated basis) in one transaction or a
series of transactions, a "Flip-Over Event" shall be deemed to have
occurred. Following the occurrence of a Flip-Over Event, each Right (other
than Rights beneficially owned by the acquiring person triggering the
Flip-Over Event, which are voided) becomes a right to acquire common
shares of the other party to the transaction having a value equal to twice
the Purchase Price.
Rights are redeemable at $0.01 per Right by action of the Board at any
time prior to the public announcement that any person has acquired
beneficial ownership of 15% or more of the common stock. During the time
the Rights are redeemable the Board may amend the Rights Plan to extend
the time period during which the Rights may be redeemed.
F-21
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 11 - Shareholders' Equity - (continued):
Shares Authorized
On June 5, 2000, shareholders of the Company approved an amendment to the
Company's Certificate of Incorporation to decrease the authorized number
of shares of the Company's common stock from 25,000,000 to 4,500,000 and
of the Company's preferred stock from 2,000,000 to 250,000 shares.
Note 12 - Stock Option Plans:
The Company has options outstanding under two plans. Under the 1995 Option
Plan and the Non-Employee Directors' Stock Option Plan, options may be
granted for 500,000 and 125,000 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>
1993 1995 Non-Employee Other Option Price
Option Plan Option Plan Director Plan Options Range
----------- ----------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
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) 7.52-26.50
Exercised -- -- -- --
---------------------------------------------------------------------------
Outstanding at July 31, 1999 31,250 260,208 28,125 --
Granted -- 6,000 19,271 -- 3.69 -4.81
Cancelled (31,250) (40,458) -- -- 4.63-26.48
Exercised -- -- -- --
---------------------------------------------------------------------------
Outstanding at July 31, 2000 -- 225,750 47,396 --
=========== ============ ============ ===========
Options currently exercisable -- 211,166 46,875 --
=========== ============ ============ ===========
Options available for grant at July 31, 2000 -- 274,250 77,604
=========== ============ ============
</TABLE>
The weighted average fair value of options granted at fair market value
was $2.16, $3.46 and $8.96 where the exercise price equals stock price
during the fiscal years ended July 31, 2000, 1999 and 1998, respectively.
F-22
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 12 - Stock Option Plans - (continued):
The table below summarizes information relating to options outstanding and
exercisable at July 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding 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> <C>
$ 3.69-5.00 143,646 $ 4.71 6.6 143,125 $ 4.71
5.01-10.00 78,750 7.09 8.5 72,500 7.09
10.01-15.00 23,750 12.17 7.7 15,416 12.52
15.01-20.00 27,000 16.35 4.0 27,000 16.35
</TABLE>
The fair value of options granted in the years ended July 31, 2000, 1999
and 1998 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, 2000 1999 1998
------------------- ---- ---- ----
Risk-free interest rate 6.0% 6.0% 6.3%
Expected volatility 53.9% 56.3% 52.4%
Dividend yield 0% 0% 0%
Expected life 5 years 5 years 5 years
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 - 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 $8, $458 and $121 for
the years ended July 31, 2000, 1999 and 1998, respectively. The Company's
pro-forma net income and pro-forma net income per share for the years
ended July 31, 2000, 1999 and 1998 would have been as follows:
Year End July 31,
-----------------
2000 1999 1998
---- ---- ----
Net income (loss)
--------------------------------------------------------------------------
As reported $ 5,074 $(7,041) $ 1,147
Pro-forma 5,066 (7,499) 1,026
Net income (loss) per share - Diluted:
--------------------------------------------------------------------------
As reported $ 2.43 $ (3.28) $ 0.53
Pro-forma 2.42 (3.49) 0.48
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 13 - 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, 2000,
1999 and 1998 the Company contributed $119, $206 and $173, respectively,
to the Plan.
Note 14 - Related Party Transactions:
The Company has advanced funds to certain shareholders. Interest is
charged at 5% per annum. The amounts due at July 31, 2000 and July 31,
1999 totaled $537 and $507, respectively. These amounts are payable, $389
by July 2005 and $148 by March 2005. Interest income earned on receivables
from shareholders was approximately $26 and $27 for the years ended July
31, 2000 and 1999, respectively.
Interest on a loan payable to a shareholder aggregated approximately $0,
$1 and $7 for the years ended July 31, 2000, 1999 and 1998, respectively.
F-24
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 14 - Related Party Transactions - (continued):
The Company had advanced funds to certain employees. Interest was charged
at 8% per annum. These amounts were paid back during the fiscal year ended
July 31, 1999.
The Company sells products to Healthfair Vitamin Centers, Inc., a company
wholly owned by a major shareholder and Director of the Company. Sales to
this affiliate were $39, $63 and $104 for the years ended July 31, 2000,
1999 and 1998, respectively. The amount due from this affiliate was $0 and
$3 at July 31, 2000 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
$0, $128 and $131 for the years ended July 31, 2000, 1999 and 1998,
respectively. Accounts receivable from these related parties aggregated
$0, $0 and $65 at July 31, 2000, 1999 and 1998, respectively.
During the fiscal years ended July 31, 2000, 1999 and 1998 the Company
paid approximately $309, $112 and $42, respectively, for legal services
provided to the company by Edell & Associates. Marc Z. Edell, a Director
of the Company and the son of the Chairman, is a principal of Edell &
Associates.
The Company held 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 $813 at July
31, 1999 which was paid in full in October 1999. Interest income earned by
the Company on this contract was $18, $74 and $78 for the years ended July
31, 2000, 1999 and 1998, respectively. The Company leased its
manufacturing and administration facility in Portland, Oregon from Agora
until October 1999. Rent expense incurred by the Company for this property
was $44, $170 and $169 for the years ended July 31, 2000, 1999 and 1998,
respectively.
F-25
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 15 - 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
pays taxes, maintenance, insurance and other related expenses. Rent
expense aggregated $420, $1,373 and $1,305 for the years ended July 31,
2000, 1999 and 1998, respectively. Future minimum lease payments due under
these leases at July 31, 2000 are as follows:
Year Ending
July 31,
--------
2001 $ 712
2002 343
2003 19
2004 7
2005 6
-------
Total $ 1,087
=======
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 $4,388 as of
July 31, 2000. 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, 2000:
Year Ending
July 31,
--------
2001 $ 488
2002 520
2003 520
2004 520
2005 585
Thereafter 1,755
-------
Total minimum lease payments 4,388
Less amount representing interest (1,251)
-------
Present value of net minimum lease payments 3,137
Less current maturities (230)
-------
Long-term maturities $ 2,907
=======
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- 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 2001
and 2002, 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.
The Company maintains employment agreements with other key management
personnel.
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.
Other
The Company is engaged from time to time in various legal actions and
governmental claims incident to its business. The Company believes the
amount of liability, if any, from those proceedings will not have a
material adverse impact on the Company's financial position or operations.
Standby Letter of Credit
The Company has two standby letters of credit aggregating $5,700 related
to the New Jersey Economic Development Authority borrowings.
F-27
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 16 - Major Customers/Suppliers:
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 47% of net sales for
the fiscal year ended July 31, 2000. The same customer accounted for 48%
of net sales in the fiscal year ended July 31, 1999.
Suppliers
One of the Company's suppliers individually accounted for approximately
19% of total purchases in 2000 and 25% in 1999. The Company believes that
materials purchased from this supplier are readily available from numerous
sources and that the loss of this supplier would not adversely affect its
operations.
Note 17 - 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, 2000
Net sales $ 21,412 $ 29,625 $ 17,234 $ 17,597 $ 85,868
Gross profit 5,058 9,383 4,582 2,599 21,622
Income (loss) from operations (1,336) 1,519 (1,862) (3,306) (4,985)
Net income (loss) 4,976 458 2,231 (2,591) 5,074
Net income (loss) per share - Basic 2.38 .22 1.07 (1.24) 2.43
Net income (loss) per share - Diluted 2.38 .22 1.07 (1.24) 2.43
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 .08 .24 .24 (3.84) (3.28)
Net income (loss) per share - Diluted .08 .24 .24 (3.84) (3.28)
</TABLE>
The fourth quarter 1999 was detrimentally impacted by charges associated
with the Company's strategic restructuring plan implementation.
The fourth quarter 2000 was detrimentally impacted by reduced production
levels, additional absorption of overhead costs and an increase in the
allowance against barter credits.
F-28
<PAGE>
IVC INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except as Noted or Per Share Information)
Note 18- Subsequent Event
On October 16, 2000 the Company entered into a new credit agreement with
Congress Financial Corporation, a subsidiary of First Union Corporation,
to replace a previously existing credit agreement. The agreement matures
on October 16, 2003. The Company can borrow up to $25,000 under a
revolving credit commitment and $5,500 under a term loan commitment,
subject to borrowing base limitations, as defined. Borrowings under the
revolving credit commitment bear interest at either .75% above First
Union's "prime rate" or at the Company's option, a rate of 2.75% above the
adjusted Eurodollar rate used by the bank. The interest rate on the term
loan is .25% higher than the revolving loan rates outlined above. The
notes are collateralized by substantially all of the Company's assets.
The agreement requires the Company to maintain minimum tangible net worth
and contains various restrictions customary in such financial
arrangements, including limitations on the payment of cash dividends.
F-29
<PAGE>
SCHEDULE II
IVC INDUSTRIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
(Dollars in Thousands, Except as Noted or Per Share Information)
<TABLE>
<CAPTION>
For the Balance at Added Charged to Charged
Year 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:
2000 $ -- -- -- -- -- $ --
====== ====== ====== ====== ====== ======
1999 $ 94 -- 162 -- 256 $ --
====== ====== ====== ====== ====== ======
Allowance for doubtful
accounts:
2000 $ 580 100 -- -- 249 $ 431
====== ====== ====== ====== ====== ======
1999 $2,148 597 -- -- 2,165 $ 580
====== ====== ====== ====== ====== ======
Inventory reserve:
2000 $2,539 -- -- -- 391 $2,148
====== ====== ====== ====== ====== ======
1999 $2,464 3,525 -- -- 3,450 $2,539
====== ====== ====== ====== ====== ======
Valuation allowance related to
deferred taxes:
2000 $ 250 -- -- -- -- $ 250
====== ====== ====== ====== ====== ======
1999 $ -- 250 -- -- -- $ 250
====== ====== ====== ====== ====== ======
</TABLE>
S-1
