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, 1998
Commission File No. 1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Illinois 37-1172197
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Chesterfield Industrial Boulevard,
P.O. Box 405, Chesterfield, Missouri 63006
(Address of principal executive offices) (Zip Code)
(314) 537-9715
(Registrant's telephone number, including area code)
Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
APPLICABLE ONLY TO CORPORATE ISSUERS:
COMMON STOCK 9,652,507 outstanding Shares as of September 30, 1998
<PAGE>
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, 1998 and Balance Sheet
as of December 31, 1997.
2. Interim Statements of Operations for the three and nine month
periods ending September 30, 1998 and September 30, 1997.
3. Interim Statements of Cash Flows for the nine month periods
ending September 30, 1998 and September 30, 1997.
The Financial Statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of results for the
periods presented.
Item 2. Management's Discussion and Analysis of Financial Condition
-------------------------------------------------------------
and Results of Operations
-------------------------
1. Financial Condition
Current assets of the Company at September 30, 1998 increased to
$9,503,000 from $6,745,000 as of December 31, 1997, primarily due to increases
in inventory and refundable income taxes. Inventories have increased by
$2,145,000 from December 31, 1997 as the result of inventories acquired and
produced for a contract packaging customer for which services began in early
July 1998. The Company purchases the specified ingredients for this customer's
products, then produces and sells the finished product according to the
customer's specifications. Refundable income taxes have increased as the result
of estimated tax deposits made on a projection of the income from the first six
months of the year. This overpayment position will be reduced over the balance
of the year.
Net property, plant and equipment increased to $10,319,000 at September
30, 1998 from $9,221,000 at December 31, 1997 due to completion of the expansion
of the Company's headquarters and related increases in office, computer and
manufacturing equipment. The Company added approximately 90,000 square feet to
its facility by expanding office, warehouse and manufacturing areas. The Company
began utilizing the additional space in the first quarter 1998.
Current liabilities increased to $6,318,000 at September 30, 1998, from
$3,653,000 at December 31, 1997. Trade accounts payable increased by $2,320,000
as of September 30, 1998 as compared to December 31, 1997 as the result of the
increased investment in inventories as discussed above. Distributor commissions
and sales taxes payable have increased slightly as the result of increased sales
volume in September 1998, as compared to December 1997. Unearned income has
increased by $79,000 to $84,000 as of September 30, 1998 as the result of
deposits made by a contract packaging customer. Current maturities of
1
<PAGE>
long-term debt and capital lease obligations have increased as of September 30,
1998 as the result of new capital leases that were entered into during the third
quarter of 1998.
Stockholders' equity increased by $788,000 to $7,956,000 as of
September 30, 1998. The Company's working capital balance increased by $93,000
since December 31, 1997, with a current ratio of 1.50 as compared to 1.85 as of
December 31, 1997. The increase in stockholders' equity and working capital is
due to the year to date net income of the Company. The increase in inventory and
related increase in accounts payable are the factors for the lower current
ratio. The Company paid cash dividends of $96,000 on January 29, 1998 and
$145,000 on June 22, 1998.
The Company has been affected by the strengthening US dollar versus the
Australian, New Zealand and Canadian currencies. Sales to these countries
account for approximately 10% of the Company's net sales. Purchases for the
materials needed to produce the Company's products are made by the Company in US
dollars, while sales to distributors are made in local currencies. Consequently,
strengthening of the US dollar versus a foreign currency can have a negative
impact on operating margins and can generate translation losses on intercompany
transactions. As shown in the Statements of Cash Flows, the Company's cash
position has been reduced by $214,000 as the result of exchange rate
fluctuations in 1998. Price adjustments to maintain operating margins are made
when considered appropriate. However, the Australian and New Zealand currencies,
in particular, are beginning to recover from their lows experienced during the
third quarter of 1998. Furthermore, the Company anticipates that its cash,
working capital balance and existing credit will be adequate to meet its
operating needs in the future, based on current and projected revenue levels.
2. Results of Operations
---------------------
The Company had a net profit of $73,000, or $.01 per share, for the
quarter ended September 30, 1998, compared to a net profit of $282,000, or $.03
per share for the same period of 1997. The decrease in net profit was due
principally to an increase in selling, general and administrative expense to
$4,548,000 in the third quarter 1998 compared to $4,328,000 in the same period
1997. Increased overhead expense in the quarter of $117,000 resulted from the
addition to the Company's office, manufacturing and warehouse facility. The
facility was expanded to provide the capacity to meet anticipated sales growth
from network marketing activities and to add capabilities necessary to increase
sales of contract packaging services. Declining sales in the international
subsidiaries contributed to the decrease in net profit, while general and
administrative expenses remained the same in an effort to increase sales.
Interest expense also increased during the period from $45,000 in 1997 to
$132,000 in 1998 due to bank debt obtained to finance the expansion of the
Company's facility. The Company anticipates that the investment in the facility
and in the international markets will generate future profits.
Net sales improved to $12,579,000 from $11,480,000 in 1997. The
increase in sales was the result of increased sales from contract packaging
services of $1,642,000 in the third quarter of 1998 as compared to $238,000 in
1997. During the third quarter 1998, net sales from network marketing activities
decreased to $10,936,000 from $11,242,000 in the same period in 1997. Net sales
from network marketing activities were comprised of $10,056,000 from sales in
the United States and $880,000 from sales of foreign subsidiaries in Australia,
New Zealand, Canada, Mexico and a licensee in the United Kingdom. This compares
to $9,970,000 and $1,272,000 in the third quarter of 1997. In an effort to
2
<PAGE>
increase sales in its foreign subsidiaries, the Company has recently hired a
director of North America Sales and has hired new sales managers in Mexico and
Canada. In the United States, the Company's primary market, net sales from
network marketing activities increased slightly during third quarter 1998,
though the distributor sales force decreased 13% in new sign-ups and distributor
renewals as compared to third quarter 1997.
The Company provides contract packaging services, including blending,
processing and packaging food products in accordance with specifications
provided by its customers. During the expansion of the Company's facility in
1997, efforts to increase contract packaging were reduced until the expansion
was completed. During the third quarter, the Company increased revenue from
contract packaging by $1,404,000 as the result of efforts put forth during the
first half of 1998. The increased sales are not yet yielding additional gross
profit as the cost of goods sold was 104% of revenues. This was due to start-up
costs including hiring and training additional plant staff. The Company expects
an improved gross margin in the future.
Cost of network marketing products sold as a percentage of net sales
decreased to 18.4% for the third quarter of 1998 versus 20.6% in the same period
of 1997. This improvement is due to efficiencies gained in indirect labor and
overhead absorption with the increase in total manufacturing output. The Company
believes that the increase in contract packaging services will improve
utilization of its facility and therefore lower per unit costs.
Distributor royalties and commissions increased slightly to 37.2% of
network marketing sales in the third quarter of 1998, as compared to 36.8% in
the third quarter of 1997. These expenses are governed by the distributor
agreements and are directly related to the level of sales. The Company pays a
percent of sales up to 18% in royalties and as much as 45% in commissions. In
addition, the Company paid royalties of $196,000 in the third quarter of 1998
through various incentive programs that reward distributors who have reached and
personally assisted other qualified distributors to reach specified levels of
compensation. These programs paid $182,000 in the third quarter of 1997.
The Company has assessed its readiness for year 2000 in terms of its
current computer hardware and software. Some software and hardware components
were determined to not be Year 2000 compliant and the Company has already
upgraded these components or has upgrades scheduled no later than first quarter
1999. The financial impact of these upgrades is not material to the Company. The
Company is also in the process of reviewing non-IT systems (production
machinery, building equipment, etc.) and reviewing the capabilities of major
suppliers. However, the Company does not believe that year 2000, and the
Company's preparation for year 2000, will have a material effect on its
operations.
Forward looking statements made in this filing involve material risks
and uncertainties that could cause actual results and events to differ
materially from those set forth, or implied, including 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 in the Company's other SEC
filings.
3
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
An arbitration before the American Arbitration Association was held
between the Company and a former officer of the Company in connection with a
Stock Purchase Agreement and Consulting Agreement entered into with the former
officer in October 1992. The arbitration concluded on October 21, 1998, and no
decision has yet been received. See Part I, Item 3 to the Company's Form 10-K
Annual Report for the year ended December 31, 1997.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits*
(b) The Company has not filed a Current Report during the
quarter covered by this report.
* Also incorporated by reference the Exhibits filed as part of the
S-18 Registration Statement of the Registrant, effective November
5, 1985, and subsequent periodic filings.
4
<PAGE>
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 12, 1998 RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
--------------------------------
Robert L. Montgomery, President,
Chief Executive Officer and
Principal Financial Officer
5
<PAGE>
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ ------------
(unaudited) (see notes)
Assets
Current Assets:
<S> <C> <C>
Cash and Cash equivalents $ 2,534,765 $ 2,426,426
Accounts and notes receivable, less allowances of
$5,900 in 1998 and $7,600 in 1997 844,508 865,701
Inventories
Finished goods 2,055,780 1,453,282
Raw materials 2,441,383 785,706
Sales aids and promotional materials 290,376 403,830
------------ ------------
Total inventories 4,787,539 2,642,818
Refundable income taxes 412,459 31,303
Prepaid expenses and other current assets 836,078 688,539
Deferred income taxes 87,352 90,065
------------ ------------
Total current assets 9,502,701 6,744,852
Deferred costs 2,661 4,232
Property, plant and equipment:
Land 829,222 790,677
Building 8,199,612 2,854,548
Machinery & equipment 2,365,673 1,723,482
Office equipment 420,644 303,235
Computer equipment & software 1,629,378 1,452,577
Construction in progress 102,196 4,797,090
------------ ------------
13,546,725 11,921,609
Less: Accumulated depreciation (3,227,532) (2,700,745)
------------ ------------
Net Property, plant and equipment 10,319,193 9,220,864
------------ ------------
Total Assets $ 19,824,555 $ 15,969,948
============ ============
</TABLE>
See notes to financial statements.
6
<PAGE>
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------------ ------------
(unaudited) (see notes)
Liabilities and Stockholders' Equity
Current liabilities:
<S> <C> <C>
Accounts payable and accrued expenses
Trade Accounts Payable $ 3,752,491 $ 1,432,901
Distributors commissions payable 1,427,616 1,326,579
Sales taxes payable 230,992 192,130
Interest expense payable 26,955 75,321
Payroll and payroll taxes payable 197,700 173,689
Other accrued expenses 152,629 89,511
------------ ------------
Total accounts payable & accrued expenses 5,788,383 3,290,131
Current maturities of long-term debt and
capital lease obligations 445,778 358,124
Unearned income 83,630 5,003
------------ ------------
Total current liabilities 6,317,791 3,653,258
Capital lease obligations, less current maturities 240,707 39,105
Long-term debt, less current maturities 5,310,357 5,109,520
Stockholders' equity:
Common stock, no par value; 20,000,000 shares
authorized; 9,652,507 shares outstanding as of 9/30/98
and 9,617,307 shares outstanding as of 12/31/97 9,179,764 9,135,764
Notes receivable-officers and directors (46,318) (4,633)
Retained earnings (696,989) (1,673,164)
Foreign currency translation adjustment (480,757) (289,902)
------------ ------------
Total Stockholders' Equity 7,955,700 7,168,065
------------ ------------
Total Liabilities and Stockholders' Equity $ 19,824,555 $ 15,969,948
============ ============
</TABLE>
See notes to financial statements.
7
<PAGE>
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Quarter ended September 30 Nine Months Ended September 30
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales at suggested retail $ 18,308,241 $ 17,449,378 $ 55,327,659 $ 54,376,312
Less: Distributor allowances on product purchases 5,729,439 5,969,160 18,477,538 18,454,896
------------ ------------ ------------ ------------
Net Sales 12,578,802 11,480,218 36,850,121 35,921,416
Costs and expenses:
Cost of products sold 3,727,590 2,520,523 8,151,181 7,389,443
Distributor royalties and commissions 4,066,766 4,141,047 12,956,205 12,855,251
Selling, general and administrative 4,547,989 4,327,646 13,417,909 12,876,080
------------ ------------ ------------ ------------
Total Costs and Expenses 12,342,345 10,989,216 34,525,295 33,120,774
------------ ------------ ------------ ------------
Income from operations 236,457 491,002 2,324,826 2,800,642
Other income (expense):
Interest income 32,842 22,410 99,605 80,726
Interest expense (132,380) (45,185) (372,628) (126,108)
Other income\expense (14,728) (3,582) (54,198) 23,498
------------ ------------ ------------ ------------
Income before income taxes 122,191 464,645 1,997,605 2,778,758
Provision for income taxes 48,904 182,516 779,066 1,082,959
------------ ------------ ------------ ------------
Net Income $ 73,287 $ 282,129 $ 1,218,539 $ 1,695,799
============ ============ ============ ============
Basic earnings per share $ 0.01 $ 0.03 $ 0.13 $ 0.18
============ ============ ============ ============
Diluted earnings per share $ 0.01 $ 0.03 $ 0.12 $ 0.16
============ ============ ============ ============
Weighted average shares of common stock
and common stock equivalents outstanding
Basic earnings per share 9,643,000 9,573,000 9,643,000 9,573,000
============ ============ ============ ============
Diluted earnings per share 10,211,000 10,411,000 10,211,000 10,411,000
============ ============ ============ ============
</TABLE>
See notes to financial statements.
8
<PAGE>
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30
1998 1997
----------- -----------
<S> <C> <C>
Operating activities:
Net Income $ 1,218,539 $ 1,695,799
Adjustments to reconcile net income to
net cash provided by (used in) operating
activities:
Depreciation and amortization 557,173 445,333
Provision for losses on accounts receivable 7,000 0
Foreign currency translation (gain) loss 106,705 (7,226)
(Increase) decrease in accounts and notes receivable (12,220) 312,596
(Increase) decrease in inventories (2,225,590) (99,159)
(Increase) decrease in refundable income taxes (394,068) (140,256)
(Increase) decrease in prepaid expenses
and other current assets (152,204) (110,149)
(Increase) decrease in deferred costs 958 50,849
Increase in accounts payable and accrued
expenses 2,542,523 38,740
Increase (decrease) in income taxes payable 10,338 (25,321)
Increase (decrease) in unearned income 78,655 (17,577)
----------- -----------
Net cash provided by (used in) operating
activities 1,737,809 2,143,629
Investing activities:
Purchase of property, plant and equipment (1,370,165) (2,751,275)
----------- -----------
Net cash provided by (used in) investing
activities (1,370,165) (2,751,275)
Financing activities:
Proceeds from long-term debt 471,486 1,880,898
Principal payments on long-term borrowings
and line of credit (239,257) (164,049)
Principal payments under capital lease
obligations (39,152) (71,690)
Proceeds from stock options exercised 0 13,125
Dividends paid (240,963) (290,368)
Proceeds from notes receivable assumed from issuance
of common stock from exercise of options 2,315 0
Purchase of treasury stock 0 (337,127)
----------- -----------
Net cash provided by (used in) financing
activities (45,571) 1,030,789
Effect of exchange rate changes on cash
and cash equivalents (213,734) (112,855)
----------- -----------
Increase (decrease) in cash and cash
equivalents 108,339 310,288
Cash and cash equivalents at beginning
of period 2,426,426 2,108,770
----------- -----------
Cash and cash equivalents at end of period $ 2,534,765 $ 2,419,058
=========== ===========
</TABLE>
See notes to financial statements
9
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1998
Note 1-- Basis of Presentation
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the
nine-month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant
Company and Subsidiaries' annual report on Form 10-K for the year
ended December 31, 1997.
Note 2-- Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Quarter ended September 30 Nine months ended September 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
Numerator:
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share--net income $ 73,287 $ 282,129 $ 1,218,539 $ 1,695,799
Denominator:
Denominator per basic earnings per
share--weighted average shares 9,643,000 9,573,000 9,643,000 9,573,000
Effect of dilutive securities:
Employee stock options and other warrants 568,000 838,000 568,000 838,000
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share--adjusted weighted average shares 10,211,000 10,411,000 10,211,000 10,411,000
=========== =========== =========== ===========
Basic earnings per share $ 0.01 $ 0.03 $ 0.13 $ 0.18
=========== =========== =========== ===========
Diluted earnings per share $ 0.01 $ 0.03 $ 0.12 $ 0.16
=========== =========== =========== ===========
</TABLE>
Note 3-- Subsequent Events
In May 1998, the former sales/general manager of the Company's Canadian
subsidiary filed lawsuit claiming unlawful termination. The individual had been
terminated by the Company in March 1998. The Company believes the claim is
without merit and intends to vigorously defend itself. At this time, the outcome
of this matter is uncertain and a range of loss cannot be reasonably estimated.
However, management believes that the final outcome will not have a material
adverse effect on the financial position of the Company
In May 1997, a former officer/director filed a demand for arbitration with
respect to a stock purchase agreement and consulting agreement entered into in
October 1992. An arbitration hearing was concluded in October 1998, but no
decision has yet been recieved. At this time, the outcome of this matter is
uncertain and a range of loss cannot be reasonably estimated. However,
management believes that the final outcome will not have a material adverse
effect on the financial position of the Company.
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET AS
OF SEPTEMBER 30, 1998 AND THE STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,534,765
<SECURITIES> 0
<RECEIVABLES> 850,408
<ALLOWANCES> 5,900
<INVENTORY> 4,787,539
<CURRENT-ASSETS> 9,502,701
<PP&E> 13,546,725
<DEPRECIATION> 3,227,532
<TOTAL-ASSETS> 19,824,555
<CURRENT-LIABILITIES> 6,317,791
<BONDS> 5,551,064
0
0
<COMMON> 9,179,764
<OTHER-SE> (1,224,064)
<TOTAL-LIABILITY-AND-EQUITY> 19,824,555
<SALES> 36,850,121
<TOTAL-REVENUES> 36,850,121
<CGS> 8,151,181
<TOTAL-COSTS> 8,151,181
<OTHER-EXPENSES> 26,328,707
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 372,628
<INCOME-PRETAX> 1,997,605
<INCOME-TAX> 779,066
<INCOME-CONTINUING> 1,218,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,218,539
<EPS-PRIMARY> .13
<EPS-DILUTED> .12
</TABLE>
