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, 2004 Commission File No. 1-11768 RELIV' INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 37-1172197 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 136 Chesterfield Industrial Boulevard, Chesterfield, Missouri 63005 (Address of principal executive offices) (Zip Code) (636) 537-9715 (Registrant's telephone number, including area code) Registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS: COMMON STOCK 16,040,170 outstanding Shares as of September 30, 2004 Part I. FINANCIAL INFORMATION Item 1. Financial Statements The following consolidated financial statements of the Registrant are attached to this Form 10-Q: 1. Interim Balance Sheet as of September 30, 2004 and Balance Sheet as of December 31, 2003. 2. Interim Statements of Operations for the three and nine month periods ending September 30, 2004 and September 30, 2003. 3. Interim Statements of Cash Flows for the nine month periods ending September 30, 2004 and September 30, 2003. The Financial Statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of results for the periods presented. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The Company produces a line of food products including nutritional supplements, diet management products, and sports drink mixes. The Company also sells a line of skin care products. These products are sold by subsidiaries of the Company to a sales force of independent distributors of the Company that sell products directly to consumers. The Company and its subsidiaries sell products to distributors throughout the United States and in Australia/New Zealand, Canada, Mexico, the United Kingdom/Ireland, the Philippines, Malaysia, and Singapore. As of September 30, 2004, the Company had approximately 70,800 distributors worldwide. The Company receives payment by credit card, personal check, or guaranteed funds for orders from independent distributors and makes related commission payments in the following month. The net sales price is the suggested retail price less the distributor discount of 20 percent to 40 percent of such suggested retail price. Sales revenue and commission expenses are recorded when the merchandise is shipped. In the nine-month period ended September 30, 2004, sales in the United States made up approximately 86% of worldwide net sales, with the remainder from our international operations. This compares to 86% for all of 2003. The sales breakdown by country is given in greater detail in the "Net Sales by Region" table below. Cost of products sold primarily consists of expenses related to raw materials, labor, quality control, and overhead directly associated with the production and 2 distribution of products and sales materials, as well as shipping costs, duties, and taxes associated with product exports. Distributor royalties and commissions are paid to Master Affiliates monthly, based on the sales of their distributor organization in the prior month. These expenses are governed by the distributor agreements. Also, included in this expense item are other sales leadership bonuses that are directly related to the level of sales. Selling, general, and administrative expenses include compensation and benefits, all other selling expenses, marketing, promotional expenses, travel, and other corporate administrative expenses. 1. Financial Condition The Company generated $5,549,000 of net cash during the first nine months of 2004 from operating activities and used $2,792,000 in financing activities. This compares to $3,869,000 of net cash provided by operating activities and $452,000 provided by financing activities in the first nine months of 2003. Cash and cash equivalents increased by $1,241,000 to $9,144,000 as of September 30, 2004, compared to December 31, 2003. Significant changes in working capital items were an increase in inventory of $1,511,000, an increase in refundable income taxes of $351,000, and an increase in prepaid expenses and other current assets of $439,000. These were offset by an increase in accounts payable and accrued expenses of $2,380,000 in the first nine months of 2004. The increase in inventory is needed to support the increased sales levels of the Company. The increase in refundable income taxes is the result of the tax benefit of $1,026,000 from the exercise of nonqualified options and warrants in the third quarter, net of the income tax expense recognized in the quarter. The increase in prepaid expenses and other current assets is due to prepayments for future promotional trips and for policy payments for various types of business insurance to be expensed over the lives of the policies. The increase in accounts payable and accrued expenses corresponds with the increase in inventory, coupled with the increase in distributor commissions payable at September 30, 2004, compared to December 31, 2003. This increase in distributor commissions payable is the result of higher worldwide sales in September 2004, compared to December 2003. The Company's net investing activities in the first nine months of 2004 consisted of $1,604,000 for capital expenditures, offset by proceeds of $120,000 from the sale of equipment. The majority of these capital expenditures are part of the previously announced upgrade of the Company's manufacturing facility. Financing activities in the first nine months of 2004 included the redemption of the remaining preferred stock issued in 2003 of $975,000, $460,000 in cash dividends paid on the Company's common stock in May 2004, and $1,294,000 in purchases of treasury stock. Most of this treasury stock was purchased from related parties and is described in greater detail in Note 8 of the 3 Consolidated Financial Statements. The Company also received $257,000 in proceeds from the exercise of options and warrants. Stockholders' equity increased to $15,842,000 at September 30, 2004, compared with $13,072,000 at December 31, 2003. The increase is primarily due to the net income in the first nine months of 2004 of the Company, along with the tax benefit from the exercise of options and warrants as described above. Equity was reduced by the preferred stock redemption, cash dividends, and treasury stock purchases described above. Stockholders' equity was also negatively impacted by the slight strengthening of the U.S. dollar against some of the currencies in which the Company has operations during the first nine months of 2004, primarily the Mexican and Philippine pesos. This impact appears in the form of an increase in the foreign currency translation adjustment, which is reflected in accumulated other comprehensive loss. This cumulative adjustment increased from an accumulated loss of $715,000 as of December 31, 2003, to an accumulated loss of $797,000, as of September 30, 2004. The Company's working capital balance was $8,880,000 at September 30, 2004, compared to $7,256,000 at December 31, 2003. The current ratio at September 30, 2004 was 1.98, compared to 2.01 at previous year-end. In March 2004, the Company renewed the term loan on its headquarters facility of approximately $3.5 million and extended the maturity of the loan until March 2007. In addition, the Company consolidated other loans related to this building totaling approximately $350,000 into this renewed loan. The Company also has an operating line of credit, with a limit based on a collateral-based formula of accounts receivable and inventory. The maximum borrowing limit is $1,000,000, with a variable interest rate equal to the prime rate. At September 30, 2004, the Company had not utilized any of the line of credit, with approximately $950,000 available under the line based on the Company's borrowing base formula. Early in 2004, the Board of Directors approved a capital expenditure plan of $1 million to upgrade the production equipment in the Company's manufacturing facility. This upgrade was completed during the third quarter of 2004. As of September 30, 2004, this equipment had been paid for from cash generated from operations. Also in May 2004, the Board of Directors declared a three-cent per common share cash dividend, in what the Company plans to be a semi-annual cash dividend payment plan. Management believes that the Company's cash flow from operations, and the borrowing capacity under the line of credit agreement will be sufficient to meet working capital requirements and fund the capital expenditure plans for the remainder of 2004 and 2005. 2. Results of Operations The Company had net income available to common shareholders of $1,264,000 ($0.08 per share basic and $0.07 per share diluted) for the quarter ended September 30, 2004, compared to net income available to common shareholders of $1,193,000 ($0.08 per share basic and $0.07 per share diluted) for the same period in 2003. For the nine months ended September 30, 2004, the Company had net income available to common 4 shareholders of $4,094,000 ($0.26 per share basic, $0.24 per share diluted), compared to $3,079,000 ($0.21 per share basic, $0.18 per share diluted) in the same period in 2003. Earnings per common share for 2003 have been adjusted for the Company's five-for-four stock split declared in September 2003. Net sales in the third quarter of 2004 improved worldwide by 23%, led by a similar increase in net sales in the United States, the Company's primary market. However, profitability only increased by 6% during the quarter, as the Company continues to incur significant expenses related to management's documentation and assessment of internal control as required by the Sarbanes-Oxley Act of 2002. The following table summarizes the net sales by geographic region for the three-month periods ended September 30, 2004 and 2003. Net Sales by Region Three months ended September 30 (in thousands) 2004 2003 Change from $ % of sales $ % of sales prior year Change in % --------------------- ------------------------------------------------- United States $20,705 85.7% $16,875 86.0% $ 3,830 22.7% Australia/New Zealand 642 2.7% 529 2.7% 113 21.4% Canada 455 1.9% 319 1.6% 136 42.6% Mexico 642 2.7% 916 4.7% (274) -29.9% United Kingdom/Ireland 122 0.5% 150 0.8% (28) -18.7% Philippines 767 3.2% 746 3.8% 21 2.8% Malaysia/Singapore 839 3.5% 79 0.4% 760 N/A --------------------- ------------------------------------------------- Consolidated total $24,172 100.0% $19,614 100.0% $ 4,558 23.2% ===================== ================================================= The following table summarizes the net sales by geographic region for the nine-month periods ended September 30, 2004 and 2003. Net Sales by Region Nine months ended September 30 (in thousands) 2004 2003 Change from $ % of sales $ % of sales prior year Change in % --------------------- ------------------------------------------------- United States $61,722 86.3% $47,933 85.5% $13,789 28.8% Australia/New Zealand 1,800 2.5% 1,414 2.5% 386 27.3% Canada 1,231 1.7% 892 1.6% 339 38.0% Mexico 1,977 2.8% 2,602 4.6% (625) -24.0% United Kingdom/Ireland 411 0.6% 349 0.6% 62 17.8% Philippines 2,137 3.0% 2,783 5.0% (646) -23.2% Malaysia/Singapore 2,263 3.2% 79 0.1% 2,184 N/A --------------------- ------------------------------------------------- Consolidated total $71,541 100.0% $56,052 100.0% $15,489 27.6% ===================== ================================================= 5 The following table illustrates the Company's active distributors and Master Affiliates as of September 30, 2004 and 2003. The total amount of distributors also includes the Master Affiliates. The Company defines an active distributor as one that enrolls as a distributor or renews their distributorship during the prior twelve months. Growth in the number of active distributors and Master Affiliates is a key factor in continuing the growth of the business. Active Distributors and Master Affiliates by Region as of 9/30/2004 as of 9/30/2003 Change in % Master Master Master Distributors Affiliates Distributors Affiliates Distributors Affiliates -------------------------------------------------------- --------------------------- United States 46,030 11,120 39,500 7,780 16.5% 42.9% Australia/New Zealand 2,990 260 2,570 190 16.3% 36.8% Canada 1,440 190 1,120 150 28.6% 26.7% Mexico 8,000 720 7,000 1,310 14.3% -45.0% United Kingdom/Ireland 410 50 430 90 -4.7% -44.4% Philippines 6,710 610 10,080 910 -33.4% -33.0% Malaysia/Singapore 5,220 710 70 -- N/A N/A -------------------------------------------------- --------------------- Consolidated total 70,800 13,660 60,770 10,430 16.5% 31.0% ================================================== ===================== In the United States, new distributor enrollments, strong retention, and strong growth in the number of Master Affiliates continue to be factors in the increased sales in this market. Through the first nine months of 2004, approximately 17,700 new distributors were enrolled, as compared to approximately 15,600 in the same period of 2003. Distributor retention was approximately 59% for the year to date, compared to an historical rate of 55%. The number of distributors reaching Master Affiliate, the highest level of discount a distributor can attain, has also continued to improve in the United States. Through the first nine months of 2004, over 5,100 distributors achieved Master Affiliate status, as compared to approximately 3,650 in the same period of 2003. The Company attributes the increase in sales and other sales statistics in part to the momentum created by the consistency and reinforcement of its training programs and business opportunity presentations, in the form of regional distributor conferences and other corporate-sponsored meetings. Also, the Company held its annual international distributor conference in St. Louis, Missouri in August 2004 with approximately 6,000 distributors in attendance. These activities have resulted in more distributors reaching the Master Affiliate level, who are more experienced and productive distributors. During the third quarter of 2004, sales in the Company's international subsidiaries continue to show mixed results. In aggregate, international sales increased by 27% to $3,467,000 in the third quarter of 2004, compared to $2,739,000 in the third quarter of 2003. Sales in the Company's newest markets of Malaysia and Singapore were $839,000 in the third quarter of 2004, compared to $79,000 in the same period in 2003. Malaysia opened for business in September 2003 and Singapore in March 2004. For the nine 6 months ended September 30, 2004, international sales were up 21%, compared to the same period in 2003. Sales in the markets of Canada and Australia/New Zealand increased by 43% and 21%, respectively, in each of these markets during the third quarter of 2004, versus the same period in 2003. The weakening of the United States dollar compared to the currencies in these markets accounts for $87,000 of the $249,000 increase in third quarter 2004 sales in these markets. On a constant-dollar basis, sales in Canada improved by 34% and in Australia/New Zealand by 10% in the third quarter of 2004, compared to the same period in 2003. Sales in these markets continues to show improvement as the Company has completed its changes to the distributor compensation plan and continues to implement its training and distributor development system in these markets. Mexican sales decreased 30% in the third quarter of 2004, compared to the same period in 2003. Although new distributor enrollments increased by 18% in the third quarter of 2004, new Master Affiliate qualifications declined by 68%. Sales in the Philippines in the third quarter of 2004 increased by 3%, compared to the same period in 2003. These two markets continue to implement changes in the business model, and these changes have had an impact on the sales in these markets. The following table summarizes selected items from the consolidated statement of operations, expressed as a percentage of net sales, for the periods indicated, and should be read in conjunction with the discussion of the components of the consolidated statements of operations that follow: Selected data from the Consolidated Three Months Ended Nine Months Ended Statements of Operations September 30 September 30 2004 2003 2004 2003 ----------------- ----------------- Cost of products sold 17.1% 16.8% 16.8% 17.2% Distributor royalties and commissions 39.4% 38.7% 39.7% 38.8% Selling, general, and administrative 34.9% 34.0% 33.9% 34.6% Provision for income taxes 3.3% 4.2% 3.8% 3.8% Net income 5.2% 6.2% 5.7% 5.6% Cost of products sold as a percentage of net sales was 17.1% in the third quarter of 2004, as compared to 16.8% in the third quarter of 2003. The increase in the percentage of cost of goods sold is the result of lower production levels during the third quarter of 2004 while the plant was in a planned shutdown for the installation of new equipment. Also, the cost of increased analytical testing procedures required under TGA (Australia) regulations contributed to the overall COGS percentage increase. Distributor royalties and commissions as a percentage of net sales were 39.4% and 38.7% in the third quarter of 2004 and 2003, respectively. These expenses are 7 governed by the distributor agreements and are directly related to the level of sales. The increase is primarily the result of the changes to the distributor compensation plan in Canada, the United Kingdom, and Australia/New Zealand over the course of 2003. These changes resulted in commission payments being made on the full retail value of the products sold, and the full effect of these changes impacted the first nine months of 2004. Also, as the Company opened up new markets in Malaysia, last September, and Singapore, in March 2004, those markets paid commissions on the full retail value of the products at the time of opening. As a result, more of the Company's international sales are weighted towards full retail commission payments. Selling, general and administrative (SGA) expenses increased $1,758,000 in the third quarter of 2004, as compared to the third quarter of 2003. SGA expenses as a percentage of net sales increased to 34.9% in the third quarter of 2004 compared to 34.0% in the third quarter of 2003. A portion of the SGA increase was the result of the opening of Singapore during 2004 and Malaysia being open for all of the third quarter of 2004, versus just the month of September in 2003. SGA expenses were $388,000 for Malaysia and Singapore for the third quarter of 2004, compared to $101,000 for the third quarter of 2003. On a consolidated basis, sales expenses represented approximately $547,000 of the increase. Some of the components were increased credit card fees due to the higher sales volume; increased conference call expenses, as the Company has implemented its use of this training and communications tool; and additional promotional bonuses. Marketing expenses have increased by $101,000, primarily in promotional trip expenses, newsletter expenses, and salaries; and warehouse and distribution expenses have increased by $21,000 as the result of higher sales volumes. General and administrative expenses increased by approximately $1,089,000. The largest single component of this increase was an increase of approximately $630,000 in accounting fees and other accounting-related services. Most of this increase is the result of management's documentation and assessment of the internal control environment required under Section 404 of the Sarbanes-Oxley Act. Because of the rapid increase in the Company's stock price over the first six months of 2004, the Company has been classified as an "Accelerated Filer". As a result, the period of time in which the Company has to perform this internal control assessment is compressed. The Company will continue to have expenses on this project in the fourth quarter; however, the expenses are expected to lower than in the third quarter. Many of these costs will be one-time expenses, as part of the first year start up and documentation under the Act. The other key components of the increase are in salaries, fringe benefit expenses, business insurance, international development expenses, increased directors' fees, and increases in other costs of being a publicly-held company. The Company recorded income tax expense of $807,000 for the third quarter of 2004, an effective rate of 39.0%. In the third quarter of 2003, the Company recorded income tax expense of $815,000, an effective rate of 40.2%. For the nine months ended September 30, 2004, the Company's effective tax rate was 39.8%, compared to 40.6% in the same period of 2003. The slightly higher rate in 2003 is primarily due to non-deductible losses in some of the Company's foreign markets, including Malaysia. 8 Critical Accounting Policies A summary of our critical accounting policies and estimates is presented on page 35 of our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2004. There have been no changes made to those policies to date in 2004. Safe Harbor Provision of the Private Securities Litigation Act of 1995 and Forward Looking Statements. The statements contained in Item 2 (Management's Discussion and Analysis of Financial Condition and Results of Operation) that are not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties. The forward-looking statements are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to the Company's management. Accordingly, these statements are subject to significant risks, uncertainties and contingencies which could cause the Company's actual growth, results, performance and business prospects and opportunities in 2004 and beyond to differ materially from those expressed in, or implied by, any such forward-looking statements. Wherever possible, words such as "anticipate," "plan," "expect," "believe," "estimate," and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying such statements. These risks, uncertainties and contingencies include, but are not limited to, the Company's ability to continue to attract, maintain and motivate its distributors, changes in the regulatory environment affecting network marketing sales and sales of food and dietary supplements and other risks and uncertainties detailed in the Company's other SEC filings. Item 3. Quantitative and Qualitative Disclosures of Market Risk The Company is exposed to various market risks, primarily foreign currency risks and interest rate risks. Foreign Currency Risk The Company's earnings and cash flows are subject to fluctuations due to changes in foreign currency rates as it has several foreign subsidiaries and continues to explore expansion into other foreign countries. As a result, exchange rate fluctuations may have an effect on sales and gross margins. Accounting practices require that the Company's results from operations be converted to U.S. dollars for reporting purposes. Consequently, the reported earnings of the Company in future periods may be significantly affected by fluctuations in currency exchange rates, generally increasing with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Products 9 manufactured by the Company for sale to the Company's foreign subsidiaries are transacted in U.S. dollars. The Company enters into foreign exchange forward contracts with a financial institution to sell Canadian dollars in order to protect against currency exchange risk associated with expected future cash flows. The Company has accounted for these contracts as free standing derivatives, such that gains or losses on the fair market value of these forward exchange contracts are recorded as other income and expense in the consolidated statements of operations. The net changes in the fair value of these forward contracts as of September 30, 2004 was a cumulative expense $87,000. As of September 30, 2004, 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 nine months of 2004 that affect the disclosures presented in Item 7A - "Qualitative and Quantitative Disclosures Regarding Market Risk" on pages 36 and 37 of our 2003 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2004. Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2004, have concluded that, as of such date our disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company would be made known to them by others within the Company. (b) Changes in internal controls. During the third quarter of 2004, there were no significant changes in our internal controls or in other factors that could significantly affect the Company's disclosure controls and procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken. Part II. OTHER INFORMATION Item 1. Legal Proceedings Not Applicable. 10 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity 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 The Certifications of the Chief Executive Officer and the Chief Financial Officer of Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached as Exhibits to this Report on Form 10-Q. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits* Exhibit No. Description ----------- ----------- 3.1 Certificate of Incorporation (incorporate by reference Appendix B of the Form 14A the Registrant filed April 22, 1999) 3.2 By-Laws (incorporate by reference Appendix C of the Form 14A the Registrant filed April 22, 1999) 3.3 Amendment to By-Laws dated March 22, 2001 (incorporate by reference Exhibit 3.3 to the Form 10-K of the Registrant for year ended December 31, 2001) 10.1 Standby Equity Distribution Agreement dated February 24, 2004, between the Registrant and Cornell Capital Partners, LP (incorporate by reference Exhibit 10.1 to the Form 10-Q of the Registrant for quarter ended March 31, 2004) 10.2 Registration Rights Agreement dated February 24, 2004, between the Registrant and Cornell Capital Partners, LP (incorporate by reference Exhibit 10.2 to the Form 10-Q of the Registrant for quarter ended March 31, 2004) 11 Exhibit No. Description ----------- ----------- 10.3 Escrow Agreement between Registrant, Cornell Capital Partners, LP and Butler Gonzalez LLP (incorporate by reference Exhibit 10.3 to the Form 10-Q of the Registrant for quarter ended March 31, 2004) 31.1 Sarbanes-Oxley Act Section 302 Certifications for Robert L. Montgomery 31.2 Sarbanes-Oxley Act Section 302 Certification for David G. Kreher 32.1 Sarbanes-Oxley Act Section 906 Certification for Robert L. Montgomery, President, Chief Executive Officer 32.2 Sarbanes-Oxley Act Section 906 Certification for David G. Kreher, Chief Financial Officer * Also incorporated by reference the Exhibits filed as part of the SB-18 Registration Statement of the Registrant, effective November 5, 1985, and subsequent periodic filings. 12 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 8, 2004 RELIV' INTERNATIONAL, INC. By: /s/ Robert L. Montgomery -------------------------------- Robert L. Montgomery, President, Chief Executive Officer By: /s/ David G. Kreher -------------------------------- David G. Kreher, Chief Financial Officer 13 Reliv International, Inc. and Subsidiaries Consolidated Balance Sheets September 30 December 31 2004 2003 ----------- ----------- (unaudited) Assets Current assets: Cash and cash equivalents $ 9,143,714 $ 7,902,508 Accounts and notes receivable, less allowances of $7,600 in 2004 and $8,600 in 2003 711,707 751,887 Accounts due from employees and distributors 106,706 72,846 Inventories Finished goods 3,611,745 3,171,185 Raw materials 2,110,706 1,047,068 Sales aids and promotional materials 443,972 452,066 ----------- ----------- Total inventories 6,166,423 4,670,319 Refundable income taxes 351,452 -- Prepaid expenses and other current assets 1,162,270 727,939 Deferred income taxes 293,754 296,164 ----------- ----------- Total current assets 17,936,026 14,421,663 Other assets 1,117,747 793,091 Accounts due from employees and distributors 185,294 52,291 Property, plant and equipment: Land 829,222 829,222 Building 8,928,155 8,801,913 Machinery & equipment 4,877,180 3,926,613 Office equipment 1,073,540 1,093,106 Computer equipment & software 2,577,528 2,564,055 ----------- ----------- 18,285,625 17,214,909 Less: Accumulated depreciation 8,209,667 7,801,038 ----------- ----------- Net property, plant and equipment 10,075,958 9,413,871 ----------- ----------- Total assets $29,315,025 $24,680,916 =========== =========== See notes to financial statements. Reliv International, Inc. and Subsidiaries Consolidated Balance Sheets September 30 December 31 2004 2003 ------------ ------------ (unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses: Trade accounts payable and other accrued expenses $ 4,041,487 $ 2,778,898 Distributors commissions payable 3,507,121 2,701,542 Sales taxes payable 465,365 446,872 Interest expense payable 18,000 42,808 Payroll and payroll taxes payable 697,285 626,665 ------------ ------------ Total accounts payable and accrued expenses 8,729,258 6,596,785 Income taxes payable -- 147,520 Current maturities of long-term debt 326,725 421,063 ------------ ------------ Total current liabilities 9,055,983 7,165,368 Noncurrent liabilities: Long-term debt, less current maturities 3,439,111 3,700,138 Deferred income taxes 77,000 77,000 Other non-current liabilities 901,198 666,032 ------------ ------------ Total noncurrent liabilities 4,417,309 4,443,170 Stockholders' equity: Preferred stock, par value $.001 per share; 3,000,000 shares authorized; -0- shares issued and outstanding as of 9/30/2004; 97,500 shares issued and outstanding -- 975,000 as of 12/31/2003 Common stock, par value $.001 per share; 30,000,000 authorized; 16,042,907 shares issued and 16,040,170 shares outstanding as of 9/30/2004; 15,143,961 shares issued and 15,141,224 shares outstanding as of 12/31/2003 16,043 15,144 Additional paid-in capital 20,786,453 18,684,338 Accumulated deficit (4,154,653) (5,878,869) Accumulated other comprehensive loss: Foreign currency translation adjustment (797,402) (714,527) Treasury stock (8,708) (8,708) ------------ ------------ Total stockholders' equity 15,841,733 13,072,378 ------------ ------------ Total liabilities and stockholders' equity $ 29,315,025 $ 24,680,916 ============ ============ See notes to financial statements. Reliv International, Inc. and Subsidiaries Consolidated Statements of Operations (unaudited) Three months ended September 30 Nine months ended September 30 2004 2003 2004 2003 ------------- ------------- ------------- ------------- Sales at suggested retail $ 34,654,446 $ 27,160,056 $ 102,794,387 $ 79,424,022 Less: distributor allowances on product purchases 10,482,388 7,546,330 31,253,292 23,372,199 ------------- ------------- ------------- ------------- Net sales 24,172,058 19,613,726 71,541,095 56,051,823 Costs and expenses: Cost of products sold 4,139,646 3,300,127 11,994,551 9,616,540 Distributor royalties and commissions 9,534,381 7,599,097 28,417,457 21,768,802 Selling, general and administrative 8,433,789 6,675,449 24,269,000 19,368,226 ------------- ------------- ------------- ------------- Total costs and expenses 22,107,816 17,574,673 64,681,008 50,753,568 ------------- ------------- ------------- ------------- Income from operations 2,064,242 2,039,053 6,860,087 5,298,255 Other income (expense): Interest income 28,849 22,753 77,202 62,657 Interest expense (65,621) (50,422) (177,523) (188,430) Other income/(expense) 43,662 16,269 65,880 77,773 ------------- ------------- ------------- ------------- Income before income taxes 2,071,132 2,027,653 6,825,646 5,250,255 Provision for income taxes 807,000 815,000 2,719,000 2,129,000 ------------- ------------- ------------- ------------- Net income 1,264,132 1,212,653 4,106,646 3,121,255 Preferred dividends accrued and paid -- 19,516 12,292 42,016 ------------- ------------- ------------- ------------- Net income available to common shareholders $ 1,264,132 $ 1,193,137 $ 4,094,354 $ 3,079,239 ============= ============= ============= ============= Earnings per common share - Basic $ 0.08 $ 0.08 $ 0.26 $ 0.21 ============= ============= ============= ============= Weighted average shares 15,846,000 14,956,000 15,473,000 14,954,000 ============= ============= ============= ============= Earnings per common share - Diluted $ 0.07 $ 0.07 $ 0.24 $ 0.18 ============= ============= ============= ============= Weighted average shares 16,974,000 17,120,000 17,069,000 16,956,000 ============= ============= ============= ============= 2003 earnings per common share and weighted average shares have been adjusted for the five-for-four stock split declared in September 2003. See notes to financial statements. Reliv International, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30 2004 2003 ----------- ----------- Operating activities: Net income $ 4,106,646 $ 3,121,255 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 818,814 693,097 Compensation expense for warrants granted 58,417 67,550 Tax benefit from exercise of options and warrants 1,026,204 -- Deferred income taxes -- 8,206 Foreign currency transaction (gain)/loss (29,313) 18,153 (Increase) decrease in accounts and notes receivable (135,997) 28,969 (Increase) decrease in inventories (1,511,459) (1,450,535) (Increase) decrease in refundable income taxes (351,452) 7,998 (Increase) decrease in prepaid expenses and other current assets (438,510) (359,165) (Increase) decrease in other assets (227,306) (130,890) Increase (decrease) in accounts payable and accrued expenses 2,380,099 1,793,022 Increase (decrease) in income taxes payable (147,204) 71,821 ----------- ----------- Net cash provided by operating activities 5,548,939 3,869,481 Investing activities: Proceeds from the sale of property, plant and equipment 119,615 79,429 Purchase of property, plant and equipment (1,603,633) (738,774) ----------- ----------- Net cash used in investing activities (1,484,018) (659,345) Financing activities: Proceeds from long-term borrowings -- 124,249 Principal payments on long-term borrowings and capital lease obligations (355,690) (441,594) Proceeds from sale of common stock 48,601 -- Proceeds from sale of preferred stock -- 1,500,000 Redemption of preferred stock (975,000) (525,000) Preferred stock dividends paid (12,292) (42,016) Common stock dividends paid (460,319) -- Repayment of loans by officers and directors -- 36,824 Proceeds from options and warrants exercised 256,602 166,189 Purchase of stock for treasury (1,293,980) (366,605) ----------- ----------- Net cash provided by (used in) financing activities (2,792,078) 452,047 Effect of exchange rate changes on cash and cash equivalents (31,637) 106,254 ----------- ----------- Increase (decrease) in cash and cash equivalents 1,241,206 3,768,437 Cash and cash equivalents at beginning of period 7,902,508 3,437,966 ----------- ----------- Cash and cash equivalents at end of period $ 9,143,714 $ 7,206,403 =========== =========== See notes to financial statements Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) September 30, 2004 Note 1-- Basis of Presentation The accompanying unaudited consolidated financial statements and notes thereto have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments which management believes necessary (which include only normal recurring accruals) to present fairly the financial position, results of operations and cash flows. These statements, however, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. Interim results may not necessarily be indicative of results that may be expected for any other interim period or for the year as a whole. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the annual report on Form 10-K for the year ended December 31, 2003, filed March 26, 2004 with the Securities and Exchange Commission. Note 2-- Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Note 3-- Earnings per Share The following table sets forth the computation of basic and diluted earnings per share: Three months ended September 30 Nine months ended September 30 2004 2003 2004 2003 ------------------------------- ------------------------------ Numerator: Numerator for basic and diluted earnings per share--net income available to common shareholders $ 1,264,132 $ 1,193,137 $ 4,094,354 $ 3,079,239 Effect of convertible preferred stock: Dividends on preferred stock -- 19,516 12,292 42,016 ---------------------------- ---------------------------- Numerator for diluted earnings per share $ 1,264,132 $ 1,212,653 $ 4,106,646 $ 3,121,255 Denominator: Denominator per basic earnings per share--weighted average shares 15,846,000 14,956,000 15,473,000 14,954,000 Effect of convertible preferred stock and dilutive securities: Convertible preferred stock -- 413,000 70,000 293,000 Employee stock options and other warrants 1,128,000 1,751,000 1,526,000 1,709,000 ---------------------------- ---------------------------- Denominator for diluted earnings per share--adjusted weighted average shares 16,974,000 17,120,000 17,069,000 16,956,000 ============================ ============================ Basic earnings per share $ 0.08 $ 0.08 $ 0.26 $ 0.21 ============================ ============================ Diluted earnings per share $ 0.07 $ 0.07 $ 0.24 $ 0.18 ============================ ============================ 2003 earnings per share and weighted average shares have been adjusted for the 5-for-4 stock split declared in September 2003. Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) September 30, 2004 Note 4-- Comprehensive Income Total comprehensive income was $1,273,328 and $4,023,771 for the three and nine months ended September 30, 2004, respectively. For the three and nine months ended September 30, 2003, comprehensive income was $1,145,207 and $3,184,114, 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 September 30 Nine months ended September 30 2004 2003 2004 2003 ------------------------------- ------------------------------ Basic: Net income available to common shareholders, as reported $1,264,132 $1,193,137 $4,094,354 $3,079,239 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 5,062 91,872 51,390 189,044 -------------------------- -------------------------- Pro forma net income available to common shareholders $1,259,070 $1,101,265 $4,042,964 $2,890,195 ========================== ========================== Diluted: Net income available to common shareholders, as reported $1,264,132 $1,212,653 $4,106,646 $3,121,255 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 5,062 91,872 51,390 189,044 -------------------------- -------------------------- Pro forma net income available to common shareholders $1,259,070 $1,120,781 $4,055,256 $2,932,211 ========================== ========================== Earnings per share: Basic--as reported $ 0.08 $ 0.08 $ 0.26 $ 0.21 ========================== ========================== Basic--pro forma $ 0.08 $ 0.07 $ 0.26 $ 0.19 ========================== ========================== Diluted--as reported $ 0.07 $ 0.07 $ 0.24 $ 0.18 ========================== ========================== Diluted--pro forma $ 0.07 $ 0.07 $ 0.24 $ 0.17 ========================== ========================== The Company issued 394,420 and 1,179,915 shares for the three and nine months ended September 30, 2004, respectively, for stock option and warrant exercises. For the three and nine months ended September 30, 2003, 46,970 and 181,809 shares, respectively, were issued for such exercises. Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) September 30, 2004 Note 6-- Standby Equity Distribution Agreement In February 2004, the Company entered into a Standby Equity Distribution Agreement ("SEDA") with an investment firm. Under the SEDA, the investment firm has committed to provide up to $5 million of funding to be drawn down at the Company's discretion by the purchase of the Company's common stock. The Company may request up to $210,000 in any seven-day period in exchange for issuing shares of its common stock to the investment firm. The facility may be used in whole or in part entirely at the Company's discretion, subject to an effective registration of the related shares. As of September 30, 2004, no shares have been issued or funds received by the Company under this agreement. Note 7-- Redemption of Preferred Stock On March 31, 2003, the Company sold an aggregate of 150,000 shares of preferred stock to three officer/directors. The terms of the sale of these preferred shares have been previously disclosed in the Company's annual report on Form 10-K for the year ended December 31, 2003. In February 2004, the Company redeemed 15,000 shares from each officer/director for a total redemption of 45,000 shares at a value of $450,000. In April 2004, the Company redeemed the remaining 17,500 shares from each officer/director for a total redemption of 52,500 shares at a value of $525,000. Note 8-- Related Party Tranactions In January 2004, the Company purchased a total of 116,564 shares of the Company's common stock from three officer/directors and one director. The total cost of the purchases was $607,178, for a weighted average purchase price of $5.21 per share. In April 2004, the Company purchased a total of 75,000 shares of the Company's common stock from two officer/directors. The total cost of the purchases was $686,802, for a weighted average purchase price of $9.16 per share. The price per share of each purchase was based on a discount from the market price per share at the time of purchase in order to approximate the dilutive impact of their shares on the open market.