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 March 31, 1999
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 9,650,502 outstanding Shares as of March 31, 1999
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 March 31, 1999 and Balance Sheet as
of December 31, 1998.
2. Interim Statements of Operations for the three month periods
ending March 31, 1999 and March 31, 1998.
3. Interim Statements of Cash Flows for the three month periods
ending March 31, 1999 and March 31, 1998.
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 Operation
1. Financial Condition
-------------------
Current assets of the Company increased during the first quarter of 1999,
to $9,801,000 from $8,358,000 as of December 31, 1998, primarily due to
increases in accounts receivable and inventory. These increases are due to the
increased sales and production of the Company's manufacturing and packaging
business. The increase in inventory is for raw materials for these customers.
Cash and cash equivalents decreased by $343,000 to $2,473,000 as of March 31,
1999 as the result of the increase in accounts receivable and inventory, as well
as equipment acquisitions to be discussed later.
The Company purchased $589,000 of property, plant and equipment during the
first quarter of 1999, bringing its total gross property, plant and equipment to
$14,745,000. The majority of the purchases were for new manufacturing
capabilities for its manufacturing and packaging business. This acquisition was
funded with an additional long-term note with the Company's primary lender of
$300,000.
Current liabilities increased by $1,696,000 from $6,175,000 as of December
31, 1998 to $7,871,000 as of March 31, 1999. The primary components of the
increase were in trade accounts payable and distributor commissions payable.
Trade accounts payable increased by $1,146,000 from $3,568,000 as of December
31, 1998 to $4,714,000 as of March 31, 1999. This increase is due to the
increased raw material inventory arising from the manufacturing and packaging
business. Distributor commissions payable increased by $389,000 to $1,561,000 as
of March 31, 1999 due to higher sales levels in March 1999 as compared to
December 1998.
2
Long-term debt increased by $124,000 as the result of the additional debt
of $300,000 that was incurred during the quarter. The increase in the current
maturities of long-term debt and capital lease obligations is due to the same
note.
Stockholders' equity increased from $8,340,000 as of December 31, 1998 to
$8,366,000 as of March 31, 1999. Equity increased as a result of net income for
the first quarter of $67,000, and as the result of an improvement in the foreign
currency translation adjustment of $62,000 at March 31, 1999 as compared to
December 31, 1998. The Australian, New Zealand and Canadian dollars all
strengthened against the US dollar over the course of the first quarter of 1999.
The Company paid out cash dividends of $97,000 in the quarter.
The Company's working capital balance has decreased by $253,000 since
December 31, 1998 to $1,930,000 as of March 31, 1999. The current ratio has also
declined to 1.25 as of March 31, 1999. As of December 31, 1998, the Company was
in technical violation of a covenant in a loan agreement covering a term loan
from 1996, as well as its lines of credit. This covenant requires that the
Company maintain a current ratio of not less than 1.5. The Company has obtained
a waiver of this covenant through June 30, 1999, and is discussing a permanent
modification in this requirement with the lender, as the makeup of the Company's
balance sheet has changed due the increased business in the manufacturing and
packaging segment.
2. Results of Operations
---------------------
The Company had net income of $67,000, or $.01 per share, for the quarter
ended March 31, 1999, compared to net income of $633,000, or $.07 per share
($.06 per share diluted), for the same period in 1998. All of the Company's
operations experienced declines in profitability. Although consolidated net
sales increased, worldwide network marketing sales decreased by 5% and selling,
general and administrative expenses increased by $492,000 in the first quarter
of 1999 as compared to the prior year.
Net sales improved to $17,695,000 in the first quarter of 1999 as compared
to $12,277,000 in the prior year. The increase in sales was due to the increase
in sales in the Company's manufacturing and packaging services segment. Sales in
this portion of the business increased to $6,208,000 in the first quarter of
1999, as compared to $163,000 in the prior year. Net sales in the network
marketing segment declined from $12,118,000 in the first quarter of 1998 to
$11,487,000 in the first quarter of 1999. Network marketing sales in the United
States declined by 3% from $10,765,000 in the first quarter of 1998 to
$10,438,000 in the first quarter of 1999. Sales in the foreign subsidiaries of
Australia, New Zealand, Canada, Mexico and the United Kingdom overall decreased
by 22% from $1,349,000 in the first quarter of 1998 to $1,049,000 in the first
quarter of 1999. The Mexican operation experienced an 11% increase in sales in
first quarter 1999.
3
The Company provides manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers. Net sales increased to $6,208,000 in
the first quarter of 1999 from $163,000 in the prior year. The increase in sales
is due to the work provided by two major customers. The Company's sales to third
party customers primarily consist of the Company purchasing raw materials, using
customer-provided packaging materials and selling a finished product to the
customer. For the first quarter of 1999, cost of goods sold for these sales were
99% of net sales. Even under optimal operating efficiencies, the gross margin
for these unaffiliated customers is substantially less than margins obtained in
the sales of the network marketing products. However, the Company has not
achieved the desired level of profitability due to labor and other production
inefficiencies.
Cost of products sold for the network marketing segment as a percentage of
net sales improved from 17.5% in the first quarter of 1998 to 16.7%. A
by-product of the increased business for unaffiliated customers is the
purchasing power it provides the Company on the materials it uses to manufacture
the network marketing products.
Distributor royalties and commissions as percentage of network marketing
sales increased from 37% in the first quarter of 1998 to 39% in the first
quarter of 1999. 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.
Interest expense increased slightly from $120,000 in the first quarter of
1998 to $130,000 in the first quarter of 1999. This is the result of the
increase in the Company's long-term debt to finance equipment acquisitions.
3. Year 2000 Issues
----------------
Most computer databases, as well as embedded microprocessors in computer
systems and industrial equipment, have been programmed to use a two-digit number
to represent the year. Computer programs that recognize a date using "00" as the
year 1900 rather than the year 2000 could result in errors or system failures.
Accordingly, all companies must analyze their systems and make the necessary
changes to ensure that automated processes will correctly distinguish between
years before and after the year 2000.
Based upon a recent assessment of its business, the Company does not
believe the Year 2000 issue will have a material adverse effect on its
operations. Based on testing of the Company's current computer hardware and
software systems the Company has determined that the vast majority of such
systems are Year 2000 compliant, and this result has been achieved without
material cost to the Company. The Company has identified some of its
telecommunication hardware and software that is not Year 2000 compliant and is
in the process of installing the necessary upgrades. The cost of these upgrades
will not be material. The Company has initiated communications with the
manufacturers of its manufacturing and warehouse equipment to ensure that this
equipment will be Year 2000 ready. Based on conversations with and evaluations
by these manufacturers, it is anticipated that no warehouse or manufacturing
equipment will need to be replaced. Consequently, no material costs will be
incurred to make any of the Company's manufacturing and warehouse equipment Year
2000 ready. The Company incurred no cost for the testing performed by the
manufacturers of this equipment.
4
Formal communications have commenced and are ongoing with all significant
suppliers and large customers of the Company, and will continue during the
balance of 1999 to determine the extent to which the Company may be vulnerable
to those third parties' failure to remediate their own potential Year 2000
problems. The Company has several suppliers of its raw materials and should be
able to obtain alternative sources of supply if these suppliers experience Year
2000 problems. The Company has two major customers for its manufacturing and
packaging services and has received confirmation from these customers that they
have addressed their Year 2000 issues. The Company's customers for its network
marketing segment are typically individuals who will have no Year 2000 exposure.
The Company ships the majority of its products through common carrier (primarily
United Parcel Services) and has received confirmation that these carriers have
addressed their Year 2000 issues.
If the Company's most significant customers, or the suppliers of the
Company's necessary energy, telecommunications and transportation needs, fail to
provide the Company with the materials and services which are necessary to
produce, distribute and sell its products, such failure could have a material
adverse effect on the results of operations, liquidity and financial condition
of the Company. There can be no guarantee that the systems of these suppliers,
vendors and customers of the Company will be timely converted to Year 2000
compliance. Nor is there any guarantee that the Company would experience no
material adverse effects should any of the significant vendors, suppliers or
customers of the Company fail to remediate their potential Year 2000 problems.
It is impossible to provide accurate estimates of the material costs to the
Company should any of the significant vendors, suppliers or customers of the
Company fail to remediate their potential Year 2000 problems. It is anticipated
that such costs, if any, would be paid from the general revenues of the Company.
Given that, as a result of the Company's communications with the aforementioned
vendors, suppliers, and major customers, said parties have indicated that they
have addressed or are addressing their own Year 2000 issues, the Company
believes that the risk of increased costs due to these parties failure to
remediate their potential Year 2000 issues, is relatively low. The Company has
not budgeted for these potential costs. No Company projects have been deferred
or abandoned due to any expenditure related to obtaining Year 2000 compliance.
The Company has determined it has no exposure to contingencies related to
the Year 2000 for the products it sells.
The Company has no contingency plans in effect for the failure of any of
Company's significant suppliers, customers or vendors of energy,
telecommunications or transportation needs to become Year 2000 ready, nor does
the Company believe that such a plan is necessary. The Company has not obtained
and does not plan to obtain insurance to cover any of its potential Year 2000
exposure.
5
The cost of attaining Year 2000 compliance has not and will not be material
for the Company. It is anticipated that no warehouse or manufacturing equipment
will need to be replaced. The Company is currently assessing its other office
equipment for any Year 2000 issues. The Company will primarily utilize internal
resources to manage the Year 2000 issue.
The Company believes that its computer hardware and software will meet its
administrative needs in the United States and in its foreign subsidiaries in the
foreseeable future.
4. Quantitative and Qualitative Disclosure of Market Risk
------------------------------------------------------
The Company's earnings and cash flow are subject to fluctuations due to
changes in foreign currency rates as it has several foreign subsidiaries and
continues to explore expansion into other foreign countries. As a result,
exchange rate fluctuations may have an effect on its sales and the Company's
gross margins. Accounting practices require that the Company's results from
operations be converted to U.S. dollars for reporting purposes. Consequently,
the reported earnings of the Company in future periods may be significantly
affected by fluctuations in currency exchange rates, generally increasing with a
weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Products
manufactured by the Company for sale to the Company's foreign subsidiaries are
transacted in U.S. dollars. As the Company's foreign operations expand, its
operating results will be subject to the risks of exchange rate fluctuations and
the Company may not be able to accurately estimate the impact of such changes on
its future business, product pricing, results of operations or financial
condition.
The Company also is exposed to market risk in changes in interest rates on
its long-term debt arrangements and commodity prices in some of the raw
materials it purchases for its manufacturing needs. However, neither presents a
risk that would have a material effect on the Company's results of operations or
financial condition.
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
Not Applicable.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
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Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
7
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits*
(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.
8
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: May 14, 1999 RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
-------------------------------------
Robert L. Montgomery, President,
Chief Executive Officer and
Principal Financial Officer
9
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31 December 31
1999 1998
------------ ------------
(unaudited) (see notes)
Assets
Current assets:
Cash and cash equivalents $ 2,473,322 $ 2,816,804
Accounts and notes receivable, less allowances
of $4,600 in 1999 and $5,000 in 1998 1,128,762 777,443
Inventories
Finished goods 2,068,803 1,702,359
Raw materials 2,976,365 1,865,649
Sales aids and promotional materials 375,580 361,322
------------ ------------
Total inventories 5,420,748 3,929,330
Refundable income taxes 271,257 314,284
Prepaid expenses and other current assets 427,111 440,597
Deferred income taxes 79,859 79,269
------------ ------------
Total current assets 9,801,059 8,357,727
Other assets:
Goodwill, net of accumulated
amortization of $26,000 499,261 512,399
Other assets 807,499 703,623
------------ ------------
Total other assets 1,306,760 1,216,022
Property, plant and equipment:
Land 829,222 829,222
Building 8,201,920 8,201,744
Machinery & equipment 3,532,607 2,783,923
Office equipment 449,588 446,205
Computer equipment & software 1,731,743 1,676,372
Construction in progress -- 235,511
------------ ------------
14,745,080 14,172,977
Less: Accumulated depreciation (3,741,530) (3,493,754)
------------ ------------
Net property, plant and equipment 11,003,550 10,679,223
------------ ------------
Total assets $ 22,111,369 $ 20,252,972
============ ============
See notes to financial statements.
10
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31 December 31
1999 1998
------------ ------------
(unaudited) (see notes)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable $ 4,713,902 $ 3,568,334
Distributors commissions payable 1,560,590 1,172,164
Sales taxes payable 221,078 221,377
Interest expense payable 28,552 27,851
Payroll and payroll taxes payable 236,100 114,906
Other accrued expenses 149,985 85,123
------------ ------------
Total accounts payable and accrued expenses 6,910,207 5,189,755
Income taxes payable 37,028 55,258
Borrowings under line of credit 228,568 313,825
Current maturities of long-term debt and
capital lease obligations 587,464 508,362
Unearned income 107,705 107,695
------------ ------------
Total current liabilities 7,870,972 6,174,895
Capital lease obligations, less current maturities 334,994 373,455
Long-term debt, less current maturities 5,340,194 5,216,107
Other non-current liabilities 199,022 148,349
Stockholders' equity:
Common stock, no par value;
20,000,000 shares authorized;
9,650,502 shares outstanding
as of 3/31/99 and 9,653,502 shares
outstanding as of 12/31/98 9,178,645 9,179,764
Notes receivable-officers and directors (43,150) (44,746)
Retained earnings (390,276) (354,195)
Foreign currency translation adjustment (379,032) (440,657)
------------ ------------
Total stockholders' equity 8,366,187 8,340,166
------------ ------------
Total liabilities and stockholders' equity $ 22,111,369 $ 20,252,972
============ ============
See notes to financial statements.
11
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Operations
Three months ended March 31
1999 1998
------------ ------------
(unaudited) (unaudited)
Sales at suggested retail $ 23,774,411 $ 18,724,406
Less: distributor allowances
on product purchases 6,079,100 6,447,549
------------ ------------
Net sales 17,695,311 12,276,857
Costs and expenses:
Cost of products sold 8,074,732 2,254,408
Distributor royalties and commissions 4,510,775 4,462,740
Selling, general and administrative 4,923,829 4,431,779
------------ ------------
Total costs and expenses 17,509,336 11,148,927
------------ ------------
Income from operations 185,975 1,127,930
Other income (expense):
Interest income 18,800 30,207
Interest expense (130,398) (119,541)
Other income\expense 34,233 (3,265)
------------ ------------
Income before income taxes 108,610 1,035,331
Provision for income taxes 41,622 402,607
------------ ------------
Net income $ 66,988 $ 632,724
============ ============
Earnings per common share $ 0.01 $ 0.07
============ ============
Earnings per common share - assuming dilution $ 0.01 $ 0.06
============ ============
See notes to financial statements.
12
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Three months ended March 31
1999 1998
----------- -----------
Operating activities:
Net income $66,988 $632,724
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 257,741 164,948
Provision for losses on accounts receivable -- 1,000
Foreign currency translation (gain) loss (21,843) (17,641)
(Increase) decrease in accounts and notes receivable (302,043) 60,327
(Increase) decrease in inventories (1,473,972) 61,424
(Increase) decrease in refundable income taxes (1,933) --
(Increase) decrease in prepaid expenses
and other current assets 38,166 (20,268)
(Increase) decrease in other assets (103,754) 211,953
Increase in accounts payable and accrued expenses 1,717,872 343,133
Increase (decrease) in income taxes payable 25,446 --
----------- -----------
Net cash provided by (used in) operating activities 202,668 1,437,600
Investing activities:
Purchase of property, plant and equipment (589,160) (471,842)
----------- -----------
Net cash provided by (used in) investing activities (589,160) (471,842)
Financing activities:
Net borrowings under line of credit (85,256) --
Proceeds from long-term borrowings 300,000 319,175
Principal payments on long-term borrowings (94,188) (68,440)
Principal payments under capital lease obligations (41,084) (13,734)
Dividends paid (96,505) (96,173)
Proceeds from notes receivable assumed from issuance
of common stock from exercise of options 1,596 --
Purchase of treasury stock (7,682) --
----------- -----------
Net cash provided by (used in) financing
activities (23,119) 140,828
Effect of exchange rate changes on cash
and cash equivalents 66,129 26,478
----------- -----------
Increase (decrease) in cash and cash
equivalents (343,482) 1,133,064
Cash and cash equivalents at beginning
of period 2,816,804 2,426,426
----------- -----------
Cash and cash equivalents at end of period $2,473,322 $3,559,490
=========== ===========
See notes to financial statements
13
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1999
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 three-month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting priciples for complete
financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant Company and Subsidiaries' annual
report on Form 10-K for the year ended December 31, 1998.
Note 2-- Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three months ended March 31
1999 1998
----------- -----------
Numerator:
Numerator for basic and diluted
earnings per share--net income $66,988 $632,724
Denominator:
Denominator per basic earnings per
share--weighted average shares 9,651,000 9,624,000
Effect of dilutive securities:
Employee stock options and other warrants 200,000 651,000
----------- -----------
Denominator for diluted earnings per
share--adjusted weighted average shares 9,851,000 10,275,000
=========== ===========
Basic earnings per share $0.01 $0.07
=========== ===========
Diluted earnings per share $0.01 $0.06
=========== ===========
Note 3-- Comprehensive Income
Total comprehensive income was $128,613 for the three months ended March 31,
1999 and $630,826 for the three months ended March 31, 1998. The Company's only
component of other comprehensive income is the foreign currency translation
adjustment.
14
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1999
Note 4-- Segment Information
Three months ended Three months ended
March 31, 1999 March 31, 1998
Network Manufacturing Network Manufacturing
marketing and packaging marketing and packaging
------------------------------- ------------------------------
Net sales to external customers 11,487,115 6,208,196 12,115,596 161,261
Intersegment net sales -- 1,567,162 -- 1,943,859
Segment profit/(loss) 649,007 (96,745) 1,528,421 (34,393)
Segment assets 13,213,440 6,424,607 11,733,509 1,988,810
A reconciliation of combined operating profit for the reportable segments to
consolidated income before income taxes is as follows:
Three months ended March 31
1999 1998
--------------------------
Total profit for
reportable segments 552,262 1,494,078
Corporate expenses (366,287) (366,147)
Non operating - net 53,033 26,941
Interest expense (130,398) (119,541)
--------------------------
Income before income taxes 108,610 1,035,331
==========================
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