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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission File No. 1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 37-1172197
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
136 Chesterfield Industrial Boulevard, Chesterfield, Missouri 63005
(Address of principal executive offices) (Zip Code)
(636) 537-9715
(Registrant's telephone number, including area code)
Registrant 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 and
has been subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK 9,458,137 outstanding Shares as of June 30, 2002
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
The following consolidated financial statements of the Registrant are
attached to this Form 10-Q:
1. Interim Balance Sheet as of June 30, 2002 and Balance Sheet as of
December 31, 2001.
2. Interim Statements of Operations for the three and six month periods
ending June 30, 2002 and June 30, 2001.
3. Interim Statements of Cash Flows for the six month periods ending
June 30, 2002 and June 30, 2001.
The Financial Statements reflect all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the periods
presented.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1. Financial Condition
Current assets of the Company increased during the first six months of
2002, to $7,514,000 from $6,514,000 as of December 31, 2001. Cash and cash
equivalents increased by $1,062,000 to $2,321,000 as of June 30, 2002, as
compared to $1,259,000 as of December 31, 2001. Accounts and notes receivable
increased to $657,000 as of June 30, 2002, as compared to $548,000 as of
December 31, 2001. Inventory decreased by $468,000 to $3,674,000 as of June 30,
2002. The Company's increase in cash is the result of the improved sales and
profitability of the Company, especially in its operations in the United States.
Inventories decreased as the result of the strong sales and efforts to maintain
higher inventory turns. Prepaid expenses and other current assets increased by
$417,000 to $779,000 at June 30, 2002 as the result of payments made for
upcoming conventions and promotional trips.
The Company purchased $258,000 of property, plant and equipment during the
first six months of 2002.
Current liabilities increased by $202,000 from $6,047,000 as of December
31, 2001 to $6,249,000 as of June 30, 2002. Repayment of the amount drawn on the
line of credit was offset by increases in distributor commissions payable,
income taxes payable, and an increase in the current maturities of long-term
debt. The amount outstanding on the line of credit reduced from $986,000 as of
December 31, 2001 to $0 as of June 30, 2002. Trade accounts payable decreased by
$12,000 from $2,882,000 as of December 31, 2001 to $2,870,000 as of June 30,
2002. Distributor commissions payable increased from $1,244,000 as of December
31, 2001 to $1,945,000 as of June 30, 2002. This is the result of higher network
marketing sales in June
2
2002, as compared to December 2001. Income taxes payable increased to $133,000
as of June 30, 2002, as compared to December 31, 2001, as the result of the
improved profitability of the Company. Current maturities of long-term debt
increased by $155,000 as the result of the refinancing of the Company's debt of
approximately $4,000,000 on its building. The effect of the refinancing was to
reduce the interest rate to a floating interest rate, set at the prime rate
(currently 4.75%), yet maintain the same amount of monthly payments of principal
and interest. This increases the amount of principal paid in each monthly
payment and increases the amount classified as current maturities.
Long-term debt and capital lease obligations decreased by $369,000 from
$4,650,000 as of December 31, 2001 to $4,281,000 as of June 30, 2002. A portion
of the decrease is due to the refinancing of primary building debt, as described
above. The Company incurred no additional long-term debt during the first six
months of 2002.
Stockholders' equity increased from $5,827,000 as of December 31, 2001 to
$6,715,000 as of June 30, 2002, as the result of the net income of the first six
months of 2002. Equity decreased by $10,000 as the result of the foreign
currency translation adjustment at June 30, 2002 as compared to December 31,
2001. Also, equity was reduced by $217,000 for treasury stock purchases made
since the end of 2001.
The Company's working capital balance has improved since the end of 2001,
from a balance of $467,000 as of December 31, 2001 to a balance of $1,265,000 as
of June 30, 2002. Accordingly, the current ratio has improved from 1.08 as of
December 31, 2001 to 1.20 as of June 30, 2002. In addition to the refinancing of
the Company's primary building debt, the Company renewed its operating line of
credit in May 2002. The Company has an operating line of credit, with a limit
based on a collateral-based formula of accounts receivable and inventory, with a
maximum borrowing limit of $1,000,000. At June 30, 2002, the Company had no
borrowings on the line of credit. Management believes that the Company's
internally generated funds together with the loan agreement will be sufficient
to meet working capital requirements in 2002.
2. Results of Operations
The Company had net income of $625,000 ($.07 per share basic and $.06 per
share diluted) for the quarter ended June 30, 2002, compared to a net income of
$13,000, or $.00 per share basic and diluted, for the same period in 2001. For
the six months ended June 30, 2002, the Company had net income of $1,084,000
($.11 per share basic and diluted), as compared to a net loss of $133,000 ($.01
loss per share basic and diluted) in the first six months of 2001. Profitability
improved substantially as network marketing sales continued to improve in the
Company's primary markets of the United States, the Philippines, and Mexico.
Furthermore, the improved gross margins reflect the elimination of any
significant production for unrelated customers by the Company's manufacturing
and packaging segment, as compared to the three and six months ended June 30,
2001.
3
Net sales increased to $15,449,000 in the second quarter of 2002 as
compared to $13,425,000 in the prior year. The increase was the result of an
increase in the Company's network marketing sales, partially offset by a
decrease in sales by the Company's manufacturing and packaging services segment.
Net sales in the network marketing segment of the business increased to
$15,383,000 in the second quarter of 2002, as compared to $11,847,000 in the
prior year. Net sales to unrelated customers by the manufacturing and packaging
segment represented $1,578,000 of total net sales in the second quarter of 2001.
Those sales were approximately $66,000 in the second quarter of 2002, as the
Company has terminated all significant sales and production activity to
unrelated customers. For the six-month period ended June 30, 2002, net sales
were $29,933,000 as compared to $27,487,000 for the same period in 2001. The
reasons for the increase over the six month period were the same as those
creating the increase in the second quarter sales.
The growth in network marketing sales was led by a strong increase in the
Company's largest market, the United States. Network marketing sales in the
United States improved by 29% to $12,686,000 in the second quarter of 2002, as
compared to $9,834,000 in the second quarter of 2001. For the first six months
of 2002, United States network marketing sales were $25,062,000 as compared to
$20,271,000 for the same period in 2001. Additionally, sales in the Company's
international subsidiaries increased overall. International sales increased by
34% to $2,697,000 in the second quarter of 2002, compared to $2,012,000 in the
second quarter of 2001. Most of the individual international markets contributed
to the overall increase in the international group. Sales in the Philippines
increased by 51%, Australia/New Zealand sales increased by 43%, Mexican sales
increased by 31%, and sales in the United Kingdom increased by 29%. For the
first six months, international sales have increased by 27%, to $4,755,000, from
$3,744,000 in the same period of 2001. New product introductions contributed to
the increase in the international sales, highlighted by the introduction of
Reliv Reversage in Mexico and Reliv NOW for Kids and Reliv Arthaffect in the
Philippines.
The Company has provided manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers, including the production of the Reliv'
brand products. In 2001, the Company decided to phase out all significant
production for unrelated customers, continuing only the Reliv' brand production.
As a result, net sales to unrelated customers decreased to approximately $66,000
in the second quarter of 2002 from $1,578,000 in the prior year. For the
six-month period, these sales were $117,000 in 2002 as compared to $3,472,000 in
2001.
Cost of products sold for the network marketing segment as a percentage of
net sales decreased to 18.6% in the second quarter of 2002, as compared to 19.0%
in the second quarter of 2001. This decrease is the result of higher production
requirements driven by the increase in worldwide network marketing sales. The
decrease in total cost of goods sold was due to the elimination of the cost of
goods associated with the low-margin manufacturing and packaging services
performed for unrelated customers. For the six month period ended June 30, cost
of products sold for the network marketing segment were 18.7% in 2002 and 18.9%
in 2001.
Distributor royalties and commissions as a percentage of network marketing
sales remained steady at 38.4% in the second quarter of 2002 and 2001. For the
six-month period,
4
royalties and commissions were 38.5% of network marketing sales in 2002 and
38.3% in 2001. These expenses are governed by the distributor agreements and are
directly related to the level of sales.
Selling, general and administrative (SGA) expenses increased by $542,000
in the second quarter of 2002, as compared to the second quarter of 2001.
However, SGA expenses as a percentage of net sales decreased by more than a full
percentage point, from 37.6% in the second quarter of 2001 to 36.2% in the
second quarter of 2002. Sales expenses accounted for approximately $250,000 of
the increase. Some of the components of the increase were increased credit card
fees due to the higher sales volume, increased sales meeting expenses due to
more and larger distributor meetings worldwide, and increased sales bonuses.
Increases in G&A expenses made up the remainder of the difference, primarily in
higher G&A salaries and insurance expenses, including a charge of $80,000 in the
second quarter of 2002 to reflect the decrease in the cash surrender value of
the executive life insurance policies. This corresponds with the overall stock
market decline experienced in the second quarter of 2002.
Interest expense decreased from $130,000 in the second quarter of 2001 to
$98,000 in the second quarter of 2002. This decrease is due to less reliance on
the line of credit, coupled with the refinancing of the Company's primary
building debt, as described in the "Financial Condition" section. For the
six-month period ended June 30, interest expense decreased from $287,000 in 2001
to $219,000 in 2002.
The Company recorded income tax expense of $375,000 for the second quarter
of 2002, an effective rate of 37.5%. In the first six months of 2001, the
Company did not recognize an income tax benefit for the loss before income taxes
incurred in that period. For the first six months of 2002, income tax expense
was $689,000, an effective rate of 38.9%.
Safe Harbor Provision of the Private Securities Litigation Act of 1995 and
Forward Looking Statements.
The statements contained in Item 2 (Management's Discussion and Analysis
of Financial Condition and Results of Operation) that are not historical facts
may be forward-looking statements (as such term is defined in the rules
promulgated pursuant to the Securities Exchange Act of 1934) that are subject to
a variety of risks and uncertainties. The forward-looking statements are based
on the beliefs of the Company's management, as well as assumptions made by, and
information currently available to the Company's management. Accordingly, these
statements are subject to significant risks, uncertainties and contingencies
which could cause the Company's actual growth, results, performance and business
prospects and opportunities in 2002 and beyond to differ materially from those
expressed in, or implied by, any such forward-looking statements. Wherever
possible, words such as anticipate, plan, expect, believe, estimate, and similar
expressions have been used to identify these forward-looking statements, but are
not the exclusive means of identifying such statements. These risks,
uncertainties and contingencies include, but are not limited to, the Company's
ability to continue to attract, maintain and motivate its distributors, changes
in the regulatory environment affecting network marketing sales and sales of
food and dietary supplements and other risks and uncertainties detailed in the
Company's other SEC filings.
5
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Company's earnings and cash flow are subject to fluctuations due to
changes in foreign currency rates as it has several foreign subsidiaries and
continues to explore expansion into other foreign countries. As a result,
exchange rate fluctuations may have an effect on its sales and the Company's
gross margins. Accounting practices require that the Company's results from
operations be converted to U.S. dollars for reporting purposes. Consequently,
the reported earnings of the Company in future periods may be significantly
affected by fluctuations in currency exchange rates, generally increasing with a
weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Products
manufactured by the Company for sale to the Company's foreign subsidiaries are
transacted in U.S. dollars. As the Company's foreign operations expand, its
operating results will be subject to the risks of exchange rate fluctuations and
the Company may not be able to accurately estimate the impact of such changes on
its future business, product pricing, results of operations or financial
condition.
The Company also is exposed to market risk in changes in interest rates on
its long-term debt arrangements and commodity prices in some of the raw
materials it purchases for its manufacturing needs. However, neither presents a
risk that would have a material effect on the Company's results of operations or
financial condition.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There has been no material litigation initiated by or against the Company
in the reporting period or any material changes to litigation reported by the
Company in its prior periodic reports.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
6
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
Exhibit Exhibit No.
------- -----------
Carl W. Hastings' Services Agreement
dated June 1, 2002 10.1
Modification Agreement dated June 1, 2002, with
Southwest Bank of St. Louis 10.2
(b) The Company has not filed a Current Report during the quarter
covered by this report.
* Also incorporated by reference the Exhibits filed as part of the
S-18 Registration Statement of the Registrant, effective November
5, 1985, and subsequent periodic filings.
7
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: August 8, 2002 RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
---------------------------------
Robert L. Montgomery, President,
Chief Executive Officer and
Principal Financial Officer
8
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30 December 31
2002 2001
------------ ------------
(unaudited) (see notes)
Assets
Current assets:
Cash and cash equivalents $ 2,321,246 $ 1,258,821
Accounts and notes receivable, less allowances of
$5,000 in 2002 and 2001 656,778 548,035
Accounts due from employees and distributors 62,500 50,200
Inventories
Finished goods 2,333,106 2,313,058
Raw materials 879,330 1,391,237
Sales aids and promotional materials 461,610 437,371
------------ ------------
Total inventories 3,674,046 4,141,666
Refundable income taxes 3,771 136,263
Prepaid expenses and other current assets 779,081 362,287
Deferred income taxes 17,000 17,000
------------ ------------
Total current assets 7,514,422 6,514,272
Other assets 557,539 646,018
Note receivable from officer 54,250 59,250
Accounts due from employees and distributors 14,516 43,741
Property, plant and equipment:
Land 829,222 829,222
Building 8,430,725 8,441,164
Machinery & equipment 4,152,174 4,030,689
Office equipment 620,577 565,085
Computer equipment & software 2,193,850 2,085,817
------------ ------------
16,226,548 15,951,977
Less: Accumulated depreciation (6,714,394) (6,276,781)
------------ ------------
Net property, plant and equipment 9,512,154 9,675,196
------------ ------------
Total assets $ 17,652,881 $ 16,938,477
============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30 December 31
2002 2001
------------ ------------
(unaudited) (see notes)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable and other accrued expenses $ 2,869,687 $ 2,882,361
Distributors commissions payable 1,945,412 1,244,439
Sales taxes payable 362,926 260,643
Interest expense payable 58,808 60,499
Payroll and payroll taxes payable 387,729 192,673
------------ ------------
Total accounts payable and accrued expenses 5,624,562 4,640,615
Income taxes payable 133,492 6,153
Borrowings under line of credit -- 985,922
Current maturities of long-term debt 434,696 279,733
Current maturities of capital lease obligations 56,748 134,682
------------ ------------
Total current liabilities 6,249,498 6,047,105
Capital lease obligations, less current maturities 1,317 8,862
Long-term debt, less current maturities 4,279,904 4,641,384
Other non-current liabilities 407,032 414,276
Stockholders' equity:
Preferred stock, par value $.001 per share; 3,000,000
shares authorized; none issued and outstanding -- --
Common stock, par value $.001 per share; 20,000,000
authorized; 9,664,757 shares issued and 9,458,137
shares outstanding as of 6/30/2002; 9,654,884 shares
issued and 9,563,267 shares outstanding as of 12/31/2001 9,665 9,655
Additional paid-in capital 9,140,415 9,119,934
Notes receivable-officers and directors (7,903) (19,289)
Treasury stock-206,620 shares in 2002
and 91,617 shares in 2001 (332,994) (115,558)
Accumulated deficit (1,395,530) (2,479,285)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (698,523) (688,607)
------------ ------------
Total stockholders' equity 6,715,130 5,826,850
------------ ------------
Total liabilities and stockholders' equity $ 17,652,881 $ 16,938,477
============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Operations
Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales at suggested retail $ 22,001,451 $ 18,529,110 $ 42,859,961 $ 37,998,980
Less: distributor allowances on product purchases 6,552,420 5,104,176 12,926,646 10,512,477
------------ ------------ ------------ ------------
Net sales 15,449,031 13,424,934 29,933,315 27,486,503
Costs and expenses:
Cost of products sold 2,915,799 3,682,602 5,672,509 7,835,423
Distributor royalties and commissions 5,912,303 4,553,485 11,484,361 9,204,117
Selling, general and administrative 5,594,051 5,051,688 10,868,810 10,305,693
------------ ------------ ------------ ------------
Total costs and expenses 14,422,153 13,287,775 28,025,680 27,345,233
------------ ------------ ------------ ------------
Income from operations 1,026,878 137,159 1,907,635 141,270
Other income (expense):
Interest income 9,150 8,530 15,639 18,716
Interest expense (97,818) (130,056) (219,276) (287,385)
Other income/(expense) 62,001 (2,240) 68,757 (5,389)
------------ ------------ ------------ ------------
Income/(loss) before income taxes 1,000,211 13,393 1,772,755 (132,788)
Provision for income taxes 375,000 0 689,000 0
------------ ------------ ------------ ------------
Net income/(loss) $ 625,211 $ 13,393 $ 1,083,755 ($132,788)
============ ============ ============ ============
Earnings/(loss) per common share $ 0.07 $ 0.00 $ 0.11 ($0.01)
============ ============ ============ ============
Earnings/(loss) per common share - assuming dilution $ 0.06 $ 0.00 $ 0.11 ($0.01)
============ ============ ============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30
2002 2001
----------- -----------
Operating activities:
Net income (loss) $ 1,083,753 ($132,788)
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 421,268 373,780
Compensation expense for warrants granted 9,937 --
Foreign currency translation (gain) loss (48,063) 12,121
(Increase) decrease in accounts and notes receivable (125,262) 1,197,569
(Increase) decrease in inventories 478,904 652,010
(Increase) decrease in refundable income taxes 132,534 196,620
(Increase) decrease in prepaid expenses
and other current assets (413,706) (419,572)
(Increase) decrease in other assets 88,435 29,265
Increase (decrease) in accounts payable and accrued expenses 966,184 (671,041)
Increase (decrease) in income taxes payable 126,236 --
----------- -----------
Net cash provided by operating activities 2,720,220 1,237,964
Investing activities:
Purchase of property, plant and equipment (257,679) (105,749)
Repayment of loans by officers and directors 16,386 3,625
----------- -----------
Net cash used in investing activities (241,293) (102,124)
Financing activities:
Net repayments under line of credit (985,922) (542,152)
Proceeds from long-term borrowings -- 41,102
Principal payments on long-term borrowings (207,160) (175,827)
Principal payments under capital lease obligations (85,478) (94,273)
Proceeds from options and warrants exercised 10,554 390
Purchase of treasury stock (217,435) --
----------- -----------
Net cash used in financing activities (1,485,441) (770,760)
Effect of exchange rate changes on cash and cash equivalents 68,939 (51,692)
----------- -----------
Increase in cash and cash equivalents 1,062,425 313,388
Cash and cash equivalents at beginning of period 1,258,821 1,198,682
----------- -----------
Cash and cash equivalents at end of period $ 2,321,246 $ 1,512,070
=========== ===========
See notes to financial statements
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2002
Note 1-- Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the six-month period ended June 30, 2002 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 2002.
The balance sheet at December 31, 2001 has been derived from the
audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting priciples for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Registrant Company
and Subsidiaries' annual report on Form 10-K for the year ended
December 31, 2001.
Note 2-- Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
-------------------------- ----------------------------
Numerator:
Numerator for basic and diluted
earnings per share--net income/(loss) $ 625,211 $ 13,393 $ 1,083,755 ($132,788)
Denominator:
Denominator per basic earnings per
share--weighted average shares 9,485,000 9,655,000 9,516,000 9,655,000
Effect of dilutive securities:
Employee stock options and other warrants 727,000 -- 727,000 --
-------------------------- ----------------------------
Denominator for diluted earnings per
share--adjusted weighted average shares 10,212,000 9,655,000 10,243,000 9,655,000
========================== ============================
Basic earnings/(loss) per share $ 0.07 $ 0.00 $ 0.11 ($0.01)
========================== ============================
Diluted earnings/(loss) per share $ 0.06 $ 0.00 $ 0.11 ($0.01)
========================== ============================
Note 3-- Comprehensive Income
Total comprehensive income was $545,988 and $1,073,839 for the three
months and six months ended June 30, 2002, respectively. For the
three and six months ended June 30, 2001, comprehensive
income/(loss) was $90,392 and $(182,487), respectively. The
Company's only component of other comprehensive income is the
foreign currency translation adjustment.
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2002
Note 4-- Segment Information
Three months ended Three months ended
June 30, 2002 June 30, 2001
------------- -------------
Network Manufacturing Network Manufacturing
marketing and packaging marketing and packaging
------------------------------ -------------------------------
Net sales to external customers 15,382,682 66,169 11,846,778 1,578,156
Intersegment net sales -- 2,545,520 -- 1,813,642
Segment profit/(loss) 1,295,041 210,436 523,135 (6,553)
Six months ended Six months ended
June 30, 2002 June 30, 2001
------------- -------------
Network Manufacturing Network Manufacturing
marketing and packaging marketing and packaging
------------------------------ -------------------------------
Net sales to external customers 29,816,742 116,573 24,014,375 3,472,128
Intersegment net sales -- 4,236,541 -- 3,504,395
Segment profit/(loss) 2,605,807 159,760 1,209,621 (281,091)
Segment assets 13,149,712 2,181,923 13,737,928 3,512,291
A reconciliation of combined operating profit for the reportable
segments to consolidated income before income taxes is as follows:
Three months ended June 30 Six months ended June 30
2002 2001 2002 2001
----------------------------- ------------------------------
Total profit for reportable segments 1,505,477 516,582 2,765,567 928,530
Corporate expenses (478,599) (379,423) (857,932) (787,260)
Non operating - net 71,151 6,290 84,396 13,327
Interest expense (97,818) (130,056) (219,276) (287,385)
----------------------------- ------------------------------
Income before income taxes 1,000,211 13,393 1,772,755 (132,788)
============================= ==============================
Note 5-- Legal Proceedings
In December 2001, five former distributors of the Company filed for
arbitration claiming unlawful termination, breach of the Distributor
Agreement, and interference with business expectancy. The
individuals had been terminated by the Company in October 2000 for
violating certain provisions of the Distributor Agreement. The
Company believes the claim is without merit and intends to
vigorously defend itself. At this time, the outcome of this matter
is uncertain and a range of loss cannot be reasonably estimated;
however, management believes that the final outcome will not have a
material adverse effect on the financial position or results of
operations of the Company.
Note 6-- Long-Term Debt
In June 2002, the Company entered into a loan modification agreement
related to the term loan on its building. The effect of the
agreement was to reduce the interest rate from a fixed rate of 8.5%
to a floating interest rate at the prime rate (currently 4.75%). The
monthly payments of principal and interest remain the same at
$38,802 per month. As of the date of the new agreement, the loan had
a balance of $4,021,000.