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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number
1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Illinois 371172197
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri 63006
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(Address of principal executive offices) (Zip Code)
(314) 537-9715
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Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
Name of each exchange
Title of Class on which registered:
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Common Stock, without par value NASDAQ National Market tier
of The NASDAQ Stock Market
Indicate by check mark whether the Registrant (1) 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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ___X___ Yes _______ No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated in Part III of the Form 10-K or any amendment to the
Form 10-K. [ ]
Based upon the closing price of $2.063 per share of Registrant's Common
Stock as reported on NASDAQ National Market tier of The NASDAQ Stock Market at
March 15, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was then approximately $12,319,143.
(Determination of stock ownership by non-affiliates was made solely for the
purpose of responding to the requirements of the Form and the Registrant is not
bound by this determination for any other purpose.)
The number of shares outstanding of the Registrant's Common Stock as of
March 15, 1999, was 9,650,502 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders to be filed with the Commission within 120 days of the end of
Registrant's last fiscal year is incorporated by reference into Part III.
PART I
Item No. 1 - Business
General
Reliv' International, Inc. (the "Company") was incorporated in Illinois
on February 11, 1985, under the name American Life Investors, Inc. The name of
the Company was changed to its current name on January 20, 1992. The Company
maintains its principal executive offices at 136 Chesterfield Industrial
Boulevard, Chesterfield, Missouri 63006.
The Company produces a line of food products including nutritional
supplements, diet management products, functional foods, a line of granola bars
and a sports drink mix. Functional foods are products designed to influence
specific functions of the body. The Company also distributes a line of premium
skin care products. These products are sold by subsidiaries of the Company to a
sales force of independent distributors who sell products directly to consumers.
The Company and its subsidiaries sell products to distributors throughout the
United States and in Australia, Canada, New Zealand, Mexico and the United
Kingdom.
The Company has two wholly-owned subsidiaries, Reliv', Inc. ("Reliv'")
and Reliv' World Corporation ("Reliv' World"). Reliv' World has five
subsidiaries - Reliv' Australia, Reliv' Canada, Reliv' New Zealand, Reliv'
Mexico and Reliv' Europe.
Reliv' was organized as an Illinois corporation on May 24, 1988, as a
wholly-owned subsidiary of the Company, and began selling nutritional supplement
products in October, 1988, in the United States.
In Australia, Canada, New Zealand, Mexico and the United Kingdom, the
Company's products are sold through Reliv' World and its subsidiaries in each of
such countries. Reliv' World was organized as an Illinois corporation on March
30, 1992, as a wholly-owned subsidiary of Reliv'. Reliv' World was organized to
conduct the foreign sales operations of the Company and to own foreign sales
operations and subsidiaries. On July 1, 1992, Reliv' declared a dividend of all
of the stock of Reliv' World and distributed all of such stock to its sole
shareholder, the Company.
In February, 1991, Reliv' entered into a joint venture agreement with
an Australian corporation and the joint venture began to market, sell and
distribute Reliv' products in Australia in May, 1991. Reliv' Australia Pty, Ltd.
("Reliv' Australia"), a wholly-owned subsidiary of Reliv' World, entered into an
agreement to purchase the joint venture interest of the Australian corporation.
Reliv' Australia also entered into an agreement with the three shareholders of
the Australian corporation under which a partnership of such persons, as a
distributor of Reliv' Australia, is to receive, for a period of 10 years from
March 1, 1992, 2 percent of sales in Australia and New Zealand (defined as the
designated retail selling price of all products, on which commissions are
payable to distributors), up to approximately $10 million (AUS) in 1992, and $12
million (AUS) in
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all subsequent years during the term, and 3 percent of sales that exceed those
figures. Since March 1, 1992, the business of the Company in Australia and sales
of the Company's products there has been conducted by Reliv' Australia.
During April, 1992, Reliv' New Zealand Limited ("Reliv' New Zealand")
was organized as a New Zealand company and as a wholly-owned subsidiary of
Reliv' World (except for nominal shares held by an officer). In June, 1992,
Reliv' New Zealand began selling the Company's products through independent
distributors in New Zealand.
On June 9, 1992, Reliv' Canada, Ltd. ("Reliv' Canada") was organized as
an Ontario, Canada corporation and as a wholly-owned subsidiary of Reliv' World.
Reliv' Canada commenced operations during October, 1992, and began selling the
Company's products to distributors in Canada in November, 1992. On December 31,
1995, Reliv' Canada was converted to a Nova Scotia, Canada unlimited liability
company, wholly-owned by Reliv' World (except for one percent owned by the
Company), under the name Reliv' Canada Company.
On June 28, 1993, Reliv' Mexico S.A. de C.V. ("Reliv' Mexico") was
organized as a Mexican corporation and as a wholly-owned subsidiary of Reliv'
World (except for one share owned by the Company). Reliv' Mexico commenced
operations in June, 1993, and began selling the Company's products to
distributors in Mexico in August, 1993. On December 20, 1994, Reliv' Mexico was
converted to a Mexican limited liability company under the name Reliv' Mexico,
S. de R.L. de C.V.
On July 1, 1995, Reliv' UK began the marketing and sale of the
Company's products in the United Kingdom in accordance with the Reliv' system
under a license and distributor arrangement with the Company. Pursuant to the
terms of the arrangement, Reliv' UK purchased all of its requirements for
products from the Company and paid Reliv' World a royalty on products sold. On
October 1, 1998, Reliv' Europe, Inc., a wholly-owned subsidiary of Reliv' World,
purchased all of Reliv' U.K.'s capital stock in return for a 3% equity ownership
in Reliv' Europe. The former owner of Reliv' U.K. forgave approximately $435,000
in advances to Reliv' U.K. Under the purchase arrangement, the former owner will
receive monthly payments equal to 1.5% of Reliv' Europe's retail sales for a
period of ten years.
Principal Products
Through its subsidiaries, the Company markets and sells a line of
related products including nutritional supplements, weight control products,
functional foods, granola bars, sports drink mixes and a premium skin care line.
The nutritional supplements include Reliv' NOW(R) and Reliv'
Classic(R). Both products are designed to provide a balanced nutritional
supplement for an individual's diet and contain a variety of vitamins and
minerals, soy and other protein sources and various herbs. The products are in
powdered form to be mixed with juice or other beverages. The Reliv' Classic
formula has a U.S.
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patent and the Reliv' NOW formula is a no-yeast derivative of the Reliv' Classic
formula. Reliv' NOW is available with all natural flavoring or in the original
formula.
Reliv' Ultrim-Plus(R) is designed as a meal replacement (for a maximum
of two meals per day) in a weight loss program. The product incorporates the
core formulation of Reliv' NOW, including vitamins, minerals, proteins and
herbs, as well as additional protein and nutrient sources. Reliv' Ultrim-Plus is
available in three flavors - vanilla, chocolate and strawberry. It is also
available in aspartame-free vanilla. The product is in powdered form for mixture
with water or milk.
Reliv' Cellebrate(R) is a patented weight loss aid designed to suppress
appetite, curb the storage of body fat, and facilitate the body's fat burning
process. Reliv' Cellebrate is in powdered form and is recommended to be used
alone or with Reliv' Ultrim Plus meal replacement.
Reliv' Celleboost(R) is also a weight loss aid designed to suppress
appetite and reduce body fat. Reliv' Celleboost is in capsule form and is
recommended to supplement Reliv' Cellebrate, Reliv' Ultrim-Plus or to be used
alone. Reliv' Celleboost was introduced in January, 1996.
Reliv' Ultra Bar(R) is a line of granola bars containing a mixture of
grains and nuts which use the core formulation of Reliv' NOW vitamins, minerals,
proteins and herbs. Flavors include yogurt, chocolate and raspberry carob. The
bars are a snack food and nutritional supplement and are used with Reliv'
Ultrim-Plus as a meal replacement in a weight loss program.
Reliv' Innergize!(R) is a patented powdered sports drink containing a
mixture of vitamins and minerals. Reliv' Innergize is available in lemon, orange
and cool punch flavors.
Reliv' Fibrestore(R) is a patented nutritional supplement containing
fiber, vitamins, minerals and herbs. The product is in powdered form for mixture
with water or juice. A modified version of the Reliv' Fibrestore formula is
marketed in Canada under the name Herbal Harmony in compliance with that
country's nutritional regulations.
Reliv' Arthaffect(R) is a nutritional supplement and functional food
containing Arthred(TM), a patented form of hydrolyzed collagen protein, which is
clinically reported to nutritionally support healthy joint function. The product
is in powdered form for mixture with water, milk or juice.
Reliv' Arthaffect was introduced in October, 1996.
Reliv' Getabetterbody(R) Weight Loss System is a weight loss system kit
containing Reliv' Ultrim Plus, Reliv' Cellebrate and Reliv' Celleboost together
with product information and other tools to be used in a weight loss program.
Reliv' ProVantage(TM) is a nutritional supplement containing soy,
designed to enhance athletic performance. The product is also of benefit to
dieters and others wanting to increase their soy intake. The product is in
powdered form for mixture with water or juice. Reliv' ProVantage was introduced
in October, 1997.
4
Reliv' Healthy Pantry(TM) premium entrees are a line of soy-based
functional foods. The meals are designed to offer the advantages of soy in low
fat, easy to prepare meals. The line includes Pasta Prima Vera, Hearty Chili,
Hearty Burger and Ala King dinner. The meals are in dried form and can be
prepared quickly with a minimum of additional ingredients. Reliv' Healthy Pantry
was introduced in May, 1997.
In November, 1998, the Company introduced Reliv' SoySentials(TM), a
nutritional supplement containing soy as well as other vitamins, minerals and
herbs designed for use by women. The product is in powdered form for mixture
with water or juice.
The Company also markets a line of skin care products which is based on
compounds found only in the avocado. The products are designed to be used
individually or in combination with each other. The product line includes: (i)
Reliv' Face and Body Bar, a mild face and body soap; (ii) Reliv' Pathway(R), a
skin cleanser and primer which contains a variety of avocado based ingredients;
(iii) Reliv' Reavo(R), a skin care cream designed to reduce the appearance of
aging in the skin caused by natural and environmental causes; and (iv) Reliv'
R.P. 1.5(R), a skin care cream having the active ingredient retinyl palmitate is
designed to reduce the appearance of aging caused by environmental causes such
as exposure to the sun. The Company's skin care line also includes toners,
moisturizers, sunless tanning lotions and related items.
The Company conducts ongoing research and development on its product
line and intends to introduce additional product items. See "Research and
Development."
Patents and Trademarks
The Company has obtained U.S. patents on the formulations of Reliv'
Innergize!, Reliv' Fibrestore and Reliv' Cellebrate.
The Reliv' Classic formula has a U.S. Patent. Reliv' NOW is a trade
secret formulation which is a derivative of the Reliv' Classic formulation. The
core mixture of Reliv' NOW is incorporated in Reliv' Ultrim-Plus and the Reliv'
Ultra Bars. These products are manufactured and sold by the Company under an
Exclusive License Agreement dated December 1, 1991 ("License Agreement"). The
License Agreement is worldwide in scope and continues through the life of the
patent. Pursuant to the License Agreement, the Company is obligated to pay the
owner of the patent and the developer of the formulations, Dr. Theodore P.
Kalogris, a royalty of 5 percent of the revenues from the sale of products
containing the licensed formulas, with a minimum $10,000 and maximum $22,000
monthly royalty. The Company's obligation to pay the royalty payments will
terminate on the later of (i) 10 years from the date of the License Agreement or
(ii) the death of Dr. Kalogris, and the License Agreement will be deemed to be
paid in full at that time.
The principal ingredient of Reliv' Arthaffect is the subject of an
issued U.S. patent. Under an agreement dated November 6, 1996, Traco Labs, Inc.
("Traco"), exclusive licensee of the patent rights, sublicensed the rights to
sell the product to the Company ("Traco Agreement"). The license
5
is exclusive for direct sales in certain sales areas and is for a term ending
upon the later of (i) the termination of Traco's rights to market the product or
(ii) December 31, 2014. The Traco Agreement provides that the Company will
purchase its requirements of the product from Traco, and the exclusivity of the
license is contingent on minimum purchases of the product being made by the
Company.
The principal ingredient of Reliv' Reavo is the subject of an issued
U.S. patent. On July 1, 1995, Avogen, Inc. ("Avogen") granted to the Company a
license under such patent and other proprietary rights relating to the skin care
line of products, to purchase such products from or through Avogen and to sell
and distribute the products (the "Avogen Agreement"). On April 25, 1997, the
Avogen Agreement was amended. The Avogen Agreement is worldwide in scope and
continues through the later of the last to expire of the patents subject to the
Avogen Agreement or December 31, 2014. Pursuant to the Avogen Agreement, as
amended, the Company was granted an exclusive license to market its current line
of skin care products subject to the Agreement, and is obligated to pay Avogen
royalties which vary depending on the product sold.
Trademark registrations for "Reliv'" and for the many of the Company's
product names are either issued or pending in the U.S. Patent and Trademark
Office. Trademark registrations for selected marks have been issued or applied
for in Australia, New Zealand, Canada, Mexico, the United Kingdom and several
other foreign countries. The Company considers its trademarks and tradenames to
be an important asset of its business.
Sales and Marketing
The Company sells its products to a network of independent contractors,
designated as "distributors", who in turn sell the products directly to
consumers. The Company's products are marketed and sold to distributors in the
United States, Australia, Canada, New Zealand, Mexico and the United Kingdom
through a subsidiary in each country. The marketing efforts of the Company and
these subsidiaries are focused on the development, training and support of this
network of independent distributors. The Company, through these subsidiaries,
supports an active training program for distributors in which Company
representatives and experienced distributors lead group training sessions. The
Company and these subsidiaries also create and provide distributors with
manuals, brochures and other promotional, training and informational
publications. Periodically, each subsidiary sponsors distributor meetings at
which Company representatives provide training and information concerning the
Company's products. Company subsidiaries also sponsor group telephone conference
calls for training and promotional activities.
Distributors consist principally of individuals, although a limited
number of distributors are corporations or partnerships. New distributors are
sponsored by existing distributors. A new distributor is required to complete a
distributor application and, in most areas, to purchase a package of distributor
materials (for $39.95 in the United States) consisting of a distributor manual,
business forms and promotional materials. Distributors purchase products from
Company subsidiaries or from other distributors for resale or consumption by the
distributor or his or her family.
6
In each country in which the Company conducts business, distributors
operate under a uniform distributor system which compensates distributors at
varying levels based on sales volumes. Initially, a distributor is designated a
Retail Distributor and is entitled to purchase products from a Company
subsidiary or other distributors at a discount of 25 percent from the Company's
suggested retail price. A distributor is promoted to higher levels in the system
by increasing his or her sales of the Company's products, directly or through
other distributors sponsored in the distributor's sales group, and by achieving
designated sales volumes. These higher ranks of distributor are designated in
order as Affiliate, Key Affiliate, Senior Affiliate and Master Affiliate. At
each higher level, a distributor is entitled to purchase products at an
increasingly higher discount; a Master Affiliate receives a 45 percent discount.
Distributors receive retail profits equal to the difference between the
price at which they sell the product to customers and the discounted price they
paid for the product. Distributors also earn wholesale commissions on products
purchased by other distributors in the distributor's sponsored group equal to
the difference between the price at which the distributor is entitled to
purchase product at and the price at which downline distributors purchase
product. The Company pays a Master Affiliate a commission with respect to
products purchased directly from the Company by Retail Distributors, Affiliates,
Key Affiliates or Senior Affiliates directly sponsored by them or who are in
their personally sponsored group (i.e., individuals sponsored by the Master
Affiliate's distributors, directly or indirectly). The commission is equal to
the difference between the prices at which such distributors were entitled to
purchase products and the 45 percent discounted price available to Master
Affiliates. Senior Affiliates, Key Affiliates and Affiliates are entitled to
receive from their Master Affiliate a portion of the commission paid to the
Master Affiliate, based upon the purchases of products from Company subsidiaries
by distributors sponsored by them or by distributors in their personal group.
Master Affiliates are also entitled to receive additional compensation
payments of two percent to five percent of the retail sales volume of product
purchased from Company subsidiaries by Master Affiliates (and their personal
groups) whom they have sponsored, and for up to five levels of sponsorship. To
qualify for these additional compensation payments, Master Affiliates are
required to maintain certain monthly sales volumes and document specified levels
of retail sales. Master Affiliates who sponsor other distributors to the level
of Master Affiliate are entitled to become part of the Director Program, and
attain higher positions in the program based on the size of their additional
compensation payments. The levels of Director, in order, are Director, Key
Director, Senior Director, Master Director and Presidential Director.
Distributors reaching these levels receive pins and/or rings recognizing their
achievement and recognition in Company publications and at Company sponsored
activities.
In mid-1996, the Company introduced the Star Director Program, which
allows Directors to receive increased additional compensation payments based on
the number of Master Affiliates they have sponsored since the program commenced.
Directors are entitled to receive an additional one percent to three percent of
additional compensation on the retail sales volume of Master Affiliates in their
sponsorship.
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The Company also sponsors an Ambassador Program. To qualify as an
Ambassador a distributor must hold the level of Master Director and must assist
personally sponsored Master Affiliates in meeting specified levels of additional
compensation payments. The levels of Ambassador are, in order, Ambassador,
Bronze Ambassador, Silver Ambassador, Gold Ambassador and Platinum Ambassador.
As higher levels are reached, Ambassadors are entitled to increased percentages
of the retail sales volume of Master Affiliates below them through five levels
of sponsorship, and at the two highest levels, a percentage of the sixth level
of sponsorship below their personally sponsored Master Affiliates. Ambassadors
are also entitled, depending on the level, to additional benefits, such as
participation in Company sponsored events, paid hotel rooms at conventions,
health insurance and car allowances. Periodically, a group of high level
Ambassadors meet with Company executives in the "Reliv Inner Circle" to exchange
ideas on new programs, products and marketing opportunities.
The Company's Direct Select(sm) program is available in the United
States whereby distributors and their retail customers may order product in less
than case lots directly from the Company by phone. An automatic monthly reorder
program is also available. Product is shipped directly to the customer and
distributors earn a commission on Direct Select sales made to their customers.
Company subsidiaries also provide a variety of additional incentives or
bonuses to the most productive distributors.
As of December 31, 1998, 36,884 persons or entities were registered as
distributors of Company subsidiaries of which 5,198 were Master Affiliates. This
is in comparison to the December 31, 1997 totals of 37,826 distributors of which
4,374 were Master Affiliates. The number of registered distributors and Master
Affiliates in each country in which Company subsidiaries operate is as follows:
Distributors Master Affiliates
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United States 29,169 4,123
Australia 3,144 286
New Zealand 1,047 111
Canada 971 402
Mexico 1,312 226
United Kingdom 1,241 50
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Not all persons registered as distributors of Company subsidiaries are
active. Reliv' requires that persons wishing to continue as distributors renew
their distributorship annually by the payment of a fee ($20 in the United
States); the number of distributors shown in the preceding table reflects
persons who have become distributors within the past 12 months and those who
renewed their distributorship during 1998.
The Company recognizes that its sales growth is based upon the
continued development of its independent distributor force and strives to
maintain an active and motivated distributor network through a combination of
quality products, discounts, commissions and bonus payments, sales conventions
and training, personal recognition and a variety of publications and promotional
materials.
The Company recognizes that businesses in the network marketing
industry risk the possibility that a portion of sales made to distributors may
not be consumed or sold to consumers and instead, may remain as inventory in the
distributors' possession. The Company's distributor organization and
compensation system is designed and intended to promote the sale of the
Company's products to consumers by distributors. Sales training and promotional
efforts emphasize that intention. To that end, and to comply with applicable
governmental regulations of multilevel selling organizations, the Company and
each subsidiary have established specific programs and requirements for
distributors including (i) monitoring by the Company of purchases by
distributors to identify potentially excessive individual purchases, (ii)
requiring that distributors certify to a specified amount of retail sales to
receive commissions, and (iii) requiring that distributors certify the sale of
at least 70 percent of previous purchases prior to the purchase of additional
amounts of product. The Direct Select program, as described above, further
promotes sales of the Company's products to consumers. Distributors are not
required at any time to purchase product, although Master Affiliates are
required to maintain certain minimum sales levels in their personal groups to
continue receiving royalty compensation payments.
Each subsidiary maintains a policy that unused product may be returned
by customers to the selling distributor or the subsidiary or licensee for a full
refund within 30 days after purchase. Each subsidiary also maintains a policy
that any distributor who terminates his distributorship may return resalable
product for a refund of 90 percent of the purchase price less any discounts or
commissions received relating to the purchase of the products.
The Company has established a suggested retail price for each of the
Company's products in each country in which the Company conducts business, but
distributors are free to determine the price at which they will sell the
Company's products. Distributors are not assigned territories and there are no
restrictions on marketing areas for distributors.
In the United States, the Company's products are warehoused and shipped
by common carrier to distributors. A facility in Chesterfield, Missouri serves
the east and central parts of the country and the Company utilizes a public
warehouse facility in Las Vegas, Nevada to supply the West Coast. See "Item No.
2 - Properties". Products are also warehoused in, and shipped to local
distributors from: Sydney, Australia; Auckland, New Zealand; Toronto, Canada;
Mexico City,
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Mexico; and London, England. Each subsidiary of the Company maintains an office
and personnel to receive, record and fill orders from distributors. Distributors
order product from Company subsidiaries in case lots and pay for the goods prior
to shipment. In general, state or local governmental sales taxes are collected
by Company subsidiaries for taxing authorities.
Manufacturing and Product Sources
The Company established a manufacturing line at its facility in
Chesterfield, Missouri and had begun manufacture of its nutritional products in
early 1993. Shortly after manufacturing commenced, the facility was flooded in
July 1993, as a result of a break in a levee on the Missouri River. The Company
initiated the return of manufacturing to its Chesterfield facility in mid-1995
and currently manufactures all of its products (except granola bars and skin
care products) at this facility. The Company expanded its Chesterfield facility
in 1997. See "Item No. 2 - Properties".
In 1996, the Company received approval from the Australian Therapeutic
Goods Authority ("TGA") to manufacture products sold in Australia at its
Chesterfield plant and currently manufactures all of Australia's requirements of
nutritional products at its Chesterfield facility. The certification of the
Company's Chesterfield site by the Australian TGA, also satisfied Canadian
manufacturing requirements and the Company manufactures substantially all of the
nutritional products sold in Canada. The Company has not experienced any
difficulty in obtaining supplies of raw materials for its nutritional products
and does not believe it will encounter any such difficulty in the future.
The Company's granola bars are manufactured by contract manufacturers,
predominantly located in the United States, who produce the products in
accordance with formulas provided by the Company, subject to quality control
requirements and inspections by representatives of the Company. During 1998, the
Company's line of skin care products was supplied to it pursuant to the Avogen
Agreement and was purchased from Avogen and various contract manufacturers.
Arthred(TM), the principal ingredient of Reliv' Arthaffect, is supplied to the
Company by Traco. The Company has had no difficulty in obtaining contract
manufacturing and there has been no material effect on the timely supply of
goods.
Research and Development
At its Chesterfield facility, the Company conducts research, product
development and formulation, testing and quality control, all relating to food
products. Research and development costs were $319,000 in 1998, $286,000 in 1997
and $289,000 in 1996.
Employees
As of December 31, 1998, the Company and all subsidiaries had
approximately 228 full-time employees compared with 162 such employees at the
end of 1997. This resulted from an increase in sales, marketing and distribution
personnel to support increased network maketing sales and an increase in
manufacturing and warehouse employees as a result of an increase in the contract
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manufacturing business segment. In March, 1998, the Company and the local
Teamsters Union ratified an agreement covering the Company's manufacturing and
warehouse employees. The Company believes that its relationship with its
employees is satisfactory.
Product Regulation
The formulation, labeling and advertising or promotion of the Company's
products are subject to regulation by the Federal Food and Drug Administration
(FDA) which regulates the Company's products under the Federal Food, Drug and
Cosmetic Act (the "FDCA"), the Federal Trade Commission (FTC) and various
agencies of the states or countries into which the Company's products are
shipped or sold. FDA regulations include requirements and limitations with
respect to the labeling of the Company's food products and also with respect to
the formulation of those products. The skin care products sold by the Company
are also subject to FDA regulations with respect to formulation and marketing of
cosmetics. FDA regulations also limit and control the extent to which health or
other claims can be made with respect to the efficacy of any food or cosmetic.
The FDCA has been amended several times with respect to nutritional supplements,
most recently by the Nutrition Labeling and Education Act of 1990 (the "NLEA")
and the Dietary Supplement Health and Education Act of 1994 (the "DSHEA") and
related regulations. Such legislation governs the marketing and sale of
nutritional supplements, including the content and presentation of health
related information included on the labels or labeling of nutritional
supplements. The Company does not believe these laws or regulations will have a
material effect on its products or operations. Nutritional and dietary
supplements such as those manufactured and sold by the Company, for which no
therapeutic claim is made, are not subject to FDA approval prior to their sale.
The Company presently does not anticipate marketing new products which would
require FDA approval. However, these products can be removed from the market if
shown to be unsafe, and if the FDA determines, based on the labeling of
products, that the intended use of the product is for the diagnosis, cure,
mitigation treatment or prevention of disease, it can regulate those products as
drugs and require premarket clearance. In addition, if the FDA determines that
the claims concerning a product's affect on the "structure or function" of the
body do not meet the requirements of DSHEA, such claims could result in such
product being subject to regulation as a drug.
The Company's advertising of its nutritional supplement products is
also subject to regulation by the FTC under the Federal Trade Commission Act,
which prohibits unfair or deceptive trade practices, including false or
misleading advertising. The FTC in recent years has brought a number of actions
challenging claims by companies (other than the Company) for weight loss and
"fat burning" dietary supplement products and plans. The FTC has also recently
issued regulations governing the marketing of nutritional supplements.
Governmental regulations in foreign countries where the Company plans
to commence or expand sales may prevent or delay entry into the market or
prevent or delay the introduction, or require the reformulation, of certain of
the Company's products. Such regulations have caused delays in introducing
certain of the Company's products in the past and such delays have had negative
affects on sales.
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The Company may be subject to additional laws or regulations
administered by the FDA or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations which the Company considers
favorable, such as the DSHEA, or more stringent interpretations of current laws
or regulations, from time to time in the future. The Company is unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental regulations
or administrative orders, when and if promulgated, would have on its business in
the future.
Sales Program Regulation
The Company's distribution and sales program is subject to regulation
by the FTC and other federal and state regulation. Various state agencies
regulate multi-level distribution activities. The Company is required to
register with, and submit information to, certain of such agencies and has
complied fully. The Company actively strives to comply with all applicable state
and federal laws and regulations affecting its products and its sales and
distribution programs. The Attorney Generals of several states have taken an
active role in investigating and prosecuting companies whose compensation plans
they feel violate local anti-pyramid and/or consumer protection statutes. The
Company is unable to predict the effect such increased activity will have on its
business in the future nor is the Company able to predict the probability of
future laws, regulations or interpretations which may be passed by state or
federal regulatory authorities.
Under current law, the Company's distributors are treated for federal
income tax purposes as independent contractors and compensation paid to them is
not subject to withholding by the Company. Several bills have been introduced in
Congress which would restrict the definition of independent contractor and
possibly jeopardize the exempt status enjoyed by direct sellers. Such a change
would negatively impact the Company's recruiting efforts. The direct selling
industry is strongly opposing such bills as they relate to direct sellers. The
Company is unable to assess the likelihood of these or similar bills being
enacted. In several states, legislation has been introduced which would narrow
the definition of independent contractor for purposes of income tax withholding
as well as unemployment compensation, worker's compensation and other employee
benefits. To date, the status of direct sellers as independent contractors has
not been affected. States are becoming increasingly active in this area,
however, and there is no assurance that future legislation at the state level
affecting direct sellers will not be enacted.
Competition
The Company's products are sold in highly competitive markets against
companies with substantially greater sales volume and financial resources than
the Company and with brands that are, through advertising and other methods,
better known to consumers. The Company competes against other direct selling
companies and against companies which sell heavily advertised and promoted
products through retail stores, including supermarkets, drug stores and health
food stores. The Reliv' Ultrim-Plus, Cellebrate and Celleboost products compete
with numerous other products in the weight loss market, including nationally
advertised products such as SlimFast(tm). Many companies have entered, or have
plans to enter, the sports drink market in which Reliv' Innergize! and
ProVantage compete, a market long dominated by Gatorade(tm). Reliv' NOW, Reliv'
Classic and
12
Reliv' Fibrestore compete with numerous mineral and vitamin supplement products.
The Company's skin care line competes with products sold by numerous,
well-established cosmetic companies, including several direct selling companies
such as Mary Kay and Avon. With Arthaffect, the Company has entered the
relatively new "functional foods" market, which is expected to be extremely
competitive and led by the major food companies.
International Operations
Prior to 1991, the Company marketed and sold its products solely within
the United States. In February, 1991, Reliv' entered into a joint venture with
an Australian corporation and the joint venture began marketing and selling the
Company's products in Australia in May, 1991. As of March, 1992, the Company
organized Reliv' World to conduct international operations, acquired the
business of the Australian joint venture and began conducting business in
Australia through Reliv' Australia. In June, 1992, the Company began marketing
and selling its products in New Zealand through Reliv' New Zealand, in November,
1992, began marketing and selling its products in Canada through Reliv' Canada,
and in August, 1993, began marketing and selling its products in Mexico through
Reliv' Mexico. In July, 1995, the Company began marketing and selling its
products in the United Kingdom through Reliv' UK, a licensee. In October, 1998,
Reliv' Europe acquired Reliv' U.K.
Each foreign subsidiary markets, sells and uses substantially the same
line of products, labeling and method of distribution as Reliv' in the United
States, although not all of the Company's products are available in each country
and the formulation of some of the products vary to comply with local
governmental regulations or requirements.
Reference is made to Note 18 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on geographical segments.
Manufacturing and Packaging Services
In the last quarter of 1995, the Company commenced providing
manufacturing and packaging services at its Chesterfield manufacturing facility.
These services include blending, processing and packaging food products in
accordance with specifications or materials provided by the customer. Revenues
from these services during 1996 were $3,310,000, decreased to $1,525,000 in
1997, as a result of the loss of a major customer, and increased to $6,332,000
in 1998 as a result of regaining a major customer and obtaining other business.
The Company has capacity for and is actively seeking additional manufacturing
and packaging business. In 1998, one customer, Met-Rx USA, Inc., accounted for
$5,447,000 of the Company's total sales.
Reference is made to Note 18 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on business segments.
Item No. 2 - Properties
The Company owns approximately six acres of land and a building
containing approximately 136,000 square feet of office, manufacturing and
warehouse space located at 136 Chesterfield
13
Industrial Boulevard, Chesterfield, Missouri, 63006, where it currently
maintains its corporate headquarters. In 1998, the Company completed an
expansion to the Chesterfield facility on land owned by the Company adjacent to
existing building. Approximately 90,000 square feet of manufacturing, warehouse
and office space was added to the existing 46,000 square foot facility. The
Company obtained a construction loan of $4,430,000 to finance the expansion. As
of December 31, 1998, this loan had a principal balance of $4,355,000.
The original property was purchased in July, 1991, and, as part of the
purchase price for the premises, the Company assumed the remaining principal
balance of $850,108 of a 1984 industrial revenue bond with an original principal
sum of $975,000. In addition, the Company executed a promissory note to the
seller in the amount of $250,000. The principal balances of the bond and
promissory note at December 31, 1998, are $541,000 and $205,000, respectively.
The promissory note is secured by a deed of trust on the premises. The Company
funds payments under the industrial revenue bond and promissory note from
working capital. In 1992, the Company completed an addition to its building of
approximately 12,000 square feet used for manufacturing of its products. In May,
1993, the Company purchased 3.4 acres of land adjacent to the original facility
for $400,000.
The Company leases office space in suburban Sydney, Australia;
Mississauga, Ontario, Canada; Mexico City, Mexico; and in suburban London,
England to support its operations in those areas, and has a contract warehouse
arrangement in Auckland, New Zealand.
Item No. 3 - Legal Proceedings
On May 21, 1997, Timothy Tobin, a former director and officer of the
Company, filed a Demand for Arbitration with the American Arbitration
Association in St. Louis, Missouri. The Demand claimed damages resulting from
alleged misrepresentations made by the Company in connection with a Stock
Purchase Agreement and Consulting Agreement entered into with Mr. Tobin in
October 1992. The Company filed an Answer and Counterclaim denying Mr. Tobin's
allegations and claiming damages resulting from Mr. Tobin's breach of warranties
contained in the October 1992 agreements. The arbitration was held before the
American Arbitration Association and concluded on October 21, 1998. The
arbitrators' decision awarded no damages to Mr. Tobin on his claim or to the
Company on its counterclaim.
In May, 1998, the former sales/general manager of the Company's
Canadian subsidiary filed a 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.
Item No. 4 - Submission of Matters to a Vote of Security Holders
N/A
14
PART II
Item No. 5 - Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock was admitted to trading on the Emerging
Company Market Place at the American Stock Exchange on March 8, 1993 and
subsequently was approved for listing on the American Stock Exchange Main Board.
Prior to that time, there was no established public trading market for the
Company's Common Stock. On September 6, 1996, the Company moved the listing of
its Common Stock to the NASDAQ National Market Tier of the NASDAQ Stock Market
under the symbol: RELV.
1998 and 1997 Quarterly Stock Price Data
----------------------------------------
HI LO
----- -----
1998
First Quarter 5.125 2.875
Second Quarter 4.875 3.063
Third Quarter 4.00 2.438
Fourth Quarter 3.750 2.031
1997
First Quarter 7.625 5.341
Second Quarter 8.625 6.00
Third Quarter 7.00 5.25
Fourth Quarter 5.75 2.75
All stock price data has been retroactively adjusted for the Company's
10% stock dividend issued in February 1997.
As of March 15, 1999, there were approximately 1,787 holders of record
of the Company's Common Stock.
On February 28, 1997, a 10% stock dividend and a cash dividend of $.01
per share was paid to shareholders of record. The cash dividend on such date was
paid on all shares after giving effect to the stock dividend. On June 13, 1997,
a cash dividend of $.02 per share was paid to shareholders of record. On January
29, 1998, a cash dividend of $.01 per share was paid to shareholders of record.
On June 22, 1998, a cash dividend of $.015 per share was paid to shareholders of
record. The amount and timing of future dividends will be subject to declaration
of the Board of Directors consistent with results of operation of the Company
and its financial condition at the time.
In March, 1995, the Company instituted an automatic dividend
reinvestment plan for its shareholders of record. Participation in the plan,
which is voluntary, provides for dividends paid by the Company to be reinvested
in shares of common stock at the then current market price. The plan also allows
participants to make additional voluntary purchases of common stock at the
market price.
Effective January 1, 1999, the Company instituted a Distributor Stock
Purchase Plan whereby qualified distributors can allocate a portion of their
commission check toward the purchase of the Company's Common Stock and can make
additional purchases of Common Stock through direct contributions. Purchases are
made at the market price. Distributors also are entitled to receive at
15
the end of each year warrants to purchase the Company's Common Stock based on
the number of shares of Common Stock purchased by the distributor during the
year pursuant to the Plan.
In 1997, pursuant to a consulting agreement, the Company issued
warrants to purchase 9,600 shares of its Common Stock at a price of $6.25 per
share, with a term of two years. The issuance of these securities was exempt
from registration under Section 4(2) of the Securities Act of 1933, as amended,
as an issuance not involving a public offering.
Item No. 6 - Selected Financial Data
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein.
Year ended December 31
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
Net Sales $51,893,511 $46,836,270 $40,729,993 $28,913,873 $32,190,444
Net Income $ 1,556,929 $ 2,028,988 $ 1,507,014 $ 569,823 $ 893,766
Earnings per common share(1):
Basic .16 .21 .15 .06 .09
Diluted .16 .20 .15 .06 .09
Cash Dividends per share of Common Stock .025 .03 .02 .01 .015
Total Assets $20,252,972 $15,969,948 $11,401,665 $10,276,234 $ 9,660,013
Long-term debt and
capital lease obligations,
less current maturities $ 5,589,562 $ 5,148,625 $ 1,478,079 $ 1,416,764 $ 1,000,024
- ---------------------------------------------
(1) All earnings per share data has been retroactively adjusted for the pro
forma effect of the Company's 10% stock dividend issued in February 1997.
Item No. 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Income and Net Sales
1998 vs. 1997
The Company's 1998 net income was $1,557,000 or $.16 per share. This
compares with net income of $2,029,000 or $.21 per share in 1997. Net income in
the United States was $1,659,000 in 1998, compared to $2,177,000 in 1997. Net
loss from international operations was $102,000 in 1998, compared with $148,000
in 1997. The decrease in income, as explained in greater detail below, resulted
from a variety of factors, including weak international results and higher
interest and overhead expenses resulting from improvements in facilities to
support the growth of the manufacturing and packaging business segment.
16
Net sales increased in 1998 to $51.9 million, as compared to $46.8
million in 1997, as a result of the 14 percent increase in net sales in the
United States from $41.7 million in 1997 to $47.4 million in 1998. Net sales in
the United States, which accounts for 91 percent of total net sales, is
comprised of network marketing sales and manufacturing and packaging services.
In 1998 network marketing sales in the United States increased by 2 percent to
$41.0 million compared to $40.2 million in 1997, and net sales from
manufacturing and packaging services increased to $6.3 million from $1.5 million
in 1997. Net sales in the foreign operations declined to $4.5 million in 1998
from $5.1 million in 1997.
Net sales for the fourth quarter of 1998 were $15.0 million, an
increase from fourth quarter 1997 net sales of $10.9 million. During the period
network marketing sales in the United States remained nearly constant at $9.5
million as compared to $9.6 million in the fourth quarter 1997. Net sales in the
foreign operations decreased from $1.2 million for the quarter in 1997 to $1.1
million. The increase in net sales was due to an increase in manufacturing and
packaging services from $150,000 to $4.4 million.
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 in 1998 to $6.3
million from $1.5 million in 1997. The increase in sales was due to the return
of a major customer along with the addition of customers. The Company's sales to
third party customers primarily consist of the Company purchasing the raw
materials, using customer-provided packaging materials and selling a finished
product to the customer. In prior years, the Company simply charged a processing
fee to the customer and did not purchase any of the raw or packaging materials.
By purchasing the raw materials, the Company feels that it can achieve better
buying efficiencies for both its own network marketing products, as well as for
its third party customers. The expansion of the Company's manufacturing and
packaging facilities has allowed for this increase in sales and will allow for
future growth in this business segment. In addition to representing another
source of income, providing manufacturing and packaging services allows the
Company to better utilize the manufacturing and product development
infrastructure, thus spreading overhead costs.
In the United States, the Company's largest market, the number of
active distributors decreased 2 percent to 29,169. The retention rate of
distributors who renew their annual agreement continued to remain high at 54
percent. Master Affiliates, distributors who have attained the highest level of
discount and are eligible for generation royalties, increased to 4,123 in the
United States in 1998 from 3,631 in 1997. In 1998 the Company processed 78,609
orders at an average retail price of $663, compared to 73,136 orders at an
average of $695 in 1997.
The increase in network marketing sales in 1998 was below expectations.
In 1998, the Company instituted a new marketing program "Family Freedom" and
introduced new sales tools in an attempt to generate greater sales levels. The
Family Freedom Program supplements existing marketing programs such as the "Road
to Presidential," "The Star Director" and "Ambassador" programs. The Star
Director Program compensates distributors who reach certain levels of sales
organization growth with bonuses based on the retail sales of their distributor
network. In 1998, $1,345,000 was paid through this program in the United States
compared to $1,329,000 in 1997 and
17
$420,000 in 1996. The Ambassador Program compensates distributors at the highest
levels for their leadership and development of sales. At year end 1998 there
were 58 Ambassadors in the United States who shared in bonuses totaling $795,000
compared to 52 Ambassadors at the end of 1997 sharing bonuses of $838,000.
The United States 1998 net sales were affected by the introduction of a
new product, SoySentials, a soy-based nutritional supplement designed for use by
women. This product expands the Company's product line in the growing functional
foods category.
The Company's Direct Select Program makes products available to
consumers by ordering directly through the Company. In 1998, the program in the
United States, produced $6.3 million, or nearly 11 percent of total product
sales at retail value, compared to $5.9 million in 1997 and $4.3 million in
1996. The Company introduced the Direct Select Program in Canada in October 1997
and in Australia, New Zealand and the United Kingdom over the course of 1998.
In Australia and New Zealand net sales declined to $2,897,000 in 1998
from $3,449,000 in 1997. Fourth quarter 1998 sales decreased to $687,000 from
$753,000 in 1997. New distributor enrollments declined in Australia and New
Zealand to 1,814 from 1,820 in 1997. Distributor renewals in Australia were 54%
and in New Zealand 38% in 1998 as compared to 48% and 37% in 1997, respectively.
Reported net sales in Australia and New Zealand were also affected by the
decline in the value of their currency as compared to the United States dollar.
As of the end of 1998, the Australian and New Zealand dollars declined 6% and
9%, respectively, from their rates as of December 31, 1997. However, the
year-end rates have improved from historic lows experienced during the third
quarter of 1998.
In 1998, the Company reorganized its geographic business units into a
single worldwide organization, and placed a single executive in charge of each
of three critical business functions, manufacturing and product development,
sales and marketing, and operations and administration. The principal purposes
of this structure change was (i) to provide consistency in marketing programs,
products and administration between the United States and foreign subsidiaries,
(ii) to eliminate inefficiencies in foreign markets and (iii) to increase sales.
The Company has also added an international sales director responsible for
Mexico, Canada and the United Kingdom and has hired new sales managers in Mexico
and Canada.
Sales in Australia and New Zealand have been affected by continued
delays in the introduction of several new products due to regulatory policies,
plus increased levels of competition. The Company has received approval in
Australia and New Zealand to sell Reliv' Classic and introduced it in May, 1998.
Reliv' Classic is the number one selling product in the United States accounting
for approximately 25% of total retail sales. Fibrestore, a product which
averages in excess of 10% of sales in the United States, was introduced in
Australia in September, 1997. In addition, during 1998 a number of top selling
products have been approved for sale in several other foreign markets which
should also support sales growth. A version of another key product, Arthaffect,
is nearing approval in Australia and should be available for sale there in the
near future.
18
Net sales in Canada decreased in 1998 to $1,214,000 from $1,338,000 in
1997. Fourth quarter sales decreased to $274,000 in 1998 compared to $334,000 in
1997. New distributor enrollments declined to 797 from 991 in 1997. Although the
Company was able to introduce Classic in March, 1998, sales for the year were
adversely affected by the change in sales management.
Net sales in Mexico in 1998 were $317,000 compared to $330,000 in 1997.
Net sales in the fourth quarter 1998 were $81,000 compared to $74,000 in 1997.
New distributor enrollment increased in 1998 to 445 compared to 360 in 1997.
Along with a new sales manager hired in the fourth quarter of 1998, the Company
has begun establishing new distribution centers, at facilities owned and
operated by key distributors in cities outside of Mexico City. Due to the lack
of an adequate cartage system in Mexico, this is a common method used by network
marketing companies to distribute their products.
The Company began marketing its products in the United Kingdom in July,
1995, through a licensee. Revenues under the license agreement in 1996, 1997 and
1998 were minimal and in October, 1998, the Company through a subsidiary assumed
ownership and control of the United Kingdom operations. The United Kingdom
subsidiary reported net sales of $109,000 in the fourth quarter of 1998.
1997 vs. 1996
The Company's 1997 net income was $2,029,000 or $.21 per share ($.20
per share diluted). This compares with net income of $1,507,000, or $.15 per
share in 1996. Net income in the United States was $2,177,000 in 1997, compared
to $1,686,000 in 1996. Net income from international operations was a loss of
$148,000 in 1997, compared with a loss of $179,000 in 1996.
Net sales increased in 1997 to $46.8 million, as compared to $40.7
million in 1996, as a result of the 21 percent increase in net sales in the
United States from $34.4 million in 1996 to $41.7 million in 1997. Net sales in
the United States, which accounts for 89 percent of total net sales, is
comprised of network marketing sales and contract packaging services. In 1997
network marketing sales in the United States increased by 29 percent to $40.2
million compared to $31.1 million in 1996, while net sales from contract
services declined to $1.5 million from $3.3 million in 1996. Net sales in the
foreign operations declined to $5.1 million in 1997 from $6.3 million in 1996.
The increase in network marketing sales during 1997 was a result of a
larger and more productive network of distributors, primarily in the United
States. In the United States, the Company's largest market, the number of active
distributors increased 12 percent to 29,616. The retention rate of distributors
who renew their annual agreement continued to remain high at 49 percent. Master
Affiliates, distributors who have attained the highest level of discount and are
eligible for generation royalties, increased to 3,631 in the United States in
1997 from 2,487 in 1996. In 1997 the Company processed 73,136 orders at an
average retail price of $695, compared to 53,391 orders at an average of $733 in
1996.
19
The United States 1997 net sales were affected by the introductions of
two new products, Healthy Pantry Premium Entrees, a line of four hot meal
products based on the use of soy protein, and Provantage, a sports nutrition
product targeted for the fitness market. Both products expand the Company's
product line in the growing functional foods category.
1997 network marketing sales strengthened throughout the United States.
Sales remained strong in the top ten states, which account for 64 percent of
total sales, with an increase of 20 percent in these states when compared to
1996 sales. Sales in the other states increased 44 percent over 1996 levels
indicating the Company is developing strong markets outside its primary states.
Illinois, Michigan and California were the Company's primary markets in 1997
contributing 31 percent of total sales, a decrease of 4 percent when compared to
the top three markets in 1996. The above trends indicate a more diverse base of
sales growth.
In Australia and New Zealand net sales declined to $3,449,000 in 1997
from $4,723,000 in 1996. Fourth quarter 1997 sales decreased to $753,000 from
$1,260,000 in 1996. New distributor enrollments declined in Australia and New
Zealand to 1,820 from 3,108 in 1996. Distributor renewals in Australia were 48%
and in New Zealand 37% in 1997 as compared to 41% and 36% in 1996, respectively.
Reported net sales in Australia and New Zealand were also affected by the
decline in the value of their currency as compared to the United States dollar.
During the year, both the Australian and New Zealand dollars declined 18% from
their rates as of December 31, 1996.
Net sales in Canada increased in 1997 to $1,338,000 from $1,247,000 in
1996. Fourth quarter sales decreased to $334,000 in 1997 compared to $416,000 in
1996. Fourth quarter net sales in 1996 were impacted by a sales promotion that
created a large one time sales increase. New distributor enrollments declined to
991 from 1,165 in 1996. The 1996 net sales in Canada were affected by the
introductions of Reliv A-Affect, a product similar to the United States
Arthaffect that's designed to nutritionally support bone and joint conditions
and Direct Select. A-Affect currently represents 7 percent of total product
sales. Direct Select, introduced in October 1997, accounts for approximately 7.5
percent of total retail sales at year end.
In Mexico net sales declined slightly as the economy continued to
contribute to Reliv Mexico's inability to increase net sales and reach
profitability. Net sales in Mexico in 1997 were $330,000, compared to $352,000
in 1996. Net sales in the fourth quarter 1997 were $74,000 compared to $103,000
in 1996. New distributor enrollment declined in 1997 to 360 compared to 487 in
1996. In response, the Company introduced a revision to the distributor
compensation plan in August 1997 to adjust for the devaluation of the peso.
The Company began marketing its products in the United Kingdom in July,
1995, through a licensee. Revenues under the license agreement in 1996 and 1997
were minimal.
Cost of Sales:
During 1998, cost of network marketing products sold improved to 17
percent of net sales compared with 18 percent in 1997, and 19 percent in 1996.
The improvement in gross profit margins is a result of lower raw materials
costs, improved manufacturing controls and utilization of
20
the facility in providing manufacturing and packaging services for unrelated
customers. Cost of network marketing products sold remained constant at 17
percent in the fourth quarter both 1998 and 1997. Cost of goods for
manufacturing and packaging services increased for the year to 101 percent from
89 percent in 1997. Even under optimal operating efficiencies, the gross margin
percentages for the manufacturing and packaging work done for unrelated
customers is substantially less than the margins obtained in the sales of the
network marketing products. However, the Company's results were affected by
start-up costs including hiring and training additional plant staff. The Company
expanded its facility in 1997 adding approximately 60,000 square feet of
warehouse and manufacturing space. The expansion space was put into full
operation during the first half of 1998.
Distributor Royalties and Discounts:
Distributor royalties and discounts as a percentage of network
marketing sales remained steady at 37 percent in both 1998 and 1997. In 1996,
distributor royalties and discounts represented 36 percent of network marketing
sales. Fourth quarter 1998 distributor royalties and discounts decreased to 35
percent from 37 percent in 1997. These expenses are governed by the distributor
agreements and are directly related to the level of sales. The Company pays a
percentage of sales up to 18 percent in royalties and as much as 45 percent in
discounts. On an annual basis, the percentage of distributor royalties and
discounts to network marketing sales has remained fairly constant. In 1998,
included in distributor royalties and discounts are royalties of $799,000 paid
through the Ambassador Program as compared to $838,000 in 1997 and $631,000 in
1996.
Selling, General and Administrative:
Selling, general and administrative expenses decreased to 35% as a
percentage of net sales for 1998, from 37 percent in 1997, and 36 percent in
1996. The percentage change is primarily due to the increase in sales of the
manufacturig and packaging business segment in comparison to total SGA expenses.
In 1998, sales meetings and convention expenses were $1,246,000 and
sales promotion incentives were $588,000, compared to $1,200,000 and $489,000 in
1997, respectively. The Star Director program, which rewards eligible
distributors with a bonus based on the retail sales of their distributor
network, paid $1,471,000 in 1998 compared to $1,329,000 in 1997 and $420,000 in
1996. The program was introduced in June 1996 and has a limit of 3% of total
product retail sales. In 1998 2.3 percent was paid and in 1997, 2.2 percent was
paid.
Consulting and professional services expenses decreased $184,000 to
$458,000 in 1998 as the Company decreased its use of marketing and public
relations companies. Staff compensation and fringes increased by 14 percent.
Staff has been increased in order to service the sales growth in the United
States, in both network marketing and manufacturing and packaging, and to
contribute additional support to the foreign operations.
Selling, general and administrative expenses as a percentage of net
sales were down in the fourth quarter 1998 as expenses were 31 percent of net
sales compared to 39 percent during the
21
fourth quarter 1997. The increase in net revenues from $10,915,000 in 1997 to
$15,043,000 is the primary reason.
Interest Expense:
Interest expense in 1998 was $509,000 compared to $210,000 in 1997 and
$213,000 in 1996. Interest expense in 1998 increased due to a loan package
secured for the expansion of the Company's office and manufacturing facility,
and the addition of capital leases of furnishings and equipment.
Income Taxes:
The provision for income taxes decreased to $941,000, or 1.8 percent of
net sales in 1998, from 3.0 percent of net sales or $1,385,000 in 1997, and 2.3
percent of net sales, or $950,000 in 1996. The effective tax rate for 1998 was
38 percent. Effective tax rates for 1997 and 1996 were 41 percent and 39
percent, respectively. The 1997 effective rate was slightly higher than 1996 as
the result of the settlement of an audit by the Internal Revenue Service for the
fiscal years 1992 through 1994.
Financial Condition
The Company generated cash flows of $2,111,000 from operating
activities during 1998 and $785,000 through long-term financing and use of their
lines of credit. This compares to $2,491,000 generated from operating activities
and $3,959,000 through long-term financing in 1997. Cash and cash equivalents
increased $390,000 to $2,817,000 by year-end 1998. The Company invested
$1,756,000 in its facility, with the completion of the construction of
approximately 90,000 square feet of office and manufacturing space, and the
acquisition of office furnishings and plant equipment. In 1997, $5,055,000 was
invested in these areas. The Company used $238,000 to pay dividends in 1998.
Current assets increased to $8,358,000 at December 31, 1998 from
$6,547,000 as of December 31, 1997. Cash and cash equivalents increased $390,000
as described above. Accounts receivable decreased by $89,000 to $777,000 from
the December 31, 1997 balance of $866,000. Accounts receivable decreased due to
advances to Reliv' UK being utilized as consideration to acquire Reliv' UK and
thereby, resulting in goodwill, but was increased as a result of receivables due
from unrelated manufacturing and packaging customers. Inventories increased to
$3,929,000 from $2,643,000 at year end 1997, primarily as a result of increases
in raw material inventories necessitated by increases in sales by the
manufacturing and packaging business.
Property, plant and equipment, after dispositions, increased $2,251,000
to $14,173,000 at December 31, 1998, as a result of the completion of the
expansion of the Company's facility. Although the Company plans include some
significant purchases of equipment 1999, the total outlay for property, plant
and equipment purchases in 1999 is expected to be less than in 1998.
Current liabilities increased to $6,175,000 at December 31, 1998 from
$3,653,000 at December 31, 1997. Trade accounts payable increased to $3,568,000
from $1,433,000 at December
22
31, 1997 primarily due to the increase in inventories. Accrued payroll and
payroll taxes decreased to $115,000 at December 31, 1998 from $174,000 for the
prior year end, primarily due to less accrued incentive compensation expense, as
well as other accrued bonuses.
Long-term debt increased to $5,590,000 from $5,149,000 at December 31,
1997. The Company entered into a loan agreement of $4,430,000 in September 1997
to provide financing for the expansion of its facility. The term of the
agreement is three years with a 20 year payment amortization schedule. The
Company has a term loan with a principal balance of $478,000 as of December 31,
1998, as well as long-term debt totalling $746,000, relating to the purchase of
its original building and land. The Company also has two operating lines of
credit in the amounts of $600,000 and $500,000. At December 31, 1998, the
Company utilized $314,000 of the lines of credit. As a result of the increased
long-term debt, the Company's ratio of total liabilities to total assets
increased to 59% from 55% at December 31, 1997.
Stockholders' equity increased to $8.3 million compared with $7.2
million at December 31, 1997. The improvement is due to the 1998 net income of
the Company. On January 31, 1997, the Company declared a 10% stock dividend and
a cash dividend of $0.01 per share paid on February 28, 1997 to recordholders as
of February 14, 1997. The stock dividend resulted in a transfer from retained
earnings to the common stock account in the amount of $5,848,000, which was
based on the closing price of $6.50 per share of Common Stock on the declaration
date. Average shares outstanding and all per share amounts included in the
accompanying consolidated financial statements and notes reflect the increased
number of shares as a result of the stock dividend.
The Company's working capital balance has decreased by $711,000 since
December 31, 1997. The current ratio at December 31, 1998 declined to 1.35 from
1.79. As of Deceber 31, 1998, the Company was in technical violation of a
covenant in a loan agreement covering a term loan from 1996, as well as its
lines of credit. This covenant requires that the Company maintain a current
ratio of not less than 1.5. The Company has obtained a waiver of this covenant
through June 30, 1999, and is confident that the current ratio will improve to
the required level. Management believes that the Company's internally generated
funds together with the loan agreement will be sufficient to meet working
capital requirements in 1999.
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 on a recent assessment, the Company does not believe the Year
2000 issue will have a material effect on its operations. The vast majority of
the Company's current computer hardware and software systems are Year 2000
compliant. The Company has identified some of its telecommunication hardware and
software that is not Year 2000 compliant and is in the process of
23
installing the necessary upgrades. The cost of these upgrades is not material.
The Company is in the process of initiating communications with the
manufacturers of its manufacturing and warehouse equipment to ensure this
equipment will be Year 2000 ready.
Formal communications will be made with all significant suppliers and
large customers of the Company 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 potential Year 2000 problems. If the Company's most
significant vendors of goods and services, 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. The Company has
determined it has no exposure to contingencies related to the Year 2000 for the
products it sells.
The cost of attaining Year 2000 compliance 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 subisidiaries
in the foreseeable future.
Safe Harbor Provision of the Private Securities Litigation Act of 1995 and
Forward Looking Statements.
The statements contained in Item 7 (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 1999 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.
24
Item No. 7A - Qualitative And Quantitative Disclosures Regarding 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.
Item No. 8 - Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements contained in
Part IV hereof.
Item No. 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item No. 10 - Directors and Executive Officers of the Registrant
Information called for by Item 10 of Part III is incorporated by reference to
the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be
held on May 27, 1999, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
Item No. 11 - Executive Compensation
Information called for by Item 11 of Part III is incorporated by reference to
the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be
held on May 27, 1999, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
25
Item No. 12 - Security Ownership of Certain Beneficial Owners and Management
Information called for by Item 12 of Part III is incorporated by reference to
the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be
held on May 27, 1999, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
Item No. 13 - Certain Relationships and Related Transactions
Information called for by Item 13 of Part III is incorporated by reference to
the definitive Proxy Statement for the 1999 Annual Meeting of Shareholders to be
held on May 27, 1999, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
PART IV
Item No. 14 - Exhibits, Financial Statement Schedules and Reports on Form 8K
(a) 1. The Consolidated Financial Statements filed as part
of this report on Form 10-K are listed on the
accompanying Index to Consolidated Financial
Statements and Consolidated Financial Statement
Schedules.
2. The Consolidated Financial Statement Schedules filed
as part of this report on Form 10-K are listed on the
accompanying Index to Consolidated Financial
Statements and Consolidated Financial Statement
Schedules.
3. Exhibits:
Exhibit
Document Number
Articles of Incorporation, as amended
(incorporate by reference Exhibit 3.1 to
the Form 10-K of the Registrant for year
ended December 31, 1995) 3.1
By-laws, as amended
(incorporate by reference Exhibit 3.2
to the Form 10-K of the Registrant for
year ended December 31, 1992) 3.2
Amended Exclusive License Agreement
(incorporate by reference Exhibit 10.1
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.1
26
Exhibit
Document Number
Asset Purchase Agreement
(Australian Joint Venture)
(incorporate by reference Exhibit 10.2
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.2
Master Agent Agreement
(re: Australia)
(incorporate by reference Exhibit 10.3
to the Form 10-K of the Registrant for year
ended December 31, 1992) 10.3
1995 Stock Option Plan (incorporate
by reference Exhibit 10.7 to the
Form 10-K of the Registrant for year
ended December 31, 1995) 10.4
Montgomery Employment Agreement
dated June 1, 1997 (incorporate by
reference Exhibit 10.6 to the Form 10-K of the
Registrant for year ended December 31, 1997) 10.5
Hastings Employment Agreement dated
June 1, 1997 (incorporate by
reference Exhibit 10.8 to the Form 10-K of the
Registrant for year ended December 31, 1997) 10.6
Kreher Employment Agreement dated April 13, 1994
(incorporate by reference Exhibit 10.14 to the
Registrant's Form 10-Q for quarter ended June 30, 1994) 10.7
1994 Annual Incentive Compensation Plan
(incorporate by reference Exhibit 10.11
to the Form 10-K of the Registrant
for year ended December 31, 1995) 10.8
1994 Long-Term Incentive Compensation Plan
(incorporate by reference Exhibit 10.12 to
the Form 10-K of the Registrant for
year ended December 31, 1995) 10.9
27
Exhibit
Document Number
Agreement with Avogen, Inc. dated July 1, 1995
(incorporate by reference Exhibit 10.13 to the
Form 10-K of the Registrant for year ended
December 31, 1995) 10.10
Agreement with Conkle & Olesten and Avogen, Inc.
dated July 1, 1995 (incorporate by reference
Exhibit 10.14 to the Form 10-K of the Registrant
for year ended December 31, 1995) 10.11
Agreement with Traco Labs, Inc.
(incorporate by reference Exhibit 10.14
to the Form 10-K of the Registrant for
year ended December 31, 1996) 10.12
Amendment to Avogen and Conkle & Oleston
Agreements dated April 25, 1997
(incorporated by reference Exhibit 10.15
to the Form 10-K of the Registrant
for year ended December 31, 1997) 10.13
Loan Agreement dated March 20, 1996
with Southwest Bank of St. Louis 10.14
Deed of Trust Note dated January 2, 1996
in the amount of $950,000 with
Southwest Bank of St. Louis 10.15
Line of Credit Note dated March 20, 1996
in the amount of $1,000,000 with
Southwest Bank of St. Louis 10.16
Line of Credit Note dated January 2, 1996
in the amount of $500,000 with
Southwest Bank of St. Louis 10.17
Deed of Trust Note dated September 2, 1997
in the amount of $4,430,000 with
Southwest Bank of St. Louis 10.18
Reliv' International, Inc. Supplemental Executive
Retirement Plan dated June 1, 1998 10.19
Stock Purchase Agreement dated October 1, 1998
among Reliv' World Corporation,
Reliv' Europe, Inc. and Global Nutrition, Inc.
regarding purchase of Reliv' UK, Ltd. 10.20
28
Exhibit
Document Number
Statement re: computation of per
share earnings (incorporated by reference
to Note 7 of the Consolidated Financial
Statements contained in Part IV) 11
Subsidiaries of the Registrant
(incorporate by reference the
the Registrants's Response to
Item 1 of Part I of this Form 10-K) 22
Consent of Ernst & Young LLP,
Independent Auditors 23
(b) N/A
(c) The Exhibits listed in subparagraph (a)(3) of this Item 14 are
attached hereto unless incorporated by reference to a previous
filing.
(d) The Schedules listed in subparagraph (a)(2) of this Item 14 are
attached hereto.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
RELIV' INTERNATIONAL, INC.
By: /s/Robert L. Montgomery
-------------------------------------------------------------
Robert L. Montgomery, Chairman of the Board of Directors,
President and Chief Executive Officer, Treasurer
Date: March 30, 1999
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ Robert L. Montgomery
-------------------------------------------------------------
Robert L. Montgomery, Chairman of the Board of Directors,
President and Chief Executive Officer, Treasurer
Date: March 30, 1999
By: /s/ David G. Kreher
-------------------------------------------------------------
David G. Kreher, Senior Vice President, Assistant Secretary
Date: March 30, 1999
By: /s/ Carl W. Hastings
-------------------------------------------------------------
Carl W. Hastings, Executive Vice President,
Assistant Secretary, Director
Date: March 30, 1999
By: /s/ Thomas W. Pinnock
-------------------------------------------------------------
Thomas W. Pinnock III, Director
Date: March 30, 1999
By: /s/ Stephen M. Merrick
-------------------------------------------------------------
Stephen M. Merrick, Senior Vice President, Secretary,
Director (principal financial and accounting officer)
Date: March 30, 1999
30
By: /s/ Donald L. McCain
-------------------------------------------------------------
Donald L. McCain, Director
Date: March 30, 1999
By: /s/ John Akin
-------------------------------------------------------------
John Akin, Director
Date: March 30, 1999
By: /s/ Sandra S. Montgomery
-------------------------------------------------------------
Sandra S. Montgomery, Director
Date: March 30, 1999
By: /s/ Thomas T. Moody
-------------------------------------------------------------
Thomas T. Moody, Director
Date: March 30, 1999
By: /s/ Marvin W. Solomonson
-------------------------------------------------------------
Marvin W. Solomonson, Director
Date: March 30, 1999
31
Reliv' International, Inc.
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1998, 1997 and 1996
Contents
Consolidated Financial Statements:
Report of Independent Auditors.......................................... . F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-2
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996....................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996....................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................................... F-6
Notes to Consolidated Financial Statements - December 31, 1998........... F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1998, 1997 and 1996....................................... F-29
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
[Letterhead of Ernst & Young LLP]
Report of Independent Auditors
Board of Directors and Stockholders
Reliv' International, Inc.
We have audited the accompanying consolidated balance sheets of Reliv'
International, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Reliv'
International, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
March 12, 1998
St. Louis, Missouri
F-1
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1998 1997
------------ -----------
Assets
Current assets:
Cash and cash equivalents $ 2,816,804 $ 2,426,426
Accounts and notes receivable,
less allowances of $5,000 in
1998 and $7,600 in 1997 777,444 865,701
Inventories:
Finished goods 1,702,359 1,453,282
Raw materials 1,865,649 785,706
Sales aids and promotional materials 361,322 403,830
------------ ------------
3,929,330 2,642,818
Refundable income taxes 314,284 31,303
Prepaid expenses and other current assets 440,596 490,638
Deferred income taxes 79,269 90,065
------------ ------------
Total current assets 8,357,727 6,546,951
Other assets:
Goodwill, net of accumulated amortization of $13,000 512,399 --
Other assets 703,623 202,133
------------ ------------
Total other assets 1,216,022 202,133
Property, plant and equipment:
Land 829,222 790,677
Building 8,201,744 2,854,548
Machinery and equipment 2,783,923 1,723,482
Office equipment 446,205 303,235
Computer equipment and software 1,676,372 1,452,577
Construction in progress 235,511 4,797,090
------------ ------------
14,172,977 11,921,609
Less accumulated depreciation and amortization (3,493,754) (2,700,745)
------------ ------------
10,679,223 9,220,864
------------ ------------
Total assets $ 20,252,972 $ 15,969,948
============ ============
See accompanying notes.
F-2
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1998 1997
------------ ------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 5,189,755 $ 3,290,131
Income taxes payable 55,258 --
Borrowings under line of credit 313,825 --
Current maturities of long-term debt and
capital lease obligations 508,362 358,124
Unearned income 107,695 5,003
------------ ------------
Total current liabilities 6,174,895 3,653,258
Non-current liabilities:
Capital lease obligations, less current maturities 373,455 39,105
Long-term debt, less current maturities 5,216,107 5,109,520
Other non-current liabilities 148,349 --
------------ ------------
Total non-current liabilities 5,737,911 5,148,625
Stockholders' equity:
Common stock, no par value; 20,000,000 shares authorized,
9,653,502 shares issued and outstanding in 1998
and 9,617,307 shares issued and outstanding in 1997 9,179,764 9,135,764
Notes receivable - officers and directors (44,746) (4,633)
Retained earnings (deficit) (354,195) (1,673,164)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (440,657) (289,902)
------------ ------------
Total stockholders' equity 8,340,166 7,168,065
------------ ------------
Total liabilities and stockholders' equity $ 20,252,972 $ 15,969,948
============ ============
See accompanying notes.
F-3
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31
1998 1997 1996
------------ ------------ ------------
Sales at suggested retail $ 75,987,414 $ 71,066,845 $ 60,840,620
Less distributor allowances on
product purchases 24,093,903 24,230,575 20,110,627
------------ ------------ ------------
Net sales 51,893,511 46,836,270 40,729,993
Costs and expenses:
Cost of products sold 14,286,498 9,404,283 10,193,418
Distributor royalties and commissions 16,664,486 16,837,084 13,429,386
Selling, general and administrative 18,069,355 17,083,792 14,585,127
------------ ------------ ------------
49,020,339 43,325,159 38,207,931
------------ ------------ ------------
Income from operations 2,873,172 3,511,111 2,522,062
Other income (expense):
Interest expense (509,492) (210,268) (212,819)
Other income 134,249 113,145 147,771
------------ ------------ ------------
Income before income taxes 2,497,929 3,413,988 2,457,014
Provision for income taxes 941,000 1,385,000 950,000
------------ ------------ ------------
Net income $ 1,556,929 $ 2,028,988 $ 1,507,014
============ ============ ============
Earnings per common share (1) $ .16 $ .21 $ .15
Earnings per common share -
assuming dilution(1) $ .16 $ .20 $ .15
(1) Per share data for 1996 reflects the pro forma effect of the Company's 10
percent stock dividend declared on January 31, 1997 and distributed on February
28, 1997.
See accompanying notes.
F-4
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Common Stock Notes Receivable Retained Other Treasury Stock
------------ Officers and Earnings Comprehensive --------------
Shares Amount Directors (Deficit) Income/(Loss) Shares Amount Total
------------------------------------------------------------------------------------------------
Balance at December 31, 1995 9,311,301 $3,412,986 $(4,633) $2,714,723 $ (79,634) 214,366 $(535,826) $5,507,616
Net income - - - 1,507,014 - - - 1,507,014
Other comprehensive
income/(loss):
Foreign currency
translation adjustment - - - - 90,604 - - 90,604
-----------
Total comprehensive income $1,597,618
-----------
Common stock purchased
for treasury - - - - - 309,189 (823,808) (823,808)
Options exercised 8,113 10,266 - - - - - 10,266
Cancellation of treasury stock (295,755) (59,154) - (710,820) - (295,755) 714,974 (55,000)
Dividends paid ($.02 per share) - - - (179,370) - - - (179,370)
Stock dividend declared
January 31, 1997 876,870 5,847,728 - (5,847,728) - 22,780 - -
-------------------------------------------------------------------------------------------------
Balance at December 31, 1996 9,900,529 9,211,826 (4,633) (2,516,181) 10,970 250,580 (644,660) $6,057,322
-------------------------------------------------------------------------------------------------
Net income - - - 2,028,988 - - - 2,028,988
Other comprehensive
income/(loss):
Foreign currency
translation adjustment - - - - (300,872) - - (300,872)
-----------
Total comprehensive income $1,728,116
-----------
Common stock purchased
for treasury - - - - - 86,306 (337,127) (337,127)
Options exercised 10,438 13,125 - - - - - 13,125
Warrants exercised 29,140 - - - - - - -
Cancellation of treasury stock (314,106) (89,187) - (892,600) - (314,106) 981,787 -
Adjustment to stock dividend (8,694) - - - - (22,780) - -
Dividends paid ($.03 per share) - - - (293,371) - - - (293,371)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1997 9,617,307 9,135,764 (4,633) (1,673,164) (289,902) - - $7,168,065
-------------------------------------------------------------------------------------------------
Net income - - - 1,556,929 - - - 1,556,929
Other comprehensive
income/(loss):
Foreign currency
translation adjustment - - - - (150,755) - - (150,755)
-----------
Total comprehensive income $1,406,174
-----------
Options exercised 36,195 44,000 (44,000) - - - - -
Repayment of loan by
officers and directors - - 3,887 - - - - 3,887
Dividends paid
($.025 per share) - - - (237,960) - - - (237,960)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1998 9,653,502 $9,179,764 $(44,746) $ (354,195) $(440,657) - $ - $8,340,166
=================================================================================================
See accompanying notes.
F-5
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
1998 1997 1996
----------- ----------- -----------
Operating activities
Net income $ 1,556,929 $ 2,028,988 $ 1,507,014
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 806,146 607,281 629,157
Provision for losses on accounts receivable 9,915 -- 78,699
Provision for deferred income taxes 9,232 (31,096) (1,974)
Foreign currency translation (gain)/loss 38,756 (23,019) 3,169
(Increase) decrease in accounts and notes
receivable (474,159) 185,115 (480,365)
(Increase) decrease in inventories (1,348,163) 30,553 (216,431)
(Increase) decrease in refundable income taxes (294,589) 21,496 183,454
(Increase) decrease in prepaid expenses and
other current assets 56,032 14,803 (61,861)
(Increase) decrease in other assets (502,034) (128,244) 69,753
Increase (decrease) in accounts payable and
accrued expenses 2,083,822 (128,082) 480,944
Increase (decrease) in income taxes payable 66,756 (68,940) (77,890)
Increase (decrease) in unearned income 102,711 (17,594) 7,839
----------- ----------- -----------
Net cash provided by operating activities 2,111,354 2,491,261 2,121,508
Investing activities
Proceeds from the sale of property, plant and
equipment 8,923 73,010 837
Purchase of property, plant and equipment (1,756,442) (5,054,726) (765,386)
Proceeds from the sale of investments -- -- 81,969
Repayment of loans to officers and directors 3,887 -- --
----------- ----------- -----------
Net cash used in investing activities (1,743,632) (4,981,716) (682,580)
Financing activities
Proceeds from long-term borrowings and line of
credit 785,307 3,958,514 363,887
Principal payments on long-term borrowings and
line of credit (344,774) (220,144) (171,097)
Principal payments under capital lease obligations (44,336) (84,723) (59,230)
Proceeds from stock options exercised -- 13,125 10,266
Dividends paid (237,960) (293,371) (179,370)
Purchase of treasury stock -- (337,127) (878,808)
----------- ----------- -----------
Net cash provided (used) by financing activities 158,237 3,036,274 (914,352)
Effect of exchange rate changes on cash and cash
equivalents (135,581) (228,163) 77,018
----------- ----------- -----------
Increase in cash and cash equivalents 390,378 317,656 601,594
Cash and cash equivalents at beginning of year 2,426,426 2,108,770 1,507,176
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,816,804 $ 2,426,426 $ 2,108,770
=========== =========== ===========
See accompanying notes.
F-6
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
1998 1997 1996
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 556,962 $ 219,997 $ 217,698
========== ========== ==========
Income taxes $1,201,896 $1,396,476 $ 845,632
========== ========== ==========
Non cash investing and financing transactions:
Capital lease obligations entered into $ 508,830 $ 92,519 $ --
========== ========== ==========
See accompanying notes.
F-7
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Nature of Business and Significant Accounting Policies
Nature of Business
Reliv' International, Inc. (the Company) produces a line of food products
including nutritional supplements, diet management products, granola bars and
sports drink mixes. The Company also distributes a line of premium skin care
products. These products are sold by subsidiaries of the Company to a sales
force of independent distributors and licensees 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, Canada, New
Zealand, Mexico and the United Kingdom. In addition, the Company provides
manufacturing and packaging services for unrelated customers.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its foreign and domestic subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost or market. Product cost is
determined using standard costs, which approximate the first-in, first-out
basis. Other inventory cost is determined using the first-in, first-out basis.
Property, Plant and Equipment
Property, plant and equipment are stated on the cost basis. Depreciation and
amortization, which includes the amortization of assets recorded under capital
leases, are computed using the straight-line or accelerated method over the
useful life of the related assets.
Goodwill
Goodwill represents the cost in excess of the fair value of the net assets
acquired and is being amortized on a straight-line basis over a period of ten
years. On a periodic basis, the Company evaluates goodwill for impairment by
comparing estimated future discounted cash flows of the business to its carrying
value.
F-8
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Revenue Recognition
The Company generally receives its sales price in cash accompanying 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 25 percent to 45 percent of such suggested retail price. Sales
revenue and commission expenses are recorded when the merchandise is shipped.
Unearned income represents prepaid orders for which the Company has not shipped
the merchandise.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with FASB statement No. 52, Foreign Currency Translation.
All balance sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Income statement amounts have been translated
using the average exchange rate for the year. The gains and losses resulting
from the changes in exchange rates from year to year have been reported in other
comprehensive income/loss. The effect on the statements of income of transaction
gains and losses is insignificant for all years presented.
Income Taxes
The provision for income taxes is computed using the liability method in
accordance with FASB statement No. 109, Accounting for Income Taxes. The primary
difference between financial statement and taxable income results from financial
statement accruals and reserves.
F-9
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for stock options in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees. Since the Company grants stock options
at an exercise price not less than the fair value of the shares at the date of
grant, no compensation expense is recognized. The Financial Accounting Standards
Board has issued Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting and Disclosure of Stock-Based Compensation, effective for years
beginning after December 1995. The Company has elected the disclosure-only
alternative of this pronouncement in a footnote to these financial statements
(see Note 8).
Basic and Diluted Earnings per Share
Basic and diluted earnings per share are calculated in accordance with FASB
Statement No. 128, Earnings per Share. All earnings per share amounts for all
periods have been presented, and, where appropriate, restated to conform to the
requirements of Statement No. 128.
Basic earnings per common share are computed using the weighted average number
of common shares outstanding during the year. Diluted earnings per common share
are computed using the weighted average number of common shares and potential
dilutive common shares that were outstanding during the period. Potential
dilutive common shares consist of outstanding stock options and warrants. See
Note 7 for additional information regarding earnings per share. On January 31,
1997, the Company declared a 10 percent stock dividend on the Company's common
stock, which was distributed on February 28, 1997 to shareholders of record on
February 14, 1997. The dividend was transferred from retained earnings to common
stock in the amount of $5,848,000, which was based on the closing price of $6.50
per share on the declaration date. Average shares outstanding and all per share
amounts included in the accompanying consolidated financial statements and notes
are based on the increased number of shares giving retroactive recognition to
the stock dividend.
Advertising
Costs of sales aids and promotional materials are capitalized as inventories.
All other advertising and promotional costs are expensed when incurred.
F-10
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Cash Equivalents
The Company's policy is to consider demand deposits and short-term investments
with a maturity of three months or less when purchased as cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to
conform to the current presentation.
2. Acquisition of Reliv UK, Ltd.
On October 1, 1998, the Company acquired the common stock of Reliv UK, Ltd.
(Reliv UK) in exchange for 250,000 shares of Reliv Europe, Inc., the holding
company of the acquired entity and certain other consideration as described
below. Prior to the acquisition, Reliv UK was a licensee of the Company. The
shares issued of Reliv Europe were valued at $12,500. In conjunction with the
acquisition, the previous owner of Reliv UK forgave approximately $435,000 in
advances to Reliv UK, and the Company converted $420,000 of its advances to
Reliv UK into 8,400,000 shares of Reliv Europe, which represents a 97% ownership
interest in Reliv Europe. Also, Reliv Europe, Inc. is to make monthly payments
of 1.5% of the retail sales of Reliv UK to the previous owner of Reliv UK for a
period of ten years. These payments are being expensed as incurred. The
operations of Reliv UK are included in the consolidated statement of operations
from the date of acquisition. The transaction was accounted for as a purchase,
and the excess cost over fair value of the net assets acquired is being
amortized on a straight-line basis over a ten-year period.
F-11
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Acquisition of Reliv UK, Ltd. (continued)
The pro forma unaudited results of operations for the years ended December 31,
1998 and 1997, assuming the purchase of Reliv UK had been consummated as of
January 1, 1997, follow:
1998 1997
------------ -------------
Net sales $52,115,582 $47,232,848
Net income 1,403,844 1,722,685
Net income per common share:
Basic $.15 $.18
Diluted $.14 $.17
3. Research and Development Expenses
Research and development expenses of $319,000, $286,000 and $289,000 in 1998,
1997 and 1996, respectively, were charged to selling, general and administrative
expenses as incurred.
4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 1998 and 1997, consist of
the following:
1998 1997
------------ ------------
Trade payables $3,568,334 $1,432,901
Distributors commissions 1,172,164 1,326,579
Sales taxes 221,377 192,130
Interest expense 27,851 75,321
Payroll and payroll taxes 114,906 173,689
Other 85,123 89,511
------------ ------------
$5,189,755 $3,290,131
============ ============
F-12
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Short-Term Borrowings
In January 1996, the Company obtained two separate lines of credit amounting to
$500,000 and $600,000, respectively. Borrowings under the $500,000 line of
credit are due January 1999 and bear interest, payable monthly, at the prime
rate. Borrowings under the $600,000 line of credit are due February 2001 and
bear interest, payable monthly, at the prime rate. A portion of the Company's
inventory and property, plant and equipment with a net book value of $3,825,000
as of December 31, 1998 are pledged as security under the terms of the
agreements. The agreements include restrictive covenants, including a
requirement that the Company maintain a current ratio of 1.5 to 1.0 and a
minimum net worth of $5,500,000. As of December 31, 1998, the Company had a
current ratio of 1.35, but it has obtained a waiver of this covenant through
June 30, 1999. As of December 31, 1998, the unused portion of the credit lines
was $786,175.
6. Long-Term Debt
Long-term debt at December 31, 1998 and 1997, consists of the following:
1998 1997
------------ -------------
Industrial revenue bonds payable in monthly installments (including interest at
85% of prime) not to exceed $9,611, commencing August 1, 1991; secured by
land and building (net book value $2,709,000 at December 31, 1998); balance
due on March 1, 2005 $ 540,776 $ 597,907
Note payable in monthly installments (including interest at prime and additional
interest at 15% of prime on the balance of the industrial revenue bonds)
equal to $9,611 less installment applied to industrial revenue bond,
commencing August 1, 1991; unsecured; balance due on March 1, 2005 204,755 204,755
Term loan payable in monthly installments of $19,550, including interest at 8.5%
through April 2001; secured by equipment and inventory (net book value of
$3,825,000 at December 31, 1998) 478,260 662,133
Term loan payable in monthly installments of $38,802, including interest at
8.5%, with the balance due March 2001; secured by land and building (net book
value of $5,601,000 at December 31, 1998) 4,355,063 3,958,514
------------ ------------
5,578,854 5,423,309
Less current maturities (362,747) (313,789)
------------ -------------
$5,216,107 $5,109,520
============ =============
F-13
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Long-Term Debt (continued)
Principal maturities of long-term debt at December 31, 1998 are as follows:
1999 $ 362,747
2000 396,555
2001 4,288,603
2002 88,455
2003 98,535
Thereafter 343,959
-------------
$ 5,578,854
=============
7. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31
1998 1997 1996
----------- ------------ ------------
Numerator:
Numerator for basic and diluted earnings
per share - net income $ 1,556,929 $ 2,028,988 $ 1,507,014
Denominator:
Denominator for basic earnings per share -
weighted average shares 9,645,000 9,600,000 9,854,000
Effect of dilutive securities:
Employee stock options and other warrants
390,000 707,000 471,000
----------- ------------ ------------
Denominator for diluted earnings per share -
adjusted weighted average shares
$10,035,000 $ 10,307,000 $ 10,325,000
=========== ============ ============
Basic earnings per share $0.16 $0.21 $0.15
=========== ============ ============
Diluted earnings per share $0.16 $0.20 $0.15
=========== ============ ============
8. Stock Options, Warrants, Treasury Stock, Repurchase Agreements, and
Distributor Stock Purchase Plan
Stock Options
The Company had an incentive stock option plan for key employees which expired
in January 1995. Accordingly, no additional options can be granted under this
plan as of that date. At December 31, 1998, options for 189,200 shares and
250,800 shares were outstanding at an option price of $2.045 and $2.25 per
share, respectively. The options are exercisable at various dates through
December 1999.
F-14
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Options, Warrants, Treasury Stock, Repurchase Agreements, and
Distributor Stock Purchase Plan (continued)
Stock Options (continued)
In May 1995, the Company adopted an incentive stock option plan which provides
for the grant of incentive stock options and nonqualified stock options for
employees (including officers) and other consultants and advisors to the
Company. A maximum of 1,100,000 shares can be purchased at an option price not
less than the fair market value of the stock at the time the options are
granted.
As the result of the Company's 10% stock dividend in February 1997, all
outstanding options and warrants were adjusted to reflect for the stock
dividend.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, (APB 25) and related interpretations in accounting for its
employee and nonemployee director stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation, requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee and nonemployee director
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of the statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rates ranging from 5.15% to 6.10% for 1996, 5.70% to 5.97% for 1997,
and 4.55% for 1998; dividend yield of .50%; volatility factor of the expected
price of the Company's stock of .658 for 1996, .624 for 1997, and .681 for 1998;
and a weighted average expected life of 4.03 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and nonemployee director stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee and
nonemployee director stock options.
F-15
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Options, Warrants, Treasury Stock, Repurchase Agreements, and
Distributor Stock Purchase Plan (continued)
Stock Options (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
and warrants is amortized to expense over the vesting period. The effects of
applying the pro forma disclosure provisions of SFAS No. 123 are not likely to
be representative of the effects on reported net income for future years. The
Company's pro forma information follows:
1998 1997 1996
----------------------------------------
Pro forma net income $1,450,356 $1,861,748 $1,385,941
Pro forma earnings per share:
Basic $.15 $.19 $.14
Diluted $.14 $.18 $.13
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
1998 1997 1996
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------
Outstanding beginning of
the year 1,165,900 $1.954 1,076,900 $1.841 883,850 $1.712
Granted:
Price = fair value 275,000 2.125 100,000 3.125 206,250 2.355
Price > fair value 75,000 2.3375 - - - -
Exercised (1) (38,300) 1.348 (11,000) 1.506 (10,450) 1.250
Forfeited (2,750) 1.818 - - (2,750) 1.250
=========== =========== ===========
Outstanding at end
of year 1,474,850 $2.021 1,165,900 $1.954 1,076,900 $1.841
=========== =========== ===========
Exercisable at end of
year 971,914 723,332 496,828
=========== =========== ===========
(1) Shares issued were less than options exercised due to cashless exercise
provision.
F-16
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Options, Warrants, Treasury Stock, Repurchase Agreements, and
Distributor Stock Purchase Plan (continued)
Stock Options (continued)
As of December 31, 1998
Options Outstanding Options Exercisable
-------------------------------------- ----------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- -------------------- ----------------- -------------------- ------------------- --------------- ------------------
$1.25 - $2.00 443,850 1.95 $1.328 305,248 $1.329
$2.01 - $2.875 933,000 2.70 2.234 568,666 2.215
$3.125 98,000 3.96 3.125 98,000 3.125
----------------- ---------------
$1.25 - $3.125 1,474,850 2.56 $2.021 971,914 $2.028
================= ===============
Warrants
In 1996, the Company, as part of a consulting agreement, issued warrants to
purchase 38,036 shares of common stock. The exercise prices of these warrants
ranged from $.045 per share to $1.932 per share and had a term of two years. In
1997, as a renewal of this agreement, the Company issued warrants to purchase
9,600 shares at an exercise price of $6.25 per share with a term of two years.
In July 1996, as part of another consulting agreement, the Company issued a
warrant to purchase 101,948 shares of common stock at an exercise price of
$4.182 per share. This warrant has a term of three years.
F-17
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Options, Warrants, Treasury Stock, Repurchase Agreements, and
Distributor Stock Purchase Plan (continued)
Warrants (continued)
A summary of the Company's warrant activity and related information for the
years ended December 31 follows:
1998 1997 1996
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
------------------------------------------------------------------------------------
Outstanding beginning of
the year 111,548 $4.360 143,348 $3.430 3,364 $1.496
Granted:
Price < fair value - - - - 6,990 0.045
Price = fair value - - 9,600 6.250 31,046 1.932
Price > fair value - - - - 101,948 4.182
Exercised (1) - - (41,400) 1.578 - -
Forfeited - - - - - -
----------- ----------- -----------
Outstanding at end
of year 111,548 $4.360 111,548 $4.360 143,348 $3.430
=========== =========== ===========
Exercisable at end of
year 111,548 111,548 143,348
=========== =========== ===========
(1) Shares issued were less than warrants exercised due to cashless exercise
provision.
As of December 31, 1998
Warrants Outstanding Warrants Exercisable
------------------------------------- -----------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- -------------------- ----------------- ----------------- -----------------
$4.182 101,948 0.496 $4.182 101,948 $4.182
$6.250 9,600 0.456 6.250 9,600 6.250
------------- --------------
$4.182 - $6.25 111,548 0.492 $4.360 111,548 $4.360
============= ==============
F-18
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stock Options, Warrants, Treasury Stock, Repurchase Agreements, and
Distributor Stock Purchase Plan (continued)
Treasury Stock and Repurchase Agreements
In October 1992, the Company entered into a stock repurchase agreement with a
former officer/director of the Company. Under the agreement, which was
retroactive to July 1992, the Company was obligated to purchase 259,686 of the
individual's shares of Company common stock. The mandatory purchase occurred in
six quarterly installments of 43,281 shares beginning in July 1992 and
concluding in December 1993. As of December 31, 1993, the Company had redeemed
all 259,686 shares required by the agreement for $657,683.
Under the same agreement, the Company also had the option to purchase an
additional 432,814 of the individual's shares on the basis of 43,281 shares each
quarter beginning in January 1995 and concluding in April 1996. Through December
31, 1996, the Company had exercised all options under the agreement and redeemed
an additional 432,814 shares for $870,218. As of December 31, 1997, all treasury
shares had been retired.
In May 1997, the former officer/director filed a demand for arbitration with
respect to the stock purchase agreement and consulting agreement entered into in
October 1992. The demand claimed damages resulting from alleged
misrepresentations made by the Company regarding these agreements. The
arbitration ruling was issued in December 1998 and awarded no damages to this
individual.
Distributor Stock Purchase Plan
In November 1998, the Company established a Distributor Stock Purchase Plan. The
plan allows distributors who have reached the "Ambassador" status the
opportunity to allocate up to 10% of their monthly compensation into the plan to
be used to purchase the Company's common stock at the current market value. The
plan also states that at the end of the year, the Company will grant warrants to
purchase additional shares of the Company's common stock based on the number of
shares purchased by the distributors under the plan during the year. The warrant
exercise price will equal the market price for the Company's common stock at the
date of issuance. The warrants issued shall be in the amount of 25% of the total
shares purchased under the plan during the year. This plan will commence in
January 1999.
F-19
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Leases
The Company leases certain manufacturing, storage and office facilities and
certain equipment and automobiles. These leases have varying terms, and certain
leases have renewal and/or purchase options. Future minimum payments under
noncancelable leases with initial or remaining terms in excess of one year
consist of the following at December 31, 1998:
Capital Operating
Leases Leases
----------- -----------
1999 $181,415 $246,126
2000 154,662 164,022
2001 148,741 92,355
2002 112,307 87,788
2003 - 1,104
Thereafter - -
----------- -----------
Total minimum lease payments 597,125 $591,395
===========
Less amount representing interest 78,055
-----------
Present value of minimum lease payments
(including current portion of $145,615) $519,070
===========
Machinery, office and computer equipment at December 31, 1998 and 1997, include
approximately $598,073 and $246,333 of equipment under leases that have been
capitalized. Accumulated depreciation and amortization for such equipment
approximated $87,149 and $154,978 at December 31, 1998 and 1997, respectively.
Rent expense for all operating leases was $324,272, $311,554 and $289,975 for
the years ended December 31, 1998, 1997 and 1996, respectively.
10. License Agreement
The Company has a license agreement with the individual who developed many of
the Company's products. This agreement provides the Company with the exclusive
worldwide license to manufacture and sell all products created by the licensor
and requires monthly royalty payments of 5 percent of net sales, with a minimum
payment of $10,000 and a maximum payment of $22,000. The agreement terminates
the earlier of December 2001 or on the death of licensor. The amount of expense
under this agreement was $264,000 for each of the years ended December 31, 1998,
1997 and 1996.
F-20
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Income Taxes
The components of income before income taxes are as follows:
Year ended December 31
1998 1997 1996
-----------------------------------------
Domestic $2,637,355 $3,625,708 $2,710,323
Foreign (139,426) (211,720) (253,309)
-----------------------------------------
$2,497,929 $3,413,988 $2,457,014
=========================================
The components of the provision for income taxes are as follows:
Year ended December 31
1998 1997 1996
-----------------------------------------
Current:
Federal $801,000 $1,239,000 $758,000
Foreign 69,000 38,000 88,000
State 59,000 134,000 108,000
-----------------------------------------
Total current 929,000 1,411,000 954,000
Deferred:
Federal 3,000 (24,000) (3,000)
Foreign 9,000 - (1,000)
State - (2,000) -
-----------------------------------------
Total deferred 12,000 (26,000) (4,000)
-----------------------------------------
$941,000 $1,385,000 $950,000
=========================================
F-21
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Income Taxes (continued)
The provision for income taxes is different from the amounts computed by
applying the United States federal statutory income tax rate of 34 percent. The
reasons for these differences are as follows:
Year ended December 31
1998 1997 1996
-------------------------------------
Income taxes at statutory rate $849,000 $1,161,000 $835,000
Differences between U.S. and
foreign tax rates on foreign income 5,000 27,000 12,000
State income taxes,
net of federal benefit 39,000 88,000 71,000
Provision for IRS audit settlement - 75,000 -
Other 48,000 34,000 32,000
-------------------------------------
$941,000 $1,385,000 $950,000
=====================================
The components of the deferred tax asset and the related tax effects of each
temporary difference at December 31, 1998 and 1997, are as follows:
1998 1997
---------------------------------
Deferred tax asset:
Product refund reserve $18,000 $18,000
Obsolescence reserve 65,000 40,000
Bad debt reserve 2,000 3,000
Miscellaneous accrued expenses (5,731) 29,065
=================================
$79,269 $90,065
=================================
Federal income taxes have not been provided on the undistributed earnings of the
Company's Australian and New Zealand subsidiaries since the Company has foreign
tax credits available to offset any related federal income taxes.
The Internal Revenue Service (IRS) examinations of the Company's U.S. federal
income tax returns for fiscal years 1992 through 1994 resulted in a proposed
assessment against the Company. In early 1998, this examination was resolved
with no material adverse effect on the Company's financial position or results
of operation.
F-22
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. Employee Benefit Plans
In 1995, the Company established a 401(k) employee savings plan which covers
substantially all employees. During 1995 and 1996, employees could contribute up
to 5 percent of their gross income to the plan, and the Company matched 50
percent of the employee's contribution. Company contributions totaled $23,000 in
1996. In 1997, the Company merged a pre-existing profit sharing plan into the
401(k) plan. For 1997, employees could contribute up to 7.5 percent of their
gross income to the plan, and the Company matched 100 percent of the employee's
contribution. Company contributions under the 401(k) plan totaled $115,000 in
1997. Company contributions totaled $0 in 1996 for discretionary contributions
for the former profit sharing plan.
In 1998, employees could contribute up to 7.5 percent of their gross income to
the plan and the Company matched 75 percent of the employee's contribution.
Company contributions under the 401(k) plan totaled $126,000 in 1998.
13. Incentive Compensation Plans
Effective January 1, 1994, the Company adopted an annual incentive compensation
plan and a long-term incentive plan. These plans include three
officers/directors and are effective until termination of their employment.
Participants in the plans are entitled to receive additional compensation based
on the attainment of defined annual and long-term performance measures.
Incentive compensation under each of the plans cannot exceed the participant's
base salary rate. The base salary rates and the performance measures specified
by both plans are established annually by the Board of Directors.
The Company paid approximately $0, $240,000 and $525,000 in 1998, 1997 and 1996,
respectively, under its incentive compensation plans.
During 1998, the Company established a supplemental executive retirement plan
which allows certain employees to defer a portion of their annual salary/bonus
into a grantor trust. The participants have a choice of certain investment
vehicles, and earnings/losses on the trust assets accrue to the
benefit/detriment of the participants. The Company may also match the
participants' deferral amount. In 1998, the Company agreed to a 56% match, which
approximated $65,000.
F-23
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. Employment Agreements
In November 1992, the Company entered into a services agreement with a former
officer for a term retroactively commencing in July 1992 and expiring in
December 1999. The Company paid approximately $50,000 in each of the years ended
December 31, 1998, 1997 and 1996.
Effective January 1, 1994, the Company entered into employment agreements with
three officers/directors and in June 1997, entered into new employment
agreements with two of these officers/directors. The employment agreements
provide for base salary rates established annually by the Board of Directors.
The Company paid base salaries of $1,272,000, $960,000 and $960,000 in 1998,
1997 and 1996, respectively, under the terms of the agreements.
15. Related Party Transactions
An officer/director of the Company is a principal in a law firm which provides
legal services to the Company. During the years ended December 31, 1998, 1997
and 1996, the Company incurred fees to the officer/director and his firm of
approximately $396,000, $332,000 and $231,000, respectively.
Accounts and notes receivable include accounts receivable from
officers/directors of $44,746, $4,633 and $4,633 at December 31, 1998, 1997 and
1996, respectively.
During 1996, the Company paid $121,000 for goods and services to a company
wholly owned by three officers/directors and one director of the Company in
connection with promotional activities.
16. Consulting Agreements
In conjunction with an acquisition, the Company entered into a consulting
agreement with a partnership consisting of three former stockholders. Under the
agreement, which commenced in March 1992 and expires in February 2002, the
Company pays annual consulting fees to the partnership equal to 2 percent of the
gross sales amount of all products sold by the Company in Australia and New
Zealand determined by the suggested retail price up to approximately
$A10,000,000 in 1992 and $A12,000,000 in all subsequent years during the term
and 3 percent of retail sales that exceed those figures. Total expense under
this agreement approximated $78,000, $96,000 and $133,000 in 1998, 1997 and
1996, respectively.
17. Legal Procedings
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 or results of operations of the
Company.
F-24
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
18. Segment Information
Description of Products and Services by Segment
The Company has two reportable segments: a network marketing segment and a
manufacturing and packaging segment. The Company's network marketing segment
consists of six operating units that sell nutritional, dietary and skin care
products to a sales force of independent distributors who sell the products
directly to customers. The manufacturing and packaging segment consists of the
manufacturing operation of the Company that produces nearly all of the products
sold by the network marketing segment along with products made for unrelated
customers based on the customers' specifications.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest expense, other non-operating income and
expense and income taxes. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed-upon
intercompany profit on intersegment sales and transfers.
Factors Management Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that perform distinctly
different functions. The manufacturing and packaging segment is evaluated on its
sales and profitability to its unrelated outside customers, along with
performance against standard costs for its intersegment sales. The network
marketing segment is evaluated on the sales and profitability of the network
marketing product line to its sales force of independent distributors.
F-25
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
18. Segment Information (continued)
Segment data for the fiscal years ended December 31, 1998, 1997 and 1996:
1998 1997 1996
--------------------------------------------------
Net Sales
Net sales to external customers:
Network marketing $45,561,745 $45,311,467 $37,419,875
Manufacturing and packaging 6,331,766 1,524,803 3,310,118
--------------------------------------------------
Total net sales to external customers 51,893,511 46,836,270 40,729,993
Intersegment net sales:
Manufacturing and packaging 7,387,501 6,994,590 5,736,777
--------------------------------------------------
Total net sales 59,281,012 53,830,860 46,466,770
Reconciling Items:
Intersegment net sales (7,387,501) (6,994,590) (5,736,777)
--------------------------------------------------
Total consolidated net sales $51,893,511 $46,836,270 $40,729,993
==================================================
Depreciation and amortization
Network marketing $492,920 $457,194 $452,483
Manufacturing and packaging 313,226 150,087 176,674
--------------------------------------------------
Total consolidated depreciation and
amortization expense $806,146 $607,281 $629,157
==================================================
Segment Profit
Network marketing $5,045,857 $5,116,625 $4,055,671
Manufacturing and packaging (616,995) (16,140) (200,532)
--------------------------------------------------
Total segment profit 4,428,862 5,100,485 3,855,139
Reconciling items:
Corporate expenses (1,555,690) (1,589,374) (1,333,077)
Nonoperating-net 134,249 113,145 147,771
Interest expense (509,492) (210,268) (212,819)
--------------------------------------------------
Total consolidated income before
income taxes $2,497,929 $3,413,988 $2,457,014
==================================================
F-26
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
18. Segment Information (continued)
1998 1997 1996
--------------------------------------------------
Segment assets
Network marketing $13,271,828 $12,740,414 $ 7,772,109
Manufacturing and packaging 4,164,340 803,108 1,420,786
--------------------------------------------------
Total segment assets 17,436,168 13,543,522 9,192,895
Reconciling items:
Corporate assets 2,816,804 2,426,426 2,208,770
--------------------------------------------------
Total consolidated assets $20,252,972 $15,969,948 $11,401,665
==================================================
Capital expenditures
Network marketing $ 433,128 $5,012,770 $ 384,818
Manufacturing and packaging 1,323,314 41,956 380,568
--------------------------------------------------
Total capital expenditures $1,756,442 $5,054,726 $ 765,386
==================================================
Geographic Area Data
1998 1997 1996
--------------------------------------------------
Net sales to external customers
United States $47,356,172 $41,718,773 $34,408,349
Australia 2,307,044 2,560,714 3,550,213
New Zealand 589,752 888,710 1,172,743
Canada 1,213,609 1,338,425 1,246,624
Mexico 317,457 329,648 352,063
United Kingdom 109,477 - -
--------------------------------------------------
Total net sales to external customers $51,893,511 $46,836,270 $40,729,992
==================================================
Assets by area
United States $16,730,842 $13,202,451 $ 8,340,211
Australia 1,878,575 1,488,667 1,472,565
New Zealand 646,584 534,465 668,501
Canada 677,550 467,467 692,905
Mexico 257,431 276,898 227,483
United Kingdom 61,990 - -
--------------------------------------------------
Total consolidated assets $20,252,972 $15,969,948 $11,401,665
==================================================
Major Customer
Revenues from sales to one customer of the Company's manufacturing and packaging
segment represented approximately $5.4 million of consolidated net sales for
1998.
F-27
19. Quarterly Financial Data (Unaudited)
First Second Third Fourth
------------------------------------------------------------
(In thousands, except per share amounts)
1998
Net sales $ 12,277 $ 11,995 $ 12,579 $ 15,043
Cost of products sold $ 2,254 $ 2,169 $ 3,728 $ 6,135
Net income $ 633 $ 513 $ 73 $ 338
Earnings per share:
Basic $ .07 $ .05 $ .01 $ .03
Diluted $ .07 $ .05 $ .01 $ .03
1997
Net sales $ 12,670 $ 11,771 $ 11,480 $ 10,915
Cost of products sold $ 2,532 $ 2,337 $ 2,521 $ 2,015
Net income $ 819 $ 595 $ 282 $ 333
Earnings per share:
Basic $ .09 $ .06 $ .03 $ .03
Diluted $ .08 $ .06 $ .03 $ .03
F-28
Reliv' International, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 1998, 1997 and 1996
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------
Additions
-------------------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end
Classification of year expenses accounts describe of year
- ----------------------------------------------------------------------------------------------------------
Year ended December 31, 1998
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful
accounts $ 7,600 $ 9,887 $ -- $ 12,487(1) $ 5,000
Reserve for obsolete
inventory 109,000 180,000 -- 113,000(2) 176,000
Supporting liability
accounts
Reserve for refunds 50,000 377,000 -- 377,000(3) 50,000
---------------------------------------------------------------------
Year ended December 31, 1997
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful
accounts $ 13,000 $ -- $ -- $ 5,400(1) $ 7,600
Reserve for obsolete
inventory 125,000 -- -- 16,000(2) 109,000
Supporting liability
accounts
Reserve for refunds 78,800 186,000 -- 214,800(3) 50,000
-------------------------------------------------------------------------
Year ended December 31, 1996
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful
accounts $ 7,000 $ 78,700 $ -- $ 72,700(1) $ 13,000
Reserve for obsolete
inventory -- 125,000 -- -- 125,000
Supporting liability
accounts
Reserve for refunds 78,800 92,000 -- 92,000(3) 78,800
--------------------------------------------------------------------------
(1) Uncollectable accounts written off, net of recoveries.
(2) Disposal of obsolete inventory.
(3) Amounts refunded, net of salable amounts returned.
F-29