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.