10-Q 1 d25794_10-q.txt QUARTERLY REPORT 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 March 31, 2001 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. APPLICABLE ONLY TO CORPORATE ISSUERS: COMMON STOCK 9,654,505 outstanding Shares as of March 31, 2001 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 March 31, 2001 and Balance Sheet as of December 31, 2000. 2. Interim Statements of Operations for the three month periods ending March 31, 2001 and March 31, 2000. 3. Interim Statements of Cash Flows for the three month periods ending March 31, 2001 and March 31, 2000. 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 Operation 1. Financial Condition Current assets of the Company decreased during the first quarter of 2001, to $8,216,000 from $9,424,000 as of December 31, 2000. Cash and cash equivalents remained relatively level at $1,217,000 as of March 31, 2001, as compared to $1,199,000 as of December 31, 2000. Accounts and notes receivable decreased by $829,000 to $1,738,000 as of March 31, 2001, as compared to $2,567,000 as of December 31, 2000. Inventory decreased by $362,000 to $4,168,000 as of March 31, 2001. The Company's accounts receivable and inventory decrease is primarily due to the reduction in the sales and production for the Company's manufacturing and packaging business. Finished goods inventory also declined for the network marketing operations, as improved sales in the first quarter of 2001, compared to the fourth quarter of 2000, helped reduce inventory levels. The Company purchased $31,000 of property, plant and equipment during the first quarter of 2001. Current liabilities decreased by $1,005,000 from $9,291,000 as of December 31, 2000 to $8,286,000 as of March 31, 2001. The primary component of the decrease was the reduction in balance due on the Company's line of credit. The amount drawn on the line of credit reduced from $1,918,000 as of December 31, 2000 to $728,000 as of March 31, 2001. Trade accounts payable decreased by $357,000 from $5,270,000 as of December 31, 2000 to $4,913,000 as of March 31, 2001. This decrease is related to the decrease in inventory, as discussed previously. Distributor commissions payable increased from $1,200,000 as of December 31, 2000 to 2 $1,717,000 as of March 31, 2001. This is the result of higher network marketing sales in March 2001, as compared to December 2000. Long-term debt and capital lease obligations decreased by $100,000 from $5,046,000 as of December 31, 2000 to $4,946,000 as of March 31, 2001. The Company incurred no additional long-term debt during the first quarter of 2001. Stockholders' equity decreased from $5,646,000 as of December 31, 2000 to $5,375,000 as of March 31, 2001, as the result of the net loss of the first quarter of 2001, coupled with the declining value of the currencies of most of the Company's key foreign subsidiaries. Equity declined by $127,000 as the result of the foreign currency translation adjustment at March 31, 2001 as compared to December 31, 2000. The Australian, New Zealand and Canadian dollars all weakened against the US dollar over the course of the first quarter of 2001. The Company's working capital balance has declined since December 31, 2000 to a working capital deficit of $70,000 as of March 31, 2001. The current ratio has also declined to 0.99 as of March 31, 2001. 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 $3,000,000. At March 31, 2001, the Company had utilized $728,000 of the line of credit, with an available balance of $887,000. Additionally, in March 2001, the Company obtained a modification agreement related to the term loan that financed the construction of the 1998 building expansion. The modification agreement effectively extended the maturity of the loan to March 2004, from March 2001. Management believes that the Company's internally generated funds together with the loan agreement will be sufficient to meet working capital requirements in 2001. 2. Results of Operations The Company had a net loss of $146,000, or $.02 per share basic and diluted, for the quarter ended March 31, 2001, compared to net income of $86,000 on a restated basis, or $.01 per share basic and diluted, for the same period in 2000. Overall net sales declined due to the continued decrease in the manufacturing and packaging business, but this was partially offset by an increase in network marketing net sales and improved gross margins. However, earnings were negatively impacted by an increase in selling, general and administrative expenses primarily caused by higher sales and marketing expenses. During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs. Previously, the Company recognized shipping and handling costs as a reduction to net sales. Effective with the adoption of Staff Accounting Bulletin No. 101 on October 1, 2000, the EITF requires shipping and handling costs to be included in cost of sales. The effect of adopting EITF 00-10 increased net sales and cost of products sold from previously reported amounts by $360,000 for the first quarter of 2000. Percentages shown below in the discussion on specific line items of the statement of operations have been recalculated for prior years based on the reclassification. 3 Net sales decreased to $14,062,000 in the first quarter of 2001 as compared to $15,448,000 in the prior year. The decrease was primarily due to the decrease in sales by the Company's manufacturing and packaging services segment. Sales in this portion of the business decreased to $1,894,000 in the first quarter of 2001, as compared to $4,517,000 in the prior year. Net sales in the network marketing segment increased to $12,168,000 in the first quarter of 2001, as compared to $10,931,000 in the first quarter of 2000. Network marketing sales in the United States improved by 7.7% to $10,437,000 in the first quarter of 2001, as compared to $9,692,000 in the first quarter of 2000. Additionally, sales in the Company's international subsidiaries increased overall. Led by the successful launch of the Company's newest market, the Philippines, international sales increased by 40% in the first quarter of 2001. International sales increased from $1,238,000 in the first quarter of 2000 to $1,731,000 in the first quarter of 2001. Net sales in the Philippines of $489,000 accounted for nearly all of the increase. A sales increase of 31% in Mexico was offset by declines in Australia, New Zealand, and the United Kingdom. Canadian operations showed a 4% increase in net sales. The Company also provides manufacturing and packaging services, including blending, processing and packaging food products in accordance with specifications provided by its customers. Net sales decreased to $1,894,000 in the first quarter of 2001 from $4,517,000 in the prior year. This decrease continues the trend of the Company's decision to place less emphasis on this business. 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 first quarter of 2001, cost of goods sold for these sales were 98% of net sales. Even under optimal operating efficiencies, the gross margin for unrelated customers is substantially less than margins obtained in the sales of the network marketing products. But, the Company has eliminated its unprofitable business in this segment and has taken steps to improve margins with its remaining customer. Cost of products sold for the network marketing segment as a percentage of net sales improved from 19.7% in the first quarter of 2000 to 18.8% in the first quarter of 2001. Part of this improvement is due to a change in the distributor compensation plan, effective September 1, 2000. This reduced the maximum discount allowed to distributors from 45% to 40%. Distributor royalties and commissions as a percentage of network marketing sales increased from 35% in the first quarter of 2000 to 38% in the first quarter of 2001. As part of the change in the distributor compensation plan discussed above, total royalties paid to Master Affiliates increased from 18% to 23% of retail sales. These expenses are governed by the distributor agreements and are directly related to the level of sales. Selling, general and administrative (SGA) expenses increased by $568,000 in the first quarter of 2001 as compared to the first quarter of 2000. Approximately $190,000 of the increase represents the SGA expenses of the new subsidiary in the Philippines, which did not exist in the first quarter of 2000. Higher conference, promotional trip, and other sales and marketing expenses in the United States and Mexico account for a majority of the increase. 4 Interest expense decreased from $168,000 in the first quarter of 2000 to $157,000 in the first quarter of 2001. This decrease is due to less reliance on the line of credit, along with declining interest rates. The Company did not recognize an income tax benefit for the loss before income taxes in the first quarter of 2001. The Company has exhausted all carryback potential on its net operating losses and, as a result, the benefit has been offset by a valuation allowance, until such time the Company has taxable income. 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 2001 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 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 5 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 Not applicable. 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. 6 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: May 15, 2001 RELIV' INTERNATIONAL, INC. By: /s/ Robert L. Montgomery ----------------------------------- Robert L. Montgomery, President, Chief Executive Officer and Principal Financial Officer 7 Reliv International, Inc. and Subsidiaries Consolidated Balance Sheets
March 31 December 31 2001 2000 --------------------- --------------------- (unaudited) (see notes) Assets Current assets: Cash and cash equivalents $ 1,217,270 $ 1,198,682 Accounts and notes receivable, less allowances of $4,000 in 2001 and $5,000 in 2000 1,737,733 2,566,982 Note receivable from officer 59,250 59,250 Inventories Finished goods 1,886,145 2,584,895 Raw materials 1,874,966 1,459,960 Sales aids and promotional materials 406,682 484,936 ------------ ------------ Total inventories 4,167,793 4,529,791 Refundable income taxes 465,726 663,735 Prepaid expenses and other current assets 484,915 322,131 Deferred income taxes 83,584 83,174 ------------ ------------ Total current assets 8,216,271 9,423,745 Other assets 827,627 849,691 Property, plant and equipment: Land 829,222 829,222 Building 8,402,143 8,399,277 Machinery & equipment 3,997,832 3,984,971 Office equipment 486,926 494,266 Computer equipment & software 1,961,434 1,961,969 ------------ ------------ 15,677,557 15,669,705 Less: Accumulated depreciation (5,720,760) (5,548,026) ------------ ------------ Net property, plant and equipment 9,956,797 10,121,679 ------------ ------------ Total assets $ 19,000,695 $ 20,395,115 ============ ============
See notes to financial statements. Reliv International, Inc. and Subsidiaries Consolidated Balance Sheets
March 31 December 31 2001 2000 --------------- ------------- (unaudited) (see notes) Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses: Trade accounts payable $ 4,913,361 $ 5,269,709 Distributors commissions payable 1,717,082 1,199,522 Sales taxes payable 253,105 171,639 Interest expense payable 71,177 65,478 Payroll and payroll taxes payable 147,420 148,573 Other accrued expenses 12,278 9,494 ------------ ------------ Total accounts payable and accrued expenses 7,114,423 6,864,415 Borrowings under line of credit 727,525 1,918,080 Current maturities of long-term debt 280,479 332,466 Current maturities of capital lease obligations 164,022 176,094 ------------ ------------ Total current liabilities 8,286,449 9,291,055 Capital lease obligations, less current maturities 101,599 143,900 Long-term debt, less current maturities 4,843,988 4,901,788 Other non-current liabilities 393,587 412,610 Stockholders' equity: Preferred stock, par value $.001 per share; 3,000,000 shares authorized; none issued and outstanding -- -- Common stock, par value $.001 per share; 20,000,000 authorized; 9,654,505 shares issued and outstanding as of 3/31/2001 and 12/31/2000 9,655 9,655 Additional paid-in capital 9,075,146 9,074,756 Notes receivable-officers and directors (24,851) (26,650) Accumulated deficit (2,933,906) (2,787,725) Accumulated other comprehensive loss: Foreign currency translation adjustment (750,972) (624,274) ------------ ------------ Total stockholders' equity 5,375,072 5,645,762 ------------ ------------ Total liabilities and stockholders' equity $ 19,000,695 $ 20,395,115 ============ ============
See notes to financial statements. Reliv International, Inc. and Subsidiaries Consolidated Statements of Operations
Three months ended March 31 2001 2000 ----------------- -------------- (unaudited) (unaudited) Sales at suggested retail $19,469,870 $21,227,123 Less: distributor allowances on product purchases 5,408,301 5,779,009 ------------ ------------ Net sales 14,061,569 15,448,114 Costs and expenses: Cost of products sold 4,152,821 6,616,072 Distributor royalties and commissions 4,650,632 3,832,424 Selling, general and administrative 5,254,005 4,685,541 ------------ ------------ Total costs and expenses 14,057,458 15,134,037 ------------ ------------ Income from operations 4,111 314,077 Other income (expense): Interest income 10,186 13,538 Interest expense (157,329) (167,670) Other income/(expense) (3,149) (17,853) ------------ ------------ (Loss) income before income taxes (146,181) 142,092 Provision for income taxes 0 56,537 ------------ ------------ Net (loss)/ income ($146,181) $85,555 ============ ============ (Loss)/earnings per common share ($0.02) $0.01 ============ ============ (Loss)/earnings per common share - assuming dilution ($0.02) $0.01 ============ ============
See notes to financial statements. Reliv International, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31 2001 2000 ------------- ------------ Operating activities: Net (loss) income ($146,181) $85,555 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation 192,636 264,437 Amortization of goodwill -- 13,138 Foreign currency translation (gain) loss (7,027) 15,410 (Increase) decrease in accounts and notes receivable 833,569 (548,962) (Increase) decrease in inventories 315,982 767,132 (Increase) decrease in refundable income taxes 197,142 -- (Increase) decrease in prepaid expenses and other current assets (165,609) (72,814) (Increase) decrease in other assets 20,385 (162,135) Increase (decrease) in accounts payable and accrued expenses 255,733 (390,480) Increase (decrease) in income taxes payable -- 65,058 ----------- ----------- Net cash provided by operating activities 1,496,630 36,339 Investing activities: Purchase of property, plant and equipment (31,251) (55,212) Repayment of loans by officers and directors 1,799 31,694 ----------- ----------- Net cash used in investing activities (29,452) (23,518) Financing activities: Net repayments under line of credit (1,190,555) (106,557) Principal payments on long-term borrowings (109,787) (112,441) Principal payments under capital lease obligations (54,372) (42,043) Proceeds from warrants exercised 390 -- ----------- ----------- Net cash used in financing activities (1,354,324) (261,041) Effect of exchange rate changes on cash and cash equivalents (94,266) (103,949) ----------- ----------- Increase (decrease) in cash and cash equivalents 18,588 (352,169) Cash and cash equivalents at beginning of period 1,198,682 1,531,700 ----------- ----------- Cash and cash equivalents at end of period $1,217,270 $1,179,531 =========== ===========
See notes to financial statements Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) March 31, 2001 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 three-month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The balance sheet at December 31, 2000 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 principles 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, 2000. Note 2-- Shipping and Handling Costs During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs. Previously, the Company recognized shipping and handling costs as a reduction to net sales. Effective with the adoption of Staff Accounting Bulletin No. 101 on October 1, 2000, the EITF requires shipping and handling costs to be included in cost of sales. The effect of adopting EITF 00-10 increased net sales and cost of products sold from previously reported amounts by $360,000 in the first quarter of 2000. Note 3-- Earnings per Share The following table sets forth the computation of basic and diluted earnings per share:
Three months ended March 31 2001 2000 ------------------------------ Numerator: Numerator for basic and diluted earnings per share--net (loss) income ($146,181) $85,555 Denominator: Denominator per basic earnings per share--weighted average shares 9,655,000 9,551,000 Effect of dilutive securities: Employee stock options and other warrants -- 385,000 ------------------------------ Denominator for diluted earnings per share--adjusted weighted average shares 9,655,000 9,936,000 ============================== Basic (loss) earnings per share ($0.02) $0.01 ============================== Diluted (loss) earnings per share ($0.02) $0.01 ==============================
Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) Note 4-- Comprehensive Income Total comprehensive loss was $272,879 for the three months ended March 31, 2001 and $19,760 for the three months ended March 31, 2000. The Company's only component of other comprehensive income is the foreign currency translation adjustment. Note 5-- Segment Information
Three months ended Three months ended March 31, 2001 March 31, 2000 -------------- -------------- Network Manufacturing Network Manufacturing marketing and packaging marketing and packaging --------------------------------- ---------------------------------- Net sales to external customers 12,167,597 1,893,972 10,930,717 4,517,397 Intersegment net sales -- 1,690,753 -- 1,549,927 Segment profit/(loss) 686,486 (274,538) 832,095 (145,709) Segment assets 12,694,948 5,088,477 13,968,328 5,009,409
A reconciliation of combined operating profit for the reportable segments to consolidated (loss) income before income taxes is as follows: Three months ended March 31 2001 2000 -------------------------- Total profit for reportable segments 411,948 686,386 Corporate expenses (407,837) (372,309) Non operating - net 7,037 (4,315) Interest expense (157,329) (167,670) -------------------------- (Loss) income before income taxes (146,181) 142,092 ==========================