10-Q 1 d01-35414.txt ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------- FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended October 31, 2001 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______________ to __________________ Commission file number 0-23624 IVC INDUSTRIES, INC. (exact name of registrant as specified in its charter) DELAWARE 22-1567481 (State or other jurisdiction of incorporation (I.R.S. Employee or organization) Identification No.) 500 HALLS MILL ROAD, FREEHOLD, NEW JERSEY 07728 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (732) 308-3000 NOT APPLICABLE -------------- (former name, address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 |_| Registrant had 2,247,796 shares of common stock outstanding as of November 30, 2001. ================================================================================ IVC INDUSTRIES, INC. Table of Contents Part I. Financial Information. Page No. -------- Item 1. Financial Statements Independent Accountants' Review Report ..................... 1 Condensed Consolidated Balance Sheets as at October 31, 2001 and July 31, 2001 ......................... 2 Condensed Consolidated Statements of Operations For The Three Months Ended October 31, 2001 and 2000 ....... 3 Condensed Consolidated Statements of Cash Flows For The Three Months Ended October 31, 2001 and 2000 ....... 4 Notes to Condensed Consolidated Financial Statements ....... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............. 10 Item 3. Quantitative and Qualitative Disclosure about Market Risk .. 13 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ........................... 14 Signature Page ............................................. 14 Item 1. Financial Statements. Independent Accountants' Review Report To the Board of Directors and Stockholders of IVC Industries, Inc. We have reviewed the accompanying condensed consolidated balance sheet of IVC Industries, Inc. as of October 31, 2001, and the related condensed consolidated statements of operations for the three months ended October 31, 2001 and condensed consolidated statement of cash flows for the three months ended October 31, 2001. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has continuing losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet as of July 31, 2001, and the related statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated October 12, 2001, we expressed an unqualified opinion (with a going concern emphasis paragraph) on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of July 31, 2001, is fairly stated, in all material respects in relation to the balance sheet from which it has been derived. /s/ AMPER POLITZNER & MATTIA, PA October 28, 2001 Edison, New Jersey 1 IVC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except as Noted or Per Share Information)

2 IVC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except as Noted or Per Share Information) (unaudited)

3 IVC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited)

4 IVC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except as Noted or Per Share Information) (unaudited) Note 1 - Basis of Presentation and Other Matters: The accompanying interim period unaudited condensed consolidated financial statements do not include all disclosures provided in the annual consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto contained in the IVC Industries, Inc. (the "Company") Annual Report on Form 10-K for the year ended July 31, 2001, as filed with the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Certain amounts have been reclassified to conform with the current period presentation. Note 2 -Liquidity For the three months ended October 31, 2001, the Company continued to experience losses from operations. These losses are attributable to an overall softness in the market for herbal and nutritional products, resulting in reduced sales levels for the Company. At April 30, 2001, the Company was not in compliance with the minimum tangible net worth covenant contained in the Company's loan and security agreement with Congress Financial Corporation, a subsidiary of First Union Corporation ("Congress"). On June 13, 2001, the Company entered into an amended loan and security agreement with Congress. Under the amended agreement, Congress waived the event of default existing as of April 30, 2001, and the rate of interest was increased from rates ranging from the prime rate plus .75% - 1% to an amended rate of the prime rate plus 3%, increasing to 5% in the event of termination or non-renewal of the loan, or if an event of default occurs. The amended agreement also provides for a $500,000 permanent special reserve, an amendment fee of $50,000, and requires the Company to maintain revised minimum tangible net worth amounts. The Company has been pursuing, among other initiatives; i) obtaining alternative sources of financing, ii) seeking additional sales opportunities within its core business, iii) seeking new sales opportunities through non-traditional channels of distribution, iv) reducing expenses to a level that would provide the Company with sufficient cash flows to meet its obligations, v) merger or sale of the Company, and/or vi) a combination of any of the foregoing. 5 On September 21, 2001, the Company signed a non-binding letter of intent with Inverness Medical Innovations, Inc. ("Innovations") for Innovations to acquire all of the outstanding stock of the Company. As contemplated by the letter of intent, each shareholder of the Company would receive from Innovations $2.50 cash for each share of the Company's common stock held by such shareholder, except that certain of the Company's principal shareholders will receive either cash, restricted shares of common stock of Innovations or a combination thereof, valued at $2.50 for each share of the Company's common stock held by such shareholders. Innovations was a majority-owned subsidiary of Inverness Medical Technology, Inc. ("Inverness"). Inverness had agreed to be acquired by Johnson & Johnson. As part of the acquisition by Johnson & Johnson, Inverness planned to restructure its operations so that its women's health, nutritional supplements and clinical diagnostics businesses are held by Innovations. On November 21, 2001, Inverness merged with Johnson & Johnson and Innovations was split-off from Inverness as a separate, publicly-owned company based in Waltham, Massachusetts. The acquisition of the Company by Innovations is subject to a number of conditions, including negotiation of a definitive acquisition agreement, approval by Innovations' and the Company's boards of directors, approval by the Company's shareholders, modification of the loan agreements with the Company's principal lender, and satisfactory due diligence. The letter of intent is non-binding, and there can be no assurance that the Company will be able to reach a definitive agreement with Innovations, or that even if it does enter into a definitive agreement with Innovations, that Innovations will complete the acquisition of the Company or that it will acquire the Company on the terms described in the letter of intent. Four shareholders of the Company holding approximately 42% of the Company's outstanding common stock have entered into voting agreements with Innovations. The voting agreements require these shareholders to vote all of the shares of the Company common stock they own in favor of the acquisition of the Company by Innovations and against any competing proposal. The voting agreements expire on January 19, 2002 if the Company and Innovations have not entered into a definitive acquisition agreement by that date. If we cannot achieve any of the foregoing, we may need to modify our business objectives or reduce or cease certain or all of our operations. Although there can be no assurances that the Company will be able to achieve any of the foregoing initiatives, the financial statements included in this Report do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 6 Note 3 - Inventories: Inventories consist of the following:

Note 4 - Long-Term Debt: 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. At April 30, 2001 the Company was not in compliance with the minimum tangible net worth covenant contained in the Company's Loan and Security Agreement with Congress. On June 13, 2001 the Company entered into an Amended Agreement with Congress. Under the Amended Agreement, Congress agreed to waive the event of default existing as of April 30, 2001, and the rate of interest was changed to the prime rate plus three percent, increasing to five percent in the event of termination or non-renewal of the loan, or if an event of default occurs. The Amended Agreement also provides for a $500,000 permanent special reserve, an amendment fee of $50,000, and requires the Company to maintain revised minimum tangible net worth amounts. 7 Note 5 - Net Income (Loss) Per Share: Basic earnings (loss) per share is computed by dividing income (loss) 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. Note 6 - Comprehensive Income: As of August 1, 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting and displaying of comprehensive income. The following table presents the Company's comprehensive loss for the three periods ended October 31, 2001 and 2000.

Note 7 - 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. 8 In August 2001, the Company received $3,752 from a key supplier in accordance with the September 17, 1999 Settlement Agreement. This amount consisted of a payment due to the Company under the Most Favored Nation Clause contained in the Settlement Agreement, and was included in the results of operations for the year ended July 31, 2001. During the quarter ended October 31, 2001 the Company received an additional price fixing settlement of $197 from one other supplier and this amount is included in the statement of operations for the same period. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (Dollars in Thousands, except As Noted or Per Share Information) Three Months Ended October 31, 2001 Compared to the Three Months Ended October 31, 2000 Results of Operations Net loss for the quarter ended October 31, 2001 was $1,825, equivalent to a basic and diluted loss of $0.85 per share versus a net loss of $1,075, equivalent to basic and diluted loss of $0.51 per share, for the quarter ended October 31, 2000. Net sales for the quarter ended October 31, 2001 were $15,350 as compared to $15,828 in the prior year's quarter, a decrease of $478 or 3.0%. This reduction was primarily attributable to a decrease in contract manufacturing and branded sales to existing customers due to the softness in the overall market for vitamins, herbs and supplements, and increased price and product competition from competitors. Cost of sales for the quarter ended October 31, 2001 was $12,262, an increase of $138 or 1% from $12,124 for the quarter ended October 31, 2000. Cost of sales increased 3.6% as a percentage of net sales over the prior year's period, primarily as a result of an increase in reserves for slow moving and obsolete inventory of $524. Selling, general and administrative expenses for the quarter ended October 31, 2001 were $4,877, an increase of $339 or 1% as compared to the prior year's quarter. The increase is the result of: i) higher promotion and distribution costs, ii) higher legal fees relating to the pending acquisition of the Company by Innovations, and iii) higher sales salaries due to increases in staff. The increase was partially offset by lower administrative salaries due to staff reductions. Other expenses-net for the quarter ended October 31, 2001 were $200, representing interest expense of $515, which was offset in part by a bad debt recovery of $341. Other expenses-net for the three months ended October 31, 2001 were $748. This amount principally represented interest expense of $690, the write-off of $65 of deferred financing costs, and was offset in part by other miscellaneous income. Income taxes generally reflect the effect of statutory federal, state and Canadian income taxes and certain non-deductible expenses. The Company's effective tax rate was 40.3% during the three months ended October 31, 2000. Due to the Company's net loss for the three months ended October 31, 2001, an income tax benefit was not recorded for the quarter. 10 Liquidity and Capital Resources Net cash provided by operating activities for the three months ended October 31, 2001 was $3,026. The increase in cash was primarily the result of a decrease in other receivables of $3,752, a decrease in accounts receivable of $2,791 and depreciation and amortization of $704. Offsetting these increases in cash were a net loss of $1,825, and an increase in inventories of $2,255. Cash used in investing activities for the nine months ended October 31, 2001 was $46 for additions to buildings and improvements and purchases of equipment. Cash used in financing activities for the nine months ended October 31, 2001 was $2,506 which consisted of the excess of borrowing repayments over actual borrowings for the period. On October 16, 2000 the Company entered into a loan and security agreement with Congress, to replace a previously existing credit agreement. The new 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 in the loan and security agreement. 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. The notes are collateralized by substantially all of the Company's assets. Borrowings under the revolving credit commitment has provided for interest at either .75% above First Union Corporation'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 was .25% higher than the revolving loan rates outlined above. At April 30, 2001 the Company was not in compliance with the minimum tangible net worth covenant contained in the Company's loan and security agreement with Congress. On June 13, 2001 the Company entered into an amended agreement with Congress. Under the amended agreement, Congress waived the event of default existing as of April 30, 2001, and the rate of interest was increased to the prime rate plus 3%, increasing to 5% in the event of termination or non-renewal of the loan, or if an event of default occurs. The amended agreement also provides for a $500,000 permanent special reserve, an amendment fee of $50,000, and requires the Company to maintain revised minimum tangible net worth amounts. 11 The Company has been pursuing, among other initiatives; i) obtaining alternative sources of financing, ii) seeking additional sales opportunities within its core business, iii) seeking new sales opportunities through non-traditional channels of distribution, iv) reducing expenses to a level that would provide the Company with sufficient cash flows to meet its obligations, v) merger or sale of the Company, and or vi) a combination of any f the foregoing. On September 21, 2001, the Company signed a non-binding letter of intent with Innovations for it to acquire all of the outstanding stock of the Company. As contemplated by the letter of intent, each shareholder of the Company would receive from Innovations $2.50 cash for each share of the Company common stock held by such shareholder, except that certain of the Company's principal shareholders would receive either cash, restricted shares of common stock of Innovations or a combination thereof, valued at $2.50 for each share of the Company's common stock held by such hareholders. Innovations was a majority-owned subsidiary of Inverness. Inverness had agreed to be acquired by Johnson & Johnson. As part of the acquisition by Johnson & Johnson, Inverness plans to restructure its operations so that its women's health, nutritional supplements and clinical diagnostics businesses are held by Innovations. On November 21, 2001 Inverness merged with Johnson and Johnson and Innovations was then split-off from Inverness as a separate, publicly-owned company based in Waltham, Massachusetts. The acquisition of the Company by Innovations is subject to a number of conditions, including negotiation of a definitive acquisition agreement, approval by Innovations' and the Company's boards of directors, approval by the Company's shareholders, modification of loan agreements with the Company's principal lender, and satisfactory due diligence. The letter of intent is non-binding, and there can be no assurance that the Company will be able to reach a definitive agreement with Innovations, or that even if it does enter into a definitive agreement with Innovations, that Innovations will complete the acquisition of the Company or that it will acquire the Company on the terms described in the letter of intent. Four shareholders of the Company holding approximately 42% of the Company's outstanding common stock have entered into voting agreements with Innovations. The voting agreements require these shareholders to vote all of the shares of the Company common stock they own in favor of the acquisition of the Company by Innovations and against any competing proposal. The voting agreements expire on January 19, 2002 if the Company and Innovations have not entered into a definitive acquisition agreement by that date. If we cannot achieve any of the foregoing, we may need to modify our business objectives or reduce or cease certain or all of our operations. 12 Although there can be no assurances that the Company will be able to achieve any of the foregoing initiatives, the financial statements in this Report do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 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 21E of the Securities Exchange Act of 1934, 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", "should", "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to identify 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 nutrition supplement industry, and the enactment or promulgation of new government legislation or regulation, including but not limited to, those risks and uncertainties referred to above and identified in the Company's 10-K for the year ended July 31, 2001, and that actual results may differ materially from those projected in the forward-looking statements as result of various factors. Item 3 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. 13 Part II. Other Information. Item 6. - Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Description of Number Exhibit ------ ------- 11 Computation of earnings (loss) per share (b) Reports on Form 8-K (i) A report on Form 8-K was filed on September 24, 2001, relating to a press release announcing the Company's signing of a non-binding letter of intent with Inverness Medical Innovations, Inc. (ii) A report on form 8-K was filed on October 18, 2001, solely to amend the Company's report on Form 8-K filed on September 24, 2001 to correctly reflect that the date of said report was September 21, 2001 rather than May 21, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: December 17, 2001 By: /s/ E. Joseph Edell --------------------- -------------------------- Chairman and Chief Executive Officer Dated: December 17, 2001 By: /s/ Thomas E. Bocchino --------------------- -------------------------- Vice President and Chief Financial Officer 14

IVC INDUSTRIES INC 10-Q