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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 September 30, 2003
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.
Registrant is not an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act)
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK 11,981,449 outstanding Shares as of September 30, 2003
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 September 30, 2003 and Balance
Sheet as of December 31, 2002.
2. Interim Statements of Operations for the three and nine month
periods ending September 30, 2003 and September 30, 2002.
3. Interim Statements of Cash Flows for the nine month periods
ending September 30, 2003 and September 30, 2002.
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 nine months of
2003, to $13,971,000 from $8,432,000 as of December 31, 2002. Cash and cash
equivalents increased by $3,768,000 to $7,206,000 as of September 30, 2003, as
compared to $3,438,000 as of December 31, 2002. Accounts and notes receivable
decreased to $662,000 as of September 30, 2003, as compared to $689,000 as of
December 31, 2002. Inventory increased by $1,463,000 to $4,920,000 as of
September 30, 2003. 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, coupled with the proceeds of sale of preferred stock of $975,000,
net of preferred stock redemptions of $525,000. Inventories have been increased
to support the strong sales in the United States and to provide adequate safety
stocks in the key foreign markets. Prepaid expenses and other current assets
increased by $351,000 to $915,000 at September 30, 2003 primarily the result of
policy payments for various types of business insurance to be expensed over the
lives of the policies, and advance payments made for conferences and other
events to be held in 2004.
The Company purchased $739,000 of property, plant and equipment during the
first nine months of 2003.
Current liabilities increased $1,802,000 from $6,040,000 as of December
31, 2002 to $7,842,000 as of September 30, 2003. Trade accounts payable
increased $589,000 from $2,462,000 as of December 31, 2002 to $3,051,000 as of
September 30, 2003. The increase is primarily the result of increased raw
material purchases and accrued property taxes at September
2
30, 2003, as compared to December 31, 2002. Distributor commissions payable
increased from $2,065,000 as of December 31, 2002 to $2,905,000 as of September
30, 2003. This is the result of higher network marketing sales in September
2003, as compared to December 2002.
Long-term debt decreased $329,000 from $4,057,000 as of December 31, 2002
to $3,728,000 as of September 30, 2003. The decrease is the result of scheduled
principal payments, offset by additional long-term debt the Company incurred
during the first nine months of 2003 of $124,000.
Stockholders' equity increased from $7,798,000 as of December 31, 2002 to
$11,784,000 as of September 30, 2003. The increase is primarily the result of
net income of $3,079,000 during the first nine months of 2003, plus the proceeds
of a preferred stock offering of $975,000 issued on March 31, 2003. Dividends on
the preferred stock outstanding of $42,000 were paid during the second and third
quarters. Equity also increased $63,000 as a result of the foreign currency
translation adjustment at September 30, 2003, as the Australian and Canadian
dollars strengthened versus the United States dollar, as compared to December
31, 2002. Declines in the value of the Mexican and Philippine pesos versus the
United States dollar partially offset the gains in the other currencies. Another
increase to equity of $166,000 was due to proceeds received from the exercise of
incentive stock options during the first nine months of 2003. Equity was reduced
$367,000 for treasury stock purchases made during the first nine months of 2003.
The Company's working capital balance has improved since the end of 2002,
from a balance of $2,393,000 as of December 31, 2002 to a balance of $6,129,000
as of September 30, 2003. Accordingly, the current ratio has improved from 1.40
as of December 31, 2002 to 1.78 as of September 30, 2003. 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 September 30, 2003, the Company had no borrowings on the line of credit.
Management believes the Company's internally generated funds together with the
loan agreement and the preferred stock proceeds will be sufficient to meet
working capital requirements in 2003.
2. Results of Operations
The Company had net income available to common shareholders of $1,193,000
($0.10 per share basic and $0.09 per share diluted) for the quarter ended
September 30, 2003, compared to a net income of $741,000 ($0.07 per share basic
and $0.06 per share diluted) for the same period in 2002. Net income for the
quarter ended September 30, 2003 was $1,213,000, and is reduced by preferred
stock dividends of $20,000 to arrive at net income available to common
shareholders. For the nine months ended September 30, 2003, the Company had net
income available to common shareholders of $3,079,000 ($0.26 per share basic and
$0.23 per share diluted), compared to $1,825,000 ($0.16 per share basic and
$0.15 per share diluted) in 2002. Profitability continued to improve
substantially as network marketing sales continued to improve worldwide led by a
23% increase in net sales in the Company's primary market of the United States.
3
Net sales increased to $19,614,000 in the third quarter of 2003 as
compared to $16,237,000 in the third quarter of 2002. For the nine months ended
September 30, net sales were $56,052,000 in 2003, as compared to $46,170,000 in
2002. The growth in sales was led by a strong increase in the Company's largest
market, the United States. Sales in the United States improved by 23% to
$16,869,000 in the third quarter of 2003, as compared to $13,741,000 in the
third quarter of 2002. For the nine months ended September 30, net sales in the
United States were $47,913,000 in 2003, compared to $38,803,000 in 2002. New
distributor enrollments in the US continues to be a factor in the increased
sales in this market. In the first nine months of 2003, approximately 15,600 new
distributors were enrolled, as compared to approximately 13,500 in the same
period of 2002. The number of distributors reaching Master Affiliate, the
highest level of discount a distributor can attain, has also continued to
improve in the United States. In the first nine months of 2003, 3,651
distributors achieved Master Affiliate status, as compared to 2,653 in the same
period of 2002. The Company attributes the increase in sales and other sales
statistics in part to its increased support provided to the distributor force in
the form of increased sales meetings and other distributor training events. The
Company is holding more of its quarterly Master Affiliate training seminars in
more cities and has lengthened the program to a full day of training on
Saturdays, compared to a half-day training session used previously. The Company
has also modified the frequency of its national conferences. In the past, the
Company invited distributors to attend two major conferences a year. Beginning
in early 2003, the Company replaced its winter conference with a series of
regional conferences in areas of significant distributor groups in order to
present the Reliv product line and business opportunity to more people. Also,
the Company's annual international distributor conference in St. Louis, MO, was
held in July with a record attendance of approximately 5,000 distributors.
During the third quarter of 2003, sales in most of the Company's
international subsidiaries showed improved results. In aggregate, international
sales increased 10% to $2,739,000 in the third quarter of 2003, compared to
$2,488,000 in the third quarter of 2002. For the nine months ended September 30,
international sales were $8,118,000 in 2003, compared to $7,243,000 in 2002, a
12% increase. The weakening of the United States dollar compared to the
Canadian, Australian, and New Zealand dollars and British pound accounts for a
portion of the increase in sales in these markets. The Mexican and Philippine
pesos have weakened compared to the U.S. dollar over the first nine months of
2003.
Mexican sales increased 17% from the prior year quarter, helped by the
introduction of Arthaffect in Mexico in October 2002 and the introduction of
Soysentials in April 2003. New distributor signups have also been strong, with
over 4,500 new signups in the first nine months of 2003, compared to 3,580 in
2002. Canada also showed a 37% growth in sales in the third quarter of 2003,
compared to the prior year quarter. Sales in Canada continue to gradually
improve as the Company completed its changes there to make the business model
function identical to that in the U.S. Effective February 1, 2003, royalties on
Canadian sales are being paid out on the full retail value of the products, just
as they are in the United States. This enhances the business opportunity
associated with selling the Reliv product line and encourages more people to
become distributors. Sales in the United Kingdom (UK) increased by 34%, as
compared to the prior year quarter. This increase was due, in part, to a similar
change to the UK distributor compensation plan that was put into effect on July
1, 2003, to pay royalties on the full retail value of the
4
products. Australia/New Zealand (AUS/NZ) sales were up 22% in the third quarter
of 2003, compared to the same period in 2002. In late September, the Company
announced a new sales manager for the AUS/NZ market, as well as a similar change
to the compensation plan as in Canada and the UK, in which royalties will be
paid based on the full retail price. Sales in the Philippines in the third
quarter of 2003 decreased by 20%, as sales declined subsequent to a price
increase and additional shipping charge that went into effect on March 1, 2003.
For the nine months ended September 30, sales in the Philippines were up 7% in
2003, compared to the same period of 2002. Sales began in the Company's newest
market, Malaysia, in late September 2003, with a modest amount of sales.
Cost of products sold as a percentage of net sales was 16.8% in the third
quarter of 2003, as compared to 17.1% in the third quarter of 2002. For the nine
months ended September 30, cost of products sold were 17.2% and 18.3% of net
sales in 2003 and 2002, respectively. The decrease in the percentage of cost of
goods sold is the result of greater efficiencies gained in the production
facility from increased production levels needed to support the growth in sales.
Efficiencies are being gained as production levels have increased with minimal
staffing increases and improved coverage of the fixed manufacturing costs.
Distributor royalties and commissions as a percentage of network marketing
sales were 38.8% and 38.3% in the third quarter of 2003 and 2002, respectively.
For the nine month period ended September 30, royalties and commissions were
38.9% and 38.5% of sales in 2003 and 2002, respectively. These expenses are
governed by the distributor agreements and are directly related to the level of
sales. The slight increase is primarily the result of commission payments being
made on the full retail value in Canada, and more recently, the United Kingdom.
Selling, general and administrative (SGA) expenses increased $630,000 in
the third quarter of 2003, as compared to the third quarter of 2002. However,
SGA expenses as a percentage of net sales decreased to 34.0% in the third
quarter of 2003 compared to 37.2% in the third quarter of 2002. For the nine
months ended September 30, total SGA expenses were $19,368,000 in 2003, compared
to $16,915,000 in 2002. On a year-to-date basis, sales expenses represented
approximately $1,248,000 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 meetings in support of the distributor
force, and increased sales bonuses. Marketing expenses increased by
approximately $242,000, primarily the result of increased incentive trip
expenses. Increases in general and administrative expenses represented
approximately $860,000 of the increase, primarily in salaries, fringe benefit
expenses, higher stock market listing fees, and increased travel expenses. Also,
included in the general and administrative expenses are approximately $250,000
in pre-opening expenses in Malaysia and other international development
expenses. The Company was granted a direct selling license to begin operations
in Malaysia in August 2003, and commenced sales in late September 2003.
Interest expense decreased to $50,000 in the third quarter of 2003 from
$63,000 in the third quarter of 2002. For the nine months ended September 30,
interest expense decreased to $188,000 for 2003, compared to $282,000 for 2002.
This decrease in 2003 is the result of not
5
utilizing the line of credit, coupled with the interest savings gained from the
refinancing of the Company's primary building debt in June 2002.
The Company recorded income tax expense of $815,000 for the third quarter
of 2003, an effective rate of 40.2%. In the third quarter of 2002, the Company
recorded income tax expense of $446,000, an effective rate of 37.6%. For the
nine months ended September 30, the Company recorded income tax expense of
$2,129,000 for 2003, an effective rate of 40.6%, and $1,135,000 for 2002, an
effective rate of 38.3%. The higher rate in 2003 is primarily due to
non-deductible losses in some of the Company's foreign markets, including
Malaysia.
Critical Accounting Policies
A summary of our critical accounting policies and estimates is presented
on pages 35 and 36 of our 2002 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 2003.
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.
Item 3. Quantitative and Qualitative Disclosures of Market Risk
The Company is exposed to various market risks, primarily foreign currency
risks and interest rate risks.
6
Foreign Currency Risk
The Company's earnings and cash flows 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 sales and 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.
During the second quarter of 2003, the Company entered into foreign
exchange forward contracts with a financial institution to sell Canadian dollars
in order to protect against currency exchange risk associated with expected
future cash flows. Contracts have a maturity of fifteen months or less. As of
September 30, 2003, the Company had Canadian dollar forward sale contracts to
hedge approximately 60% of our expected Canadian cash flows. The exchange rate
for the Canadian dollar to the U.S. dollar as of September 30, 2003 had
strengthened by 16.5%, compared to the exchange rate as of December 31, 2002.
The amount of the changes in the fair value of these forward contracts as of
September 30, 2003 was immaterial. As of September 30, 2003, the Company had no
hedging instruments in place to offset exposure to the Australian or New Zealand
dollars, Mexican or Philippine pesos, or the British pound.
There have been no other material changes in market risk exposures during
the first three months of 2003 that affect the disclosures presented in Item 7A
- - "Qualitative and Quantitative Disclosures Regarding Market Risk" on pages 37
and 38 of our 2002 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 28, 2003.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days before the
filing date of this report, have concluded that, as of such date our disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company would be made known to them by others within
the Company.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect the
Company's disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material weaknesses
in the Company's internal controls. As a result, no corrective actions were
required or undertaken.
7
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
At the Annual Meeting of Shareholders on May 22, 2003, the following
actions were submitted and approved by vote of the shareholders:
1. Election of 10 directors;
2. Approval of 2003 Stock Option Plan;
3. Authorization of one-for-four forward split of the Company's Common
Stock;
4. Authorization of an increase in the authorized shares of the Company's
Common Stock to 30,000,000 shares; and
5. Ratification of the Board's selection of Ernst & Young LLP as the
Company's independent certified public accountants.
A total of 11,185,122 shares (approximately 93%) of the issued and
outstanding shares of the Company were represented by proxy or in person at the
meeting. These shares were voted on the matters described above as follows:
1. For the directors as follows:
Name Total Votes For Total Votes Against
---- --------------- -------------------
Robert L. Montgomery 10,946,818 238,304
Sandra S. Montgomery 10,938,241 246,881
Carl W. Hastings 10,948,705 236,417
David G. Kreher 10,948,705 236,417
Donald L. McCain 10,933,891 251,231
Thomas T. Moody 10,948,444 236,678
Thomas W. Pinnock, III 10,948,705 236,417
Stephen M. Merrick 10,935,957 249,165
John B. Akin 10,933,691 251,431
Marvin W. Solomonson 10,931,632 253,490
8
2. For the 2003 Stock Option Plan as follows:
Total Broker Non-Votes
Total Votes For Total Votes Against and Votes Abstain
--------------- ------------------- ----------------------
6,862,805 183,327 4,138,988
3. For the One-for Four Stock Split as follows:
Total Votes For Total Votes Against Total Votes Abstain
--------------- ------------------- -------------------
11,117,052 47,359 20,709
4. For the Increase in Authorized Shares as follows:
Total Votes For Total Votes Against Total Votes Abstain
--------------- ------------------- -------------------
10,845,674 309,830 29,616
5. For the Ratification of Ernst & Young LLP as follows:
Total Votes For Total Votes Against Total Votes Abstain
--------------- ------------------- -------------------
11,127,731 38,101 19,287
Item 5. Other Information
Not applicable.
9
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
Exhibit
No. Description
------- -----------
3.1 Second Amended and Restated Certificate of Incorporation
(Incorporated by reference Appendix B to the Company's
Schedule 14A Definitive Proxy Statement filed April 17, 2003)
31.1 Sarbanes-Oxley Act Section 302 Certifications for Robert L.
Montgomery
31.2 Sarbanes-Oxley Act Section 302 Certification for David G.
Kreher
32.1 Sarbanes-Oxley Act Section 906 Certification for Robert L.
Montgomery, Chief Executive Officer
32.2 Sarbanes-Oxley Act Section 906 Certification for David G.
Kreher, Chief Financial Officer
(b) The Company filed a Current Report on August 7, to report the
issuance of a Press Release regarding its Second Quarter
earnings.
* Also incorporated by reference are the Exhibits filed as part
of the S-18 Registration Statement of the Registrant,
effective November 5, 1985, and subsequent periodic filings.
10
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: November 10, 2003 RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
------------------------------------
Robert L. Montgomery, President,
Chief Executive Officer
By: /s/ David G. Kreher
------------------------------------
David G. Kreher, Chief
Financial Officer
11
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 December 31
2003 2002
------------ -----------
(unaudited) (see notes)
Assets
Current assets:
Cash and cash equivalents $ 7,206,403 $ 3,437,966
Accounts and notes receivable, less allowances of
$5,000 in 2003 and 2002 662,404 688,898
Accounts due from employees and distributors 100,449 104,000
Inventories
Finished goods 3,308,479 2,361,064
Raw materials 1,094,700 680,516
Sales aids and promotional materials 516,903 415,565
----------- -----------
Total inventories 4,920,082 3,457,145
Refundable income taxes -- 8,072
Prepaid expenses and other current assets 914,913 564,486
Deferred income taxes 166,311 171,873
----------- -----------
Total current assets 13,970,562 8,432,440
Other assets 573,816 442,927
Note receivable from officer 13,875 48,250
Accounts due from employees and distributors 49,178 78,000
Property, plant and equipment:
Land 829,222 829,222
Building 8,775,889 8,583,444
Machinery & equipment 3,916,290 4,057,983
Office equipment 955,701 738,976
Computer equipment & software 2,464,454 2,275,019
----------- -----------
16,941,556 16,484,644
Less: Accumulated depreciation 7,535,982 7,040,275
----------- -----------
Net property, plant and equipment 9,405,574 9,444,369
----------- -----------
Total assets $24,013,005 $18,445,986
=========== ===========
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 December 31
2003 2002
------------ ------------
(unaudited) (see notes)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable and other accrued expenses $ 3,051,341 $ 2,462,356
Distributors commissions payable 2,905,315 2,065,327
Sales taxes payable 443,580 393,413
Interest expense payable 46,237 55,238
Payroll and payroll taxes payable 626,969 381,748
------------ ------------
Total accounts payable and accrued expenses 7,073,442 5,358,082
Income taxes payable 332,214 257,441
Current maturities of long-term debt 436,348 415,235
Current maturities of capital lease obligations -- 8,755
------------ ------------
Total current liabilities 7,842,004 6,039,513
Noncurrent liabilities:
Long-term debt, less current maturities 3,727,980 4,057,042
Deferred income taxes 84,435 84,435
Other non-current liabilities 574,258 467,350
------------ ------------
Total noncurrent liabilities 4,386,673 4,608,827
Stockholders' equity:
Preferred stock, par value $.001 per share; 3,000,000
shares authorized; 97,500 shares issued and outstanding
as of 9/30/2003 975,000 --
Common stock, par value $.001 per share; 30,000,000
authorized; 12,070,639 shares issued and 11,981,449
shares outstanding as of 9/30/2003; 12,006,761 shares
issued and 11,921,932 shares outstanding as of 12/31/2002 12,071 12,007
Additional paid-in capital 17,975,522 17,863,505
Notes receivable-officers and directors -- (2,449)
Accumulated deficit (6,094,716) (8,960,782)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (712,524) (775,383)
Treasury stock (371,025) (339,252)
------------ ------------
Total stockholders' equity 11,784,328 7,797,646
------------ ------------
Total liabilities and stockholders' equity $ 24,013,005 $ 18,445,986
============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Operations
Three months ended September 30 Nine months ended September 30
2003 2002 2003 2002
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales at suggested retail $ 27,160,056 $ 23,169,058 $ 79,424,022 $ 66,029,019
Less: distributor allowances on product purchases 7,546,330 6,931,981 23,372,199 19,858,627
------------ ------------ ------------ ------------
Net sales 19,613,726 16,237,077 56,051,823 46,170,392
Costs and expenses:
Cost of products sold 3,300,127 2,774,485 9,616,540 8,446,994
Distributor royalties and commissions 7,599,097 6,220,776 21,768,802 17,705,137
Selling, general and administrative 6,675,449 6,045,862 19,368,226 16,914,672
------------ ------------ ------------ ------------
Total costs and expenses 17,574,673 15,041,123 50,753,568 43,066,803
------------ ------------ ------------ ------------
Income from operations 2,039,053 1,195,954 5,298,255 3,103,589
Other income (expense):
Interest income 22,753 11,497 62,657 27,136
Interest expense (50,422) (63,159) (188,430) (282,435)
Other income/(expense) 16,269 42,877 77,773 111,634
------------ ------------ ------------ ------------
Income before income taxes 2,027,653 1,187,169 5,250,255 2,959,924
Provision for income taxes 815,000 446,000 2,129,000 1,135,000
------------ ------------ ------------ ------------
Net income 1,212,653 741,169 3,121,255 1,824,924
Preferred dividends accrued and paid 19,516 -- 42,016 --
------------ ------------ ------------ ------------
Net income available to common shareholders $ 1,193,137 $ 741,169 $ 3,079,239 $ 1,824,924
============ ============ ============ ============
Earnings per common share $ 0.10 $ 0.07 $ 0.26 $ 0.16
============ ============ ============ ============
Earnings per common share - assuming dilution $ 0.09 $ 0.06 $ 0.23 $ 0.15
============ ============ ============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Nine months ended September 30
2003 2002
----------- -----------
Operating activities:
Net income $ 3,121,255 $ 1,824,924
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 693,097 649,898
Compensation expense for warrants granted 67,550 14,905
Deferred income taxes 8,206 --
Foreign currency transaction loss 18,153 (67,248)
(Increase) decrease in accounts and notes receivable 28,969 (108,557)
(Increase) decrease in inventories (1,450,535) 343,141
(Increase) decrease in refundable income taxes 7,998 130,199
(Increase) decrease in prepaid expenses
and other current assets (359,165) (390,136)
(Increase) decrease in other assets (130,890) 50,697
Increase (decrease) in accounts payable and accrued expenses 1,793,022 1,127,326
Increase (decrease) in income taxes payable 71,821 274,543
----------- -----------
Net cash provided by operating activities 3,869,481 3,849,692
Investing activities:
Purchase of property, plant and equipment (738,774) (481,725)
Proceeds from the sale of property, plant and equipment 79,429 26,081
----------- -----------
Net cash used in investing activities (659,345) (455,644)
Financing activities:
Proceeds from long-term borrowings 124,249 --
Principal payments on long-term borrowings and line of credit (390,788) (1,331,126)
Principal payments under capital lease obligations (50,806) (122,165)
Proceeds from sale of preferred stock 1,500,000 --
Redemption of preferred stock (525,000) --
Preferred stock dividends paid (42,016) --
Repayment of loans by officers and directors 36,824 8,000
Proceeds from options exercised 166,189 45,929
Purchase of stock for treasury (366,605) (280,237)
----------- -----------
Net cash provided by (used in) financing activities 452,047 (1,679,599)
Effect of exchange rate changes on cash and cash equivalents 106,254 63,761
----------- -----------
Increase in cash and cash equivalents 3,768,437 1,778,210
Cash and cash equivalents at beginning of period 3,437,966 1,258,821
----------- -----------
Cash and cash equivalents at end of period $ 7,206,403 $ 3,037,031
=========== ===========
See notes to financial statements
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2003
Note 1-- Basis of Presentation
The accompanying unaudited consolidated financial statements and notes
thereto have been prepared in accordance with the instructions to Form
10-Q and reflect all adjustments which management believes necessary
(which include only normal recurring accruals) to present fairly the
financial position, results of operations and cash flows. These
statements, however, do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations and cash flows in conformity with accounting principles
generally accepted in the United States. Interim results may not
necessarily be indicative of results that may be expected for any other
interim period or for the year as a whole. These financial statements
should be read in conjunction with the audited consolidated financial
statements and footnotes included in the annual report on Form 10-K for
the year ended December 31, 2002, filed March 28, 2003 with the Securities
and Exchange Commission.
Note 2-- Reclassifications
Certain prior year amounts have been reclassified to conform to the
current year presentation.
Note 3-- Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
Three months ended September 30 Nine months ended September 30
2003 2002 2003 2002
------------------------------- ------------------------------
Numerator:
Numerator for basic and diluted
earnings per share--net income
available to common shareholders $ 1,193,137 $ 741,169 $ 3,079,239 $ 1,824,924
Effect of convertible preferred stock:
Dividends on preferred stock 19,516 -- 42,016 --
---------------------------- ----------------------------
Numerator for diluted earnings per share $ 1,212,653 $ 741,169 $ 3,121,255 $ 1,824,924
Denominator:
Denominator for basic earnings per
share--weighted average shares 11,965,000 11,252,000 11,963,000 11,295,000
Effect of convertible preferred stock and
dilutive securities:
Convertible preferred stock 330,000 -- 235,000 --
Employee stock options and other warrants 1,401,000 1,229,000 1,367,000 1,229,000
---------------------------- ----------------------------
Denominator for diluted earnings per
share--adjusted weighted average shares 13,696,000 12,481,000 13,565,000 12,524,000
============================ ============================
Basic earnings per share $ 0.10 $ 0.07 $ 0.26 $ 0.16
============================ ============================
Diluted earnings per share $ 0.09 $ 0.06 $ 0.23 $ 0.15
============================ ============================
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2003
Note 4-- Comprehensive Income
Total comprehensive income was $1,145,207 and $3,184,114 for the three and
nine months ended September 30, 2003, respectively. For the three and nine
months ended September 30, 2002, comprehensive income was $654,493 and
$1,728,332, respectively. The Company's only component of other
comprehensive income is the foreign currency translation adjustment.
Note 5-- Stock-Based Compensation
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under those plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Three months ended September 30 Nine months ended September 30
2003 2002 2003 2002
------------------------------- ------------------------------
Net income, as reported for basic EPS $1,193,137 $741,169 $3,079,239 $1,824,924
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 91,872 122,316 189,044 209,596
------------------------ --------------------------
Pro forma net income-basic EPS $1,101,265 $618,853 $2,890,195 $1,615,328
======================== ==========================
Net income, as reported for diluted EPS $1,212,653 $741,169 $3,121,255 $1,824,924
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 91,872 122,316 189,044 209,596
------------------------ --------------------------
Pro forma net income-diluted EPS $1,120,781 $618,853 $2,932,211 $1,615,328
======================== ==========================
Earnings per share:
Basic--as reported $ 0.10 $ 0.07 $ 0.26 $ 0.16
======================== ==========================
Basic--pro forma $ 0.09 $ 0.05 $ 0.24 $ 0.14
======================== ==========================
Diluted--as reported $ 0.09 $ 0.06 $ 0.23 $ 0.15
======================== ==========================
Diluted--pro forma $ 0.08 $ 0.05 $ 0.22 $ 0.13
======================== ==========================
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2003
Note 6-- Sale of Preferred Stock
On March 31, 2003, the Company sold an aggregate of 150,000 shares of
preferred stock to three officer/directors. The securities, called "Series
A Preferred Stock" ("Preferred Stock"), were designated by the Company's
Board of Directors out of the 3,000,000 previously authorized shares of
$.001 par value preferred stock. Each of the officer/directors
(collectively "the Preferred Stockholders") purchased 50,000 shares of
Preferred Stock for $500,000 ($10.00 per share).
The Preferred Stockholders are entitled to receive dividends at an annual
rate of 6% of the shares' purchase price. These dividends shall accrue on
a daily basis and are payable quarterly when declared by the Company's
Board of Directors. All dividends on shares of Preferred Stock are
cumulative.
In August 2003, the Company redeemed 17,500 shares from each
officer/director for a total redemption of 52,500 shares at a value of
$525,000. The remaining shares of Preferred Stock as of September 30, 2003
have no voting rights, and are convertible into 241,935 shares of the
Company's $.001 par value common stock at a conversion price based upon
the closing price of the Company's common stock on the NASDAQ Stock Market
on the date of issuance. Shares of Preferred Stock are not eligible for
conversion until January 1, 2006, may be redeemed at any time by the
Company, and have a liquidation preference over common stock to the extent
of the purchase price of the preferred stock and accrued dividends.
Note 7-- Related Party Tranactions
In February 2003, the Company purchased 25,000 shares of the Company's
common stock from an officer/director at a price of $3.895 per share. The
total amount paid for the stock was $97,375. In June and October 2003, the
Company purchased additional shares from the same officer/director. In
June, the Company purchased 25,000 shares at $4.446 per share for a total
purchase price of $111,150, and in October, the Company purchased 50,000
shares at $4.845 per share for a total purchase price of $242,250 In May
2003, the Company purchased 10,000 shares from a director at a price of
$4.2275 per share. The total amount paid for this purchase was $42,275.
Note 8-- Stock Split
On September 4, 2003, the Board of Directors of the Company declared a 5
for 4 stock split, in the nature of a stock dividend to be issued to all
shareholders of record as of October 29, 2003. The final number of shares
to be issued and the distribution of such shares will be determined as of
November 13, 2003. Fractional shares will not be issued. The Company will
issue payment to shareholders for fractional shares based upon the closing
price per share for the day preceding the record date.
Since the final number of shares to be distributed has not been fixed as
of the filing date of this Form 10-Q, the Management Discussion and
Analysis, unaudited consolidated financial statements, and footnotes do
not yet reflect the effect of the stock split on the number of shares
outstanding or the earnings per share data.