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, 2001
Commission File No. 1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 37-1172197
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
136 Chesterfield Industrial Boulevard, Chesterfield, Missouri 63005
(Address of principal executive offices) (Zip Code)
(636) 537-9715
(Registrant's telephone number, including area code)
Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK 9,654,505 outstanding Shares as of June 30, 2001
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, 2001 and Balance Sheet as of
December 31, 2000.
2. Interim Statements of Operations for the three and six month periods
ending June 30, 2001 and June 30, 2000.
3. Interim Statements of Cash Flows for the six month periods ending June
30, 2001 and June 30, 2000.
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 Operation
1. Financial Condition
Current assets of the Company decreased during the first six months of
2001, to $8,095,000 from $9,424,000 as of December 31, 2000. Cash and cash
equivalents increased to $1,512,000 as of June 30, 2001, as compared to
$1,199,000 as of December 31, 2000. Accounts and notes receivable decreased by
$1,187,000 to $1,380,000 as of June 30, 2001, as compared to $2,567,000 as of
December 31, 2000. Inventory decreased by $677,000 to $3,853,000 as of June 30,
2001. The Company's accounts receivable and inventory decrease is primarily due
to the reduction in the sales and production for the Company's manufacturing and
packaging business. Prepaid expenses and other current assets increased as the
result of advance payments made on a new product line to be introduced in August
2001.
The Company purchased $106,000 of property, plant and equipment during the
first six months of 2001.
Current liabilities decreased by $1,275,000 from $9,291,000 as of December
31, 2000 to $8,016,000 as of June 30, 2001. The primary component of the
decrease is the reduction in trade accounts payable. Trade accounts payable
decreased by $1,185,000 from $5,270,000 as of December 31, 2000 to $4,085,000 as
of June 30, 2001. This decrease is related to the decrease in inventory and
reduction in the manufacturing for third-party customers, as discussed
previously. Another significant component of the decrease was the reduction in
balance due on the Company's line of credit. The amount drawn on the line of
credit reduced from $1,918,000 as of December 31, 2000 to $1,376,000 as of June
30, 2001. Distributor commissions payable increased from $1,200,000 as of
December 31, 2000 to $1,574,000 as of June 30, 2001. This is
2
the result of higher worldwide network marketing sales in June 2001, as compared
to December 2000.
Long-term debt and capital lease obligations decreased by $181,000 from
$5,046,000 as of December 31, 2000 to $4,865,000 as of June 30, 2001. The
Company incurred $41,000 in additional long-term debt during the first six
months of 2001.
Stockholders' equity decreased from $5,646,000 as of December 31, 2000 to
$5,467,000 as of June 30, 2001, as the result of the net loss of the first six
months of 2001, coupled with the declining value of the currencies of most of
the Company's key foreign subsidiaries. Equity declined by $50,000 as the result
of the foreign currency translation adjustment at June 30, 2001 as compared to
December 31, 2000. The Australian, New Zealand and Canadian dollars all weakened
against the US dollar over the course of the first six months of 2001.
The Company's working capital balance has declined slightly from $133,000
as of December 31, 2000 to $79,000 as of June 30, 2001. The current ratio has
remained constant at 1.01 as of June 30, 2001. The Company also has an operating
line of credit, with a limit based on a collateral-based formula of accounts
receivable and inventory, which was renewed in May 2001. The maximum borrowing
limit is $2,000,000. At June 30, 2001, the Company had utilized $1,376,000 of
the line of credit. Additionally, in March 2001, the Company obtained a
modification agreement related to the term loan that financed the construction
of the 1998 building expansion. The modification agreement effectively extended
the maturity of the loan to March 2004, from March 2001. Management believes
that the Company's internally generated funds together with the loan agreement
will be sufficient to meet working capital requirements in 2001.
2. Results of Operations
The Company had a net income of $13,000, or $.00 per share basic and
diluted, for the quarter ended June 30, 2001, compared to net income of $63,000,
on a restated basis, or $.01 per share basic and diluted, for the same period in
2000. Net sales declined due to the continued decrease in the manufacturing and
packaging business, and gross margin contribution declined in comparison to the
second quarter of 2000. Net margin from network marketing sales, defined as net
sales less cost of goods sold and distributor royalties and commissions declined
slightly, as network marketing sales in the United States were essentially flat.
Selling, general and administrative expenses decreased slightly as the result of
efforts to bring administrative costs more in line with current sales levels.
For the six months ended June 30, 2001, the Company had a net loss of $133,000,
as compared to net income of $148,000, on a restated basis, in the first six
months of 2000.
During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. Previously, the Company
recognized shipping and handling costs as a reduction to net sales. Effective
with the adoption of Staff Accounting Bulletin No. 101 on October 1, 2000, the
EITF requires shipping and handling costs to be included in cost of sales. The
effect of adopting EITF 00-10 increased net sales and cost of products sold from
previously reported amounts by $370,000 and $730,000 for the three and six
3
months ended June 30, 2000, respectively. Percentages shown below in the
discussion on specific line items of the statement of operations have been
recalculated for prior years based on the reclassification.
Net sales decreased to $13,425,000 in the second quarter of 2001 as
compared to $15,557,000 in the prior year. The decrease was primarily due to the
decrease in sales by the Company's manufacturing and packaging services segment.
Sales in this portion of the business decreased to $1,578,000 in the second
quarter of 2001, as compared to $4,373,000 in the prior year. Net sales in the
network marketing segment increased to $11,847,000 in the second quarter of
2001, as compared to $11,184,000 in the second quarter of 2000. Network
marketing sales in the United States improved by 2% to $9,834,000 in the second
quarter of 2001, as compared to $9,618,000 in the second quarter of 2000.
Additionally, sales in the Company's international subsidiaries increased
overall. Led by the sales growth of the Company's newest market, the
Philippines, international sales increased by 28% in the second quarter of 2001
as compared to the second quarter of 2000. International sales increased from
$1,566,000 in the second quarter of 2000 to $2,012,000 in the second quarter of
2001. Net sales in the Philippines of $685,000 accounted for nearly all of the
increase. A sales increase of 18% in Mexico was offset by a decline of 49% in
the Australia/New Zealand market. Sales in the second quarter of 2000 in
Australia were very strong due to purchasing in advance of a new GST tax that
went into effect on July 1, 2000. In response to the decline in sales in this
market, the Company terminated its sales manager in the region in July 2001 and
is in the process of searching for a replacement. Canadian and UK operations
showed a 10% and 11% increase in net sales, respectively.
The Company also provides manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers. Net sales decreased to $1,578,000 in
the second quarter of 2001 from $4,373,000 in the prior year. Through the first
six months of the year, net sales in this segment had declined from $8,891,000
in 2000 to $3,472,000 in 2001. This decrease continues the trend of the
Company's decision to place less emphasis on this business. The Company's sales
to third party customers primarily consist of the Company purchasing raw
materials, using customer-specified packaging materials and selling a finished
product to the customer. For the second quarter of 2001, cost of goods sold for
these sales were 91% of net sales. Even under optimal operating efficiencies,
the gross margin for unrelated customers is substantially less than margins
obtained in the sales of the network marketing products. As a result of the
declining sales and uncertain plans of the Company's remaining third-party
customer, the Company has decided to terminate that relationship as well. The
Company expects to conclude production for this customer during the third
quarter. As production has declined over the course of 2001, the Company has
taken steps to reduce payroll through layoffs and attrition. During the course
of 2001, the Company has reduced plant employment by approximately 40 people.
Cost of products sold for the network marketing segment as a percentage of
net sales improved from 19.7% in the second quarter of 2000 to 19.0% in the
second quarter of 2001. Part of this improvement is due to a change in the
distributor compensation plan, effective September 1, 2000. This reduced the
maximum discount allowed to distributors from 45% to 40%.
4
Distributor royalties and commissions as a percentage of network marketing
sales increased from 35% in the second quarter of 2000 to 38% in the second
quarter of 2001. As part of the change in the distributor compensation plan
discussed above, total royalties paid to Master Affiliates increased from 18% to
23% of retail sales. These expenses are governed by the distributor agreements
and are directly related to the level of sales.
Selling, general and administrative (SGA) expenses decreased by $79,000 in
the second quarter of 2001 as compared to the second quarter of 2000. The
Company has taken various steps to reduce administrative costs and will continue
these cost reductions in future quarters.
Interest expense decreased from $158,000 in the second quarter of 2000 to
$130,000 in the second quarter of 2001. This decrease is due to less reliance on
the line of credit, along with declining interest rates.
The Company did not recognize an income tax benefit for the loss before
income taxes in the first six months of 2001. The Company has exhausted all
carryback potential on its net operating losses and, as a result, the benefit
has been offset by a valuation allowance, until such time the Company has
taxable income.
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 2001 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 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
5
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
In June 2001, five former distributors of the Company filed lawsuits
claiming wrongful termination, breach of the Distributor Agreement and
interference with business expectancy. The individuals had been terminated by
the Company in October 2000 for violating certain provisions of the Distributor
Agreement. The Company believes the claims are without merit and intends to
vigorously defend itself. The Company has engaged outside counsel to defend
these claims. Due to the preliminary nature of these actions, the outcome of
these matters is uncertain, and a range of loss cannot reasonably be estimated.
However, management believes that the final outcome will not have a material
adverse effect on the financial position or results of operations of the
Company.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits*
6
(b) The Company has not filed a Current Report during the quarter
covered by this report.
* Also incorporated by reference the Exhibits filed as part of the
S-18 Registration Statement of the Registrant, effective November
5, 1985, and subsequent periodic filings.
7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 2001 RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
--------------------------------------
Robert L. Montgomery, President,
Chief Executive Officer and
Principal Financial Officer
8
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30 December 31
2001 2000
------------ ------------
(unaudited) (see notes)
Assets
Current assets:
Cash and cash equivalents $1,512,070 $1,198,682
Accounts and notes receivable, less allowances of
$1,100 in 2001 and $5,000 in 2000 1,380,090 2,566,982
Note receivable from officer 59,250 59,250
Inventories
Finished goods 1,655,634 2,584,895
Raw materials 1,702,620 1,459,960
Sales aids and promotional materials 494,810 484,936
------------ ------------
Total inventories 3,853,064 4,529,791
Refundable income taxes 465,760 663,735
Prepaid expenses and other current assets 740,602 322,131
Deferred income taxes 84,058 83,174
------------ ------------
Total current assets 8,094,894 9,423,745
Other assets 818,581 849,691
Property, plant and equipment:
Land 829,222 829,222
Building 8,401,891 8,399,277
Machinery & equipment 4,000,000 3,984,971
Office equipment 546,024 494,266
Computer equipment & software 1,980,045 1,961,969
------------ ------------
15,757,182 15,669,705
Less: Accumulated depreciation (5,908,368) (5,548,026)
------------ ------------
Net property, plant and equipment 9,848,814 10,121,679
------------ ------------
Total assets $18,762,289 $20,395,115
============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30 December 31
2001 2000
------------ ------------
(unaudited) (see notes)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable $4,085,060 $5,269,709
Distributors commissions payable 1,574,123 1,199,522
Sales taxes payable 282,287 171,639
Interest expense payable 63,716 65,478
Payroll and payroll taxes payable 165,034 148,573
Other accrued expenses 11,914 9,494
------------ ------------
Total accounts payable and accrued expenses 6,182,134 6,864,415
Borrowings under line of credit 1,375,928 1,918,080
Current maturities of long-term debt 290,491 332,466
Current maturities of capital lease obligations 167,626 176,094
------------ ------------
Total current liabilities 8,016,179 9,291,055
Capital lease obligations, less current maturities 58,095 143,900
Long-term debt, less current maturities 4,807,224 4,901,788
Other non-current liabilities 413,501 412,610
Stockholders' equity:
Preferred stock, par value $.001 per share; 3,000,000
shares authorized; none issued and outstanding -- --
Common stock, par value $.001 per share; 20,000,000
authorized; 9,654,505 shares issued and outstanding
as of 6/30/2001 and 12/31/2000 9,655 9,655
Additional paid-in capital 9,075,146 9,074,756
Notes receivable-officers and directors (23,025) (26,650)
Accumulated deficit (2,920,513) (2,787,725)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (673,973) (624,274)
------------ ------------
Total stockholders' equity 5,467,290 5,645,762
------------ ------------
Total liabilities and stockholders' equity $18,762,289 $20,395,115
============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Operations
Three months ended June 30 Six months ended June 30
2001 2000 2001 2000
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales at suggested retail $18,529,110 $21,303,242 $37,998,980 $42,530,365
Less: distributor allowances on product purchases 5,104,176 5,745,941 10,512,477 11,524,950
------------ ------------ ------------ ------------
Net sales 13,424,934 15,557,301 27,486,503 31,005,415
Costs and expenses:
Cost of products sold 3,682,602 6,276,108 7,835,423 12,892,180
Distributor royalties and commissions 4,553,485 3,865,982 9,204,117 7,698,406
Selling, general and administrative 5,051,688 5,130,995 10,305,693 9,816,536
------------ ------------ ------------ ------------
Total costs and expenses 13,287,775 15,273,085 27,345,233 30,407,122
------------ ------------ ------------ ------------
Income from operations 137,159 284,216 141,270 598,293
Other income (expense):
Interest income 8,530 11,634 18,716 25,172
Interest expense (130,056) (158,250) (287,385) (325,920)
Other income/(expense) (2,240) (33,022) (5,389) (50,875)
------------ ------------ ------------ ------------
Income/(loss) before income taxes 13,393 104,578 (132,788) 246,670
Provision for income taxes 0 41,963 0 98,500
------------ ------------ ------------ ------------
Net income/(loss) $13,393 $62,615 ($132,788) $148,170
============ ============ ============ ============
Earnings/(loss) per common share $0.00 $0.01 ($0.01) $0.02
============ ============ ============ ============
Earnings/(loss) per common share - assuming dilution $0.00 $0.01 ($0.01) $0.01
============ ============ ============ ============
See notes to financial statements.
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
Six months ended June 30
2001 2000
----------- -----------
Operating activities:
Net income (loss) ($132,788) $148,170
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation 373,780 535,961
Amortization of goodwill -- 26,276
Foreign currency translation (gain) loss 12,121 33,905
(Increase) decrease in accounts and notes receivable 1,197,569 (1,896,612)
(Increase) decrease in inventories 652,010 (218,485)
(Increase) decrease in refundable income taxes 196,620 --
(Increase) decrease in prepaid expenses
and other current assets (419,572) 50,114
(Increase) decrease in other assets 29,265 23,538
Increase (decrease) in accounts payable and accrued expenses (671,041) 2,022,460
Increase (decrease) in income taxes payable -- 100,402
----------- -----------
Net cash provided by operating activities 1,237,964 825,729
Investing activities:
Purchase of property, plant and equipment (105,749) (237,329)
Repayment of loans by officers and directors 3,625 33,415
----------- -----------
Net cash used in investing activities (102,124) (203,914)
Financing activities:
Net repayments under line of credit (542,152) (460,082)
Proceeds from long-term borrowings 41,102 220,000
Principal payments on long-term borrowings (175,827) (227,411)
Principal payments under capital lease obligations (94,273) (35,778)
Proceeds from warrants exercised 390 --
----------- -----------
Net cash used in financing activities (770,760) (503,271)
Effect of exchange rate changes on cash and cash equivalents (51,692) (111,093)
----------- -----------
Increase in cash and cash equivalents 313,388 7,451
Cash and cash equivalents at beginning of period 1,198,682 1,531,700
----------- -----------
Cash and cash equivalents at end of period $1,512,070 $1,539,151
=========== ===========
See notes to financial statements
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 2001
Note 1-- Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001.
The balance sheet at December 31, 2000 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, 2000.
Note 2-- Shipping and Handling Costs
During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. Previously, the Company
recognized shipping and handling costs as a reduction to net sales. Effective
with the adoption of Staff Accounting Bulletin No. 101 on October 1, 2000, the
EITF requires shipping and handling costs to be included in cost of sales. The
effect of adopting EITF 00-10 increased net sales and cost of products sold from
previously reported amounts by $370,000 and $730,000 for the three and six
months ended June 30, 2000, respectively.
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
2001 2000 2001 2000
------------------------ -------------------------
Numerator:
Numerator for basic and diluted
earnings per share--net income/(loss) $13,393 $62,615 ($132,788) $148,170
Denominator:
Denominator per basic earnings per
share--weighted average shares 9,655,000 9,552,000 9,655,000 9,552,000
Effect of dilutive securities:
Employee stock options and other warrants -- 375,000 -- 375,000
------------------------ -------------------------
Denominator for diluted earnings per
share--adjusted weighted average shares 9,655,000 9,927,000 9,655,000 9,927,000
======================== =========================
Basic earnings/(loss) per share $0.00 $0.01 ($0.01) $0.02
======================== =========================
Diluted earnings/(loss) per share $0.00 $0.01 ($0.01) $0.01
======================== =========================
Note 4-- Comprehensive Income
Total comprehensive income/(loss) was $90,392 and $(182,487) for the three
months and six months ended June 30, 2001, respectively. For the three and six
months ended June 30, 2000, comprehensive income was $29,468 and $9,708,
respectively. The Company's only component of other comprehensive income is the
foreign currency translation adjustment.
Note 5-- Segment Information
Three months ended Three months ended
June 30, 2001 June 30, 2000
------------- -------------
Network Manufacturing Network Manufacturing
marketing and packaging marketing and packaging
---------------------------- ---------------------------
Net sales to external customers 11,846,778 1,578,156 11,184,088 4,373,213
Intersegment net sales -- 1,813,642 -- 1,816,027
Segment profit/(loss) 523,135 (6,553) 608,294 137,269
Six months ended Six months ended
June 30, 2001 June 30, 2000
------------- -------------
Network Manufacturing Network Manufacturing
marketing and packaging marketing and packaging
---------------------------- ---------------------------
Net sales to external customers 24,014,375 3,472,128 22,114,805 8,890,610
Intersegment net sales -- 3,504,395 -- 3,365,954
Segment profit/(loss) 1,209,621 (281,091) 1,408,309 (8,440)
Segment assets 13,737,928 3,512,291 14,052,634 6,782,595
A reconciliation of combined operating profit for the reportable segments
to consolidated income before income taxes is as follows:
Three months ended June 30 Six months ended June 30
2001 2000 2001 2000
-------------------------- --------------------------
Total profit for reportable segments 516,582 745,563 928,530 1,399,869
Corporate expenses (379,423) (461,348) (787,260) (801,576)
Non operating - net 6,290 (21,388) 13,327 (25,703)
Interest expense (130,056) (158,250) (287,385) (325,920)
-------------------------- --------------------------
Income before income taxes 13,393 104,577 (132,788) 246,670
========================== ==========================
Note 6-- Legal Proceedings
In June 2001, five former distributors of the Company filed lawsuits claiming
unlawful termination, breach of the Distributor Agreement and interference with
business expectancy. The individuals had been terminated by the Company in
October 2000 for violating certain provisions of the Distributor Agreement. The
Company believes the claim is without merit and intends to vigorously defend
itself. At this time, the outcome of this matter is uncertain and a range of
loss cannot be reasonably estimated; however, management believes that the final
outcome will not have a material adverse effect on the financial position or
results of operations of the Company.