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, 1999
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 9,619,102 outstanding Shares as of September 30, 1999
<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, 1999 and Balance Sheet
as of December 31, 1998.
2. Interim Statements of Operations for the three and nine month
periods ending September 30, 1999 and September 30, 1998.
3. Interim Statements of Cash Flows for the nine month periods
ending September 30, 1999 and September 30, 1998.
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 Operation
1. Overview
--------
The Company manufactures nutritional and related products which its
sells through network marketing. In late 1997, the Company commenced
manufacturing and packaging services for outside customers. Revenues from
manufacturing and packaging services were $1.5 million in 1997, $6.3 million in
1998 and were $22.6 million for the first nine months of 1999. While revenues
from manufacturing and packaging have increased dramatically, the Company has
had to make large investments in plant and equipment to support this business
segment, and the rapid growth has caused production and warehousing difficulties
and labor inefficiencies. As a result, the manufacturing and packaging services
business segment has generated losses resulting in losses for the Company as a
whole. Despite an increase in net sales to $16,967,000 in the first nine months
of 1999, from $12,579,000 for the same period of 1998, the Company had a loss of
$650,000 for the first nine months of 1999, compared to income of $1,219,000 for
the same period of 1998. Reduced network marketing sales in the core U.S. market
has also contributed to the loss. As described further below, the Company has
taken steps to make its manufacturing and packaging services business segment
profitable, including eliminating jobs that do not provide an adequate margin.
The Company is also taking steps to increase network marketing sales in its core
U.S. market.
2. Financial Condition
--------------------
Current assets of the Company increased during the third quarter of
1999, to $9,460,000 from $8,358,000 as of December 31, 1998, primarily due to
increases in accounts receivable and inventory. These increases are due to the
increased sales and production of the Company's manufacturing and packaging
business. The increase in inventory is for raw materials for these
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<PAGE>
customers. Cash and cash equivalents decreased by $1,206,000 to $1,610,000 as of
September 30, 1999 as the result of the increase in accounts receivable and
inventory, coupled with the net loss for the year to date, as well as equipment
acquisitions.
The Company purchased $966,000 of property, plant and equipment during
the first nine months of 1999, bringing its total gross property, plant and
equipment to $15,259,000. The majority of the purchases were for new
manufacturing capabilities for its manufacturing and packaging business. This
acquisition was funded with an additional long-term note with the Company's
primary lender of $300,000.
Current liabilities increased by $2,344,000 from $6,175,000 as of
December 31, 1998 to $8,519,000 as of September 30, 1999. The primary components
of the increase were in trade accounts payable and borrowings under the line of
credit. Trade accounts payable increased by $579,000 from $3,568,000 as of
December 31, 1998 to $4,147,000 as of September 30, 1999. This increase is due
to the increased raw material inventory as discussed previously. Borrowings
under the line of credit have increased by $1,398,000 in order to fund the
increase in inventory and as the result of the net loss for the year to date.
Long-term debt has decreased by $101,000 to $5,115,000 as of September
30, 1999. The net decrease is primarily a combination of debt principal payments
of $431,000, net of the additional debt of $300,000 that was incurred during the
first quarter. The increase in the current maturities of long-term debt and
capital lease obligations is due to the same note.
Stockholders' equity decreased from $8,340,000 as of December 31, 1998
to $7,628,000 as of September 30, 1999, as the result of the net losses of the
second and third quarters. The Company paid out cash dividends of $97,000 in the
first quarter of 1999, and it has used approximately $59,000 to purchase
treasury stock over the course of 1999, most of which occurred in the third
quarter. Equity improved by $89,000 as the result of the improved foreign
currency translation adjustment at September 30, 1999 as compared to December
31, 1998. The Australian, New Zealand and Canadian dollars, as well as the
Mexican peso all strengthened against the US dollar over the course of the first
nine months of 1999.
The Company's working capital balance has decreased by $1,242,000 since
December 31, 1998 to $941,000 as of September 30, 1999. The current ratio has
also declined to 1.11 as of September 30, 1999. During the second quarter of
1999, the Company restructured its line of credit arrangements with its primary
lender. The new line of credit provides a formula-based borrowing arrangement
against a percentage of accounts receivable and inventory up to a maximum
borrowing limit. The Company requested this modification in the line of credit,
as the makeup of the Company's balance sheet has changed due the increased
business in the manufacturing and packaging segment.
3. Results of Operations
---------------------
The Company had a net loss of $350,000, or $.04 per share, for the
quarter ended September 30, 1999, compared to net income of $73,000, or $.01 per
share, for the same period in 1998. The Company continues to experience
significant setbacks in the profitability of its manufacturing and
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<PAGE>
packaging operations, coupled with a sales decline in network marketing sales in
its core United States market. In addition, consolidated selling, general and
administrative expenses increased by $336,000 in the third quarter of 1999 as
compared to the prior year. For the nine months ended September 30, 1999, the
Company incurred a loss of $650,000 compared to net income of $1,219,000 for the
first nine months of 1998.
Net sales improved to $16,967,000 in the third quarter of 1999 as
compared to $12,579,000 in the prior year. The increase in sales was solely due
to the increase in sales by the Company's manufacturing and packaging services
segment. Sales in this portion of the business increased to $7,237,000 in the
third quarter of 1999, as compared to $1,643,000 in the prior year. Sales in the
manufacturing and packaging services segment were $22,568,000 for the first nine
months of 1999 as compared to $1,973,000 for the prior year.
Net sales in the network marketing segment declined from $10,936,000 in
the third quarter of 1998 to $9,730,000 in the third quarter of 1999. Network
marketing sales in the United States declined by 15% from $10,056,000 in the
third quarter of 1998 to $8,558,000 in the third quarter of 1999. Sales in the
foreign subsidiaries of Australia, New Zealand, Canada, Mexico and the United
Kingdom overall increased by 33% to $1,171,000 in the third quarter of 1999 as
compared to $880,000 in the third quarter of 1998. This increase is due to
improved sales in the Company's Mexican subsidiary, which experienced an
increase of over 130% in its third quarter 1999 sales, versus third quarter
1998. This increase is due to the efforts of the sales manager in that market,
combined with the implementation of distribution centers across Mexico in order
to facilitate sales and other distributor activities in cities outside of the
Mexican headquarters in Mexico City. In its Australian and New Zealand markets,
sales improved by 14% in the third quarter of 1999 as compared to the third
quarter 1998.
During the third quarter, the Company successfully launched its
enhanced Internet site, with e-commerce capabilities. The web site allows a
number of features for distributors, including online ordering, online
sponsoring of new distributors, distributor account information and information
on a distributors' sales organization, or downline group. The Company has been
pleased with the response to the web site to this point and expects that more
distributors will take full advantage of its capabilities as more features and
enhancements are introduced. In conjunction with the Internet site launch,
distributors are also able to establish their own personal web sites utilizing a
variety of templates. These sites are linked to the corporate web site and
enable distributors to engage in retail sales, linked to Reliv order entry and
shipping, e-mail communication and other interactive functions. Over 500
distributors have signed up for personal web sites to date.
The Company provides manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers. Net sales increased to $7,237,000 in
the third quarter of 1999 from $1,643,000 in the prior year. The increase in
sales is due to the work provided by two major customers. The Company's sales to
third party customers primarily consist of the Company purchasing raw materials,
using customer- provided packaging materials and selling a finished product to
the customer. For the third quarter of 1999, cost of goods sold for these sales
were 99% of net sales. Even under optimal operating efficiencies, the gross
margin for these customers is substantially less than margins obtained in the
sales of the network marketing products. The Company's growth in this area has
led to production
4
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capacity and warehousing problems and related labor inefficiencies. The Company
has taken steps to better manage its growth in this area, including some plant
staffing cuts and the consolidation of an unprofitable second shift into its
first shift operations. It has also begun reviewing profit margins by customer
and project and has either discontinued or is restructuring those projects that
are not yielding the needed profit margins.
Cost of products sold for the network marketing segment as a percentage
of net sales increased slightly from 18.4% in the third quarter of 1998 to 18.7%
in the third quarter of 1999. The increase is due in part to the Company's
decision to discontinue a portion of its skin care line of products.
Distributor royalties and commissions as percentage of network
marketing sales remained steady at 37% of network marketing sales in the third
quarter of both 1999 and 1998. 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.
Interest expense increased from $132,000 in the third quarter of 1998
to $154,000 in the third quarter of 1999. This is the result of the increase in
the Company's long-term debt to finance equipment acquisitions and the increased
borrowings against the line of credit.
4. Year 2000 Issues
----------------
Most computer databases, as well as embedded microprocessors in
computer systems and industrial equipment, have been programmed to use a
two-digit number to represent the year. Computer programs that recognize a date
using "00" as the year 1900 rather than the year 2000 could result in errors or
system failures. Accordingly, all companies must analyze their systems and make
the necessary changes to ensure that automated processes will correctly
distinguish between years before and after the year 2000.
Based upon a recent assessment of its business, the Company does not
believe the Year 2000 issue will have a material adverse effect on its
operations. Based on testing of the Company's current computer hardware and
software systems the Company has determined that the vast majority of such
systems are Year 2000 compliant, and this result has been achieved without
material cost to the Company. The Company has identified some of its
telecommunication hardware and software that is not Year 2000 compliant and is
in the process of installing the necessary upgrades. The cost of these upgrades
will not be material. The Company has initiated communications with the
manufacturers of its manufacturing and warehouse equipment to ensure that this
equipment will be Year 2000 ready. Based on conversations with and evaluations
by these manufacturers, it is anticipated that no warehouse or manufacturing
equipment will need to be replaced. Consequently, no material costs will be
incurred to make any of the Company's manufacturing and warehouse equipment Year
2000 ready. The Company incurred no cost for the testing performed by the
manufacturers of this equipment.
Formal communications have commenced and are ongoing with all
significant suppliers and large customers of the Company, and will continue
during the balance of 1999 to determine the extent to which the Company may be
vulnerable to those third parties' failure to remediate their own
5
<PAGE>
potential Year 2000 problems. The Company has several suppliers of its raw
materials and should be able to obtain alternative sources of supply if these
suppliers experience Year 2000 problems. The Company has two major customers for
its manufacturing and packaging services and has received confirmation from
these customers that they have addressed their Year 2000 issues. The Company's
customers for its network marketing segment are typically individuals who will
have no Year 2000 exposure. The Company ships the majority of its products
through common carrier (primarily United Parcel Services) and has received
confirmation that these carriers have addressed their Year 2000 issues.
If the Company's most significant customers, or the suppliers of the
Company's necessary energy, telecommunications and transportation needs, fail to
provide the Company with the materials and services which are necessary to
produce, distribute and sell its products, such failure could have a material
adverse effect on the results of operations, liquidity and financial condition
of the Company. There can be no guarantee that the systems of these suppliers,
vendors and customers of the Company will be timely converted to Year 2000
compliance. Nor is there any guarantee that the Company would experience no
material adverse effects should any of the significant vendors, suppliers or
customers of the Company fail to remediate their potential Year 2000 problems.
It is impossible to provide accurate estimates of the material costs to
the Company should any of the significant vendors, suppliers or customers of the
Company fail to remediate their potential Year 2000 problems. It is anticipated
that such costs, if any, would be paid from the general revenues of the Company.
Given that, as a result of the Company's communications with the aforementioned
vendors, suppliers, and major customers, said parties have indicated that they
have addressed or are addressing their own Year 2000 issues, the Company
believes that the risk of increased costs due to these parties failure to
remediate their potential Year 2000 issues, is relatively low. The Company has
not budgeted for these potential costs. No Company projects have been deferred
or abandoned due to any expenditure related to obtaining Year 2000 compliance.
The Company has determined it has no exposure to contingencies related
to the Year 2000 for the products it sells.
The Company has no contingency plans in effect for the failure of any
of Company's significant suppliers, customers or vendors of energy,
telecommunications or transportation needs to become Year 2000 ready, nor does
the Company believe that such a plan is necessary. The Company has not obtained
and does not plan to obtain insurance to cover any of its potential Year 2000
exposure.
The cost of attaining Year 2000 compliance has not and will not be
material for the Company. It is anticipated that no warehouse or manufacturing
equipment will need to be replaced. The Company is currently assessing its other
office equipment for any Year 2000 issues. The Company will primarily utilize
internal resources to manage the Year 2000 issue.
The Company believes that its computer hardware and software will meet
its administrative needs in the United States and in its foreign subsidiaries in
the foreseeable future.
6
<PAGE>
Item 3. Quantitative and Qualitative Disclosure of Market Risk
------------------------------------------------------
The Company's earnings and cash flow are subject to fluctuations due to
changes in foreign currency rates as it has several foreign subsidiaries and
continues to explore expansion into other foreign countries. As a result,
exchange rate fluctuations may have an effect on its sales and the Company's
gross margins. Accounting practices require that the Company's results from
operations be converted to U.S. dollars for reporting purposes. Consequently,
the reported earnings of the Company in future periods may be significantly
affected by fluctuations in currency exchange rates, generally increasing with a
weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Products
manufactured by the Company for sale to the Company's foreign subsidiaries are
transacted in U.S. dollars. As the Company's foreign operations expand, its
operating results will be subject to the risks of exchange rate fluctuations and
the Company may not be able to accurately estimate the impact of such changes on
its future business, product pricing, results of operations or financial
condition.
The Company also is exposed to market risk in changes in interest rates
on its long-term debt arrangements and commodity prices in some of the raw
materials it purchases for its manufacturing needs. However, neither presents a
risk that would have a material effect on the Company's results of operations or
financial condition.
Part II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
In May, 1998, former sales/general manager of the Company's Canadian
subsidiary filed a lawsuit claiming unlawful termination and breach of contract.
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.
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.
7
<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, 1999 RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
-----------------------------------
Robert L. Montgomery, President,
Chief Executive Officer and
Principal Financial Officer
8
<PAGE>
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 December 31
1999 1998
------------ ------------
(unaudited) (see notes)
Assets
Current assets:
Cash and cash equivalents $ 1,610,358 $ 2,816,804
Accounts and notes receivable,
less allowances of
$3,100 in 1999 and $5,000 in 1998 1,260,324 777,443
Inventories
Finished goods 1,931,028 1,702,359
Raw materials 3,006,304 1,865,649
Sales aids and promotional materials 410,174 361,322
------------ ------------
Total inventories 5,347,506 3,929,330
Refundable income taxes 607,208 314,284
Prepaid expenses and other current assets 554,497 440,597
Deferred income taxes 79,960 79,269
------------ ------------
Total current assets 9,459,853 8,357,727
Other assets:
Goodwill, net of accumulated amortization
of $52,553 in 1999 and $13,000 in 1998 472,984 512,399
Other assets 1,001,017 703,623
------------ ------------
Total other assets 1,474,001 1,216,022
Property, plant and equipment:
Land 829,222 829,222
Building 8,338,821 8,201,744
Machinery & equipment 3,826,702 2,783,923
Office equipment 462,265 446,205
Computer equipment & software 1,801,791 1,676,372
Construction in progress -- 235,511
------------ ------------
15,258,801 14,172,977
Less: Accumulated depreciation (4,282,755) (3,493,754)
------------ ------------
Net property, plant and equipment 10,976,046 10,679,223
------------ ------------
Total assets $ 21,909,900 $ 20,252,972
============ ============
See notes to financial statements.
9
<PAGE>
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30 December 31
1999 1998
------------ ------------
(unaudited) (see notes)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses:
Trade accounts payable $ 4,147,329 $ 3,568,334
Distributors commissions payable 1,426,755 1,172,164
Sales taxes payable 186,419 221,377
Interest expense payable 29,894 27,851
Payroll and payroll taxes payable 194,332 114,906
Other accrued expenses 201,799 85,123
------------ ------------
Total accounts payable and accrued expenses 6,186,528 5,189,755
Income taxes payable 1,805 55,258
Borrowings under line of credit 1,711,948 313,825
Current maturities of long-term debt
and capital lease obligations 613,267 508,362
Unearned income 5,706 107,695
------------ ------------
Total current liabilities 8,519,254 6,174,895
Capital lease obligations,
less current maturities 343,449 373,455
Long-term debt, less current maturities 5,114,846 5,216,107
Other non-current liabilities 304,106 148,349
Stockholders' equity:
Common stock, no par value;
20,000,000 shares authorized;
9,619,102 shares outstanding
as of 9/30/99 and 9,653,502 shares
outstanding as of 12/31/98 9,178,645 9,179,764
Notes receivable-officers and directors (39,886) (44,746)
Retained deficit (1,158,574) (354,195)
Foreign currency translation adjustment (351,940) (440,657)
------------ ------------
Total stockholders' equity 7,628,245 8,340,166
------------ ------------
Total liabilities and stockholders' equity $ 21,909,900 $ 20,252,972
============ ============
See notes to financial statements.
10
<PAGE>
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales at suggested retail $ 21,949,007 $ 18,308,241 $ 69,437,840 $ 55,327,659
Less: distributor allowances on product purchases 4,982,390 5,729,439 15,813,749 18,477,538
------------ ------------ ------------ ------------
Net sales 16,966,617 12,578,802 53,624,091 36,850,121
Costs and expenses:
Cost of products sold 8,981,652 3,727,590 27,969,050 8,151,181
Distributor royalties and commissions 3,551,871 4,066,766 11,742,671 12,956,205
Selling, general and administrative 4,883,658 4,547,989 14,683,105 13,417,909
------------ ------------ ------------ ------------
Total costs and expenses 17,417,181 12,342,345 54,394,826 34,525,295
------------ ------------ ------------ ------------
Income/(loss) from operations (450,564) 236,457 (770,735) 2,324,826
Other income (expense):
Interest income 19,472 32,842 81,172 99,605
Interest expense (154,410) (132,380) (425,103) (372,628)
Other income/(expense) 21,399 (14,728) 65,779 (54,198)
------------ ------------ ------------ ------------
Income/(loss) before income taxes (564,103) 122,191 (1,048,887) 1,997,605
Provision/(benefit) for income taxes (213,910) 48,904 (398,577) 779,066
------------ ------------ ------------ ------------
Net income/(loss) ($ 350,193) $ 73,287 ($ 650,310) $ 1,218,539
============ ============ ============ ============
Earnings/(loss) per common share ($ 0.04) $ 0.01 ($ 0.07) $ 0.13
============ ============ ============ ============
Earnings/(loss) per common share - assuming dilution ($ 0.04) $ 0.01 ($ 0.07) $ 0.12
============ ============ ============ ============
</TABLE>
See notes to financial statements.
11
<PAGE>
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net income/(loss) ($ 650,310) $ 1,218,539
Adjustments to reconcile net income/(loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 819,877 557,173
Provision for losses on accounts receivable -- 7,000
Foreign currency translation (gain) loss (24,108) 106,705
(Increase) decrease in accounts and notes receivable (430,084) (12,220)
(Increase) decrease in inventories (1,385,238) (2,225,590)
(Increase) decrease in refundable income taxes (397,969) (394,068)
(Increase) decrease in prepaid expenses
and other current assets (102,723) (152,204)
(Increase) decrease in other assets (306,232) 958
Increase in accounts payable and accrued expenses 1,092,281 2,542,523
Increase (decrease) in income taxes payable 49,607 10,338
Increase (decrease) in unearned income (102,018) 78,655
----------- -----------
Net cash provided by (used in) operating activities (1,436,917) 1,737,809
Investing activities:
Purchase of property, plant and equipment (966,258) (1,370,165)
----------- -----------
Net cash used in investing activities (966,258) (1,370,165)
Financing activities:
Net borrowings under line of credit 1,398,123 --
Proceeds from long-term borrowings 300,000 471,486
Principal payments on long-term borrowings (311,094) (239,257)
Principal payments under capital lease obligations (119,555) (39,152)
Dividends paid (96,505) (240,963)
Proceeds from notes receivable assumed from issuance
of common stock from exercise of options 4,860 2,315
Purchase of treasury stock (58,682) --
----------- -----------
Net cash provided by financing
activities 1,117,147 (45,571)
Effect of exchange rate changes on cash
and cash equivalents 79,582 (213,734)
----------- -----------
Increase (decrease) in cash and cash
equivalents (1,206,446) 108,339
Cash and cash equivalents at beginning
of period 2,816,804 2,426,426
----------- -----------
Cash and cash equivalents at end of period $ 1,610,358 $ 2,534,765
=========== ===========
</TABLE>
See notes to financial statements
12
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1999
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, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999.
The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting priciples for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Registrant Company
and Subsidiaries' annual report on Form 10-K for the year ended
December 31, 1998.
Note 2-- Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three months ended September 30 Nine months ended September 30
1999 1998 1999 1998
------------------------------ ----------------------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share--net income/(loss) ($350,193) $73,287 ($650,310) $1,218,539
Denominator:
Denominator per basic earnings per
share--weighted average shares 9,649,000 9,643,000 9,649,000 9,643,000
Effect of dilutive securities:
Employee stock options and other warrants 117,000 568,000 117,000 568,000
------------------------------ ----------------------------
Denominator for diluted earnings per
share--adjusted weighted average shares 9,766,000 10,211,000 9,766,000 10,211,000
============================== ============================
Basic earnings/(loss) per share ($0.04) $0.01 ($0.07) $0.13
============================== ============================
Diluted earnings/(loss) per share ($0.04) $0.01 ($0.07) $0.12
============================== ============================
</TABLE>
Note 3-- Comprehensive Income
Total comprehensive income/(loss) was ($397,559) and ($561,593) for
the three months and nine months ended September 30, 1999,
respectively. For the three and nine months ended September 30, 1998,
comprehensive income/(loss) was ($9,025) and $1,027,684, respectively.
The Company's only component of other comprehensive income is the
foreign currency translation adjustment.
13
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Note 4-- Segment Information
<TABLE>
<CAPTION>
Three months ended Three months ended
September 30, 1999 September 30, 1998
------------------ ------------------
Network Manufacturing Network Manufacturing
marketing and packaging marketing and packaging
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net sales to external customers 9,729,566 7,237,051 10,936,232 1,642,570
Intersegment net sales -- 1,392,638 -- 1,626,509
Segment profit/(loss) 361,553 (432,945) 882,826 (227,402)
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1999 September 30, 1998
------------------ ------------------
Network Manufacturing Network Manufacturing
marketing and packaging marketing and packaging
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Net sales to external customers 31,056,509 22,567,582 34,877,448 1,972,673
Intersegment net sales -- 4,677,551 -- 5,445,162
Segment profit/(loss) 1,320,182 (977,980) 3,895,245 (410,767)
Segment assets 13,370,696 5,790,273 12,738,487 4,551,303
</TABLE>
A reconciliation of combined operating profit for the reportable
segments to consolidated income before income taxes is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
----------------------------- -------------------------------
<S> <C> <C> <C> <C>
Total profit for reportable segments (71,392) 655,424 342,202 3,484,478
Corporate expenses (379,172) (418,967) (1,112,937) (1,159,652)
Non operating - net 40,871 18,114 146,951 45,407
Interest expense (154,410) (132,380) (425,103) (372,628)
----------------------------- -------------------------------
Income before income taxes (564,103) 122,191 (1,048,887) 1,997,605
============================= ===============================
</TABLE>
Note 5-- Legal Proceedings
In May 1998, the former sales/general manager of the Company's
Canadian subsidiary filed lawsuit claiming unlawful termination and
breach of contract. 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 or
results of operations of the Company.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDING SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFRENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,610,358
<SECURITIES> 0
<RECEIVABLES> 1,263,324
<ALLOWANCES> 3,100
<INVENTORY> 5,347,506
<CURRENT-ASSETS> 9,459,853
<PP&E> 15,258,801
<DEPRECIATION> 4,282,755
<TOTAL-ASSETS> 21,909,900
<CURRENT-LIABILITIES> 6,186,528
<BONDS> 5,114,846
0
0
<COMMON> 9,178,645
<OTHER-SE> (1,550,400)
<TOTAL-LIABILITY-AND-EQUITY> 21,909,900
<SALES> 53,624,091
<TOTAL-REVENUES> 53,624,091
<CGS> 27,969,050
<TOTAL-COSTS> 39,711,721
<OTHER-EXPENSES> 14,617,326
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 343,931
<INCOME-PRETAX> (1,048,887)
<INCOME-TAX> (398,577)
<INCOME-CONTINUING> (650,310)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (650,310)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
