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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, 2004
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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK 15,689,782 outstanding Shares as of June 30, 2004
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, 2004 and Balance Sheet as of
December 31, 2003.
2. Interim Statements of Operations for the three and six month periods
ending June 30, 2004 and June 30, 2003.
3. Interim Statements of Cash Flows for the six month periods ending
June 30, 2004 and June 30, 2003.
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
Overview
The Company produces a line of food products including nutritional
supplements, diet management products, and sports drink mixes. The Company also
sells a line of skin care products. These products are sold by subsidiaries of
the Company to a sales force of independent distributors of the Company that
sell products directly to consumers. The Company and its subsidiaries sell
products to distributors throughout the United States and in Australia/New
Zealand, Canada, Mexico, the United Kingdom/Ireland, the Philippines, Malaysia,
and Singapore. As of June 30, 2004, the Company had approximately 67,900
distributors worldwide.
The Company receives payment by credit card, personal check, or guaranteed
funds for orders from independent distributors and makes related commission
payments in the following month. The net sales price is the suggested retail
price less the distributor discount of 20 percent to 40 percent of such
suggested retail price. Sales revenue and commission expenses are recorded when
the merchandise is shipped. In the six-month period ended June 30, 2004, sales
in the United States made up approximately 87% of worldwide net sales, with the
remainder from our international operations. This compares to 86% for all of
2003. The sales breakdown by country is given in greater detail in the "Net
Sales by Region" table below.
Cost of products sold primarily consists of expenses related to raw
materials, labor, quality control, and overhead directly associated with the
production and distribution of products and sales materials, as well as shipping
costs, duties, and taxes associated with product exports.
2
Distributor royalties and commissions are paid to Master Affiliates
monthly, based on the sales of their distributor organization in the prior
month. These expenses are governed by the distributor agreements. Also included
in this expense item are other sales leadership bonuses that are directly
related to the level of sales.
Selling, general, and administrative expenses include compensation and
benefits, all other selling expenses, marketing, promotional expenses, travel,
and other corporate administrative expenses.
1. Financial Condition
The Company generated $3,628,000 of net cash during the first six months
of 2004 from operating activities and used $2,733,000 in financing activities.
This compares to $2,400,000 of net cash provided by operating activities and
$1,026,000 was provided by financing activities in the first six months of 2003.
Cash and cash equivalents increased by $493,000 to $7,410,000 as of June 30,
2004, compared to December 31, 2003.
Significant changes in working capital items were an increase in inventory
of $1,410,000, and an increase in prepaid expenses and other current assets of
$222,000. These were offset by an increase in accounts payable and accrued
expenses of $2,476,000 in the first six months of 2004. The increase in
inventory is needed to support the increased sales levels of the Company, plus
provide a safety stock for a planned production shutdown for approximately three
weeks in late July and early August 2004. This shutdown is needed to install
equipment to upgrade the capacity and improve the automation of the Company's
production line. The increase in prepaid expenses and other current assets is
due to prepayments for future promotional trips and for policy payments for
various types of business insurance to be expensed over the lives of the
policies. The increase in accounts payable and accrued expenses corresponds with
the increase in inventory, coupled with the increase in distributor commissions
payable at June 30, 2004, compared to December 31, 2003. This increase in
distributor commissions payable is the result of higher worldwide sales in June
2004, compared to December 2003.
The Company's net investing activities in the first six months of 2004
consisted of $1,348,000 for capital expenditures. The majority of these capital
expenditures are part of the previously announced upgrade of the Company's
manufacturing facility. Financing activities in the first six months of 2004
included the redemption of the remaining preferred stock issued in 2003 of
$975,000, $460,000 in cash dividends paid on the Company's common stock in May
2004, and $1,294,000 in purchases of treasury stock. Most of this treasury stock
was purchased from related parties and is described in greater detail in Note 8
of the Consolidated Financial Statements. The Company also received $132,000 in
proceeds from the exercise of options.
Stockholders' equity increased to $13,398,000 at June 30, 2004, compared
with $13,072,000 at December 31, 2003. The increase is primarily due to the net
income in the first six months of 2004 of the Company, reduced by the preferred
stock redemption, cash dividends, and treasury stock purchases described above.
Stockholders' equity was also negatively impacted by the slight strengthening of
the U.S. dollar against a number of the currencies in which the
3
Company has operations during the first six months of 2004. This impact appears
in the form of an increase in the foreign currency translation adjustment, which
is reflected in accumulated other comprehensive loss. This cumulative adjustment
worsened from an accumulated loss of $715,000 as of December 31, 2003, to an
accumulated loss of $807,000, as of June 30, 2004.
The Company's working capital balance was $6,410,000 at June 30, 2004,
compared to $7,256,000 at December 31, 2003. The current ratio at June 30, 2004
was 1.70, compared to 2.01 at previous year-end. In March 2004, the Company
renewed the term loan on its headquarters facility of approximately $3.5 million
and extended the maturity of the loan until March 2007. In addition, the Company
consolidated other loans related to this building totaling approximately
$350,000 into this renewed loan. The Company also has an operating line of
credit, with a limit based on a collateral-based formula of accounts receivable
and inventory. The maximum borrowing limit is $1,000,000, with a variable
interest rate equal to the prime rate. At June 30, 2004, the Company had not
utilized any of the line of credit, with approximately $940,000 available under
the line based on the Company's borrowing base formula. Also, in February 2004,
the Company entered into a standby equity distribution agreement, which will
provide the Company with up to $5 million of funding from the sale of its common
stock. This agreement is described in greater detail in Note 6 of the
Consolidated Financial Statements.
Early in 2004, the Board of Directors approved a capital expenditure plan
of $1 million to upgrade the production equipment in the Company's manufacturing
facility. As of June 30, 2004, most of this equipment had been paid for from
cash generated from operations. Also in May 2004, the Board of Directors
declared a three-cent per common share cash dividend, in what the Company plans
to be a semi-annual cash dividend payment plan. Management believes that the
Company's cash flow from operations, the borrowing capacity under the line of
credit agreement, and the standby equity distribution agreement will be
sufficient to meet working capital requirements and fund the capital expenditure
plans for the remainder of 2004 and 2005.
2. Results of Operations
The Company had net income available to common shareholders of $1,201,000
($0.08 per share basic and $0.07 per share diluted) for the quarter ended June
30, 2004, compared to net income available to common shareholders of $909,000
($0.06 per share basic and $0.05 per share diluted) for the same period in 2003.
For the six months ended June 30, 2004, the Company had net income available to
common shareholders of $2,830,000 ($0.19 per share basic, $0.17 per share
diluted), compared to $1,886,000 ($0.13 per share basic, $0.11 per share
diluted) in the same period in 2003. Earnings per common share for 2003 have
been adjusted for the Company's five-for-four stock split declared in September
2003. Profitability continued to improve substantially as net sales in the
second quarter of 2004 improved worldwide by 34%, led by a similar increase in
net sales in the United States, the Company's primary market.
4
The following table summarizes the net sales by geographic region for the
three-month periods ended June 30, 2004 and 2003.
Net Sales by Region Three months ended June 30
(in thousands) 2004 2003 Change from
$ % of sales $ % of sales prior year Change in %
--------------------- --------------------------------------------------
United States $ 20,446 85.6% $ 15,260 85.9% $ 5,186 34.0%
Australia/New Zealand 565 2.4% 460 2.6% 105 22.8%
Canada 378 1.6% 299 1.7% 79 26.4%
Mexico 664 2.8% 911 5.1% (247) -27.1%
United Kingdom/Ireland 145 0.6% 97 0.5% 48 49.5%
Philippines 674 2.8% 740 4.2% (66) -8.9%
Malaysia/Singapore 1,019 4.3% -- 0.0% 1,019 N/A
--------------------- -------------------------------------------------
Consolidated total $ 23,891 100.0% $ 17,767 100.0% $ 6,124 34.5%
===================== =================================================
The following table summarizes the net sales by geographic region for the
six-month periods ended June 30, 2004 and 2003.
Net Sales by Region Six months ended June 30
(in thousands) 2004 2003 Change from
$ % of sales $ % of sales prior year Change in %
--------------------- --------------------------------------------------
United States $ 41,017 86.6% $ 31,058 85.2% $ 9,959 32.1%
Australia/New Zealand 1,158 2.4% 885 2.4% 273 30.8%
Canada 776 1.6% 573 1.6% 203 35.4%
Mexico 1,335 2.8% 1,687 4.6% (352) -20.9%
United Kingdom/Ireland 289 0.6% 198 0.5% 91 46.0%
Philippines 1,370 2.9% 2,037 5.6% (667) -32.7%
Malaysia/Singapore 1,424 3.0% -- 0.0% 1,424 N/A
--------------------- -------------------------------------------------
Consolidated total $ 47,369 100.0% $ 36,438 100.0% $ 10,931 30.0%
===================== =================================================
The following table illustrates the Company's active distributors and
Master Affiliates as of June 30, 2004 and 2003. The total amount of distributors
also includes the Master Affiliates. The Company defines an active distributor
as one that enrolls as a distributor or renews their distributorship during the
prior twelve months. Growth in the number of active distributors and Master
Affiliates is a key factor in continuing the growth of the business.
5
Active Distributors and Master Affiliates by Region
as of 6/30/2004 as of 6/30/2003 Change in %
Master Master Master
Distributors Affiliates Distributors Affiliates Distributors Affiliates
---------------------------------------------------------- ---------------------------
United States 45,040 9,870 38,900 7,020 15.8% 40.6%
Australia/New Zealand 2,770 230 2,540 180 9.1% 27.8%
Canada 1,350 160 1,060 130 27.4% 23.1%
Mexico 7,740 760 7,150 1,240 8.3% -38.7%
United Kingdom/Ireland 410 50 390 80 5.1% -37.5%
Philippines 6,510 580 11,340 900 -42.6% -35.6%
Malaysia/Singapore 4,080 520 N/A N/A N/A N/A
---------------------------------------------------------- ---------------------------
Consolidated total 67,900 12,170 61,380 9,550 10.6% 27.4%
========================================================== ===========================
In the United States, new distributor enrollments, strong retention, and
strong growth in the number of Master Affiliates continue to be factors in the
increased sales in this market. In the second quarter of 2004, approximately
6,100 new distributors were enrolled, as compared to approximately 5,100 in the
same period of 2003. Distributor retention was approximately 56%, compared to an
historical rate of 55%. 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 second quarter of 2004, over 1,800
distributors achieved Master Affiliate status, as compared to approximately
1,100 in the same period of 2003. The trends in all of these key distributor
force statistics are consistent with, or slightly better than those comparisons
in the first quarter of 2004. The Company attributes the increase in sales and
other sales statistics in part to the momentum created by the consistency and
reinforcement of its training programs and business opportunity presentations,
in the form of regional distributor conferences and other corporate-sponsored
meetings. 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. These activities have resulted in more experienced and productive
distributors reaching the Master Affiliate level.
During the second quarter of 2004, sales in the Company's international
subsidiaries continue to show mixed results. In the aggregate, international
sales increased by 37% to $3,446,000 in the second quarter of 2004, compared to
$2,507,000 in the second quarter of 2003. Excluding sales of $1,019,000 in the
new markets of Malaysia and Singapore in the second quarter of 2004,
international sales declined by 3%. For the six months ended June 30, 2004,
international sales were up 18%, compared to the same period in 2003.
Sales in the markets of Canada, Australia/New Zealand, and the UK
increased by at least 23% in each of these markets during the second quarter of
2004, versus the same period in 2003. The weakening of the United States dollar
compared to the currencies in these markets over the course of 2003 accounts for
$89,000 of the $232,000 increase in second quarter 2004 sales in these markets.
On a constant-dollar basis, sales in these markets improved by 17% in both the
second quarter and first six months of 2004, compared to the same periods in
2003. Sales in these markets continues to show improvement as the Company has
completed its changes to the
6
distributor compensation plan and continues to implement its training and
distributor development system in these markets.
Mexican sales decreased 27% in the second quarter of 2004, compared to the
same period in 2003. Although new distributor enrollments increased by 15% in
the second quarter of 2004, new Master Affiliate qualifications declined by 26%.
Sales in the Philippines in the second quarter of 2004 decreased by 9%, compared
to the same period in 2003. These two markets continue to implement changes in
the business model, and these changes have had an impact on the sales in these
markets.
In the second quarter of 2004, sales were $1,019,000 in the Company's
newest markets, Malaysia and Singapore. Sales began in Malaysia in September
2003, and in Singapore in late March 2004. Malaysia has become the Company's
second largest market, in terms of sales.
The following table summarizes selected items from the consolidated
statement of operations, expressed as a percentage of net sales, for the periods
indicated, and should be read in conjunction with the discussion of the
components of the consolidated statements of operations that follow:
Selected data from the Consolidated Three Months Ended Six Months Ended
Statements of Operations June 30 June 30
2004 2003 2004 2003
------------------- -------------------
Cost of products sold 16.8% 16.9% 16.6% 17.3%
Distributor royalties and commissions 40.0% 38.9% 39.9% 38.9%
Selling, general, and administrative 34.8% 35.6% 33.4% 34.8%
Provision for income taxes 3.4% 3.5% 4.0% 3.6%
Net income 5.0% 5.2% 6.0% 5.2%
Cost of products sold as a percentage of net sales was 16.8% in the second
quarter of 2004, as compared to 16.9% in the second quarter of 2003. 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 net sales were
40.0% and 38.9% in the second quarter of 2004 and 2003, respectively. These
expenses are governed by the distributor agreements and are directly related to
the level of sales. The increase is primarily the result of the changes to the
distributor compensation plan in Canada, the United Kingdom, and Australia/New
Zealand over the course of 2003. These changes resulted in commission payments
being made on the full retail value of the products sold, and the full effect of
these changes impacted the first six months of 2004. Also, as the Company opened
up new markets in Malaysia, last September, and Singapore, in March 2004, those
markets paid commissions on the
7
full retail value of the products at the time of opening. As a result, more of
the Company's international sales are weighted towards full retail commission
payments.
Selling, general and administrative (SGA) expenses increased $1,992,000 in
the second quarter of 2004, as compared to the second quarter of 2003. SGA
expenses as a percentage of net sales decreased to 34.8% in the second quarter
of 2004 compared to 35.6% in the second quarter of 2003. Of the total increase,
$375,000 was from the SGA expenses of Malaysia and Singapore in the second
quarter of 2004, as sales had not yet begun in these countries by the second
quarter of 2003. The balance of the increase in the SGA of the remaining markets
was made up of several components. Sales expenses represented approximately
$651,000 of the increase. Some of the components were increased credit card fees
due to the higher sales volume; increased conference call expenses, as the
Company has implemented its use of this training and communications tool; and
additional promotional bonuses. Marketing expenses have increased by $204,000,
primarily in promotional trip expenses, and warehouse and distribution expenses
have increased by $45,000 as the result of higher sales volumes.
General and administrative expenses increased by approximately $717,000.
The largest single component of this increase was an increase of approximately
$288,000 in accounting fees and other accounting-related services. Most of this
increase is the result of management's documentation and assessment of the
internal control environment required under Section 404 of the Sarbanes-Oxley
Act. Because of the rapid increase in the Company's stock price over the first
six months of 2004, the Company has recently become an "Accelerated Filer". As a
result, the period of time in which the Company has to perform this internal
control assessment is compressed. The Company will have expenses on this project
in the third and fourth quarter. Much of these costs will be one-time expenses,
as part of the first year of compliance and testing under the Act. The other key
components of the increase are in salaries and bonuses, fringe benefit expenses,
business insurance, international development expenses, increased travel
expenses, and increases in other costs of being a publicly-held company.
The Company recorded income tax expense of $802,000 for the second quarter
of 2004, an effective rate of 40.0%. In the second quarter of 2003, the Company
recorded income tax expense of $629,000, an effective rate of 40.3%. For the six
months ended June 30, 2004, the Company's effective tax rate was 40.2%, compared
to 40.8% in the same period of 2003. The slightly 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 page 35 of our 2003 Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 26, 2004.
8
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 2004 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.
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.
The Company enters 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. The Company
has accounted for these contracts as free standing derivatives, such that gains
or losses on the fair market value of these forward exchange contracts are
recorded as other income and expense in the consolidated statements of
operations. The net changes in the fair value of these forward contracts as of
June 30, 2004 was a cumulative expense $53,000. As of June 30, 2004, the Company
had no hedging instruments in place to
9
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 six months of 2004 that affect the disclosures presented in Item 7A -
"Qualitative and Quantitative Disclosures Regarding Market Risk" on pages 36 and
37 of our 2003 Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 26, 2004.
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-15(e) and 15d-15(e)) as of June 30, 2004, 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. During the second quarter of 2004, 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.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
In April, 2004, the Company purchased an aggregate of 75,000 shares of
equity securities from certain of the Company's officers and directors for an
average purchase price of $9.16 per share. These purchases are described in
greater detail in Note 8 of the Consolidated Financial Statements under the
heading "Related Party Transactions".
The foregoing equity purchases by the Company during the fiscal quarter
ended June 30, 2004 have been reflected as follows:
10
ISSUER PURCHASES OF EQUITY SHARES
(d)
(c) Maximum Number (or
Total Number of Approximate Dollar
(a) (b) Shares (or Units) Value) of Shares (or
Total Number of Average Price Purchased as Part of Units) that May Yet Be
Shares (or Units) Paid per Share Publicly Announced Purchased Under the
Period Purchased (or Unit) Plans or Programs Plans or Programs
April 1-30, 2004 75,000 $9.16 0(1) N/A(1)
May 1-31, 2004 0 -- 0(1) N/A(1)
June 1-30, 2004 0 -- 0(1) N/A(1)
- ----------
(1) There is no publicly announced plan or program for the redemption or
repurchase of the Company's equity securities.
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 25, 2004, the following
actions were submitted and approved by vote of the shareholders:
1. Election of 7 directors; and
2. Ratification of the Board's selection of Ernst & Young LLP as the
Company's independent certified public accountants.
A total of 14,209,000 shares (approximately 94%) 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 14,193,807 15,626
David G. Kreher 14,192,871 16,563
Donald L. McCain 14,198,420 11,014
Stephen M. Merrick 14,195,965 13,469
11
John B. Akin 14,198,420 11,014
Denis St. John 14,196,784 12,650
Robert M. Henry 14,194,463 14,930
2. For the Ratification of Ernst & Young LLP as follows:
Total Broker Non-Votes and
Total Votes For Total Votes Against Total Votes Abstain
--------------- ------------------- --------------------------
14,146,597 34,900 26,827
Item 5. Other Information
The Company notes that in September 2003 and again in January 2004,
it received communications from the Secretary of State of Illinois, Securities
Department. In a September 2003 letter, the Securities Division inquired,
without concluding, whether the Company may have made certain misrepresentations
and/or omissions concerning the background of unidentified Reliv' officers
and/or directors. It sought information and flowcharts regarding Reliv'
officers, board members and various committees. In a January 2004 Subpoena, the
State sought specific information regarding former Reliv' "outside" Board
member, Marvin Solomonson. This information included, but was not limited to,
information about Solomonson's background, training, credentials, compensation,
and any investigation by the Company of Solomonson and disclosures regarding
these.
The Company provided timely information to the Secretary of State
regarding all these matters. Since its reply, the State has sought no further
information. No action of any kind has been taken by the State. The Company also
notes the following. On December 27, 2000, Solomonson entered into a Consent
Order of Prohibition and Fine ("COPF") with the Division of Securities. Pursuant
to this COPF, Solomonson was fined $2,000, censured, required to sell securities
only in conformance with the Securities Act, and, without admitting or denying
any matter, was determined to have violated Section 12.C of the Illinois
Securities Act by selling an investment certificate after his Illinois
securities registration had terminated.
The Certifications of the Chief Executive Officer and the Chief Financial
Officer of Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
are attached as Exhibits to this Report on Form 10-Q.
12
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation (incorporate by
reference Appendix B of the Form 14A the
Registrant filed April 22, 1999)
3.2 By-Laws (incorporate by reference Appendix C of
the Form 14A the Registrant filed April 22, 1999)
3.3 Amendment to By-Laws dated March 22, 2001
(incorporate by reference Exhibit 3.3 to the Form
10-K of the Registrant for year ended December 31,
2001)
10.1 Standby Equity Distribution Agreement dated
February 24, 2004, between the Registrant and
Cornell Capital Partners, LP (incorporate by
reference Exhibit 10.1 to the Form 10-Q of the
Registrant for quarter ended March 31, 2004)
10.2 Registration Rights Agreement dated February 24,
2004, between the Registrant and Cornell Capital
Partners, LP (incorporate by reference Exhibit
10.2 to the Form 10-Q of the Registrant for
quarter ended March 31, 2004)
10.3 Escrow Agreement between Registrant, Cornell
Capital Partners, LP and Butler Gonzalez LLP
(incorporate by reference Exhibit 10.3 to the Form
10-Q of the Registrant for quarter ended March 31,
2004)
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, President, Chief Executive
Officer
32.2 Sarbanes-Oxley Act Section 906 Certification for
David G. Kreher, Chief Financial Officer
13
(b) The Company filed two Current Reports Form 8-K on May 4, 2004, one
reporting its financial results for the fiscal quarter ended March 31,
2004, and the other reporting a $0.03 per share cash dividend on shares of
the Registrant's common stock. The Company has not filed any other Current
Reports on Form 8-K during the quarter covered by this report.
* Also incorporated by reference the Exhibits filed as part of the SB-18
Registration Statement of the Registrant, effective November 5, 1985, and
subsequent periodic filings.
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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 11, 2004 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
15
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30 December 31
2004 2003
----------- -----------
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 7,409,656 $ 7,902,508
Accounts and notes receivable, less allowances of
$7,600 in 2004 and $8,600 in 2003 647,604 751,887
Accounts due from employees and distributors 117,306 72,846
Inventories
Finished goods 3,741,211 3,171,185
Raw materials 1,849,664 1,047,068
Sales aids and promotional materials 458,828 452,066
----------- -----------
Total inventories 6,049,703 4,670,319
Refundable income taxes 122,158 --
Prepaid expenses and other current assets 941,348 727,939
Deferred income taxes 292,173 296,164
----------- -----------
Total current assets 15,579,948 14,421,663
Other assets 1,109,257 793,091
Accounts due from employees and distributors 195,963 52,291
Property, plant and equipment:
Land 829,222 829,222
Building 8,887,443 8,801,913
Machinery & equipment 4,860,489 3,926,613
Office equipment 1,160,000 1,093,106
Computer equipment & software 2,513,190 2,564,055
----------- -----------
18,250,344 17,214,909
Less: Accumulated depreciation 8,005,566 7,801,038
----------- -----------
Net property, plant and equipment 10,244,778 9,413,871
----------- -----------
Total assets $27,129,946 $24,680,916
=========== ===========
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30 December 31
2004 2003
------------ ------------
(unaudited)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable and other accrued expenses $ 4,297,885 $ 2,778,898
Distributors commissions payable 3,453,920 2,701,542
Sales taxes payable 425,283 446,872
Interest expense payable 2,077 42,808
Payroll and payroll taxes payable 641,217 626,665
------------ ------------
Total accounts payable and accrued expenses 8,820,382 6,596,785
Income taxes payable -- 147,520
Current maturities of long-term debt 350,000 421,063
------------ ------------
Total current liabilities 9,170,382 7,165,368
Noncurrent liabilities:
Long-term debt, less current maturities 3,599,128 3,700,138
Deferred income taxes 77,000 77,000
Other non-current liabilities 885,200 666,032
------------ ------------
Total noncurrent liabilities 4,561,328 4,443,170
Stockholders' equity:
Preferred stock, par value $.001 per share; 3,000,000
shares authorized; -0- shares issued and outstanding
as of 6/30/2004; 97,500 shares issued and outstanding -- 975,000
as of 12/31/2003
Common stock, par value $.001 per share; 30,000,000
authorized; 15,692,519 shares issued and 15,689,782
shares outstanding as of 6/30/2004; 15,143,961 shares
issued and 15,141,224 shares outstanding as of 12/31/2003 15,693 15,144
Additional paid-in capital 19,321,726 18,684,338
Accumulated deficit (5,123,877) (5,878,869)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (806,598) (714,527)
Treasury stock (8,708) (8,708)
------------ ------------
Total stockholders' equity 13,398,236 13,072,378
------------ ------------
Total liabilities and stockholders' equity $ 27,129,946 $ 24,680,916
============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Operations
(unaudited)
Three months ended June 30 Six months ended June 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
Sales at suggested retail $ 34,280,799 $ 25,407,802 $ 68,139,940 $ 52,263,966
Less: distributor allowances on product purchases 10,389,594 7,641,155 20,770,903 15,825,869
------------ ------------ ------------ ------------
Net sales 23,891,205 17,766,647 47,369,037 36,438,097
Costs and expenses:
Cost of products sold 4,000,626 3,008,695 7,854,905 6,316,413
Distributor royalties and commissions 9,562,686 6,914,507 18,883,076 14,169,705
Selling, general and administrative 8,314,261 6,321,793 15,835,211 12,692,777
------------ ------------ ------------ ------------
Total costs and expenses 21,877,573 16,244,995 42,573,192 33,178,895
------------ ------------ ------------ ------------
Income from operations 2,013,632 1,521,652 4,795,845 3,259,202
Other income (expense):
Interest income 27,883 24,162 48,353 39,904
Interest expense (46,671) (69,961) (111,902) (138,008)
Other income/(expense) 8,023 84,187 22,218 61,504
------------ ------------ ------------ ------------
Income before income taxes 2,002,867 1,560,040 4,754,514 3,222,602
Provision for income taxes 802,000 629,000 1,912,000 1,314,000
------------ ------------ ------------ ------------
Net income 1,200,867 931,040 2,842,514 1,908,602
Preferred dividends accrued and paid -- 22,500 12,292 22,500
------------ ------------ ------------ ------------
Net income available to common shareholders $ 1,200,867 $ 908,540 $ 2,830,222 $ 1,886,102
============ ============ ============ ============
Earnings per common share - Basic $ 0.08 $ 0.06 $ 0.19 $ 0.13
============ ============ ============ ============
Weighted average shares 15,393,000 14,953,000 15,285,000 14,958,000
============ ============ ============ ============
Earnings per common share - Diluted $ 0.07 $ 0.05 $ 0.17 $ 0.11
============ ============ ============ ============
Weighted average shares 17,389,000 17,085,000 16,976,000 16,877,000
============ ============ ============ ============
2003 earnings per common share and weighted average shares have been adjusted
for the five-for-four stock split declared in September 2003.
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30
2004 2003
------------- -------------
Operating activities:
Net income $ 2,842,514 $ 1,908,602
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 508,767 463,987
Compensation expense for warrants granted 38,667 45,032
Deferred income taxes -- 12,700
Foreign currency transaction (gain)/loss (21,046) (1,284)
(Increase) decrease in accounts and notes receivable (96,522) 167,511
(Increase) decrease in inventories (1,410,092) (1,069,936)
(Increase) decrease in refundable income taxes (122,158) 8,059
(Increase) decrease in prepaid expenses
and other current assets (222,207) (296,953)
(Increase) decrease in other assets (218,817) (83,834)
Increase (decrease) in accounts payable and accrued expenses 2,476,295 1,371,112
Increase (decrease) in income taxes payable (147,560) (124,535)
------------- -------------
Net cash provided by operating activities 3,627,841 2,400,461
Investing activities:
Purchase of property, plant and equipment (1,348,385) (322,400)
------------- -------------
Net cash used in investing activities (1,348,385) (322,400)
Financing activities:
Proceeds from long-term borrowings -- 64,150
Principal payments on long-term borrowings and
capital lease obligations (172,488) (301,913)
Proceeds from sale of common stock 48,601 --
Proceeds from sale of preferred stock -- 1,500,000
Redemption of preferred stock (975,000) --
Preferred stock dividends paid (12,292) (22,500)
Common stock dividends paid (460,319) --
Repayment of loans by officers and directors -- 20,500
Proceeds from options exercised 132,388 132,492
Purchase of stock for treasury (1,293,980) (366,605)
------------- -------------
Net cash provided by (used in) financing activities (2,733,090) 1,026,124
Effect of exchange rate changes on cash and cash equivalents (39,218) 133,077
------------- -------------
Increase (decrease) in cash and cash equivalents (492,852) 3,237,262
Cash and cash equivalents at beginning of period 7,902,508 3,437,966
------------- -------------
Cash and cash equivalents at end of period $ 7,409,656 $ 6,675,228
============= =============
See notes to financial statements
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2004
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,
2003, filed March 26, 2004 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 June 30 Six months ended June 30
2004 2003 2004 2003
---------------------------- ----------------------------
Numerator:
Numerator for basic and diluted
earnings per share--net income
available to common shareholders $ 1,200,867 $ 908,540 $ 2,830,222 $ 1,886,102
Effect of convertible preferred stock:
Dividends on preferred stock -- 22,500 12,292 22,500
---------------------------- ----------------------------
Numerator for diluted earnings per share $ 1,200,867 $ 931,040 $ 2,842,514 $ 1,908,602
Denominator:
Denominator per basic earnings per
share--weighted average shares 15,393,000 14,953,000 15,285,000 14,958,000
Effect of convertible preferred stock and
dilutive securities:
Convertible preferred stock -- 465,000 106,000 234,000
Employee stock options and other warrants 1,996,000 1,667,000 1,585,000 1,685,000
---------------------------- ----------------------------
Denominator for diluted earnings per
share--adjusted weighted average shares 17,389,000 17,085,000 16,976,000 16,877,000
============================ ============================
Basic earnings per share $ 0.08 $ 0.06 $ 0.19 $ 0.13
============================ ============================
Diluted earnings per share $ 0.07 $ 0.05 $ 0.17 $ 0.11
============================ ============================
2003 earnings per share and weighted average shares have been
adjusted for the 5-for-4 stock split declared in September 2003.
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2004
Note 4-- Comprehensive Income
Total comprehensive income was $1,082,067 and $2,750,443 for the
three and six months ended June 30, 2004, respectively. For the
three and six months ended June 30, 2003, comprehensive income was
$1,022,568 and $2,038,907, 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 June 30 Six months ended June 30
2004 2003 2004 2003
-------------------------- --------------------------
Basic:
Net income available to common
shareholders, as reported $1,200,867 $ 908,540 $2,830,222 $1,886,102
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 369 31,872 46,328 97,172
-------------------------- --------------------------
Pro forma net income available to
common shareholders $1,200,498 $ 876,668 $2,783,894 $1,788,930
========================== ==========================
Diluted:
Net income available to common
shareholders, as reported $1,200,867 $ 931,040 $2,842,514 $1,908,602
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 369 31,872 46,328 97,172
-------------------------- --------------------------
Pro forma net income available to
common shareholders $1,200,498 $ 899,168 $2,796,186 $1,811,430
========================== ==========================
Earnings per share:
Basic--as reported $ 0.08 $ 0.06 $ 0.19 $ 0.13
========================== ==========================
Basic--pro forma $ 0.08 $ 0.06 $ 0.18 $ 0.12
========================== ==========================
Diluted--as reported $ 0.07 $ 0.05 $ 0.17 $ 0.11
========================== ==========================
Diluted--pro forma $ 0.07 $ 0.05 $ 0.16 $ 0.11
========================== ==========================
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2004
Note 6-- Standby Equity Distribution Agreement
In February 2004, the Company entered into a Standby Equity
Distribution Agreement ("SEDA") with an investment firm. Under the
SEDA, the investment firm has committed to provide up to $5 million
of funding to be drawn down at the Company's discretion by the
purchase of the Company's common stock. The Company may request up
to $210,000 in any seven-day period in exchange for issuing shares
of its common stock to the investment firm. The facility may be used
in whole or in part entirely at the Company's discretion, subject to
an effective registration of the related shares. As of June 30,
2004, no shares have been issued or funds received by the Company
under this agreement.
Note 7-- Redemption of Preferred Stock
On March 31, 2003, the Company sold an aggregate of 150,000 shares
of preferred stock to three officer/directors. The terms of the sale
of these preferred shares have been previously disclosed in the
Company's annual report on Form 10-K for the year ended December 31,
2003.
In February 2004, the Company redeemed 15,000 shares from each
officer/director for a total redemption of 45,000 shares at a value
of $450,000. In April 2004, the Company redeemed the remaining
17,500 shares from each officer/director for a total redemption of
52,500 shares at a value of $525,000.
Note 8-- Related Party Tranactions
In January 2004, the Company purchased a total of 116,564 shares of
the Company's common stock from three officer/directors and one
director. The total cost of the purchases was $607,178, for a
weighted average purchase price of $5.21 per share. In April 2004,
the Company purchased a total of 75,000 shares of the Company's
common stock from two officer/directors. The total cost of the
purchases was $686,802, for a weighted average purchase price of
$9.16 per share. The price per share of each purchase was based on a
discount from the market price per share at the time of purchase in
order to approximate the dilutive impact of their shares on the open
market.
Note 9-- Cash Dividend Declaration
On May 4, 2004, the Company announced that the Board of Directors
had declared a dividend of three cents ($0.03) per common share to
all shareholders of record as of May 17, 2004, that was paid on May
31, 2004.
The declaration of future dividends will be determined by the Board
of Directors from time to time taking into account the results of
operations, conditions, financial requirements of the Company and
other factors. The Board of Directors may change the amount and
timing of dividend distributions, at their discretion.