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, 1997
Commission File No. 1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Illinois 37-1172197
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Chesterfield Industrial Boulevard,
P.O. Box 405, Chesterfield, Missouri 63006
(Address of principal executive offices) (Zip Code)
(314) 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 9,826,385 outstanding Shares as of September 30, 1997
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, 1997 and Balance Sheet
as of December 31, 1996.
2. Interim Statements of Operations for the three and nine month
periods ending September 30, 1997 and September 30, 1996.
3. Interim Statements of Cash Flows for the nine month periods
ending September 30, 1997 and September 30, 1996.
The Financial Statements reflect all adjustments which are, in the
opinion of management, necessary to 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
-------------------
The current assets of the Company increased 5% during the third quarter
1997, to $6,853,000 from $6,553,000 as of December 31, 1996. Cash and cash
equivalents increased to $2,419,000 at September 30, 1997 from $2,109,000 at
December 31, 1996, as a result of increased sales and net profits. Accounts
receivable decreased to $746,000 at September 30, 1997, from $1,056,000 at
December 31, 1996, as a result of a decrease in sales of the Company's contract
packaging services, which are generally paid on 30-day terms. Contract packaging
sales declined to $238,000 for the third quarter as compared to $1,147,000 in
the fourth quarter 1996. Inventories increased only slightly to $2,823,000 from
$2,762,000 at December 31, 1996. The Company's finished goods inventory declined
during the past quarter by $374,000 due to limited utilization of the
manufacturing facility as a result of interruptions during the plant expansion.
Net property, plant and equipment increased to $7,164,000 as of
September 30, 1997, as a result of the expansion of the Company's facility on
land the Company owns adjacent to its existing building in Chesterfield,
Missouri. The Company entered into a construction agreement on May 9, 1997, that
includes expanding office, warehousing and manufacturing areas by adding
approximately 90,000 square feet of space to its facility. The expansion project
is anticipated to cost $5 to $6 million and will be financed with cash generated
through operations and bank debt. The expansion project was approximately 50%
completed as of September 30, 1997, and has an anticipated occupation date of
mid-December, 1997.
2
Current liabilities decreased to $3,826,000 at September 30, 1997, from
$3,866,000 at December 31, 1996. Trade accounts payable decreased to $1,387,000
from $1,689,000 at December 31, 1996, as a result of cash generated from
operations. Distributor commissions payable increased $478,000 as sales volume
in September, 1997, increased as compared to December, 1996.
Long-term debt increased to $3,166,000 at September 30, 1997, from
$1,465,000 at December 31, 1996, as the Company utilized $1,881,000 of a total
bank commitment of $4,400,000 to finance the construction of its facility
expansion.
The Company's working capital balance has improved by $341,000 since
December 31, 1996, with a current ratio of 1.79 due to the net profits generated
from operations. The Company anticipates that its cash, working capital balance
and established credit will be adequate to meet its operating needs in the
future, based on current and projected revenue levels.
2. Result of Operations
--------------------
The Company had a net profit of $282,000 and $.03 per share earnings
for the quarter ended September 30, 1997, compared to a net profit of $338,000
and $.03 per share earnings for the same period in 1996, both on a fully diluted
basis. Net sales for the period increased to $11,480,000 from $9,934,000 in
1996. Net sales in the third quarter 1997, comprised of $11,242,000 in network
marketing sales and $238,000 in contract packaging services, as compared to
$9,195,000 in network marketing sales and $739,000 in contract packaging
services in 1996.
The increase in net sales from network marketing activities to
$11,242,000 in the third quarter of 1997, was primarily due to a 32% growth in
net sales in the United States to $9,970,000 as compared to $7,560,000 in 1996.
The distributor sales force in the United States grew with an increase of 9% in
new sign-ups. Distributor retention in the United States remained strong as 51%
of the required distributors renewed their distributorship in the third quarter
1997. Distributors are required to renew their distributorship each year by
paying a $20 renewal fee. The number of product orders increased by 44% over
1996 levels. Net sales in the international operations, comprised of Australia,
Canada, Mexico, New Zealand and the United Kingdom, decreased 22% over 1996 to
$1,272,000. The Company is allocating additional sales and marketing resources
to the international markets to facilitate an increase in sales. The Company is
currently searching for a sales manager for the Australia and New Zealand
operations which has been operating without a sales manager since May 1997.
Cost of network marketing products sold as a percentage of net sales,
was 20.6% for the third quarter of 1997, compared to 18.5% in the same period of
1996. The decline in gross margin is a result of inventory losses and increased
operating costs caused by the United Parcel Service strike in which nearly 2,500
cases of product were replaced due to lost or undelivered product. During the
strike the Company relied on alternative methods of delivery which proved to be
less dependable. This problem was corrected with the settlement of the United
Parcel Service strike. In addition, as stated above under "Financial Condition,"
the result of the reduced level of finished goods manufacturing caused by
interruptions during the facility expansion, created higher unallocated
3
overhead costs. Completion of the facility expansion project and a return to
previous production levels should improve the Company's gross margin.
The Company provides contract packaging services, including blending,
processing and packaging food products in accordance with specifications
provided by its customers. Net sales from contract services declined in the
third quarter of 1997, as compared to the same quarter in 1996, due to the loss
of a substantial customer. This decline negatively effected the gross margin due
to the inability to reduce overhead cost to offset the decline in net sales. The
Company is taking action to replace the lost contract packaging income, plus
reduce operating expenses to a level necessary to support the current income.
Distributor royalties and commissions remained constant at 36.8% of
network marketing sales in the third quarter 1997, compared to 36.9% for the
same period in 1996. These expenses are governed by the distributor agreements
and are directly related to the level of sales. The Company pays a percent of
sales up to 18% in royalties and as much as 45% in commissions. In addition, the
Company paid royalties of $182,000 through the Ambassador Program, an incentive
program that rewards distributors who have reached and personally assisted
qualified distributors to reach a specified level of compensation. The
Ambassador Program paid $151,000 in the third quarter 1996.
Selling, general and administrative expenses, as a percentage of net
sales, increased to 37.7% for the third quarter of 1997, from 36.6% in the same
period in 1996. In the third quarter 1997, the Company increased sales and
marketing activities to support the plans for sales development, with a strong
emphasis on the international markets. Sales and marketing related expenses
increased $691,000 over 1996 levels, to $2,085,000.
Forward looking statements made in this filing involve material risks
and uncertainties that could cause actual results and events to differ
materially from those set forth, or implied, including 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 reported in the Company's
other SEC filings.
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
4
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits*
Description No.
----------- ---
Statement Re: Computation of
Per Share Earnings 11
(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.
5
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 13, 1997 RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
------------------------
Robert L. Montgomery, President,
Chief Executive Officer and
Principal Financial Officer
6
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 December 31
1997 1996
(Unaudited) (see notes)
------------ ------------
Assets
Current Assets:
Cash and Cash equivalents $ 2,419,058 $ 2,108,770
Accounts and notes receivable, less allowances of
$9,500 in 1997 and $13,000 in 1996 746,570 1,056,360
Inventories
Finished goods 1,511,624 1,219,295
Raw materials 944,671 1,136,897
Sales aids and promotional materials 366,413 405,768
------------ ------------
Total inventories 2,822,708 2,761,960
Refundable income taxes 184,298 48,949
Prepaid expenses and other current assets 618,244 512,031
Deferred income taxes 62,426 65,000
------------ ------------
Total current assets 6,853,304 6,553,070
Deferred costs 23,412 79,223
Property, plant and equipment:
Land 790,677 790,677
Building 2,854,937 2,863,457
Machinery & equipment 1,790,684 1,693,849
Office equipment 365,745 328,780
Computer equipment & software 1,456,460 1,245,137
Construction in progress 2,559,284 74,423
------------ ------------
9,817,787 6,996,323
Less: Accumulated depreciation (2,654,234) (2,226,951)
------------ ------------
Net Property, plant and equipment 7,163,553 4,769,372
------------ ------------
Total Assets $ 14,040,269 $ 11,401,665
============ ============
<FN>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statments at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
statements.
See notes to financial statements.
</FN>
7
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 December 31
1997 1996
(Unaudited) (see notes)
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses
Trade Accounts Payable $ 1,386,991 $ 1,688,777
Distributors commissions payable 1,542,015 1,064,023
Sales taxes payable 233,689 225,509
Interest expense payable 18,777 13,625
Payroll and payroll taxes payable 179,547 391,905
Other accrued expenses 138,398 112,219
------------ ------------
Total accounts payable & accrued expenses 3,499,417 3,496,058
Income taxes payable 36,466 65,102
Notes payable - short term 0 0
Current maturities of long-term debt and
capital lease obligations 284,999 282,502
Unearned income 5,023 22,602
------------ ------------
Total current liabilities 3,825,905 3,866,264
Capital lease obligations, less current maturities 46,941 13,211
Long-term debt, less current maturities 3,166,323 1,464,868
Stockholders' equity:
Common stock, no par value; 20,000,000 shares
authorized; 9,826,385 shares outstanding as of 9/30/97
and 9,900,529 shares outstanding as of 12/31/96 9,224,951 9,211,826
Notes receivable-officers and directors (4,633) (4,633)
Retained earnings (1,376,252) (2,516,181)
Foreign currency translation adjustment (123,679) 10,970
Less cost of treasury stock-261,780 shares as of 9/30/97
and 250,580 shares as of 12/31/96 (719,287) (644,660)
------------ ------------
Total Stockholders' Equity 7,001,100 6,057,322
------------ ------------
Total Liabilities and Stockholders' Equity $ 14,040,269 $ 11,401,665
============ ============
<FN>
See notes to financial statements.
</FN>
8
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Operations
Quarter ended September 30 Year to Date September 30
1997 1996 1997 1996
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Sales at suggested retail $17,449,378 $14,082,399 $54,376,312 $42,914,171
Less: Distributor allowances on product purchases 5,969,160 4,147,951 18,454,896 14,227,862
------------ ------------ ------------ ------------
Net Sales 11,480,218 9,934,448 35,921,416 28,686,309
Costs and expenses:
Cost of products sold 2,520,523 2,348,313 7,389,443 7,331,330
Distributor royalties and commissions 4,141,047 3,389,495 12,855,251 9,475,884
Selling, general and administrative 4,327,646 3,630,709 12,876,080 10,358,743
------------ ------------ ------------ ------------
Total Costs and Expenses 10,989,216 9,368,517 33,120,774 27,165,957
------------ ------------ ------------ ------------
Income from operations 491,002 565,931 2,800,642 1,520,352
Other income (expense):
Interest income 22,410 9,421 80,726 74,849
Interest expense (45,185) (52,820) (126,108) (170,830)
Other income\expense (3,582) 10,068 23,498 22,477
------------ ------------ ------------ ------------
Income
before income taxes 464,645 532,600 2,778,758 1,446,848
Provision for income taxes 182,516 194,416 1,082,959 529,125
------------ ------------ ------------ ------------
Net Income 282,129 338,184 1,695,799 917,723
============ ============ ============ ============
Earnings per common equivalent share 0.03 0.03 0.16 0.09
============ ============ ============ ============
<FN>
See notes to financial statements.
</FN>
9
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30
1997 1996
(Unaudited) (Unaudited)
Operating activities
Net Income $ 1,695,799 $ 917,723
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 445,333 458,548
Provision for losses on accounts receivable 0 13,000
Foreign currency translation (gain) loss (7,226) (3,651)
(Increase) decrease in accounts and notes receivable 312,596 (39,112)
(Increase) decrease in inventories (99,159) 59,876
(Increase) decrease in refundable income taxes (140,256) (7,352)
(Increase) decrease in prepaid expenses
and other current assets (110,149) (238,201)
(Increase) decrease in deferred costs 50,849 52,334
Increase (decrease) in accounts payable
and accrued expenses 38,740 (103,108)
Increase (decrease) in income taxes payable (25,321) 148,729
Increase (decrease) in unearned income (17,577) 19,190
------------ ------------
Net cash provided by (used in) operating
activities 2,143,629 1,277,976
Investing Activities:
Purchase of property, plant and equipment (2,751,275) (556,858)
------------ ------------
Net cash provided by (used in) investing
activities (2,751,275) (556,858)
Financing activities:
Increase in short-term borrowings 0 100,000
Proceeds from long-term debt 1,880,898 698,467
Principal payments on long-term borrowings
and line of credit (164,049) (119,063)
Principal payments under capital lease
obligations (71,690) (45,747)
Proceeds from stock options exercised 13,125 0
Dividends paid (290,368) (46,688)
Purchase of treasury stock (337,127) (843,503)
------------ ------------
Net cash provided by (used in) financing
activities 1,030,789 (256,534)
Effect of exchange rate changes on cash
and cash equivalents (112,855) 69,839
------------ ------------
Increase (decrease) in cash and cash
equivalents 310,288 534,423
Cash and cash equivalents at beginning
of period 2,108,770 1,507,176
------------ ------------
Cash and cash equivalents at end of year $ 2,419,058 $ 2,041,599
============ ============
<FN>
See notes to consolidated financial statements.
</FN>
10
September 30, 1997
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 nine-month period ended September 30,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. 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,
1996.
Note 2 -- Stock Dividend
On January 31, 1997, the Company declared a 10 percent stock dividend
on the Company's common stock which was distributed on February 28, 1997 to
shareholders of record on February 14, 1997. The dividend was transferred from
retained earnings to common stock in the amount of $5,848,000, which was based
on the closing price of $6.50 per share on the declaration date and was
reflected in the balance sheet as of December 31, 1996. Average shares
outstanding and all per share amounts included in the accompanying consolidated
financial statements and notes are based on the increased number of shares
giving retroactive recognition to the stock dividend.
Note 3 -- Commitments and Long Term Debt
The Company began a expansion to its facility on land the Company owns
adjacent to its existing building in Chesterfield, Missouri. The construction
agreement of May 9, 1997 includes expanding the office, warehousing and
manufacturing areas by adding approximately 90,000 square feet of space to its
facility. The expansion project is anticipated to cost $5 to $6 million and will
be financed with cash generated through operations and bank debt.
In September, 1997, the Company obtained a loan commitment of
approximately $4.4 million for the expansion project. As of September 30, 1997,
approximately $1.9 million of the commitment has been utilized and is reflected
in the long-term debt caption of the balance sheet.
Note 4 -- Legal Proceedings
On May 21, 1997, Timothy Tobin, a former director and officer of the
Company, filed a Demand for Arbitration with the American Arbitration
Association in St. Louis, Missouri. The Demand claimed damages in excess of
$750,000 resulting from alleged misrepresentations made by the Company in
connection with a Stock Purchase Agreement and Consulting Agreement entered into
with Mr. Tobin in October 1992. The Company has filed an Answer and Counterclaim
denying Mr. Tobin's allegations and claiming damages in excess of $150,000
resulting from Mr. Tobin's breach of warranties contained in the October 1992
agreements. The Company intends to vigorously defend Mr. Tobin's claim and to
actively pursue its counterclaim.
11