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, 2001 --------------- [ ] 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. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 22-1567481 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 500 Halls Mill Road, Freehold, New Jersey 07728 ----------------------------------------------- (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 ($0.08 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. [X] As of October 12, 2001, 2,247,797 shares of Common Stock of the registrant were outstanding and the aggregate market value of Common Stock held by non-affiliates was approximately $1,940,133. Portions of our Proxy Statement to be delivered to our shareholders in connection with our 2002 annual meeting of shareholders are hereby incorporated by reference into Part III of this Report. IVC INDUSTRIES, INC. TABLE OF CONTENTS Annual Report on Form 10-K For the Fiscal Year ended July 31, 2001

~~Years~~Page ~~Ended~~No. ~~July 31,~~ --------~~------------~~ ~~2000~~PART ~~1999~~I ~~1998~~Item ~~1997~~1 ~~1996~~Description ~~---------~~of ~~---------~~Business..................................................................................1 ~~---------~~Item ~~---------~~2 ~~---------~~Description ~~OPERATING~~of ~~RESULTS~~Property.................................................................................12 ~~Net~~Item ~~sales~~3 $Legal ~~85,868~~Proceedings.......................................................................................13 $Item ~~107,339~~4 $Submission ~~119,775~~of $Matters ~~108,531~~to $a ~~104,159~~Vote ~~Income~~of ~~(loss)~~Security ~~from~~Holders.....................................................13 ~~operations~~PART ~~(4,985)~~II ~~(8,502)~~Item ~~3,484~~5 ~~4,423~~Market ~~1,540~~For ~~Net~~Common ~~income~~Equity ~~(loss)~~and ~~5,074~~Related ~~(7,041)~~Shareholder $Matters................................................14 ~~1,147~~Item $6 ~~1,346~~Selected $Financial ~~296~~Data.................................................................................15 ~~Net~~Item ~~income~~7 ~~(loss)~~Management's ~~per~~Discussion ~~share~~and -Analysis ~~Basic~~of $Financial ~~2.43~~Condition $and ~~(3.28)~~Results $of Operations.54..............................................................................16 $Item 7A Quantitative and Qualitative Disclosures About Market Risk.63.............................................20 $Item 8 Financial Statements and Supplementary Data.14............................................................21 ~~Net~~Item ~~income~~9 ~~(loss)~~Changes ~~per~~In ~~share~~and -Disagreements ~~Diluted~~With $Accountants ~~2.43~~on $Accounting ~~(3.28)~~and $Financial Disclosure.53...................21 $PART ~~.63~~III $Item ~~.14~~10 ~~2000~~Directors ~~1999~~and ~~1998~~Executive ~~1997~~Officers ~~1996~~of ~~---------~~the ~~---------~~Registrant...................................................21 ~~---------~~Item ~~---------~~11 ~~---------~~Executive ~~FINANCIAL~~Compensation...............................................................................21 ~~POSITION~~Item ~~Total~~12 ~~assets~~Security ~~$60,248~~Ownership ~~$65,241~~of ~~$81,254~~Certain ~~$68,210~~Beneficial ~~$68,675~~Owners ~~Long~~and ~~term~~Management.......................................21 ~~obligations~~Item -13 ~~less~~Certain ~~current~~Relationships ~~portion~~and ~~25,560~~Related ~~31,034~~Transactions.......................................................22 ~~10,588~~PART ~~31,430~~IV 28Item 14 Exhibits,~~656~~ ~~Shareholders'~~Financial ~~equity~~Statement ~~15,607~~Schedules ~~10,540~~and ~~17,760~~Reports ~~16,417~~on ~~15,041~~Form 8-K........................................22

PART I ITEM 1 DESCRIPTION OF BUSINESS THE COMPANY IVC Industries, Inc. (the "Company," which may also be referred to as "IVC," "we," "us," or "our") 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(R), Rybutol(R) and Nature's Wonder(R) brands, as well as the Company-manufactured store brands, are sold in national and regional drug store, club stores, supermarket and mass merchandising chains. The Company's Synergy Plus(R) brand is sold primarily in health food stores and its Nature's Wonder(R) brand is also sold through independent drug stores. The Company's products are also marketed internationally under its own brands and private brands, and are 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 (See "Manufacturing and Packaging"). 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. FACTORS THAT COULD AFFECT OUR FUTURE BUSINESS LIQUIDITY For the year ended July 31, 2001, the Company continued to experience losses from its operations in the amount of $5,909,000. These losses are attributable to an overall softness in the market for herbal and nutritional products, resulting in significantly 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. 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%, 1 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. 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 is a majority-owned subsidiary of Inverness Medical Technology, Inc. ("Inverness"). Inverness has agreed to be acquired by Johnson & Johnson. As part of the pending 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. Innovations will then be 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, satisfactory due diligence, and completion of the pending split-off of Innovations and merger of Inverness with Johnson & Johnson. 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. 2 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. 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 such 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." 3 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. 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(R), 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(R) brand are free of sugar, salt and starch. The Company has also obtained kosher certification for a substantial portion of the Synergy Plus(R) line. The Company believes that its kosher certification can help it to achieve increased market share both domestically and on an international basis. 4 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. 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 GlaxoSmithkline (formerly Block Drug), 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. In addition to a Phazyne line of antiflatulants, Intergel now also provides Nytol Nighttime Sleep-Aid to GlaxoSmithkline. Softgel nutritional and herbal products manufactured by Intergel are marketed as LiquaFil(R) Softgels under the Company's Fields of Nature(R), Synergy Plus(R) 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, 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. 5 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 and does not require large budgets for national consumer advertising. 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(R) products are currently positioned below "premium brands" and above store branded products. The Company uses the Efficient Consumer Response ("ECR") recommended processes for evaluating consumer needs and applying them to the various retail trade avenues of distribution. 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(R), 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. 6 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. INDUSTRY OVERVIEW 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 16% of the total purchases in 2001 and 19% in 2000, 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. 7 MAJOR CUSTOMERS The Company's has approximately 700 active customers. The Company's ten largest customers accounted for 82% of sales during the fiscal year 2001 with one individual customer, Costco Wholesale accounting for 57% of sales. During the fiscal year 2000, the Company's ten largest customers accounted for approximately 83% of sales, with one customer, Costco Wholesale accounting for 47% 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(R), LiquaFil(R), and Nature's Wonder(R) brands compete with numerous brands of larger vitamin distributors and manufacturers, such as (i) Nature's Bounty(R) by NBTY, Inc., (ii) Sundown(R) by Rexall Sundown, Inc., (iii) Your Life(R) by Leiner Health Products, Inc. and (iv) Nature Made(R) by 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(R) 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. Currently the Company's Synergy Plus(R) competes with brands manufactured by our competitors including the following: (i) Twinlab(R) by Twinlab Corporation; (ii) Solgar(R) by the Solgar Vitamin and Health division of American Home Products Corporation; and (iii) Schiff(R) by 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 our 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 8 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. 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 Food and Drug Administration ("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. The 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 the 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 the 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. The 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 should allow the Company to comply with the new regulations, once they are enacted. The 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 9 of a particular DIN or GP would adversely affect the Company's ability to continue to sell the particular product to which the DIN or GP was assigned. Material non-compliance with the provisions of the Canadian Act may result in the loss of a DIN or GP or the seizure and forfeiture of the particular products which are sold in non-compliance with the Canadian Act. In addition, the Company cannot predict whether new legislation or regulations governing the Company's activities will be enacted by legislative bodies or promulgated by agencies regulating the Company's activities, or what the effect of any such legislation or regulations on the Company's business would be. TRADEMARKS 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(R), Rybutol(R), Nature's Wonder(R), Pine Bros(R) and LiquaFil(R) 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 The Company does not conduct primary research for the development of new ingredients. Instead, the Company's research efforts are solely focused on developing new products in response to market trends and consumer demands. 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. There can be no assurance that the new products we develop (i) will be commercially viable or successfully marketed; (ii) will obtain regulatory approval; or (iii) will prove to be safe and effective. 10 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. ENVIRONMENTAL LAW COMPLIANCE Most of our manufacturing and certain research operations are or will be affected by federal, state and local environmental laws. We have made, and intend to continue to make, necessary expenditures for compliance with applicable laws. While we cannot predict with certainty the future operating costs for environmental compliance, we do not believe they will have a material effect on our capital expenditures, earnings or competitive position. EMPLOYEES At July 31, 2001 the Company employed 370 employees, of which 26 were in sales and marketing, 223 were in manufacturing and packaging, 50 were in quality control and regulatory compliance departments, 39 were in warehousing and 32 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. 11 ITEM 2 DESCRIPTION OF PROPERTY The following table sets forth the Company's properties:

~~For~~APPROXIMATE ~~The~~LEASED ~~Years~~OR ~~Ended~~LOCATION ~~July~~TYPE ~~31,~~OF ~~-----------------------------------------~~FACILITY ~~2000~~SQUARE ~~1999~~FEET ~~1998~~OWNED --------~~---~~ ----------- -----~~------~~ ~~Net sales $ 85,868 $ 107,339 $ 119,775 Cost of sales 64,246 81,189 91,256~~ ----------- -----~~------~~ ~~----------- Gross profit 21~~Freehold,~~622~~ ~~26,150~~NJ 28Manufacturing,~~519~~ ~~Selling~~Packaging, ~~general and administrative expenses 26~~Warehousing,~~607~~ 27160,~~658~~000 ~~25,035~~Owned ~~Special~~Distribution and ~~unusual~~Corporate ~~charges~~Offices ~~-- 3~~Freehold,~~360~~ --NJ ~~Loss~~Warehousing onand ~~sale~~Distribution ~~of retail subsidiary -- 2~~130,~~343~~000 ~~-- Shutdown of manufacturing facility -- 1,291 -- ----------- ----------- ----------- Income~~ (~~loss~~1) ~~from~~Leased ~~operations (4~~Irvington,~~985)~~ ~~(8,502)~~NJ ~~3,484~~Manufacturing ~~Recovery,~~and ~~price~~Administration ~~fixing settlement 16~~35,~~305~~000 --Leased ~~-- Other expenses~~Irvington, ~~net~~NJ ~~2,365~~Warehousing ~~2,429~~and ~~1,572~~Distribution ~~----------- ----------- ----------- Income (loss) before income taxes 8~~43,~~955~~000 (~~10,931~~2) ~~1,912~~Leased ~~Income tax expense (benefit) 3~~Springfield,~~881~~ ~~(3,890)~~NJ ~~765~~Warehousing ~~-----------~~and ~~-----------~~Distribution ~~----------- Net income (loss) $ 5~~20,~~074~~000 $Leased (7Surrey,~~041)~~ $British 1Warehousing,~~147~~ ~~===========~~Distribution ~~===========~~and =========== 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 2Columbia,~~088,092~~ ~~2,148,143~~Canada ~~2,143,191~~Administration ~~Weighted average shares - diluted 2~~8,~~090,506~~000 ~~2,148,909 2,154,365~~Leased

----------------- (1) The Company subleases approximately 30,000 square feet of this facility to a third party. (2) The Company subleased approximately 21,500 square feet of this facility to a third party through April 2001. As of April 15, 2001, the landlord did not renew the Company's lease and the Company is currently leasing 21,500 square feet of this facility on a month to month basis. The Company believes that its properties will satisfy its foreseeable needs for office, manufacturing and warehouse space. 12 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 None. 13 PART II ITEM 5 MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock trades on the OTC Bulletin Board under the symbol "IVCO.OB". The table below presents the quarterly high and low sales prices for the Company's Common Stock as reported by The Nasdaq SmallCap Market System through April 20, 2001, and as reported by the OTC Bulletin Board thereafter. 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 2001 First Quarter $3.00 $1.25 Second Quarter 1.63 .25 Third Quarter 1.16 .63 Fourth Quarter .95 .70 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 October 12, 2001, there were approximately 60 holders of record of the Company's Common Stock. The Company believes that there were in excess of 1,100 beneficial holders of our Common Stock as of such date. On October 12, 2001, the last reported sales price of our Common Stock on the OTC Bulletin Board was $1.86 per share. 14 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.

~~For The~~ Years Ended July 31, -------------------------------- ~~2000 1999 1998~~ -------- -------- -------- ~~CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 5,074 $ (7,041) $ 1,147~~ -----~~---~~ ~~--------~~2001 ~~--------~~2000 ~~Adjustments~~1999 to1998 ~~reconcile~~1997 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~~OPERATING ~~cash~~RESULTS ~~provided~~Net bysales ~~operating~~$ ~~activities 9~~67,~~434~~869 ~~174~~$ 485,~~225~~868 ~~--------~~$ ~~--------~~107,339 ~~--------~~$ ~~CASH~~119,775 ~~FLOWS~~$ ~~FROM INVESTING ACTIVITIES: Payments for notes receivable -- -- 56 Additions to property~~108,531 ~~plant~~Income ~~and~~(loss) ~~equipment~~from operations (35,~~549~~909) (14,~~614~~985) (38,~~715~~502) ~~Proceeds from sale of assets 293 --~~ 3,~~874~~784 ~~Purchase~~4,423 ofNet ~~retail~~income ~~subsidiary~~(loss) ~~-- --~~ (862,548) ~~Retirement~~5,074 ~~of common stock --~~ (~~317~~7,041) --$ ~~--------~~1,147 ~~--------~~$ ~~--------~~1,346 Net ~~cash~~income ~~provided by~~ (~~used in~~loss) ~~investing~~per ~~activities~~share ~~(3,256) (1,931) 129~~ -~~-------~~ ~~--------~~Basic ~~--------~~$ ~~CASH FLOWS FROM FINANCING ACTIVITIES: Payments on borrowings~~ (~~10,731~~1.22) ~~(8,162)~~$ ~~(6,343)~~2.43 ~~Proceeds~~$ ~~from borrowings 5,154 8,737~~ (3~~,500~~.28) ~~Principal~~$ ~~payments~~0.54 on$ ~~capital~~0.63 ~~lease~~Net ~~(179)~~income (~~135~~loss) --per ~~--------~~share -~~-------~~ ~~--------~~Diluted ~~Net~~$ ~~cash provided by~~ (~~used in~~1.22) ~~financingactivities~~$ ~~(5,756)~~2.43 ~~440~~$ (~~2,843~~3.28) ~~--------~~$ ~~--------~~0.53 ~~--------~~$ ~~Foreign~~0.63 ~~currency~~2001 ~~translation~~2000 ~~adjustment~~1999 ~~(61)~~1998 --1997 ~~(86)~~ -------- -~~-------~~ -------- ~~NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 361 (1,317) 1,425 CASH AND CASH EQUIVALENTS~~ - ~~BEGINNING 287 1,604 179~~ --------- --------- --------- ~~CASH~~FINANCIAL ~~AND~~POSITION ~~CASH~~Total ~~EQUIVALENTS~~assets -$ ~~ENDING~~51,091 $ ~~648~~60,248 $ ~~287~~65,241 $ 181,~~604~~254 ~~========~~$ ~~========~~68,210 ~~========~~Long ~~SUPPLEMENTAL~~term ~~DISCLOSURE~~obligations OF- ~~CASH~~less ~~FLOW~~current ~~INFORMATION~~portion ~~Cash~~21,344 ~~paid~~25,560 ~~during~~31,034 ~~the~~10,588 ~~period~~31,430 ~~for:~~Shareholders' ~~Interest~~equity ~~$ 2~~13,~~589~~029 ~~$ 2~~15,~~466~~607 ~~$ 2~~10,~~210~~540 ~~======== ======== ======== Taxes $ 686 $ 682 $ 1~~17,~~436~~760 ~~======== ======== ========~~16,417

15 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, ------------------------- 2001 2000 1999 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Cost of sales 80.0 74.8 75.6 ----- ----- ----- Gross profit 20.0 25.2 24.4 Selling, general and administrative expenses 28.7 31.0 25.8 Special and unusual charges -- -- 3.1 Loss on sale of retail subsidiary -- -- 2.2 Shutdown of manufacturing facility -- -- 1.2 ----- ----- ----- Income (loss) from operations (8.7) (5.8) (7.9) Recovery, price fixing settlement 5.5 19.0 -- Other expenses-net (3.9) (2.8) (2.3) ----- ----- ----- Income (loss) before income taxes (7.1) 10.4 (10.2) Income tax expense (benefit) (3.3) 4.5 (3.6) ----- ----- ----- Net income (loss) (3.8%) 5.9% (6.6%) ===== ===== ===== 16 YEAR ENDED JULY 31, 2001 COMPARED TO THE YEAR ENDED JULY 31, 2000 Net Sales. Net sales for the year ended July 31, 2001 were $67,869, a decrease of $17,999 or 21% compared to $85,868 for the year ended July 31, 2000. This decrease is principally due to: (i) increased price and product competition from competitors, (ii) a customer's discontinuance of the Fields of Nature(R) line of vitamins and nutritional supplements, (iii) the Company's discontinuance of certain Canadian OTC products due to poor profitability, (iv) a one time allowance to a contract manufacturing customer for a new product introduction and discontinuance of the old product, and (v) the softness in the overall market for vitamins, herbs and supplements. Offsetting these sales decreases, to a lesser extent, were new product introductions. Costs and Expenses. Cost of sales for the year ended July 31, 2001 was $54,269, a decrease of $9,977, or 15.5% as compared to $64,246 for the year ended July 31, 2000. As a percentage of net sales, cost of sales increased 5.2% from the preceding year to 80%. The increase in cost of sales percentage over the prior year is primarily attributable to an increase in the reserve for slow moving and obsolete inventory of $2,520, and to the underutilization of plant capacity. Selling, general and administrative expenses for the year ended July 31, 2001 were $19,509, a decrease of $7,098 or 26.7% as compared to $26,607 for the year ended July 31, 2000. The decrease is primarily attributable to decreases in: (i) customer advertising and promotions, (ii) commissions and brokerage, and (iii) freight and delivery commensurate with the decrease in sales. Additional cost savings were achieved through personnel reductions and decreased consultants and professional fees. Recovery, Price Fixing Settlement. Recovery, price fixing settlement for the year ended July 31, 2001 was $3,752. This amount represents supplemental amounts due the Company under the Most Favored Nation Clause contained in the settlement agreements. Other Expenses-Net. Other expenses-net increased $290 for the year ended July 31, 2001. Interest expense increased to $2,724 for fiscal 2001 compared to $2,589 for fiscal 2000. The increase was primarily due to higher interest rates in 2001. Income Taxes. See "Income Taxes" under Note 2 of our Notes to Consolidated Financial Statements for reconciliation of the amount of tax computed under statutory rates to the income tax provision. 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 17 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 under utilization 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 realized 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" under Note 2 of our Notes to Consolidated Financial Statements for reconciliation of the amount of tax computed under statutory rates to the income tax provision. LIQUIDITY AND CAPITAL RESOURCES At July 31, 2001, the Company had working capital of $13,756 compared to $19,169 at July 31, 2000, a decrease of $5,413 or 28.2%. Net cash provided by operating activities amounted to $4,345 for the year ended July 31, 2001. The increase in cash was primarily the result of a decrease in inventories of $11,283 , an increase in inventory reserves of $2,573, and depreciation and amortization of $2,861. Offsetting these increases in cash were a net loss of $2,548, an increase in accounts receivable of $2,713, and an increase in current assets of $3,549 which included a receivable from a price fixing recovery settlement of $3,752. During the year the Company spent $162 for additions to property, plant and equipment. Cash used in financing activities for the year was $4,237, consisting of the excess of borrowing repayments over actual borrowings for the year. 18 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. 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. 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 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 is a majority-owned subsidiary of Inverness. Inverness has agreed to be acquired by Johnson & Johnson. As part of the pending 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. Innovations will then be 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, satisfactory due diligence, and completion of the pending split-off of Innovations and merger of Inverness with Johnson & Johnson. 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. 19 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. 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. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's principal financial instrument is long-term notes payable under a secured revolving loan and security 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 loan and security 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. 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 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, including but not limited to, those risks and uncertainties set forth under the heading "Factors That Could Affect Our Future Results" of Part I of this Report, 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. 20 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Independent Auditors' Reports.......................................F-1 Consolidated Balance Sheets As of July 31, 2001 and 2000....................................F-2 Consolidated Statements of Operations for the Years Ended July 31, 2001, 2000 and 1999....................................F-3 Consolidated Statements of Cash Flows for the Years Ended July 31, 2001, 2000 and 1999....................................F-4 to F-5 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended July 31, 1999, 2000 and 2001.........F-6 Notes to Consolidated Financial Statements..........................F-7 to F-32 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 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 shareholders to be held in January 2002 (the "2001 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 2001 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 2001 Proxy Statement, which is incorporated herein by this reference. 21 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 2001 Proxy Statement, which is incorporated herein by this reference. 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 The information required by this item is included in Item 8 of Part II of this Form 10-K under the heading "Financial Statements and Supplementary Data" (2) FINANCIAL STATEMENT SCHEDULES Report of Independent Accountants on Financial Statement Schedule for the three years in the period ended July 31, 2001 (Page F-1) 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. (9) 3.2 Restated Certificate of Incorporation of IVC Industries, Inc. (9) 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 (the "Rights Agreement") (3) 4.3 First Amendment to Rights Agreement, dated as of February 1, 2001, between IVC Industries, Inc, and American Stock Transfer and Trust Company, as Rights Agent. 4.4 Second Amendment to Rights Agreement, dated as of September 21, 2001, between IVC Industries, Inc, and American Stock Transfer and Trust Company, as Rights Agent. 22 10.1 Loan and Security Agreement, dated as of October 16, 2000, between IVC Industries, Inc., and Congress Financial Corporation (9) 10.2 Amended Loan and Security Agreement, dated as of June 13, 2001, between IVC Industries, Inc., and Congress Financial Corporation.(10) 10.3 Agreement, dated as of June 2, 1998, by and between IVC Industries, Inc. and The Navesink Group (4) 10.4 Lease Agreement, dated as of July 28, 1998, between The Navesink Group and IVC Industries, Inc. (4) 10.5 Settlement Agreement, dated September 17, 1999 with Hoffman La-Roche Inc. and Roche Vitamins Inc. (5) 10.6 Employment Agreement, dated as of April 28, 1995, with E. Joseph Edell (6)* 10.7 Amendment to Employment Agreement, dated as of February 1, 1998, with E. Joseph Edell (4)* 10.8 International Vitamin Corporation 1995 Stock Option Plan as amended through January 2000 (7)* 10.9 Non-Employee Directors' Stock Option Plan as amended through June 2001* 10.10 Employment Agreement, dated as of April 12, 2000, with Michael Durso (8)* 10.11 Employment Agreement, dated as of April 12, 2000, with William Lederman (8)* 10.12 Employment Agreement, dated as of August 1, 2000, with Thomas Bocchino (9)* 11 Earnings Per Share Computation 21 Subsidiaries of IVC Industries, Inc. 23 Consent of Amper Politziner & Mattia P.A., independent accountants. *Management compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K. FOOT NOTES -------------------- (1) Incorporated herein by reference to the Current Report on Form 8-K filed on May 15, 1996, as amended on August 9, 1996. (2) Incorporated herein by reference to the Annual Report on Form 10-K for the year ended July 31, 1999. 23 (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 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 the Quarterly Report on Form 10-QSB filed for the quarter ended April 30, 1995. (7) Incorporated herein by reference to the Registration Statement on Form S-8 filed on January 11, 2000. (8) Incorporated herein by reference to the Quarterly Report on Form 10-Q for the quarter ended April 30, 2000. (9) Incorporated herein by reference to the Annual Report on Form 10-K for the year ended July 31, 2000. (10) Incorporated herein by reference to the Quarterly Report on Form 10-Q for the quarter ended April 30, 2001. (B) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the fourth quarter ended July 31, 2001. 24 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 29, 2001 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 29, 2001 -------------------------- Directors Chief Executive E. Joseph Edell Officer and President /s/ Thomas E. Bocchino Vice President, Chief October 29, 2001 -------------------------- Financial Officer and Thomas E. Bocchino Secretary /s/ Andrew M. Pinkowski Director October 29, 2001 -------------------------- Andrew M. Pinkowski /s/ William Hennrich Director October 29, 2001 -------------------------- William Hennrich /s/ David Popofsky Director October 29, 2001 -------------------------- David Popofsky 25 /s/ Elliott Weinberg Director October 29, 2001 -------------------------- Elliott Weinberg /s/ Michael G. Seaman Director October 29, 2001 -------------------------- Michael G. Seaman /s/ Jeffrey. Edell Director October 29, 2001 -------------------------- Jeffrey Edell /s/ Erwin Lehr Director October 29, 2001 -------------------------- Erwin Lehr /s/ Samuel Potenza Director October 29, 2001 -------------------------- Samuel Potenza 26 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, 2001 and 2000 and the related consolidated statements of operations, cash flows and shareholders' equity for each of the years ended July 31, 2001, 2000 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2001 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 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 1. 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. In connection with our audits of the financial statements referred to above, we audited the financial schedule listed under Item 14. In our opinion, the financial schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information stated therein. /s/ AMPER POLITZINER & MATTIA P.A. October 12, 2001 Edison, New Jersey See notes to consolidated financial statements. F-1 IVC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Dollars in Thousands, Except as Noted or Per Share Information)

~~Foreign~~July ~~Common~~31, ~~Treasury Additional Retained Currency Stock Stock Common Treasury Paid~~-~~In Earnings Translation (Shares) (Shares) Stock Stock Capital (Deficit) Adjustment Total~~ --------- -------- ------- -------- --- ASSETS 2001 2000 ------- ------~~---~~ ------------ -~~------~~ ~~Balance~~Current -assets: ~~July~~Cash ~~31,~~and ~~1997~~cash ~~2,140,950~~equivalents $~~(4,000)~~ $530 ~~171~~ $ ~~(54)~~648 ~~$11~~Accounts receivable,~~446~~ $net 48,~~970~~994 $6,330 ~~(116)~~Inventories ~~$16~~13,~~417~~277 ~~Issuance~~27,133 ofOther ~~treasury~~receivable, ~~shares~~price tofixing ~~employee~~settlement ~~benefit plan -- 4~~3,~~000~~752 -- 54Deferred --taxes --2,241 --1,751 54Prepaid ~~Issuance~~expenses of191 ~~shares~~252 toRefundable ~~employee~~income ~~benefit~~taxes ~~plan~~1,101 101,~~519~~123 --Other 1current assets -- ~~172~~120 -- -- ~~173 Issuance of options to non~~- ~~employee Directors~~ -- -- -- -- 55 -- -- ~~55 Net income~~ -- -- -- -- -- 1Total current assets 30,~~147~~086 --37,357 1Property,~~147~~ ~~Foreign~~plant ~~currency~~and ~~translation~~equipment, ~~adjustment~~net --18,009 --20,578 --Due --from --related --parties ~~(86)~~524 ~~(86)~~493 ~~---------~~Deferred ~~-------~~taxes ~~-------~~1,591 ~~-------~~1,163 Other assets 585 657 ------- ------- ------- ------- ~~Balance~~Total -assets ~~July~~$ 3150,795 ~~1998~~$ 260,~~151,469~~248 ~~172~~============= --============= ~~11,673~~LIABILITIES ~~6,117~~AND ~~(202)~~SHAREHOLDERS' ~~17,760~~EQUITY ~~Shares~~Current ~~retired~~liabilities: ~~(63,377)~~Current --portion ~~(5)~~of long--term ~~(312)~~debt --$ --2,290 ~~(317)~~$ ~~Issuance~~2,365 ofCurrent ~~options~~portion toof ~~non-employee~~capital ~~Directors~~lease --payable --284 --230 --Current ~~138~~portion --of --deferred ~~138~~gain ~~Net~~on ~~(loss)~~building --sale --119 --112 --Accounts --payable (79,~~041)~~088 --10,039 (7Accrued expenses 3,~~041)~~847 ~~Foreign~~5,351 ~~currency~~Income ~~translation~~taxes ~~adjustment~~payable 20 91 -- -- -- -- -- --- -- -- --------- Total current liabilities 15,648 18,188 Long-term debt - less current portion 18,721 22,653 Capital lease obligation 2,623 2,907 Deferred gain on building sale 774 893 ----- -------- ------- ------- Total liabilities 37,766 44,641 ------- ------- ------------- ~~Balance~~Shareholders' -equity: ~~July~~Preferred 31stock, ~~1999~~$.01 2par value,~~088~~ 250,~~092~~000 --shares $authorized, ~~167~~none $issued -- ~~$11,499~~-- $Common ~~(924)~~stock, $.08 ~~(202)~~par ~~$10~~value,~~540~~ ~~Issuance~~4,500,000 ofshares ~~options~~authorized; toissued ~~non-employee~~and ~~Directors~~outstanding --2,103,623 --as --of --July 5431, --2001 --and 542,088,092 ~~Net~~as ~~Income~~of --July --31, --2000, --respectively --168 ~~5,074~~167 Additional paid--in 5capital 11,~~074~~586 11,553 Foreign currency translation adjustment ~~-- -- -- -- --~~ (61327) (61263) Retained earnings 1,602 4,150 --------- ----~~---~~ ------- ------- Total shareholders' equity 13,029 15,607 ------- ------- ------- ------- ~~Balance~~Total -liabilities ~~July~~and ~~31,~~shareholders' ~~2000~~equity ~~2,088,092 --~~ $ ~~167 -- $11~~50,~~553~~795 $ 460,~~150~~248 ~~$ (263) $15,607~~ ========= ====~~===~~ ======= ======~~= ======= ======= ======= =======~~

See notes to consolidated financial statements. F-2 IVC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands, Except as Noted or Per Share Information)

~~1993~~FOR ~~1995~~THE ~~Non-Employee~~YEARS ~~Other~~ENDED ~~Option~~JULY ~~Price~~31, ~~Option Plan Option Plan Director Plan Options Range~~ ----------- ----------- ------------------- 2001 2000 1999 ----------- ----------- ----------- ~~Outstanding~~Net atsales ~~July~~$ 3167,869 ~~1997~~$ 5385,~~875~~868 ~~47,748~~$ 5107,~~000~~339 ~~12,500~~Cost ~~Granted~~of --sales 1654,~~125~~269 664,~~250~~246 ~~-- $15.76-18.72 Cancelled -- (6~~81,~~250)~~189 -- -- ~~12.00~~-~~36.00 Exercised~~ -- -- -- -- --------- -----------~~-------------------------------------------------------~~ ~~Outstanding~~Gross atprofit ~~July~~13,600 3121,622 ~~1998~~26,150 53Selling,~~875~~ 57general and administrative expenses 19,~~623~~509 1126,~~250~~607 1227,~~500~~658 ~~Granted~~Special --and ~~238,250~~unusual ~~19,375~~charges -- ~~3.75~~-~~16.00~~- ~~Cancelled (22~~3,~~625)~~360 ~~(35,665)~~Loss ~~(2,500)~~on ~~(12,500)~~sale ~~7.52-26.50~~of ~~Exercised~~retail subsidiary -- -- 2,343 Shutdown of manufacturing facility -- -- 1,291 ----------- ----------- -----------~~------------------------------------------~~ ~~Outstanding~~Income at(loss) ~~July~~from 31operations (5,909) ~~1999 31~~(4,~~250~~985) ~~260~~(8,~~208~~502) 28Recovery,~~125~~ --price ~~Granted~~fixing --settlement 63,~~000~~752 1916,~~271~~305 -- ~~3.69~~Other ~~-4.81~~expenses, ~~Cancelled~~net ~~(31~~2,~~250)~~633 ~~(40~~2,~~458)~~365 --2,429 -- ~~4.63~~-~~26.48 Exercised~~ -- -- -- -- ----------- ----------- Income (loss) before income taxes (4,790) 8,955 (10,931) Income tax expense (benefit) (2,242) 3,881 (3,890) ----------- ----------- -----------~~--------------------~~ ~~Outstanding~~Net atincome ~~July~~(loss) 31$ (2,548) ~~2000~~$ ~~-- 225~~5,~~750~~074 47$ (7,~~396~~041) -- =========== ============ ============ ~~===========~~Net ~~Options~~income ~~currently~~(loss) ~~exercisable~~per share -- ~~211,166~~basic ~~46,875~~$ --(1.22) ~~===========~~$ 2.43 $ (3.28) ============ ============ =========== ~~Options~~Net ~~available~~income ~~for~~(loss) ~~grant~~per atshare ~~July~~- ~~31,~~diluted ~~2000~~$ --(1.22) ~~274,250~~$ ~~77,604~~2.43 $ (3.28) =========== ============ ============ Weighted average shares - basic 2,096,195 2,088,092 2,148,143 Weighted average shares - diluted 2,096,348 2,090,506 2,148,909

See notes to consolidated financial statements. F-3 IVC INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands, Except as Noted or Per Share Information)

~~Options~~FOR ~~Outstanding~~THE ~~Options~~YEARS ~~Exercisable~~ENDED JULY 31, --------------------------------------------------- 2001 2000 1999 -------------- --------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (2,548) $ 5,074 $ (7,041) -------------- --------------- ~~Exercise~~-------------- ~~Options~~Adjustments ~~Weighted~~to ~~Avg.~~reconcile ~~Remaining~~net ~~Est.~~income ~~Options~~to ~~Weighted~~net ~~Avg.~~cash ~~Price~~provided ~~Outstanding~~by ~~Exercise~~(used ~~Price~~in) ~~Life~~operating activities: Depreciation and amortization 2,882 2,689 2,370 Provision for bad debts 49 100 597 Provision for excess and obsolete inventory 2,573 391 75 Deferred income taxes provision (~~Years~~benefit) ~~Exercisable~~(918) ~~Exercise~~2,330 ~~Price~~(3,216) $Stock ~~3.69~~options issued to non-~~5.00~~employee ~~143~~directors 34 54 138 (Gain) loss on sale of assets - (172) 2,~~646~~343 $Deferred ~~4.71~~gain ~~6.6~~on ~~143~~sale of assets (112) (104) - Changes in assets - (increase) decrease: Accounts receivable (2,~~125~~713) $866 3,832 Inventories 11,283 (150) 8,706 Prepaid expenses and other current assets (3,549) 1,776 895 Other assets (110) 780 801 Changes in liabilities - increase (decrease): Accounts payable and accrued expenses (2,455) (4.,291) (9,326) Income taxes payable (71) ~~5.01~~91 -~~10.00~~ 78-------------- --------------- -------------- Total adjustments 6,~~750~~893 4,360 7~~.09~~,215 ~~8.5~~-------------- 72--------------- -------------- Net cash provided by operating activities 4,~~500~~345 ~~7.09~~9,434 ~~10.01~~174 -~~15.00~~------------- 23--------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property,~~750~~ ~~12.17~~plant ~~7.7~~and 15equipment (162) (3,~~416~~549) ~~12.52~~(1,614) ~~15.01~~Proceeds from sale of assets - 293 - Retirement of common stock - - (317) -------------- --------------- -------------- Net cash provided by (used in) investing activities (162) (3,256) (1,931) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on borrowings (20~~.00~~,560) 27(10,~~000~~731) (8,162) Proceeds from borrowings 16~~.35~~,553 5,154 8,737 Principal payments on capital lease (230) (179) (135) -------------- --------------- -------------- Net cash provided by (used in) financing activities (4.0,237) 27(5,~~000~~756) ~~16.35~~440 -------------- --------------- -------------- Foreign currency translation adjustment (64) (61) - -------------- --------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (118) 361 (1,317) CASH AND CASH EQUIVALENTS - BEGINNING 648 287 1,604 -------------- --------------- -------------- CASH AND CASH EQUIVALENTS - ENDING $ 530 $ 648 $ 287 ============== =============== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 2,844 $ 2,589 $ 2,466 ============== =============== ============== Taxes $ 334 $ 686 $ 682 ============== =============== ==============

See notes to consolidated financial statements. F-4 Non Cash Financing and Investing Activities ------------------------------------------- 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 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)

~~First~~FOREIGN ~~Second~~COMMON ~~Third~~ADDITIONAL ~~Fourth~~RETAINED ~~Full~~CURRENCY ~~Year~~STOCK ~~Ended:~~COMMON ~~Quarter~~PAID-IN ~~Quarter~~EARNINGS ~~Quarter~~TRANSLATION ~~Quarter~~(SHARES) ~~Year~~STOCK CAPITAL (DEFICIT) ADJUSTMENT TOTAL ----------- --------- --------- ---------- ---------- ---------- ~~July~~BALANCE - JULY 31, ~~2000~~1998 ~~Net~~2,151,469 ~~sales~~$ 172 $ 2111,~~412~~673 $ 296,~~625~~117 $ ~~17,234~~(202) $ 17,~~597~~760 $Shares 85retired (63,~~868~~377) ~~Gross~~(5) ~~profit~~(312) ~~5,058~~-- ~~9,383~~-- ~~4,582~~(317) ~~2,599~~Issuance ~~21,622~~of ~~Income~~options to non-employe Directors -- -- 138 -- -- 138 Net (loss) ~~from~~-- ~~operations~~-- -- (17,~~336~~041) ~~1,519~~-- (17,~~862~~041) ~~(3,306)~~Foreign ~~(4,985)~~currency ~~Net~~translation ~~income~~adjustment ~~(loss)~~-- ~~4,976~~-- ~~458~~-- 2-- -- -- --------- ------- -------- ---------- ---------- ---------- BALANCE - JULY 31,~~231~~ (1999 2,~~591)~~088,092 5$ 167 $ 11,~~074~~499 ~~Net~~$ ~~income~~(924) $ (~~loss~~202) ~~per~~$ ~~share~~10,540 Issuance of options to non-employee ~~Basic~~Directors ~~2.38~~-- ~~.22~~-- ~~1.07~~54 ~~(1.24)~~-- ~~2.43~~-- 54 Net income ~~(loss)~~-- ~~per~~-- ~~share~~-- 5,074 -- ~~Diluted~~5,074 ~~2.38~~Foreign ~~.22~~currency ~~1.07~~translation adjustment -- -- -- -- (~~1.24~~61) ~~2.43~~(61) ~~July~~--------- ------- -------- ---------- ---------- ---------- BALANCE - JULY 31, ~~1999~~2000 ~~Net~~2,088,092 ~~sales~~ $ ~~29,239~~167 $ 3011,~~661~~553 $ 254,~~558~~150 $ ~~21,881~~(263) $ ~~107~~15,~~339~~607 ~~Gross~~Issuance ~~profit~~of ~~7,006~~options ~~8,492~~to ~~7,014~~non-employee ~~3,638~~Directors ~~26,150~~-- ~~Income~~-- ~~(loss)~~16 ~~from~~-- ~~operations~~-- ~~914~~16 1Issuance of shares to non-employee Directors 15,~~547~~531 1~~,283~~ ~~(12,246)~~17 ~~(8,502)~~-- ~~Net~~-- ~~income~~18 Net (loss) ~~179~~-- ~~569~~-- ~~459~~-- (82,~~248~~548) -- (72,~~041~~548) ~~Net~~Foreign ~~income~~currency ~~(loss)~~translation ~~per~~adjustment ~~share~~-- -- ~~Basic~~-- ~~.08~~-- ~~.24 .24~~ (~~3.84~~64) (~~3.28~~64) ~~Net~~--------- ~~income~~------- ~~(loss)~~-------- ~~per~~---------- ~~share~~---------- ---------- ~~Diluted~~BALANCE ~~.08~~- ~~.24~~JULY ~~.24~~31, ~~(3.84)~~2001 2,103,623 $ 168 $ 11,586 $ 1,602 $ (~~3.28~~327) $ 13,029 ========= ======= ======== ========== ========== ==========

See notes to consolidated financial statements. F-6 IVC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except as Noted or Per Share Information) Note 1 - Liquidity For the year ended July 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 ("Congress"), a subsidiary of First Union Corporation. 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 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 is 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. As discussed in Note 18, on September 21 the Company signed a non-binding letter of intent with Inverness Medical Innovations, Inc. ("Innovations"), for Innovations to buy all of the outstanding stock of the Company. 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. 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, club stores, supermarkets and mass merchandising chains, health food and independent drug stores. Its products are distributed under the Fields of Nature(R), LiquaFil(R), Rybutol(R), Nature's Wonder(R), Synergy Plus(R), Nature's Blend(R) and Pine Bros(R). brands, as well as under the private labels of its retail chain store customers. Total sales during 2001 consist of domestic sales of 86%, Canadian sales of 11% and export sales of 3%. F-7 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): 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. 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 shareholders' 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. Concentration of Credit Risk ---------------------------- Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of trade receivables. The Company sells its products to a geographically diverse customer base in the drug store, supermarket and discount chain industries. The Company performs ongoing credit evaluations of its customers and maintains reserves for potential losses. 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 $354 and $480 in 2001 and 2000, 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. F-8 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): Accounts Receivable ------------------- Accounts receivable are stated at their net values. Included in net accounts receivable is an allowance for doubtful accounts. At July 31, 2001 and 2000, the allowance for doubtful accounts was $204 and $431 respectively. Fair Values of Financial Instruments ------------------------------------ Fair values of cash and cash equivalents, accounts receivable, accounts payable and 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 ("First In, First Out") or market. 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 VSC in 1999. Other Assets ------------ Other assets include trademarks, security deposits, a covenant not to compete and deferred financing costs. The covenant not to compete is being amortized over the period of expected benefit, and the deferred financing costs are being amortized over the life of the related financing agreements. Prepaid vendor credits of $217, determined to be worthless, were written off in the year ended July 31, 2001. F-9 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): 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, 2001 and 2000. Revenue Recognition ------------------- Revenues are recognized when a product is shipped. Such revenues are recorded net of estimated sales returns, discounts and allowances. Staff Accounting bulletin No. 101, "Revenue Recognition", has been implemented with no significant impact on the financial statements. Recoverability of Long-Lived Assets ----------------------------------- The Company reviews for impairment of long-lived assets and certain intangibles whenever events or changes in circumstances dictate that the carrying amount of an asset may not be recoverable. Recoverability is analyzed at the lowest level at which undiscounted net cash flows can be directly attributable to long-lived assets. Recoverability of long-lived assets could be affected by the outcome of the uncertainty discussed in Note 1. Stock-Based Compensation ------------------------ Statement of Financial Accounting Standards No.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 ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company accounts for stock-based compensation in accordance with the provisions of APB 25, and complies with the disclosure provisions of SFAS 123. Under APB 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. Financial Accounting Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB No. 25," has been adopted and did not have a material affect on the financial statements. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force ("EITF") The Financial Accounts Standard Board ("FASB") Issue No. 96-18, "Accounting for Equity Instruments that are Issued to other than Employees for Acquiring, or in Conjunction with Selling Goods or Services." F-10 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): 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. Shipping and Handling Fees and Costs ------------------------------------ The Company classifies shipping and handling costs as marketing, selling and distribution expenses in the accompanying consolidated statement of operations. Shipping and handling expenses for the years ended July 31, 2001, 2000 and 1999 were $ 3,356, $4,852 and $4,875, respectively. 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, 2001, 2000 and 1999 were $7,057, $9,300 and $7,500, respectively. F-11 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): New Accounting Pronouncements ----------------------------- On June 29, 2001, the FASB issued Statements of Financial Accounting Standards No. 141 "Business Combinations" "SFAS 141" and No. 142 "Goodwill and Other Intangible Assets" "SFAS 142." SFAS 141 supercedes ABP Opinion No. 16, "Business Combinations", and eliminates the pooling-of-interests method of accounting for business combinations, thus requiring all business combinations be accounted for using the purchase method. In addition, in applying the purchase method, SFAS 141 changes the criteria for recognizing intangible assets apart from goodwill and states the following criteria should be considered in determining the recognition of the intangible assets: (1) the intangible asset arises from contractual or other legal rights, or (2) the intangible asset is separable or dividable from the acquired entity and capable of being sold, transferred, licensed, rented, or exchanged. The requirements of SFAS 141 are effective for all business combinations completed after June 30, 2001. SFAS 142 supercedes APB Opinion No. 17, "Intangible Assets", and requires goodwill and other intangible assets that have an indefinite useful life to no longer be amortized; however, these assets must be reviewed at least annually for impairment. Application of SFAS 142 is required immediately for business combinations completed after June 30, 2001. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company believes that SFAS 143 will not have an effect on the Company's financial statements. In October 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), that replaces Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"). The primary objectives of this project were to develop one accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale and to address significant implementation issues. The accounting model for long-lived assets to be disposed of by sale applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30 "Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business", for the disposal of segments of a business. SFAS 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The provisions of SFAS 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company is currently evaluating the impact, which SFAS 144 may have on the Company. F-12 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): The EITF has issued EITF 00-25, "Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer", which is effective for fiscal quarters beginning after December 15, 2001. The consensus of the EITF is that consideration paid by a vendor to a retailer, such as slotting fees and cooperative advertising, should be classified as a reduction in revenue in the vendor's income statement rather than as an operating expense, unless certain criteria are met. The Company does not believe that this issuance will have any impact on the classifications in its presentation of the accompanying consolidated statement of operations. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). 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 SFAS 133 will have on its financial position and results of operations. Reclassifications ----------------- Certain amounts in the 2000 and 1999 statements have been reclassified to conform to the 2001 presentation. F-13 IVC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except as Noted or Per Share Information) Note 3 - Vitamin Specialties Disposition: On July 13, 1999, the Company completed the sale of its 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 $1,800 selling price included 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. F-14 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, -------- 2001 2000 ---- ---- Finished goods $ 3,764 $ 7,579 Bulk and work in process 5,259 11,864 Raw materials and packaging components 4,254 7,690 ------------ ------------ Total inventory $ 13,277 $ 27,133 ============ ============ Property, Plant and Equipment: July 31, -------- 2001 2000 ---- ---- Land $ 1,451 $ 1,451 Buildings and improvements 9,023 8,908 Capital lease building 2,416 2,761 Leasehold improvements 518 514 Machinery and equipment 20,927 20,909 Furniture and fixtures 570 568 Computer Equipment 2,548 2,609 Transportation Equipment 253 253 ------------ ------------ Sub-Total 37,706 37,973 Accumulated depreciation and amortization (19,697) (17,395) ------------ ------------ Net property, plant and equipment $ 18,009 $ 20,578 ============ ============ F-15 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):

~~For~~Accrued ~~the~~payroll ~~Balance at Added Charged to Charged Year Ended Beginning During Cost~~ and torelated ~~Other~~$ ~~Balance~~903 at758 ~~July~~Accrued ~~31,~~interest ~~Description~~57 of188 ~~Year~~Income ~~the~~taxes ~~Year~~payable ~~Expenses~~58 ~~Accounts~~354 ~~Deductions~~Accrued ~~End~~for ofplant ~~Year~~shut ~~--------~~down ~~-----------~~183 ~~----------~~498 ~~--------~~Accrued ~~----------~~for ~~--------~~product ~~----------~~returns ~~-----------~~978 ~~Accumulated amortization of goodwill: 2000 $~~ -- --Accrued --brokerage -- --76 $Accrued --advertising ~~======~~and ~~======~~promotion ~~======~~486 ~~======~~1,799 ~~======~~Accrued ~~======~~severance ~~1999~~328 $722 94Other --854 ~~162~~956 -- ~~256 $~~ -- ~~====== ====== ====== ====== ====== ====== Allowance for doubtful accounts: 2000 $ 580 100~~ -- -- ~~249 $ 431 ====== ====== ====== ====== ====== ====== 1999 $2,148 597~~ -- -- ~~2,165 $ 580 ====== ====== ====== ====== ====== ====== Inventory reserve: 2000 $2,539~~ -- -- --Accrued ~~391~~Expenses $~~2,148~~ ~~====== ====== ====== ====== ====== ====== 1999 $2,464~~ 3,~~525~~847 --$ ~~-- 3~~5,~~450~~351 ~~$2,539~~ ====== ====== ====== ====== ====== ====== Valuation allowance related to deferred taxes: 2000 $ 250 -- -- -- -- $ 250 ====== ====== ====== ====== ====== ====== 1999 $ -- 250 -- -- -- $ 250 ====== ====== ====== ====== ====== ======

Note 5 - Long-Term Debt:

F-16 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 Congress Financial Corporation ----------------------------------------------- On October 16, 2000 the Company entered into a loan and security agreement with Congress, a subsidiary of First Union Corporation, 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. 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 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. The Company was in compliance with the revised minimum tangible net worth covenant as of July 31, 2001. Bonds Payable ------------- One of the New Jersey Economic Development Authority tax exempt bond issues had an outstanding balance of $1,400 as of July 31, 2001. Interest on these bonds is payable based upon the weekly tax-free floating rate. The bonds require aggregate annual principal payments of $720 (interest 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. The bonds are collateralized by certain machinery and equipment. F-17 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 other bonds payable to the New Jersey Economic Development Authority with a balance of $2,975 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. The aggregate amount of long-term debt maturing in each of the five years subsequent to July 31, 2001 and thereafter is as follows: 2002 $ 2,290 2003 2,314 2004 12,702 2005 1,619 2006 1,455 Thereafter 631 --------- Total $ 21,011 ========= F-18 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 Company 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, 2001 the remaining balance was $183, consisting of lease continuation costs. F-19 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, ---------------------------- 2001 2000 1999 ---- ---- ---- Current tax expense (benefit): Federal $(1,337) $ 1,158 $ (776) State (251) 68 (73) Foreign 264 325 175 -------- ------- -------- (1,324) 1,551 (674) ======= ======= ======= Deferred tax expense (benefit): Federal (980) 2,040 (2,904) State 62 290 (312) Foreign -- -- -- ------- ------- ------- (918) 2,330 (3,216) ------- ------- ------- Income tax provision (benefit) $(2,242) $ 3,881 $(3,890) ======= ======= ======= The differences between the provision for income taxes and income taxes computed using the federal income tax rate were as follows for the periods ended: July 31, -------------------------------- 2001 2000 1999 ---- ---- ---- Provision at statutory rate $(1,636) $ 3,045 $(3,716) Increases (reductions) in taxes from: State income taxes, net (147) 358 (320) Foreign taxes 264 325 -- Effect of foreign income not subject to federal income tax (201) (217) (3) Nondeductible costs 17 7 123 Increase in valuation allowance 295 -- 250 Reversal of prior tax accruals (834) 363 (224) ------- ------- ------- Income tax provision (benefit) $(2,242) $ 3,881 $(3,890) ======= ======= ======= F-20 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 were as follows: July 31, ---------------------- 2001 2000 --------- --------- Current assets and liabilities Allowance for doubtful accounts $ 97 $ 237 Inventory valuation (IRC(section mark)263A) 203 403 Accrued expenses 147 256 Net operating loss carryforward 252 -- Inventory valuation allowance 1,793 811 AMT credit carryforward 294 294 ------- ------- 2,786 2,001 Valuation allowance (545) (250) ------- ------- Net current deferred tax asset $ 2,241 $ 1,751 ======= ======= Non-current assets and liabilities Deferred gain on sale of land $ 389 $ 430 Installment contract -- (206) Property and equipment 352 130 Other 413 339 Accrued expenses 437 470 ------- ------- 1,591 1,163 Valuation allowance -- -- ------- ------- Net non-current deferred tax (liability) $ 1,591 $ 1,163 ======= ======= Valuation allowances are established when necessary, to reduce deferred tax assets to established realizable amounts. Because of losses experienced in fiscal 2001, a valuation allowance of $545 has been recorded to offset the related net deferred assets due to uncertainty regarding their future realization. The valuation allowance relates to utilization of state net operating losses and federal and state AMT credit carryforwards in 2001, and utilization of federal and state AMT credit carryforwards in 2000. The Company believes some uncertainty exists with regard to the ability to realize these items, and accordingly, has established a valuation allowance. F-21 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. In August 2001, the Company received $3,752 from a key supplier in accordance with the September 17, 1999 Settlement Agreement. This amount consists of a payment due to the Company under the Most Favored Nation Clause contained in the Settlement Agreement, and is included in the results of operations for the year ended July 31, 2001. Note 10 - Other Expenses, net: July 31, ---------------------------------- 2001 2000 1999 ---- ---- ---- Interest expense $ 2,767 $ 2,589 $ 2,682 Interest income (65) (66) (75) Other (69) (158) (178) ------- ------- ------- Other expenses, net $ 2,633 $ 2,365 $ 2,429 ======= ======= ======= Interest expense for the years ended July 31, 2001, 2000 and 1999, excludes capitalized interest of approximately 0, 0 and $37, 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. In April 1998, the shareholders approved an increase in the number of shares subject to the 1995 Option Plan to 250,000 shares. F-22 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 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. In June 2001, the Board of Directors amended the Non-Employee Directors' Stock Option Plan to provide that options granted under the Plan will become immediately exercisable in full upon a change in control of the Company. 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 were retroactively reflected in the 1999 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-23 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% or more of the outstanding shares of the Company's common stock or (ii) the close of business on the tenth day after the commencement of, 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-24 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:

The weighted average fair value of options granted at fair market value was $.88, $2.16 and $3.46 where the exercise price equals stock price during the fiscal years ended July 31, 2001, 2000 and 1999, respectively. F-25 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, 2001:

The fair value of options granted in the years ended July 31, 2001, 2000 and 1999 is estimated on the date the options are granted based on the Black-Scholes option-pricing model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. The following weighted-average assumptions were used: Year Ended July 31, 2001 2000 ------------------- ---- ---- Risk-free interest rate 6.0% 6.0% Expected volatility 59.5% 53.9% Dividend yield 0% 0% Expected life 5 years 5 years F-26 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 APB 25, "Accounting for Stock Issued to Employees", rather than the fair value-based method in SFAS 123. 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 $186, $8 and $458 for the years ended July 31, 2001, 2000 and 1999, 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:

Since compensation expense associated with option grants is recognized over the vesting period, the initial impact of applying SFAS 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, 2001, 2000 and 1999 the Company contributed $112, $119 and $206, respectively, to the Plan. Note 14 - Related Party Transactions: The Company has advanced funds to certain shareholders. Interest is charged using the monthly long term applicable federal rate. The amounts due at July 31, 2001 and July 31, 2000 totaled $570 and $537, respectively. These amounts are payable, $415 by July 2005 and $155 by March 2005. Interest income earned on receivables from shareholders was approximately $21 and $26 for the years ended July 31, 2001 and 2000, respectively. Interest on a loan payable to a shareholder aggregated approximately $2,0 and $1 for the years ended July 31, 2001, 2000 and 1999, respectively. F-27 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 of the Company. Sales to this affiliate were $15, $39 and $63 for the years ended July 31, 2001, 2000 and 1999, respectively. The amount due from this affiliate was $3 and 0 at July 31, 2001 and 2000, respectively. The Company sells products to D.N.R. Inc., an Israeli company one of whose principal shareholders is the brother-in-law of the former President of the Company's International Division. These sales aggregated 0,0 and $128 for the years ended July 31, 2001, 2000 and 1999, respectively. There were no accounts receivable from these related parties at July 31, 2001 and 2000. During the fiscal years ended July 31, 2001, 2000 and 1999 the Company paid approximately $302, $309 and $112, respectively, for legal services provided to the Company by Edell & Associates. Marc Z. Edell, a former 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 0, $18 and $74 for the years ended July 31, 2001, 2000 and 1999, 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 0, $44 and $170 for the years ended July 31, 2001, 2000 and 1999, respectively. F-28 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, 2001, 2000 and 1999, respectively. Future minimum lease payments due under these leases at July 31, 2000 are as follows: Year Ending July 31, -------- 2002 $322 2003 180 2004 168 2005 167 2006 161 ---- Total $998 ==== 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 $3,900 as of July 31, 2001. 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, 2001: Year Ending July 31, -------- 2002 $ 520 2003 520 2004 520 2005 585 2006 585 Thereafter 1,170 ------ Total minimum lease payments 3,900 Less amount representing interest (993) ------ Present value of net minimum lease payments 2,907 Less current maturities (284) ------ Long-term maturities $2,623 ====== F-29 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 2002 and 2003, respectively. The agreement with Mr. Edell is for one year and expires on January 31 of each 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 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 these 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 $4,135 related to the New Jersey Economic Development Authority borrowings. F-30 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 57% of net sales for the fiscal year ended July 31, 2001. The same customer accounted for 47% of net sales in the fiscal year ended July 31, 2000. Suppliers --------- One of the Company's suppliers individually accounted for approximately 16% of total purchases in 2001 and 19% in 2000. 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:

The fourth quarter 2001 was detrimentally impacted by reduced production levels, an increase in inventory reserves to provide for slow moving or obsolete inventory, and the write-off of the balance in barter credits. 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-31 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 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. The Company and Innovations signed a non-binding letter of intent on September 21, 2001, which describes the general terms of Innovations' proposed acquisition 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 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 is a majority-owned subsidiary of Inverness Medical Technology, Inc. ("Inverness"). Inverness has agreed to be acquired by Johnson & Johnson. As part of the pending 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. Innovations will then be 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, satisfactory due diligence, and completion of the pending split-off of Innovations and merger of Inverness with Johnson & Johnson. 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. F-32 SCHEDULE II IVC INDUSTRIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JULY 31, 2001 AND 2000 (Dollars in Thousands, Except as Noted or Per Share Information)

S-1 Exhibit Index ------------- Exhibit Number Description 4.3 First Amendment to Rights Agreement, dated as of February 1, 2001, between IVC Industries, Inc, and American Stock Transfer and Trust Company, as Rights Agent. 4.4 Second Amendment to Rights Agreement, dated as of September 21, 2001, between IVC Industries, Inc, and American Stock Transfer and Trust Company, as Rights Agent. 10.9 Non-Employee Directors' Stock Option Plan as amended through June 2001. 11 Earnings Per Share Computation 21 Subsidiaries of IVC Industries, Inc. 23 Consent of Amper Politziner & Mattia P.A., independent accountants.

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