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, 2003 Commission File No. 1-11768 RELIV' INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 37-1172197 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 136 Chesterfield Industrial Boulevard, Chesterfield, Missouri 63005 (Address of principal executive offices) (Zip Code) (636) 537-9715 (Registrant's telephone number, including area code) Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| APPLICABLE ONLY TO CORPORATE ISSUERS: COMMON STOCK 11,943,803 outstanding Shares as of June 30, 2003 Part I. FINANCIAL INFORMATION Item 1. Financial Statements The following consolidated financial statements of the Registrant are attached to this Form 10-Q: 1. Interim Balance Sheet as of June 30, 2003 and Balance Sheet as of December 31, 2002. 2. Interim Statements of Operations for the three and six month periods ending June 30, 2003 and June 30, 2002. 3. Interim Statements of Cash Flows for the six month periods ending June 30, 2003 and June 30, 2002. The Financial Statements reflect all adjustments, which are, in the opinion of management, necessary for a fair statement of results for the periods presented. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1. Financial Condition Current assets of the Company increased during the first six months of 2003, to $12,927,000 from $8,432,000 as of December 31, 2002. Cash and cash equivalents increased by $3,237,000 to $6,675,000 as of June 30, 2003, as compared to $3,438,000 as of December 31, 2002. Accounts and notes receivable decreased to $530,000 as of June 30, 2003, as compared to $689,000 as of December 31, 2002. Inventory increased by $1,129,000 to $4,586,000 as of June 30, 2003. The Company's increase in cash is the result of the improved sales and profitability of the Company, especially in its operations in the United States, coupled with the proceeds of sale of preferred stock of $1,500,000. Inventories have been increased to support the strong sales in the United States and to provide adequate safety stocks in the key foreign markets. Prepaid expenses and other current assets increased by $303,000 to $868,000 at June 30, 2003 primarily the result of policy payments for various types of business insurance to be expensed over the lives of the policies. The Company purchased $322,000 of property, plant and equipment during the first six months of 2003. Current liabilities increased $1,238,000 from $6,040,000 as of December 31, 2002 to $7,278,000 as of June 30, 2003. Trade accounts payable increased $811,000 from $2,462,000 as of December 31, 2002 to $3,273,000 as of June 30, 2003. The increase is primarily the result of increased raw material purchases, increased payables for promotional trips, and accrued property taxes at June 30, 2003, as compared to December 31, 2002. Distributor commissions payable 2 increased from $2,065,000 as of December 31, 2002 to $2,484,000 as of June 30, 2003. This is the result of higher network marketing sales in June 2003, as compared to December 2002. Long-term debt decreased $233,000 from $4,057,000 as of December 31, 2002 to $3,824,000 as of June 30, 2003. The decrease is the result of scheduled principal payments, offset by additional long-term debt the Company incurred during the first quarter of 2003 of $64,000. Stockholders' equity increased from $7,798,000 as of December 31, 2002 to $11,147,000 as of June 30, 2003. The increase is primarily the result of net income of $1,909,000 during the first six months of 2003, plus the proceeds of a preferred stock offering of $1,500,000 issued on March 31, 2003. Dividends on the preferred stock outstanding of $22,500 were paid at the end of the second quarter. Equity also increased $153,000 as a result of the foreign currency translation adjustment at June 30, 2003, as the Australian and Canadian dollars strengthened versus the United States dollar, as compared to December 31, 2002. Another increase to equity of $132,000 was due to proceeds received from the exercise of incentive stock options during the first six months of 2003, as compared to December 31, 2002. Equity was reduced $367,000 for treasury stock purchases made during the first six months of 2003. The Company's working capital balance has improved since the end of 2002, from a balance of $2,393,000 as of December 31, 2002 to a balance of $5,649,000 as of June 30, 2003. Accordingly, the current ratio has improved from 1.40 as of December 31, 2002 to 1.78 as of June 30, 2003. The Company has an operating line of credit, with a limit based on a collateral-based formula of accounts receivable and inventory, with a maximum borrowing limit of $1,000,000. At June 30, 2003, the Company had no borrowings on the line of credit. Management believes the Company's internally generated funds together with the loan agreement and the preferred stock proceeds will be sufficient to meet working capital requirements in 2003. 2. Results of Operations Note: Per share data for the quarter ended June 30 and first six months of 2002 has been restated to reflect the effect of the Company's 19% stock dividend declared on September 19, 2002 and distributed on October 25, 2002. The Company had net income available to common shareholders of $909,000 ($0.08 per share basic and $0.07 per share diluted) for the quarter ended June 30, 2003, compared to a net income of $625,000 ($0.06 per share basic and $0.05 per share diluted) for the same period in 2002. Net income for the quarter ended June 30, 2003 was $931,000, and is reduced by preferred stock dividends of $22,500 to arrive at net income available to common shareholders. For the six months ended June 30, 2003, the Company had net income available to common shareholders of $1,886,000 ($0.16 per share basic and $0.14 per share diluted), compared to $1,084,000 ($0.10 per share basic and $0.09 per share diluted) in 2002. Profitability continued to improve substantially as network marketing sales continued to improve worldwide led by a 20% increase in net sales in the Company's primary market of the United States. 3 Net sales increased to $17,767,000 in the second quarter of 2003 as compared to $15,449,000 in the second quarter of 2002. For the six months ended June 30, net sales were $36,438,000 in 2003, as compared to $29,933,000 in 2002. The growth in sales was led by a strong increase in the Company's largest market, the United States. Sales in the United States improved by 20% to $15,259,000 in the second quarter of 2003, as compared to $12,752,000 in the second quarter of 2002. For the six months ended June 30, net sales in the United States were $31,059,000 in 2003, compared to $25,178,000 in 2002. New distributor enrollments in the US continues to be a factor in the increased sales in this market. In the first six months of 2003, approximately 10,100 new distributors were enrolled, as compared to approximately 8,600 in the same period of 2002. The number of distributors reaching Master Affiliate, the highest level of discount a distributor can attain, has also continued to improve in the United States. In the first six months of 2003, 2,270 distributors achieved Master Affiliate status, as compared to 1,639 in the same period of 2002. The Company attributes the increase in sales and other sales statistics in part to its increased support provided to the distributor force in the form of increased sales meetings and other distributor training events. The Company is holding quarterly Master Affiliate training seminars in more cities and has lengthened the program to a full day of training on Saturdays, compared to a half-day training session used previously. The Company has also modified the frequency of its national conferences. In the past, the Company invited distributors to attend two major conferences a year. Now, the Company has replaced its winter conference with a series of regional conferences in areas of significant distributor groups in order to present the Reliv product line and business opportunity to more people. Also, the Company recently concluded its annual international distributor conference in St. Louis, MO, with a record attendance of approximately 5,000 distributors. During the second quarter of 2003, sales in the Company's international subsidiaries showed mixed results. In aggregate, international sales decreased 7% to $2,507,000 in the second quarter of 2003, compared to $2,697,000 in the second quarter of 2002. For the six months ended June 30, international sales were $5,380,000 in 2003, compared to $4,755,000 in 2002, a 13% increase. Mexican sales increased 16% from the prior year quarter, helped by the introduction of Arthaffect in Mexico in October 2002 and the introduction of Soysentials in April 2003. New distributor signups have also been strong, with over 2,900 new signups in the first six months of 2003, compared to 2,080 in 2002. Canada also showed a 29% growth in sales in the second quarter of 2003, compared to the prior year quarter. A portion of the increase, when reported in US dollars, is the result of the strengthening of the Canadian dollar versus the US dollar. Sales in Canada continue to gradually improve as the Company completed its changes there to make the business model function identical to that in the United States. Effective February 1, 2003, royalties on Canadian sales are being paid out on the full retail value of the products, just as they are in the United States. This enhances the business opportunity associated with selling the Reliv product line and encourages more people to become distributors. Sales in the Philippines in the second quarter of 2003 decreased by 29%, as sales declined subsequent to a price increase and additional shipping charge that went into effect on March 1, 2003. However, for the six months ended June 30, sales in the Philippines were up 22% in 2003, compared to the same period of 2002. 4 Cost of products sold as a percentage of net sales was 16.9% in the second quarter of 2003, as compared to 18.9% in the second quarter of 2002. For the six months ended June 30, cost of products sold were 17.3% and 19.0% of net sales in 2003 and 2002, respectively. The decrease in the percentage of cost of goods sold is the result of greater efficiencies gained in the production facility from increased production levels needed to support the growth in sales. Efficiencies are being gained as production levels have increased with minimal staffing increases and improved coverage of the fixed manufacturing costs. Distributor royalties and commissions as a percentage of network marketing sales were 38.9% and 38.4% in the second quarter of 2003 and 2002, respectively. For the six month period ended June 30, royalties and commissions were 38.9% and 38.5% of sales in 2003 and 2002, respectively. These expenses are governed by the distributor agreements and are directly related to the level of sales. Selling, general and administrative (SGA) expenses increased $728,000 in the second quarter of 2003, as compared to the second quarter of 2002. However, SGA expenses as a percentage of net sales decreased to 35.6% in the second quarter of 2003 compared to 36.2% in the second quarter of 2002. For the six months ended June 30, total SGA expenses were $12,693,000 in 2003, compared to $10,869,000 in 2002. On a year-to-date basis, sales expenses represented approximately $840,000 of the increase. Some of the components of the increase were increased credit card fees due to the higher sales volume, increased sales meeting expenses due to more and larger meetings in support of the distributor force, and increased sales bonuses. Marketing expenses increased by approximately $311,000, primarily the result of increased incentive trip expenses. Increases in general and administrative expenses represented approximately $624,000 of the increase, primarily in salaries, fringe benefit expenses, higher stock market listing fees, and increased travel expenses. Also, included in the general and administrative expenses are approximately $161,000 in pre-opening expenses in Malaysia and other international development expenses. The Company was recently granted a direct selling license to begin operations in Malaysia, with a scheduled opening of October 1, 2003. Interest expense decreased to $70,000 in the second quarter of 2003 from $98,000 in the second quarter of 2002. For the six months ended June 30, interest expense decreased to $138,000 for 2003, compared to $219,000 for 2002. This decrease in 2003 is the result of not utilizing the line of credit, coupled with the interest savings gained from the refinancing of the Company's primary building debt in June 2002. The Company recorded income tax expense of $629,000 for the second quarter of 2003, an effective rate of 40.3%. In the second quarter of 2002, the Company recorded income tax expense of $375,000, an effective rate of 37.5%. For the six months ended June 30, the Company recorded income tax expense of $1,314,000 for 2003, an effective rate of 40.8%, and $689,000 for 2002, an effective rate of 38.9%. The higher rate in 2003 is primarily due to non-deductible losses in some of the Company's foreign markets, including Malaysia. 5 Critical Accounting Policies A summary of our critical accounting policies and estimates is presented on pages 35 and 36 of our 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003. Safe Harbor Provision of the Private Securities Litigation Act of 1995 and Forward Looking Statements. The statements contained in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operation) that are not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties. The forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to the Company's management. Accordingly, these statements are subject to significant risks, uncertainties and contingencies which could cause the Company's actual growth, results, performance and business prospects and opportunities in 2002 and beyond to differ materially from those expressed in, or implied by, any such forward-looking statements. Wherever possible, words such as "anticipate," "plan," "expect," "believe," "estimate," and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying such statements. These risks, uncertainties and contingencies include, but are not limited to, the Company's ability to continue to attract, maintain and motivate its distributors, changes in the regulatory environment affecting network marketing sales and sales of food and dietary supplements and other risks and uncertainties detailed in the Company's other SEC filings. Item 3. Quantitative and Qualitative Disclosures of Market Risk The Company is exposed to various market risks, primarily foreign currency risks and interest rate risks. Foreign Currency Risk The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency rates as it has several foreign subsidiaries and continues to explore expansion into other foreign countries. As a result, exchange rate fluctuations may have an effect on sales and gross margins. Accounting practices require that the Company's results from operations be converted to U.S. dollars for reporting purposes. Consequently, the reported earnings of the Company in future periods may be significantly affected by fluctuations in currency exchange rates, generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Products manufactured by the Company for sale to the Company's foreign subsidiaries are transacted in U.S. dollars. During the second quarter of 2003, the Company entered into foreign exchange forward contracts with a financial institution to sell Canadian dollars in order to protect against currency exchange 6 risk associated with expected future cash flows. Contracts have a maturity of eighteen months or less. As of June 30, 2003, the Company had Canadian dollar forward sale contracts to hedge approximately 60% of our expected Canadian cash flows. The exchange rate for the Canadian dollar to the U.S. dollar as of June 30, 2003 had strengthened by 16.7%, compared to the exchange rate as of December 31, 2002. The amount of the changes in the fair value of these forward contracts as of June 30, 2003 was immaterial. As of June 30, 2003, the Company had no hedging instruments in place to offset exposure to the Australian or New Zealand dollars, Mexican or Philippine pesos, or the British pound. There have been no other material changes in market risk exposures during the first three months of 2003 that affect the disclosures presented in Item 7A - - "Qualitative and Quantitative Disclosures Regarding Market Risk" on pages 37 and 38 of our 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days before the filing date of this report, have concluded that, as of such date our disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company. (b) Changes in internal controls. There were no significant changes in our internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken. Part II. OTHER INFORMATION Item 1. Legal Proceedings There has been no material litigation initiated by or against the Company in the reporting period or any material changes to litigation reported by the Company in its prior periodic reports. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. 7 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* Exhibit No. Description ----------- ----------- 31.1 Sarbanes-Oxley Act Section 302 Certifications of Robert L. Montgomery. 31.2 Sarbanes-Oxley Act Section 302 Certifications of David G. Kreher. 32.1 Sarbanes-Oxley Act Section 906 Certification for Robert L. Montgomery, Chief Executive Officer 32.2 Sarbanes-Oxley Act Section 906 Certification for David G. Kreher, Chief Financial Officer (b) The Company 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-8 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: August 12, 2003 RELIV' INTERNATIONAL, INC. By: /s/ Robert L. Montgomery ------------------------------------ Robert L. Montgomery, President, Chief Executive Officer RELIV' INTERNATIONAL, INC. By: /s/ David G. Kreher ------------------------------------ David G. Kreher, Chief Financial Officer 9 Consolidated Balance Sheets June 30 December 31 2003 2002 ------------ ------------ (unaudited) (see notes) Assets Current assets: Cash and cash equivalents $ 6,675,228 $ 3,437,966 Accounts and notes receivable, less allowances of $5,000 in 2003 and 2002 529,931 688,898 Accounts due from employees and distributors 105,000 104,000 Inventories Finished goods 2,913,118 2,361,064 Raw materials 1,190,313 680,516 Sales aids and promotional materials 482,784 415,565 ------------ ------------ Total inventories 4,586,215 3,457,145 Refundable income taxes -- 8,072 Prepaid expenses and other current assets 867,729 564,486 Deferred income taxes 163,009 171,873 ------------ ------------ Total current assets 12,927,112 8,432,440 Other assets 526,761 442,927 Note receivable from officer 27,750 48,250 Accounts due from employees and distributors 64,000 78,000 Property, plant and equipment: Land 829,222 829,222 Building 8,588,310 8,583,444 Machinery & equipment 4,137,388 4,057,983 Office equipment 847,341 738,976 Computer equipment & software 2,418,233 2,275,019 ------------ ------------ 16,820,494 16,484,644 Less: Accumulated depreciation 7,510,745 7,040,275 ------------ ------------ Net property, plant and equipment 9,309,749 9,444,369 ------------ ------------ Total assets $ 22,855,372 $ 18,445,986 ============ ============ See notes to financial statements. Consolidated Balance Sheets June 30 December 31 2003 2002 ------------ ------------ (unaudited) (see notes) Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses: Trade accounts payable and other accrued expenses $ 3,273,374 $ 2,462,356 Distributors commissions payable 2,484,336 2,065,327 Sales taxes payable 409,034 393,413 Interest expense payable 49,356 55,238 Payroll and payroll taxes payable 506,841 381,748 ------------ ------------ Total accounts payable and accrued expenses 6,722,941 5,358,082 Income taxes payable 135,016 257,441 Current maturities of long-term debt 420,480 415,235 Current maturities of capital lease obligations -- 8,755 ------------ ------------ Total current liabilities 7,278,437 6,039,513 Noncurrent liabilities: Long-term debt, less current maturities 3,823,631 4,057,042 Deferred income taxes 84,435 84,435 Other non-current liabilities 521,396 467,350 ------------ ------------ Total noncurrent liabilities 4,429,462 4,608,827 Stockholders' equity: Preferred stock, par value $.001 per share; 3,000,000 shares authorized; 150,000 shares issued and outstanding as of 6/30/2003 1,500,000 -- Common stock, par value $.001 per share; 30,000,000 authorized; 12,114,632 shares issued and 11,943,803 shares outstanding as of 6/30/2003; 12,006,761 shares issued and 11,921,932 shares outstanding as of 12/31/2002 12,115 12,007 Additional paid-in capital 18,038,473 17,863,505 Notes receivable-officers and directors -- (2,449) Accumulated deficit (7,074,680) (8,960,782) Accumulated other comprehensive loss: Foreign currency translation adjustment (622,578) (775,383) Treasury stock (705,857) (339,252) ------------ ------------ Total stockholders' equity 11,147,473 7,797,646 ------------ ------------ Total liabilities and stockholders' equity $ 22,855,372 $ 18,445,986 ============ ============ See notes to financial statements. Reliv International, Inc. and Subsidiaries Consolidated Statements of Operations Three months ended June 30 Six months ended June 30 2003 2002 2003 2002 ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) Sales at suggested retail $ 25,407,802 $ 22,001,451 $ 52,263,966 $ 42,859,961 Less: distributor allowances on product purchases 7,641,155 6,552,420 15,825,869 12,926,646 ------------ ------------ ------------ ------------ Net sales 17,766,647 15,449,031 36,438,097 29,933,315 Costs and expenses: Cost of products sold 3,008,695 2,915,799 6,316,413 5,672,509 Distributor royalties and commissions 6,914,507 5,912,303 14,169,705 11,484,361 Selling, general and administrative 6,321,793 5,594,051 12,692,777 10,868,810 ------------ ------------ ------------ ------------ Total costs and expenses 16,244,995 14,422,153 33,178,895 28,025,680 ------------ ------------ ------------ ------------ Income from operations 1,521,652 1,026,878 3,259,202 1,907,635 Other income (expense): Interest income 24,162 9,150 39,904 15,639 Interest expense (69,961) (97,818) (138,008) (219,276) Other income/(expense) 84,187 62,001 61,504 68,757 ------------ ------------ ------------ ------------ Income before income taxes 1,560,040 1,000,211 3,222,602 1,772,755 Provision for income taxes 629,000 375,000 1,314,000 689,000 ------------ ------------ ------------ ------------ Net income 931,040 625,211 1,908,602 1,083,755 Preferred dividends accrued and paid 22,500 -- 22,500 -- ------------ ------------ ------------ ------------ Net income available to common shareholders $ 908,540 $ 625,211 $ 1,886,102 $ 1,083,755 ============ ============ ============ ============ Earnings per common share $ 0.08 $ 0.06 $ 0.16 $ 0.10 ============ ============ ============ ============ Earnings per common share - assuming dilution $ 0.07 $ 0.05 $ 0.14 $ 0.09 ============ ============ ============ ============ 2002 earnings per common share have been restated for the stock dividend declared in September 2002. See notes to financial statements. Reliv International, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) Six months ended June 30 2003 2002 ----------- ----------- Operating activities: Net income $ 1,908,602 $ 1,083,753 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 463,987 421,268 Compensation expense for warrants granted 45,032 9,937 Deferred income taxes 12,700 -- Foreign currency transaction loss (1,284) (48,063) (Increase) decrease in accounts and notes receivable 167,511 (125,262) (Increase) decrease in inventories (1,069,936) 478,904 (Increase) decrease in refundable income taxes 8,059 132,534 (Increase) decrease in prepaid expenses and other current assets (296,953) (413,706) (Increase) decrease in other assets (83,834) 88,435 Increase (decrease) in accounts payable and accrued expenses 1,371,112 966,184 Increase (decrease) in income taxes payable (124,535) 126,236 ----------- ----------- Net cash provided by operating activities 2,400,461 2,720,220 Investing activities: Purchase of property, plant and equipment (322,400) (257,679) ----------- ----------- Net cash used in investing activities (322,400) (257,679) Financing activities: Proceeds from long-term borrowings 64,150 -- Principal payments on long-term borrowings and line of credit (267,181) (1,193,082) Principal payments under capital lease obligations (34,732) (85,478) Proceeds from sale of preferred stock 1,500,000 -- Preferred stock dividends paid (22,500) -- Repayment of loans by officers and directors 20,500 16,386 Proceeds from options exercised 132,492 10,554 Purchase of stock for treasury (366,605) (217,435) ----------- ----------- Net cash provided by (used in) financing activities 1,026,124 (1,469,055) Effect of exchange rate changes on cash and cash equivalents 133,077 68,939 ----------- ----------- Increase in cash and cash equivalents 3,237,262 1,062,425 Cash and cash equivalents at beginning of period 3,437,966 1,258,821 ----------- ----------- Cash and cash equivalents at end of period $ 6,675,228 $ 2,321,246 =========== =========== See notes to financial statements Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2003 Note 1-- Basis of Presentation The accompanying unaudited consolidated financial statements and notes thereto have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals) to present fairly the financial position, results of operations and cash flows. These statements, however, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. Interim results may not necessarily be indicative of results that may be expected for any other interim period or for the year as a whole. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the annual report on Form 10-K for the year ended December 31, 2002, filed March 28, 2003 with the Securities and Exchange Commission. Note 2-- Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Note 3-- Earnings per Share The following table sets forth the computation of basic and diluted earnings per share: Three months ended June 30 Six months ended June 30 2003 2002 2003 2002 --------------------------- --------------------------- Numerator: Numerator for basic and diluted earnings per share--net income available to common shareholders $ 908,540 $ 625,211 $ 1,886,102 $ 1,083,755 Effect of convertible preferred stock: Dividends on preferred stock 22,500 -- 22,500 -- --------------------------- --------------------------- Numerator for diluted earnings per share $ 931,040 $ 625,211 $ 1,908,602 $ 1,083,755 Denominator: Denominator per basic earnings per share--weighted average shares 11,962,000 11,292,000 11,966,000 11,329,000 Effect of convertible preferred stock and dilutive securities: Convertible preferred stock 372,000 -- 187,000 -- Employee stock options and other warrants 1,334,000 865,000 1,348,000 865,000 --------------------------- --------------------------- Denominator for diluted earnings per share--adjusted weighted average shares 13,668,000 12,157,000 13,501,000 12,194,000 =========================== =========================== Basic earnings per share $ 0.08 $ 0.06 $ 0.16 $ 0.10 =========================== =========================== Diluted earnings per share $ 0.07 $ 0.05 $ 0.14 $ 0.09 =========================== =========================== 2002 earnings per share have been restated for the stock dividend declared in September 2002. Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2003 Note 4-- Comprehensive Income Total comprehensive income was $1,022,568 and $2,038,907 for the three and six months ended June 30, 2003, respectively. For the three and six months ended June 30, 2002, comprehensive income was $545,988 and $1,073,839, 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 2003 2002 2003 2002 -------------------------- ------------------------- Net income, as reported for basic EPS $908,540 $625,211 $1,886,102 $1,083,755 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 31,872 37,113 97,172 87,280 --------------------- ------------------------- Pro forma net income-basic EPS $876,668 $588,098 $1,788,930 $ 996,475 ===================== ========================= Net income, as reported for diluted EPS $931,040 $625,211 $1,908,602 $1,083,755 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 31,872 37,113 97,172 87,280 --------------------- ------------------------- Pro forma net income-diluted EPS $899,168 $588,098 $1,811,430 $ 996,475 ===================== ========================= Earnings per share: Basic--as reported $ 0.08 $ 0.06 $ 0.16 $ 0.10 ===================== ========================= Basic--pro forma $ 0.07 $ 0.05 $ 0.15 $ 0.09 ===================== ========================= Diluted--as reported $ 0.07 $ 0.05 $ 0.14 $ 0.09 ===================== ========================= Diluted--pro forma $ 0.07 $ 0.05 $ 0.13 $ 0.08 ===================== ========================= Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) June 30, 2003 Note 6-- Sale of Preferred Stock On March 31, 2003, the Company sold an aggregate of 150,000 shares of preferred stock to three officer/directors. The securities, called "Series A Preferred Stock" ("Preferred Stock"), were designated by the Company's Board of Directors out of the 3,000,000 previously authorized shares of $.001 par value preferred stock. Each of the officer/directors (collectively "the Preferred Stockholders") purchased 50,000 shares of Preferred Stock for $500,000 ($10.00 per share). The Preferred Stockholders are entitled to receive dividends at an annual rate of 6% of the shares' purchase price. These dividends shall accrue on a daily basis and are payable quarterly when declared by the Company's Board of Directors. All dividends on shares of Preferred Stock are cumulative. Shares of Preferred Stock have no voting rights, and are convertible into 372,207 shares of the Company's $.001 par value common stock at a conversion price based upon the closing price of the Company's common stock on the NASDAQ Stock Market on the date of issuance. Shares of Preferred Stock are not eligible for conversion until January 1, 2006, may be redeemed at any time by the Company, and have a liquidation preference over common stock to the extent of the purchase price of the preferred stock and accrued dividends. Note 7-- Related Party Tranactions In February 2003, the Company purchased 25,000 shares of the Company's common stock from an officer/director at a price of $3.895 per share. The total amount paid for the stock was $97,375. In June 2003, the Company purchased an additional 25,000 shares from the same officer/director at a price of $4.446 per share. The total amount paid for this purchase was $111,150. In May 2003, the Company purchased 10,000 shares from a director at a price of $4.2275 per share. The total amount paid for this purchase was $42,275.