10-Q 1 file001.txt QUARTERLY REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended January 31, 2002 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 13(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934. For the transition period from _______________ to ________________ Commission file number 0-23624 IVC INDUSTRIES, INC. (exact name of registrant as specified in its charter) DELAWARE 22-1567481 (State or other jurisdiction of incorporation (I.R.S. Employee or organization) Identification No.) 500 HALLS MILL ROAD, FREEHOLD, NEW JERSEY 07728 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (732) 308-3000 NOT APPLICABLE (former name, address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Registrant had 2,247,797 shares of common stock outstanding as of March 1, 2002. ================================================================================ IVC INDUSTRIES, INC. TABLE OF CONTENTS

~~October~~PART ~~31,~~I. ~~July~~FINANCIAL ~~31,~~INFORMATION. ~~2001~~Page ~~2001~~No. -------- ~~--------~~Item ~~ASSETS~~1. ~~Current~~Financial ~~assets:~~Statements ~~Cash~~Independent ~~and~~Accountants' ~~cash~~Review ~~equivalents~~Report............................... $ 945 $ 530 Accounts receivable, net 6,203 8,994 Inventories 15,532 13,277 Other receivable, price fixing settlement -- 3,752 Deferred taxes 2,241 2,241 Prepaid expenses 271 191 Refundable income taxes 1~~,101~~ ~~1,101~~Condensed ~~Other~~Consolidated ~~current~~Balance ~~assets~~Sheets 8as --at ~~--------~~January ~~-------- Total current assets 26~~31,~~301~~ ~~30,086~~2002 ~~Property, plant~~ and ~~equipment,~~July ~~net 17~~31,~~394~~ ~~18,009~~2001................................... Due from related parties, net 532 524 Deferred taxes 1,591 1,591 Other assets 565 585 -------- -------- Total assets $ 46,383 $ 50,795 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2~~,293~~ $Condensed ~~2,290~~Consolidated ~~Current~~Statements ~~portion~~ of ~~capital~~Operations ~~lease~~For ~~payable~~The ~~290~~Three ~~284~~and ~~Current~~Six ~~portion~~Months ofEnded ~~deferred~~January ~~gain on building sale 119 119 Accounts payable 9~~31,~~484~~ ~~9,088~~2002 ~~Accrued~~and ~~expenses~~2001......... 3~~,354~~ ~~3,847~~Condensed ~~Income~~Consolidated ~~taxes~~Statements ~~payable~~of --Cash 20Flows ~~--------~~For ~~--------~~The ~~Total~~Three ~~current~~and ~~liabilities~~Six ~~15,540~~Months ~~15,648~~Ended ~~Long-term~~January ~~debt - less current portion 16~~31,~~280~~ ~~18,721~~2002 ~~Capital~~and ~~lease~~2001........ ~~obligations~~4 ~~2,548~~Notes ~~2,623~~to ~~Deferred~~Condensed ~~gain~~Consolidated onFinancial ~~building sale 745 774 -------- -------- Total liabilities 35,113 37,766 -------- -------- Shareholders' equity: Preferred stock, $~~Statements.01................ ~~par~~5 ~~value,~~Item ~~250,000 shares authorized: none issued -- -- Common stock, $~~2.08 ~~par~~Management's ~~value,~~Discussion ~~4,500,000 shares authorized: issued~~ and ~~outstanding~~Analysis ~~2,247,796 as~~ of ~~October~~Financial ~~31,~~Condition ~~2001~~ and ~~2,103,623~~Results as of ~~July~~Operations........................ ~~31, 2001 180 168 Additional paid-in capital~~ 11~~,699~~ ~~11,586~~Item ~~Foreign~~3. ~~currency~~Quantitative ~~translation~~and ~~adjustment~~Qualitative ~~(386)~~Disclosure ~~(327)~~about ~~Retained~~Market ~~earnings~~Risk............ ~~(223)~~16 ~~1,602~~PART ~~--------~~II. ~~--------~~OTHER ~~Total~~INFORMATION. ~~shareholders'~~Item ~~equity~~6. ~~11,270~~Exhibits ~~13,029 -------- -------- Total liabilities~~ and ~~shareholders'~~Reports ~~equity~~on $Form ~~46,383~~8-K..................................... $17 ~~50,795~~Signature ~~========~~Page....................................................... ~~========~~17

ITEM 1. FINANCIAL STATEMENTS. Independent Accountants' Review Report To the Board of Directors and Stockholders of IVC Industries, Inc. We have reviewed the accompanying condensed consolidated balance sheet of IVC Industries, Inc. as of January 31, 2002, and the related condensed consolidated statements of operations for the three months and six months ended January 31, 2002 and condensed consolidated statement of cash flows for the six months ended January 31, 2002. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has continuing losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet as of July 31, 2001, and the related statements of operations, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated October 12, 2001, we expressed an unqualified opinion (with a going concern emphasis paragraph) on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of July 31, 2001, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. /s/ AMPER POLITZNER & MATTIA, PA February 26, 2002 Edison, New Jersey 1 IVC INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except as Noted or Per Share Information)

~~Three~~January ~~Months~~31, ~~Ended~~July ~~October~~ 31, 2002 2001 --------------- --------------- ASSETS (unaudited) ------ ~~2001~~Current ~~2000~~assets: Cash and cash equivalents $ 504 $ 530 Accounts receivable, net 6,194 8,994 Inventories 13,154 13,277 Other receivable, price fixing settlement - 3,752 Deferred taxes - 2,241 Prepaid expenses 397 191 Refundable income taxes 1,101 1,101 --------------- --------------- ~~Net~~Total ~~sales~~current $assets 1521,350 $30,086 15Property,~~828~~ ~~Cost~~plant ofand ~~sales~~equipment, 12net 16,~~262~~855 1218,~~124~~009 Due from related parties, net 538 524 Deferred taxes - 1,591 Other assets 506 585 --------------- --------------- ~~Gross~~Total ~~profit~~assets 3$ 39,~~088~~249 3$ 50,~~704~~795 ~~Selling~~=============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,347 ~~general~~$ ~~and~~2,290 ~~administrative~~Current portion of capital lease payable 296 284 Current portion of deferred gain on building sale 119 119 Accounts payable 9,627 9,088 Accrued expenses 43,~~877~~573 43,~~548~~847 Income taxes payable 39 20 --------------- --------------- ~~Loss~~Total ~~from~~current ~~operations~~liabilities (116,~~789)~~001 ~~(844)~~15,648 ~~Recovery~~Long-term debt - less current portion 12,995 ~~price~~18,721 ~~fixing~~Capital ~~settlement~~lease ~~197~~obligations --2,472 ~~Other~~2,623 ~~expenses~~Deferred -gain ~~net~~on ~~200~~building ~~748~~sale 715 774 --------------- --------------- ~~Loss~~Total ~~before~~liabilities ~~income taxes (1~~32,~~792)~~183 (137,~~592)~~766 ~~Income tax expense (benefit) 33 (517)~~ --------------- --------------- ~~Net~~Shareholders' ~~loss~~equity: $Preferred (1stock,~~825)~~ $.01 (1par value,~~075)~~ ~~===========~~250,000 ~~===========~~shares ~~Net~~authorized: ~~loss~~none ~~per~~issued ~~share~~ - ~~basic~~Common $stock, (0$.~~85)~~08 $par ~~(0.51)~~value, ~~===========~~4,500,000 ~~===========~~shares ~~Net~~authorized: ~~loss~~issued ~~per~~and ~~share~~outstanding 2,247,797 as of January 31, 2002 and 2,103,623 as of July 31, 2001, respectively 180 168 Additional paid-in ~~diluted~~capital $11,699 11,586 Foreign currency translation adjustment (~~0.85~~399) $ (~~0.51~~327) ~~===========~~Retained ~~===========~~earnings ~~Weighted~~(deficit) ~~average~~(4,414) ~~shares~~1,602 --------------- ~~basic~~--------------- 2Total shareholders' equity 7,~~149,097~~066 213,~~090,081~~029 ~~===========~~--------------- ~~===========~~--------------- ~~Weighted~~Total ~~average~~liabilities ~~shares~~and -shareholders' ~~diluted~~equity 2$ 39,~~149,097~~249 2$ 50,~~090,081~~795 =============== ===============

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

Three Months Ended ~~October~~Six Months Ended January 31, January 31, ------------------------ ~~2001 2000~~ ------------ ---------------------------------- ~~CASH~~2002 ~~FLOWS~~2001 ~~FROM~~2002 ~~OPERATING~~2001 ~~ACTIVITIES:~~---------------- ~~Net~~----------------- ~~loss $(1,825) $ (1,075)~~ ---------------- --------------- ~~Adjustments~~Net tosales ~~reconcile~~$ ~~net~~19,653 ~~income~~$ to19,590 ~~net~~$ ~~cash~~35,003 ~~provided~~$ by35,418 ~~(used~~Cost ~~in)~~of ~~operating~~sales ~~activities:~~13,534 ~~Depreciation~~14,609 ~~and~~25,796 ~~amortization~~26,733 ~~704~~---------------- ~~698~~----------------- ~~Provision~~---------------- ~~for~~--------------- ~~bad~~Gross ~~debts~~profit 756,119 364,981 ~~Provision~~9,207 ~~for~~8,685 ~~excess~~Selling, general and ~~obsolete~~administrative ~~inventory~~expenses ~~524~~5,992 ~~(68)~~4,960 ~~Gain~~10,869 on9,508 ~~sale~~---------------- ~~of assets (30) (605) Deferred income taxes~~ ----------------- ~~23 Stock and options issued to non~~-~~employee~~--------------- ~~directors 11~~ --------------- ~~Common~~Income ~~Stock issued to IVC Industries, Inc. Retirement Savings Plan 114~~ (20loss) ~~Changes~~from inoperations ~~assets~~127 -21 (~~increase) decrease: Accounts receivable 2,716~~ 1,~~339~~662) ~~Inventories~~ (~~2,779~~823) 3Recovery,~~180~~ ~~Prepaid~~price ~~expenses~~fixing ~~and~~settlement ~~other~~- ~~current~~- ~~assets~~197 ~~3,664~~- ~~(178)~~ Other ~~assets~~expenses ~~(31) (320) Changes in liabilities~~ - ~~increase~~net ~~(decrease):~~486 ~~Accounts~~742 ~~payable~~686 ~~and accrued expenses (97) (2~~1,~~453)~~490 ~~Income taxes payable (20) (49)~~ ------- --------- ~~Total adjustments 4,851 1,583~~ ------- ---------- ~~Net cash provided by operating activities 3,026 508~~ ------- --------- ~~CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (46) (19)~~ ------- -------- ~~Net~~Loss ~~cash~~before ~~used~~income intaxes ~~investment activities~~ (46359) (19721) ~~------- -------- CASH FLOWS FROM FINANCING ACTVITIES: Principal payments on long-term debt~~ (52,~~840~~151) (182,~~538~~313) ~~Proceeds~~Income ~~from~~tax ~~long-term~~expense ~~debt~~(benefit) 3,~~403~~832 ~~18,925 Principal payments on capital lease obligations~~ (69188) 3,865 (56705) ------- --------- ~~Net cash used in (provided by) financing activities (2,506) 331~~ ------- ---------- ~~Foreign currency translation adjustment (59) (38)~~ ------- -------- ~~NET INCREASE IN CASH 415 782 CASH AND CASH EQUIVALENTS~~-~~BEGINNING~~ ~~530 648~~ ------- -------- ~~CASH~~Net ~~AND~~loss ~~CASH~~$ ~~EQUIVALENTS-ENDING~~(4,191) $ ~~945~~(533) $ (6,016) $ (1,~~430~~608) ================ ================= ~~SUPPLEMENTAL~~================ ~~DISCLOSURE~~=============== OFNet ~~CASH~~loss ~~FLOW~~per ~~INFORMATION~~share ~~Cash~~- ~~paid~~basic ~~during~~$ ~~the~~(1.86) ~~period~~$ ~~for:~~(0.25) ~~Interest~~ $ ~~515~~(2.74) $ ~~751~~(0.77) ================ ================= ~~Taxes~~================ =============== Net loss per share - diluted $ 72(1.86) $ ~~751~~(0.25) $ (2.74) $ (0.77) ================ ================= ================ =============== Weighted average shares - basic 2,247,796 3,094,529 2,198,447 2,090,081 ================ ================= ================ =============== Weighted average shares - diluted 2,247,796 3,094,529 2,198,447 2,090,081 ================ ================= ================ ===============

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

~~October~~Six ~~31,~~Months ~~July~~Ended January 31, ~~2001~~---------------------------------- 2002 2001 ----------- ------------- ~~(unaudited)~~CASH ~~Finished~~FLOWS ~~goods~~FROM OPERATING ACTIVITIES: Net loss $ 3(6,~~586~~016) $ (1,608) ----------- ------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,404 1,358 Provision for bad debts 150 34 Provision for excess and obsolete inventory 595 - Gain on sale of assets (59) (56) Deferred income taxes 3,~~764~~832 ~~Bulk~~17 Stock and ~~work~~options issued to non-employee directors 12 28 Common Stock issued to IVC Industries, Inc. Retirement Savings Plan 113 Changes in ~~process~~assets 5- (increase) decrease: Accounts receivable 2,~~945~~650 (1,002) Inventories (472) 5,~~259~~069 ~~Raw~~Prepaid ~~materials~~expenses and ~~packaging~~other ~~components~~current 6assets 3,~~001~~546 4(486) Other assets (20) (268) Changes in liabilities - increase (decrease): Accounts payable and accrued expenses 265 (1,~~254~~848) Income taxes payable 19 (8) ----------- ------------- Total ~~inventories~~adjustments 12,035 2,838 ----------- ------------- Net cash provided by operating activities 6,019 1,230 ----------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (166) (76) ----------- ------------- Net cash used in investment activities (166) (76) ----------- ------------- CASH FLOWS FROM FINANCING ACTVITIES: Principal payments on long-term debt (14,256) (19,297) Proceeds from long-term debt 8,587 18,207 Principal payments on capital lease obligations (139) (113) ----------- ------------- Net cash (used in) financing activities (5,808) (1,203) ----------- ------------- Foreign currency translation adjustment (72) (5) ----------- ------------- NET INCREASE (DECREASE) IN CASH (26) (53) CASH AND CASH EQUIVALENTS-BEGINNING 530 648 ----------- ------------- CASH AND CASH EQUIVALENTS-ENDING $15 504 $ 595 =========== ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 1,~~532~~081 $13 1,~~277~~584 =========== ============= Taxes $ 161 $ 158 =========== =============

4 IVC INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except as Noted or Per Share Information) (unaudited) Note 1 - Basis of Presentation and Other Matters: The accompanying interim period unaudited condensed consolidated financial statements do not include all disclosures provided in the annual consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto contained in the IVC Industries, Inc. (the "Company") Annual Report on Form 10-K for the year ended July 31, 2001, as filed with the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. Certain amounts have been reclassified to conform with the current period presentation. Note 2 - Liquidity For the six months ended January 31, 2002, the Company continued to experience losses from operations. These losses are attributable to an overall softness in the market for herbal and nutritional products, resulting in reduced sales levels for the Company. At April 30, 2001, the Company was not in compliance with the minimum tangible net worth covenant contained in the Company's loan and security agreement with Congress Financial Corporation, a subsidiary of First Union Corporation ("Congress"). On June 13, 2001, the Company entered into an amended loan and security agreement with Congress. Under the amended agreement, Congress waived the event of default existing as of April 30, 2001, and the rate of interest was increased from rates ranging from the prime rate plus .75% - 1% to an amended rate of the prime rate plus 3%, increasing to 5% in the event of termination or non-renewal of the loan, or if an event of default occurs. The amended agreement also provides for a $500,000 permanent special reserve, an amendment fee of $50,000, and requires the Company to maintain revised minimum tangible net worth amounts. The Company has been pursuing, among other initiatives; i) obtaining alternative sources of financing, ii) seeking additional sales opportunities within its core business, iii) seeking new sales opportunities through non-traditional channels of distribution, iv) reducing expenses to a level that would provide the Company with sufficient cash flows to meet its obligations, v) merger or sale of the Company, and/or vi) a combination of any of the foregoing. 5 On September 21, 2001, the Company signed a non-binding letter of intent with Inverness Medical Innovations, Inc. ("Inverness") for Inverness to acquire all of the outstanding stock of the Company. As contemplated by the letter of intent, each stockholder of the Company was to receive from Inverness $2.50 cash for each share of the Company's common stock held by such stockholder, except that certain of the Company's principal stockholders were to receive either cash, restricted shares of common stock of Inverness or a combination thereof, valued at $2.50 for each share of the Company's common stock held by such stockholders. Inverness was a majority-owned subsidiary of Inverness Medical Technology, Inc. Inverness Medical Technology, Inc. had agreed to be acquired by Johnson & Johnson. As part of the acquisition by Johnson & Johnson, Inverness Medical Technology, Inc. planned to restructure its operations so that its women's health, nutritional supplements and clinical diagnostics businesses are held by Inverness. On November 21, 2001, Inverness Medical Technology, Inc. merged with Johnson & Johnson and Inverness was split-off from Inverness Medical Technology, Inc. as a separate, publicly-owned company based in Waltham, Massachusetts. On December 21, 2001 the Company and Inverness signed a definitive merger agreement. Under the terms of the merger agreement, upon the adoption and approval of the merger agreement by the Company's stockholders and the completion of the merger: (i) the Company will merge with and into Nutritionals Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Inverness, with Nutritionals Acquisition Corporation continuing as the surviving corporation and (ii) certain principal stockholders would receive shares of Inverness common stock, valued at $2.50, in exchange for their shares of the Company's common stock, with the remaining stockholders receiving $2.50 in cash in exchange for their shares of the Company's common stock. On January 24, 2002, the merger agreement between the Company and Innovations was amended and restated. Under the terms of the amended and restated merger agreement, upon the adoption and approval of the amended and restated merger agreement by the Company's stockholders and the completion of the merger: (i) Nutritionals Acquisition Corporation will merge with and into the Company, with the Company continuing as the surviving corporation and (ii) each outstanding share of the Company's common stock will be cancelled and converted into the right to receive $2.50 in cash in exchange for their shares of the Company's common stock. The completion of the transactions contemplated by the merger agreement is subject to a number of conditions, including adoption and approval of the merger agreement by the holders of the Company's common stock, the accuracy of representations and warranties made by the parties, the absence of certain material adverse effects on the Company and other customary closing conditions. It was also a condition to the obligations of Inverness and Nutritionals Acquisition Corporation to complete the merger that the Company amend its loan agreements with Congress Financial Corporation in a manner satisfactory to Inverness and that Inverness obtain the consent of its secured lender to the merger. Although the transaction is expected to close in the first quarter of 2002, there can be no assurance Inverness will complete the acquisition of the Company. 6 Six stockholders of the Company holding approximately 53.3% of the Company's outstanding common stock have entered into voting agreements with Inverness. The voting agreements require these stockholders to vote all of the shares of the Company common stock they own in favor of the acquisition of the Company by Inverness and against any competing proposal. 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. 7 Note 3 - Inventories: Inventories consist of the following: January, July 31, 2002 2001 ---- ---- (unaudited) Finished goods $ 2,984 $ 3,764 Bulk and work in process 5,337 5,259 Raw materials and packaging components 4,833 4,254 -------- --------- Total inventories $ 13,154 $ 13,277 ======== ======== Note 4 - Deferred Tax Assets: Due to the uncertainty of utilization of deferred tax assets, valuation allowances were established for the full amount of current deferred taxes of $2,241, and non-current deferred taxes of $1,591 during this quarter. Note 5 - Long-Term Debt: On October 16, 2000 the Company entered into a new credit agreement with Congress Financial Corporation, a subsidiary of First Union Corporation, to replace a previously existing credit agreement. The agreement matures on October 16, 2003. The Company can borrow up to $25,000 under a revolving credit commitment and $5,500 under a term loan commitment, subject to borrowing base limitations, as defined. Borrowings under the revolving credit commitment bear interest at either .75% above First Union's "prime rate" or at the Company's option, a rate of 2.75% above the adjusted Eurodollar rate used by the bank. The interest rate on the term loan is .25% higher than the revolving loan rates outlined above. The notes are collateralized by substantially all of the Company's assets. The agreement requires the Company to maintain minimum tangible net worth and contains various restrictions customary in such financial arrangements, including limitations on the payment of cash dividends. At April 30, 2001 the Company was not in compliance with the minimum tangible net worth covenant contained in the Company's Loan and Security Agreement with Congress. On June 13, 2001 the Company entered into an Amended Agreement with Congress. Under the Amended Agreement, Congress agreed to waive the event of default existing as of April 30, 2001, and the rate of interest was changed to the prime rate plus three percent, increasing to five percent in the event of termination or non-renewal of the loan, or if an event of default occurs. The Amended Agreement also provides for a $500,000 permanent special reserve, an amendment fee of $50,000, and requires the Company to maintain revised minimum tangible net worth amounts. 8 Note 6 - Net Income (Loss) Per Share: Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period, increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Note 7 - Comprehensive Income: As of August 1, 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for the reporting and displaying of comprehensive income. The following table presents the Company's comprehensive loss for the three and six month periods ended January 31, 2002 and 2001.

Three Months Ended ~~October~~Six Months Ended January 31, January 31, 2002 2001 ~~2000~~2002 2001 ------------ ------------ ------------ -------- Net loss $ (14,~~825~~191) $ (533) $ (6,016) $ (1,~~075~~608) Other comprehensive income (loss), net of tax: Foreign ~~currency~~exchange translation ~~adjustment~~adjustments (5413) 33 (3872) (5) --------- ---------- ---------- ---------- Comprehensive loss $ (14,~~879~~204) $ (500) $ (6,088) $ (1,~~113~~613) ========= ========== ========== ==========

Note 8 - 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. 9 In August 2001, the Company received $3,752 from a key supplier in accordance with the September 17, 1999 Settlement Agreement. This amount consisted of a payment due to the Company under the Most Favored Nation Clause contained in the Settlement Agreement, and was included in the results of operations for the year ended July 31, 2001. During the quarter ended January 31, 2002 the Company received an additional price fixing settlement of $197 from one other supplier and this amount is included in the statement of operations for the same period. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (Dollars in Thousands, except As Noted or Per Share Information) THREE MONTHS ENDED JANUARY 31, 2002 COMPARED TO THE THREE MONTHS ENDED JANUARY 31, 2001 Results of Operations Net loss for the quarter ended January 31, 2002 was $4,191, equivalent to a basic and diluted loss of $1.86 per share versus a net loss of $533, equivalent to basic and diluted loss of $0.25 per share, for the quarter ended January 31, 2001. Net sales for the quarter ended January 31, 2002 were $19,653 as compared to $19,590 for the quarter ended January 31, 2001, virtually flat between periods. Cost of sales for the quarter ended January 31, 2002 was $13,534, a decrease of $1,075 or 7.4% from $14,609 for the quarter ended January 31, 2001. Cost of sales decreased 5.7% as a percentage of net sales over the prior year's period, primarily as a result of a shift in sales to products with higher gross profit margins from products with lower gross profit margins. Selling, general and administrative expenses for the quarter ended January 31, 2002 were $ 5,992, an increase of $1,032 or 21% as compared to the quarter ended January 31, 2001. The increase is the result of: i) higher promotion and distribution costs, ii) higher legal fees relating to the pending acquisition of the Company by Inverness, and iii)higher sales salaries due to increases in staff. The increase was partially offset by lower administrative salaries due to staff reductions. Other expenses-net for the quarter ended January 31, 2002 were $486, representing interest expense of $518, which was offset in part by other miscellaneous income. Other expenses-net for the three months ended January 31, 2001 were $742. This amount principally represented interest expense of $754 which was offset in part by other miscellaneous income. Income taxes generally reflect the effect of statutory federal, state and Canadian income taxes and certain non-deductible expenses. The Company's effective tax rate was 26% during the three months ended January 31, 2001. Due to the uncertainty of utilization of deferred tax assets, valuation allowances were established for the full amount of current deferred taxes of $2,241, and non-current deferred taxes of $1,591 during this quarter. 11 SIX MONTHS ENDED JANUARY 31, 2002 COMPARED TO THE SIX MONTHS ENDED JANUARY 31, 2001 Results of Operations Net loss for the six months ended January 31, 2002 was $6,016, equivalent to a basic and diluted loss of $2.74 per share, versus a net loss of $1,608, or $.77 per basic and diluted share, for the six months ended January 31, 2001. Net sales for the six months ended January 31, 2002 were $35,003 as compared to $35,418 for the six months ended January 31, 2001, a decrease of $415 or 1.1%, virtually flat between the periods. Cost of sales for the six months ended January 31, 2002, was $25,796 or 73.7% of sales, compared to $26,733, or 75.5% of sales for the six months ended January 31, 2001. Cost of sales decreased 1.8% as a percentage of sales versus the prior year's period as a result of a shift in sales to products with higher gross profit margins from products with lower gross profit margins. Selling, general and administrative expenses for the six months ended January 31, 2002 were $10,869 or 31.18% of sales as compared to $9,508 or 26.8% of sales, in the same period of the prior year. The increase is the result of: i) higher promotion and distribution costs, ii) higher legal fees relating to the acquisition of the Company by Innovations and iii) higher sales salaries due to increases in staff. This increase was partially offset by lower administrative salaries due to staff reductions. Other expenses-net were $686 for the six months ended January 31, 2002, representing interest expense of $1,075, which was offset in part by a bad debt recovery of $341 and other miscellaneous income. Other expenses-net for the six months ended January 31, 2001 were $1,490. This amount principally represented interest expense of $1,430 which was offset in part by other miscellaneous income. Income taxes generally reflect the effect of statutory federal, state and Canadian income taxes and certain non-deductible expenses. The Company's effective tax rate was 34.8% for the six months ended January 31, 2001. Due to the Company's net loss for the six months ended January 31, 2002, an income tax benefit was not recorded. Due to the uncertainty of utilization of deferred tax assets, valuation allowances were established for the full amount of current deferred taxes of $2,241, and non-current deferred taxes of $1,591 during this period. 12 Liquidity and Capital Resources Net cash provided by operating activities for the three months ended January 31, 2002 was $6,019. The increase in cash was primarily the result of a decrease in deferred income taxes of $3,832, a decrease in other receivables of $3,546, a decrease in account receivable of $2,650, depreciation and amortization of $1,404, and an increase in provision for excess and obsolete inventory of $595. Offsetting these increases in cash were a net loss of $6,016, and an increase in inventories of $472. Cash used in investing activities for the six months ended January 31, 2002 was $166 for additions to buildings and improvements and purchases of equipment. Cash used in financing activities for the six months ended January 31, 2002 was $5,808, which consisted of the excess of borrowing repayments over actual borrowings for the period. On October 16, 2000 the Company entered into a loan and security agreement with Congress, to replace a previously existing credit agreement. The new agreement matures on October 16, 2003. The Company can borrow up to $25,000 under a revolving credit commitment and $5,500 under a term loan commitment, subject to borrowing base limitations, as defined in the loan and security agreement. The agreement requires the Company to maintain minimum tangible net worth and contains various restrictions customary in such financial arrangements, including limitations on the payment of cash dividends. The notes are collateralized by substantially all of the Company's assets. Borrowings under the revolving credit commitment has provided for interest at either .75% above First Union Corporation's "prime rate" or at the Company's option, a rate of 2.75% above the adjusted Eurodollar rate used by the bank. The interest rate on the term loan was .25% higher than the revolving loan rates outlined above. At April 30, 2001 the Company was not in compliance with the minimum tangible net worth covenant contained in the Company's loan and security agreement with Congress. On June 13, 2001 the Company entered into an amended agreement with Congress. Under the amended agreement, Congress waived the event of default existing as of April 30, 2001, and the rate of interest was increased to the prime rate plus 3%, increasing to 5% in the event of termination or non-renewal of the loan, or if an event of default occurs. The amended agreement also provides for a $500,000 permanent special reserve, an amendment fee of $50,000, and requires the Company to maintain revised minimum tangible net worth amounts. 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. 13 On September 21, 2001, the Company signed a non-binding letter of intent with Inverness for Inverness to acquire all of the outstanding stock of the Company. As contemplated by the letter of intent, each stockholder of the Company was to receive from Inverness $2.50 cash for each share of the Company's common stock held by such stockholder, except that certain of the Company's principal stockholders were to receive either cash, restricted shares of common stock of Inverness or a combination thereof, valued at $2.50 for each share of the Company's common stock held by such stockholders. Inverness was a majority-owned subsidiary of Inverness Medical Technology, Inc. Inverness Medical Technology, Inc. had agreed to be acquired by Johnson & Johnson. As part of the acquisition by Johnson & Johnson, Inverness Medical Technology, Inc. planned to restructure its operations so that its women's health, nutritional supplements and clinical diagnostics businesses are held by Inverness. On November 21, 2001, Inverness Medical Technology, Inc. merged with Johnson & Johnson and Inverness was split-off from Inverness Medical Technology, Inc. as a separate, publicly-owned company based in Waltham, Massachusetts. On December 21, 2001 the Company and Inverness signed a definitive merger agreement. Under the terms of the merger agreement, upon the adoption and approval of the merger agreement by the Company's stockholders and the completion of the merger: (i) the Company will merge with and into Nutritionals Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of Inverness, with Nutritionals Acquisition Corporation continuing as the surviving corporation and (ii) certain principal stockholders would receive shares of Inverness common stock, valued at $2.50, in exchange for their shares of the Company's common stock, with the remaining stockholders receiving $2.50 in cash in exchange for their shares of the Company's common stock. On January 24, 2002, the merger agreement between the Company and Innovations was amended and restated. Under the terms of the amended and restated merger agreement, upon the adoption and approval of the amended and restated merger agreement by the Company's stockholders and the completion of the merger: (i) Nutritionals Acquisition Corporation will merge with and into the Company, with the Company continuing as the surviving corporation and (ii) each outstanding share of the Company's common stock will be cancelled and converted into the right to receive $2.50 in cash in exchange for their shares of the Company's common stock. The completion of the transactions contemplated by the merger agreement is subject to a number of conditions, including adoption and approval of the merger agreement by the holders of the Company's common stock, the accuracy of representations and warranties made by the parties, the absence of certain material adverse effects on the Company and other customary closing conditions. It was also a condition to the obligations of Inverness and Nutritionals Acquisition Corporation to complete the merger that the Company amend its loan agreements with Congress Financial Corporation in a manner satisfactory to Inverness and that Inverness obtain the consent of its secured lender to the merger. Although the transaction is expected to close in the first quarter of 2002, there can be no assurance Inverness will complete the acquisition of the Company. 14 Six stockholders of the Company holding approximately 53.3% of the Company's outstanding common stock have entered into voting agreements with Inverness. The voting agreements require these stockholders to vote all of the shares of the Company common stock they own in favor of the acquisition of the Company by Inverness and against any competing proposal. 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 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. 15 FORWARD LOOKING STATEMENTS This report, including the description of Business and Management's Discussion and analysis, contains certain "forward-looking statements", within the meaning of Section 21E of the Securities Exchange Act of 1934, which represent the Company's expectations or beliefs including, but not limited to, statements concerning industry performance, the Company's operations, performance, financial condition, growth and acquisition strategies, margins and growth in sales of the Company's products. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", anticipate", "intend" "could", "should", "estimate" or "continue" or the negative or other variations thereof or comparable terminology are intended to identify risks and uncertainties, certain of which are beyond the Company's control, and actual results may differ materially depending on a variety of important factors, including beneficial or adverse trends in the domestic market for vitamins and nutritional supplements, the gain or loss of significant customers for the Company's products, the competitive environment in the vitamin and nutrition supplement industry, and the enactment or promulgation of new government legislation or regulation, including but not limited to, those risks and uncertainties referred to above and identified in the Company's 10-K for the year ended July 31, 2001, and that actual results may differ materially from those projected in the forward-looking statements as result of various factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The Company's principal financial instrument is long-term notes payable under a secured revolving credit agreement. The Company is affected by market risk exposure primarily through the effect of changes in interest rates on amounts payable by the Company under this credit agreement. Changes in these factors cause fluctuations in the Company's net income and cash flows. The Company does not utilize derivative financial instruments to hedge against changes in interest rates or for any other purpose. 16 PART II. OTHER INFORMATION. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Description of Number Exhibit ------- -------------- 11 Computation of earnings (loss) per share (b) Reports on Form 8-K (i) A report on Form 8-K was filed on December 27, 2001, relating to a press release announcing the Company's signing of a definitive merger agreement whereby Inverness Medical Innovations, Inc. will acquire all of the outstanding common stock of the Company SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: March 15, 2002 By: /s/ E. Joseph Edell --------------------------- --------------------------- Chairman and Chief Executive Officer Dated: March 15, 2002 By: /s/ Thomas E. Bocchino --------------------------- ---------------------------- Secretary and Chief Financial Officer 17 IVC INDUSTRIES, INC. AND SUBSIDIARIES EXHIBIT II COMPUTATION OF EARNINGS (LOSS) PER SHARE (Dollars in Thousands, Except Per Share Information) (unaudited)

Filing Compare · IVC INDUSTRIES INC