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, 2002
Commission File Number
1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 371172197
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri 63005
(Address of principal executive offices) (Zip Code)
(636) 537-9715
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:
Common Stock, par value $0.001 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 $4.22 per share of Registrant's Common
Stock as reported on NASDAQ National Market tier of The NASDAQ Stock Market at
March 17, 2003, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was then approximately $26,524,493.
(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 17, 2003, was 11,952,591 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2003 Annual Meeting of
Shareholders to be filed with the Commission within 120 days of the end of
Registrant's last fiscal year are incorporated by reference into Part III.
INDEX
Part I
Item No. 1 Business........................................................................................3
Item No. 2 Properties.....................................................................................22
Item No. 3 Legal Proceedings..............................................................................23
Item No. 4 Submission of Matters to a Vote of Security Holders............................................23
Part II
Item No. 5 Market for Registrant's Common Equity and Related Stockholder Matters..........................23
Item No. 6 Selected Financial Data........................................................................25
Item No. 7 Management's Discussion and Analysis of Financial Condition and Results of Operations..........25
Item No. 7A Qualitative And Quantitative Disclosures Regarding Market Risk.................................37
Item No. 8 Financial Statements and Supplementary Data....................................................38
Item No. 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...........................................................................38
Part III
Item No. 10 Directors and Executive Officers of the Registrant.............................................39
Item No. 11 Executive Compensation.........................................................................39
Item No. 12 Security Ownership of Certain Beneficial Owners and Management.................................39
Item No. 13 Certain Relationships and Related Transactions.................................................39
Item No. 14 Controls and Procedures........................................................................39
Item No. 15 Exhibits, Financial Statement Schedules and Reports on Form 8K.................................40
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PART I
Item No. 1 - Business
Overview
Reliv' International, Inc. (the "Company") has a stated mission to
"Nourish Our World" by offering a unique nutritional product line and an
extraordinary entrepreneurial opportunity that enables financial freedom,
long-term security and personal growth to its distributors. The Company's
products include nutritional supplements, weight management products, functional
foods, granola bars, sports nutrition and a line of skin care products.
Nutritional supplements include vitamins, minerals, dietary supplements, herbs
and compounds derived therefrom. Functional foods are products designed to
influence specific functions of the body. The Company and its subsidiaries sell
products to distributors throughout the United States, Australia, Canada, New
Zealand, Mexico, the United Kingdom, Ireland and the Philippines.
The Company's products are distributed through a network marketing system
- -- a system in which distributors sell products directly to retail customers and
sponsor other individuals as distributors. Distributors derive compensation both
from the direct sales of products and from sales volume generated by sponsored
distributors. Network marketing involves person-to-person communication and
training on the products and the system. The Company believes this feature makes
network marketing a more effective means of marketing its products than in-store
retail sales. The network marketing system provides financial opportunity to a
broad cross-section of people, including those seeking to simply supplement
other income, as well as those who desire a full-time home-based business.
Background - Corporate Structure
The Company was incorporated in Illinois on February 11, 1985 and
commenced its present business in October, 1988. On April 10, 2000, the Company
changed its state of incorporation from Illinois to Delaware by the merger of
the Company into Reliv Merger Corporation, a wholly-owned subsidiary of the
Company, which was incorporated under the laws of Delaware. Reliv Merger
Corporation changed its name to Reliv International, Inc., thus the name of the
Company remained the same after the merger. Such reincorporation caused certain
changes to the Company's charter and bylaws, all of which were approved at the
1999 annual meeting of shareholders. The Company maintains its principal
executive offices and production facilities at 136 Chesterfield Industrial
Boulevard, Chesterfield, Missouri 63005.
The Company has two wholly-owned subsidiaries, Reliv', Inc. ("Reliv'") and
Reliv' World Corporation ("Reliv' World"). Reliv' World has seven subsidiaries -
Reliv' Australia Pty. Ltd, Reliv' Canada Company, Reliv' New Zealand Ltd.,
Reliv' NOW de Mexico S.A. de R.L. de C.V., Reliv' Europe, Inc. (which owns
Reliv' U.K. Limited Corporation), and Reliv' Philippines, Inc.
3
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 2002, sales in the United
States represented approximately 84% of net sales.
In Australia, Canada, New Zealand, Mexico, the United Kingdom, Ireland and
the Philippines, 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, was 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 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. In 2002, approximately 3% of the Company's net sales were attributed
to sales in Australia.
During April, 1992, Reliv' New Zealand Ltd. ("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. Sales in New Zealand represented less than 1% of the Company's net
sales in 2002.
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. In June, 2000, the Company
consolidated Reliv Canada's operations with the Company's operations located in
Chesterfield, Missouri, but maintains and operates a warehouse facility in
Canada which serves as a distribution center for the Company's products. In
2002, approximately 2% of the Company's net sales were attributed to sales in
Canada.
4
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. In September, 2000, Reliv NOW de Mexico S.A. de R.L. de C.V.
was organized and now conducts the Company's operations in Mexico. Sales in
Mexico represented approximately 5% of the Company's net sales in 2002.
On July 1, 1995, Reliv' UK Limited Corporation ("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 1.5% 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. In December
2002, Reliv UK moved its facility from London to Birmingham. In 2002, less than
1% of the Company's net sales were attributed to sales in the United Kingdom.
In June, 2000, Reliv Philippines, Inc. ("Reliv Philippines") was organized
as a Philippine corporation and as a wholly-owned subsidiary of Reliv World
(except for nominal shares which are owned by the five directors of Reliv
Philippines). Reliv Philippines commenced operations in August, 2000, and began
selling the Company's products to distributors in the Philippines in December,
2000. The establishment of Reliv Philippines was partially financed by investor
loans to Reliv World aggregating $240,000, including warrants to purchase up to
12% of the stock of Reliv Philippines. In 2002, Reliv Philippines was the
Company's leading international market for sales with 5% of the Company's net
sales attributed to the Philippine network.
In March 2002, Reliv UK commenced sales of the Company's products to
distributors and customers in the Republic of Ireland. Due to the close
proximity between Ireland and the UK, the operations and fulfillment of Irish
distributors are carried out by Reliv UK. Currently, Reliv UK ships product
directly to distributors in Ireland with the intent of opening a distribution
center in the near future. The Company is pursuing product registration in
Ireland for several of its products at this time.
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 nutrition and a skin care line.
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The Company's nutritional supplements include Reliv' Classic(R) and Reliv'
NOW(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. Containers of Reliv NOW and Reliv
Classic come in a one month supply, 28 servings, and are in powdered form to be
mixed with juice or other beverages. The Reliv' Classic formula has a U.S.
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. In 2002, sales of Reliv Classic and Reliv NOW represented approximately
27% and 9% of net sales, respectively. Reliv NOW is available in every country
where the Company does business (except Ireland) while Reliv Classic is only
available in the United States, Australia, New Zealand, Canada and the United
Kingdom.
Innergize!(R) is a patented powdered sports drink containing a mixture of
vitamins and minerals designed for performance enhancement. A can of Innergize
contains 28 servings and is available in lemon, orange and cool punch flavors.
In 2002, sales of Innergize represented approximately 14% of net sales.
Innergize is available in every country where the Company does business. In
Canada, the product is called Optain(R) due to local product regulations.
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 formula includes an
advanced complex of thermogenic fat burners, along with an increased level of
soy protein. Each serving of the product provides 35 percent of the recommended
daily allowance of many essential vitamins and minerals. A can of Reliv'
Ultrim-Plus contains 14 servings and is available in three flavors - vanilla,
chocolate and strawberry. The product is in powdered form for mixture with water
or milk and is sold in every country where the Company does business. Sales of
Reliv Ultrim-Plus made up approximately 5% of net sales in 2002.
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.
Cellebrate, which comes in 56 servings per can, is in powdered form and is
recommended to be used alone or with Reliv' Ultrim Plus meal replacement. Sales
of Cellebrate made up approximately 3% of net sales in 2002. Cellebrate is
available in the United States and Canada.
FibRestore(R) is a patented nutritional supplement containing fiber,
vitamins, minerals and herbs. A can of FibRestore contains 28 servings (except
in Mexico) and is in powdered form for mixture with water or juice. A modified
version of the FibRestore formula is marketed in Canada under the name Herbal
Harmony(R) in order to comply with that country's nutritional regulations.
FibRestore is available in all of the countries in which the Company does
business with the exception of Ireland. Sales of FibRestore made up
approximately 13% of net sales in 2002.
Arthaffect(R) is a nutritional supplement and functional food containing
Arthred, a patented form of hydrolyzed collagen protein, which is clinically
reported to nutritionally support healthy joint function. A can of Arthaffect
contains 30 servings and is in powdered form for mixture
6
with water, milk or juice. In 2002, sales of Arthaffect represented
approximately 7% of net sales. The product is available in the United States,
Australia, New Zealand, Mexico, the Philippines and Canada. The product is
called A-Affect(R) in the countries outside the United States due to local
product regulations.
ProVantage(R) is a nutritional supplement containing soy and is designed
to enhance athletic performance with a balance of nutrients needed to improve
endurance, recovery and repair. ProVantage helps increase muscle mass and
function, reduce fatigue and burn excess body fat for extra energy. The product
is also of benefit to dieters and others wanting to increase their soy intake. A
can of ProVantage contains 11 servings and is in powdered form for mixture with
water or juice. In 2002, sales of ProVantage represented approximately 3% of net
sales. ProVantage is available in the United States, Australia, New Zealand, and
Canada.
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. Sales of Reliv Ultra
Bars made up approximately 1% of net sales in 2002. The product is available
only in the United States.
SoySentials(R) is a nutritional supplement containing soy as well as other
vitamins, minerals and herbs and is designed for use by women. A can of
SoySentials contains 14 servings and is in powdered form for mixture with water
or juice. The U.S. Food and Drug Administration has identified soy protein as an
effective nutrient for reducing cholesterol levels, and thereby reducing the
risk of heart disease. In 2002, sales of SoySentials represented approximately
4% of net sales. SoySentials is only available in the United States.
Reliv' Soy Sense(TM) is a vanilla flavored nutritional supplement
containing soy as well as other vitamins, minerals and herbs and can be consumed
by men as well as women. A can of Reliv' Soy Sense contains 14 servings and is
in powdered form for mixture with water or juice. In 2002, sales of Reliv Soy
Sense represented approximately 1% of net sales. Reliv Soy Sense is available in
the United States, Australia, New Zealand, Canada, and the United Kingdom. Due
to local regulations, the product is called Reliv' So Sense(TM) in Canada.
Reliv NOW For Kids(TM) is a product designed to provide a balanced
nutritional supplement for a child's diet and contains a variety of vitamins and
minerals. The products are in powdered form to be mixed with water or milk.
Reliv NOW For Kids is available in chocolate and vanilla. Sales of Reliv NOW For
Kids made up approximately 3% of net sales in 2002. Reliv NOW For Kids is
available in the United States, the United Kingdom and the Philippines.
ReversAge(R) is an anti-aging dietary supplement designed to slow down the
effects of the aging process. Three proprietary complexes form the foundation of
the supplement: longevity complex, antioxidant complex and herbal complex. The
longevity complex is the restorative
7
complex, designed to replenish key hormones while creating balance within the
body's major systems; the antioxidant complex is designed to halt aging at the
cellular level and the herbal complex delivers a variety of age-defying herbs,
including Ginkgo Biloba and Maca. The lime flavored product is in powdered form
for mixture in water and is available in every country where the Company does
business except the United Kingdom and Ireland. In Canada the product is called
Nutriversal(TM). During 2002, sales of ReversAge represented approximately 6% of
net sales.
ReversAge(R) Performance Enhancing Skin Care is a line of skin care
products including: Facial Cleansing Gel, Body Lotion, Smooth and Lift Serum,
Daily Skin Defense, Eye Renewal Cream, Nightly Skin Restore and Cleansing Bar.
ReversAge is clinically proven effective, dermatologist tested and
hypoallergenic. Each skin care product is enriched with the Company's
Dermalongevity Complex(TM) and has been specially formulated to protect and
repair when and where a consumer needs it. The ReversAge Read and Need(TM)
Technology adjusts to different skin types and delivers the necessary moisture
and nutrients to repair and replenish skin. The patented Nutri-Dynamic Delivery
System holds active ingredients in place on the surface of the skin for up to 12
hours, allowing continuous delivery of youth-promoting nutrients to the skin.
ReversAge is available in every market where Reliv currently operates with the
exception of the United Kingdom, Ireland, the Philippines and Mexico. In 2002,
ReversAge skin care represented approximately 3% of annual net sales.
Reliv Delight(R) is a powdered food supplement in the nature of a milk
replacement. Due to the significant level of cross-border sponsoring between
Mexico and the United States and because of the growing U.S.-Hispanic market,
the Company introduced Reliv Delight in the U.S. in July, 2001, subsequent to
its introduction in Mexico in March, 2001. In 2002, sales of Reliv Delight
represented less than 1% of net sales.
The Company conducts ongoing research and development on its product line
and intends to introduce additional product items in the future. See "Research
and Development."
Patents
The Company has obtained U.S. patents on five product formulations
including Innergize!, FibRestore, Cellebrate, Arthaffect and ReversAge (dietary
supplement) and is the licensee of a sixth U.S. patent for the Reliv Classic
formula.
Reliv Classic is 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 was 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 net revenues from the sale of products containing
the licensed formula, with a minimum $10,000 and maximum $22,000 monthly
royalty. The Company's obligation to pay the royalty payments terminated on the
death of Dr. Kalogris in February, 2003, and the royalties under the License
Agreement were deemed
8
to be paid in full at that time. The Company shall pay the heirs of Dr. Kalogris
$10,000 a year until expiration of the patent for use of name and likeness.
Arthaffect promotes healthy joint function and works without the dangerous
side effects of many popular arthritis treatments. A key component of this
comprehensive formula is Arthred(R), a patented ingredient that has been
clinically proven to help rebuild damaged cartilage. Under an agreement dated
November 6, 1996, Traco Labs, Inc. ("Traco"), exclusive licensee of the patent
rights, sublicensed the rights to sell the ingredient to the Company ("Traco
Agreement"). The license 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.
In January, 2002, the Company was awarded a U.S. Patent for its dietary
supplement ReversAge(R). ReversAge is an anti-aging dietary supplement designed
to slow down, and in some cases, reverse the aging process. Three proprietary
complexes form the foundation of the supplement: longevity complex, antioxidant
complex and herbal complex. The longevity complex is the restorative complex,
designed to replenish key hormones while creating balance within the body's
major systems. The three cornerstone ingredients in this complex are 7KETO,
Symbiotropin Growth Hormone Releaser and SAM-e (S-Adenosyl-L-Methionnine).
Second, ReversAge includes an antioxidant complex designed to halt aging at the
cellular level. This proprietary complex delivers some of the most powerful
antioxidants available, including Co Enzyme Q10 and Resveratrol (Protykin).
Finally, the herbal complex delivers a variety of age-defying herbs, including
Ginkgo Biloba and Maca.
The principal ingredient delivery system of ReversAge (skin care) is the
subject of issued U.S. patents. On March 1, 2001, Hydron Technologies, Inc
("Hydron") and the Company entered into an agreement which states that the
Company shall purchase skin care products from or through Hydron and shall have
the right to sell and distribute the products to the Company's distributors (the
"Hydron Agreement"). The Hydron Agreement is worldwide in scope and continues
through February, 2004 with a right of renewal by the Company upon reaching
predetermined sales goals. Pursuant to the Hydron Agreement, the Company was
granted an exclusive license to market its line of skin care products subject to
the Agreement, and is obligated to pay Hydron royalties which vary depending on
the volume of product sold.
Trademarks
Trademark registrations for "Reliv'" and for many of the Company's product
names are either issued or pending in the U.S. Patent and Trademark Office
("USPTO"). Currently, the Company has eighteen (18) marks in use and registered
with the USPTO and three (3) pending final approval. Trademark registrations for
selected marks have been issued or applied for in Australia, New Zealand,
Canada, Mexico, the United Kingdom, Ireland, the Philippines and several other
foreign countries that offer good network marketing opportunities. The Company
considers its trademarks and tradenames to be an important asset of its
business.
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Company Strategy
The Company's business model focuses on the sales and marketing of
nutritional and skin care products to distributors and customers. The Company is
continually developing programs to attract and retain distributors and
customers. The Company has designed and implemented a range of support tools to
help distributors become more effective in selling their products, including a
newly enhanced distributor website which makes product purchasing and
distributor information more simple and accessible. Downline Organizer is a
subscription service offered by the Company that provides an array of additional
tools and international reports to help plan, organize and drive a distributor's
business. Downline Organizer offers: 24/7 access to business-critical
information on purchasing and sponsoring via 14 customizable reports; timely
alerts about a distributor's current activity; e-mail; a calendar, etc.
The Company plans to expand into the most promising international markets.
In March, 2002, the Company entered Ireland--its newest market since opening the
Philippines in December, 2000. The Company's decision to enter new markets in
the future will be based on its assessment of several factors including market
size, distributor interest, anticipated demand for the Company's products,
receptivity to network marketing, ease of entry, and regulatory restrictions
regarding products and the marketing system. The Company intends to maintain
its seamless international distributor compensation plan in new markets to allow
distributors to receive commissions for sales throughout the international
system. The Company believes this seamless plan will facilitate and enhance the
expansion of the Company's business into various international markets.
The Company intends to utilize its research and development capabilities
in nutrition science to improve, develop and introduce new products. In August,
2002, the Company introduced an enhanced Reliv NOW formula with significant
nutritional differences from the old formula including: a decrease in calories
from 120 to 40; a decrease in calories from fat from 10 to zero; a decrease in
carbohydrates from 18 grams to 1 gram; a decrease in sugars from 14 grams to 1
gram; a decrease in sodium from 180 milligrams to 110 milligrams; and replaced
dairy whey with soy protein. During 2002, the Company introduced several
products into foreign markets, including Arthaffect and Reliv NOW For Kids in
the Philippines and ReversAge and Arthaffect in Mexico.
Sales and Marketing
The Company sells its products to a network of independent distributors,
who sell the products directly to customers or consume the products themselves.
Network marketing is a form of direct selling through a network of distributors
who purchase products at wholesale prices from the manufacturer and then make
retail sales to consumers. The concept of network marketing is based on the
strength of personal recommendations that frequently come from friends and
family. The Company believes that network marketing is an effective way to
distribute its products because it allows person-to-person product education,
which is not as readily available through traditional distribution channels.
Customers who desire to sell the
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Company's products may become distributors by being sponsored into the program
by another distributor, thereby becoming part of the sponsoring distributor's
down line.
The Company's products are marketed and sold to distributors in the United
States, Australia, Canada, New Zealand, Mexico, the United Kingdom, Ireland and
the Philippines through a subsidiary in each country (except Ireland). 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 and business opportunities. Once a year, the
Company sponsors an international conference in St. Louis, Missouri, for the
benefit of distributors worldwide. The Company also sponsors national and
regional conferences within every market as well as Master Affiliate Training
(MAT) Schools where distributors who have attained the level of Master Affiliate
may attend and learn sales and recruitment strategies from Ambassadors of the
Company and certain corporate personnel. Company subsidiaries also sponsor group
telephone conference calls for training and promotional activities.
The Company also recommends and encourages the use of Tuesday night
Business Opportunity Meetings ("BOM") and Saturday morning trainings throughout
its network of distributors. Every month the Company publishes for its
distributors the location, date and time of opportunity meetings and trainings
as well as the distributor who will be hosting such event. These meetings serve
as a forum for teaching new recruits the fundamentals of the Company's
compensation plan as well as introducing them to the Company's products and
their unique benefits.
Distributors consist principally of individuals, although a limited number
of distributors are corporations or partnerships. A new distributor is required
to complete a distributor application and, in most areas, to purchase a package
of distributor materials (for $39.95 plus shipping in the United States)
consisting of a distributor manual, business forms and promotional materials
distributed throughout the year. New distributors must enter into a written
contract, which obligates them to adhere to the Company's policies and
procedures. Distributors purchase products from Company subsidiaries or from
other distributors for resale or consumption by the distributor or his or her
family. The Company believes many of its distributors are attracted to the
Company because of the quality of its products and its rewarding compensation
plan.
In each country in which the Company conducts business, distributors
operate under a uniform distributor system that compensates distributors at
varying levels based on sales volumes. At the lowest rank, a distributor is
designated as a Retail Distributor and is entitled to purchase products from a
Company subsidiary or other distributors at a discount of 20 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
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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 40 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 down line distributors purchase
product. In July, 2001, the Company introduced Profit Paid Direct, a system
developed to track and pay wholesale profits to distributors. No longer are
Master Affiliates required to track and distribute wholesale profits to their
personal group. Now, the Company calculates wholesale profits and issues a check
directly to the qualified distributor once a month. For example, Assume A is a
40% discount Master Affiliate who signs up B, a 30% discount Key Affiliate, who
signs up C, a 20% discount Retail Distributor. If C purchases directly from the
Company, a 10% wholesale profit check will be sent to both A and B.
Master Affiliates are also entitled to receive additional compensation
payments of two percent to eight 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 "generation royalty" payments, Master Affiliates
are required to maintain certain monthly sales volumes and to 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.
The Company has a 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 royalty on the
retail sales volume of Master Affiliates in their downline organization for an
unlimited depth, until they reach a Master Affiliate who has achieved Star
Director status.
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.
Silver Ambassadors and up are entitled to additional percentages of the retail
sales volume of downline Master Affiliates in the fourth, fifth and sometimes
sixth level of sponsorship. Ambassadors are also entitled, depending on the
level, to additional benefits, such as participation in Company sponsored
events, paid hotel rooms and
12
transportation for national conventions, health insurance and car allowances.
Ambassadors reaching the level of Silver Ambassador and up form the "Reliv Inner
Circle."
The Company's Direct Select program is available for distributors and
their retail customers to order product in less than case lots directly from the
Company by phone. Auto-Ship, an automatic monthly reorder program available for
distributors and customers, provides a simple and convenient ordering process
for consumers as well as distributors wanting to satisfy maintenance
requirements such as Personal Volume Qualification. Product is shipped directly
to the distributor or customer and upline distributors earn a commission on all
Direct Select and Auto-Ship sales.
Company subsidiaries also provide a variety of additional incentives or
bonuses to the most productive distributors such as Momentum Bonus Awards in the
form of cash for distributors with the highest personal group volume in a month
and trips for the highest volumes during a sales promotion time period.
As of December 31, 2002, 51,139 persons or entities were registered as
distributors of Company subsidiaries of which 7,189 were Master Affiliates. This
is an increase in the number of distributors from December 31, 2001 totals of
43,437 distributors of which 6,657 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
------------ -----------------
United States 36,100 5,255
Australia 2,090 134
New Zealand 390 18
Canada 915 107
Mexico 3,412 907
United Kingdom/Ireland 241 74
The Philippines 7,991 694
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 ($30 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 2002.
13
The Company recognizes that its sales growth is based upon the continued
development of its independent distributor force and it 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 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.
Compliance
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 network
marketing 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
number of retail sales 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 generation royalty compensation payments.
The Company maintains a policy that unused product may be returned by
customers to the selling distributor for a full refund or exchange within 30
days after purchase. Each subsidiary also maintains a policy that any
distributor who terminates his distributorship may return resalable product
which was purchased from the Company within three months of the return 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 believes this
buy-back policy addresses and satisfies a number of the regulatory compliance
issues pertaining to network marketing systems, particularly inventory loading.
In order to comply with regulations that apply to both the Company and its
distributors, the Company conducts considerable research into the applicable
regulatory framework prior to entering any new market to identify all necessary
licenses and approvals and applicable limitations on operations in that market.
The Company devotes substantial resources to obtaining the necessary licenses
and approvals and bringing its operations into compliance with the applicable
limitations. The Company also researches laws applicable to distributor
operations and revises or alters distributor manuals and other training
materials and programs to
14
provide distributors with guidelines for operating a business, marketing and
distributing products and similar matters, as required by applicable regulations
in each market.
Regulations in existing and new markets often are ambiguous and subject to
considerable interpretive and enforcement discretion by the responsible
regulators. Moreover, although when the Company believes that it is in
compliance with all applicable regulations, new regulations regularly are being
added and the interpretation of existing regulations is subject to change. It is
an ongoing part of the Company's business to anticipate and respond to new and
changing regulations and to make corresponding changes in operations to the
extent practicable.
The Company has a compliance department that receives and reviews
allegations of distributor misconduct. If the Company determines that a
distributor has violated any section of the Company's Policies and Procedures,
it may take a number of disciplinary actions. For example, the Company may
impose sanctions such as warnings or suspensions until specific conditions are
satisfied, or take other appropriate actions at the Company's discretion
including termination of the Distributor Agreement.
Manufacturing and Product Sources
The Company established a manufacturing line at its facility in
Chesterfield, Missouri and began to manufacture all its nutritional products
(except granola bars and skin care) in early 1993. The Company expanded its
Chesterfield facility in 1997. At its Chesterfield manufacturing facility, the
Company manufactured products that accounted for approximately 96% of net sales
in 2002. The remaining 4% is comprised of the Company's granola bar and skin
care lines, which are produced by third parties. See "Item No. 2 - Properties."
The Company's ability to manufacture its powder nutritional products is a
competitive advantage with respect to competitors not engaged in manufacturing
and contributes to its ability to provide high-quality products. The Company's
product manufacturing includes identifying suppliers of raw materials, acquiring
the finest quality raw materials, blending exact amounts of raw materials into
batches, and canning and labeling the finished products. Since the Company
carefully selects its ingredient suppliers, it is able to control the quality of
raw materials and its finished products. 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. By
monitoring and testing products at all stages of the manufacturing process,
precise product composition can be guaranteed by the Company. In addition,
management believes it can keep costs associated with its nutritional
supplements at the lowest level possible by manufacturing its own products.
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.
15
The Company's granola bars are manufactured by contract manufacturers who
produce the products in accordance with formulas provided by the Company,
subject to quality control requirements and inspections by representatives of
the Company. The Company has had no difficulty in obtaining contract
manufacturing and there has been no material adverse effect due to untimely
supply of goods.
The Company's skin care line is manufactured by a third party, Hydron
Technologies, Inc. Hydron is both owner and licensee of certain proprietary
technology used in the Company's skin care products. The Company and Hydron
entered into an Agreement for the supply of such skin care products through
February, 2004, and beyond if renewed by the Company.
Distributors order product from Company subsidiaries in case lots and
individual quantities and pay for the goods prior to shipment. In the United
States, the Company's products are warehoused and shipped by common carrier to
distributors. The facility in Chesterfield, Missouri serves all parts of the
country. See "Item No. 2 - Properties." Products are also warehoused in, and
shipped to local distributors from: Sydney, Australia; Auckland, New Zealand;
Oakville, Canada; and Birmingham, England. Reliv Philippines currently has
sixteen product pick-up centers located throughout the country which are
operated by business partners and four company owned and operated business
centers located in the following cities: Makati, Davao, Ortigas and Cebu. In
Mexico, product is warehoused and shipped in and from approximately fifty
distribution centers located throughout the country. With the exception of Reliv
Canada and Reliv New Zealand, each subsidiary of the Company maintains an office
and personnel to receive, record and fill orders from distributors. Distributors
in Ireland order and receive product from Reliv UK.
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 were $27,292,000 in 1999 as a result of a major customer and obtaining
other business, but decreased to $16,748,000 in 2000 due to the Company's
decision to place less emphasis on this business. In 2001, revenues were
$3,879,000 as production and sales to the last significant customer concluded in
August, 2001. In 2002, manufacturing and packaging net sales to external
customers were only $137,000.
Reference is made to Note 19 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on business segments.
Research and Development
The Company is committed to continuous product innovation and improvement
through sound scientific research. The mission of the Company's research and
development team is to develop superior products that support life-long health.
Products are developed and enhanced using a combination of published scientific
research and in-house studies. The Company periodically consults with a panel of
physicians who advise the Company on product
16
development. The Company intends to continue to use its resources in the
research and development of new products and enhancement of existing products.
At its Chesterfield facility, the Company conducts research, product development
and formulation, testing and quality control, all relating to nutritional food
products. Research and development costs were $431,000 in 2002, $355,000 in
2001, and $410,000 in 2000.
Employees
As of December 31, 2002, the Company and all subsidiaries had
approximately 205 full-time employees compared with 202 such employees at the
end of 2001.
Product Regulation
The formulation, labeling and advertising or promotion of the Company's
products are subject to regulation by the 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. 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. 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 adverse effect on its products or operations. The adoption of new
regulations in the United States or in any of the international markets, or
changes in the interpretation of existing regulations, could have a material
effect on the Company.
The majority of the products marketed by the Company are classified as
dietary supplements under the FDCA. 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. 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 pre-market clearance. In addition, if the
FDA determines that the claims concerning a product's effect 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.
Manufacturers of dietary supplements that make specified types of statements on
dietary supplements, including some product performance claims, must have
substantiation that the statements are truthful and not misleading.
17
In January 2000, the FDA published a final rule that defines the types of
statements that can be made concerning the effect of a dietary supplement on the
structure or function of the body pursuant to the DSHEA. Under the DSHEA,
dietary supplement labeling may bear "structure/function" claims, which are
claims that the products affect the structure or function of the body, without
prior FDA review. They may not, without prior FDA review, bear a claim that they
can prevent, treat, cure, mitigate or diagnose disease, otherwise known as a
"disease claim". The new final rule describes how the FDA will distinguish
disease claims from structure/function claims.
The Company's advertising of its products is subject to regulation by the
FTC. The FTC prohibits unfair methods of competition and unfair or deceptive
acts or practices in or affecting commerce and provides that the dissemination
of any false advertisement pertaining to drugs or foods, including dietary
supplements, is an unfair or deceptive act or practice. Under the FTC's
substantiation doctrine, an advertiser must have a "reasonable basis" for all
claims made about a product. Failure to be able to adequately substantiate
claims may be considered either deceptive or unfair practices. In order to avoid
a violation of the FTC standards, the Company makes sure it has adequate
substantiation for all advertising claims made for its products. In addition,
the FTC has increased its scrutiny of the use of distributor testimonials.
Although it is impossible for the Company to monitor all the product claims made
by its independent distributors, the Company makes its best effort to ensure
that its distributors do not violate the FTC's standards.
The FTC, which exercises jurisdiction over the advertising of all of the
Company's products, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of some of their products. These enforcement actions have resulted
in consent decrees and monetary payments by the companies involved. Although the
Company has not been the target of FTC enforcement action for the advertising of
its products, no assurance can be given that the FTC will not question its
advertising or other operations in the future. In November 1998, the FTC issued
a guide for the dietary supplement industry, describing how the FTC applies the
law that it administers to advertisements for dietary supplements.
The Company may be subject to additional laws or regulations administered
by the FDA, FTC 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 would have on its business in
the future. The Company could become subject to requirements for the
reformulation of certain products, the recall of certain products, additional
documentation for certain products, label changes, and additional scientific
substantiation. Any or all such requirements could have a material adverse
effect on the Company's business and operations.
The Company is aware that, in some of its international markets, there has
been recent adverse publicity concerning products that contain substances
generally referred to as "genetically modified organisms" ("GMOs"). In some
markets, the possibility of health risks
18
thought to be associated with GMOs has prompted proposed or actual governmental
regulation. When necessary, the Company has responded to government regulations
that forbid products containing GMOs by changing certain unacceptable
ingredients to non-GMO. Some of the Company's products in certain markets still
contain substances that would be or might be classified as GMOs. The Company
cannot anticipate the extent to which regulations in these markets will restrict
the use of GMOs in its products or the impact of any regulations on business in
those markets. In response to any applicable future regulations, the Company
will reformulate its products to satisfy the regulations. Compliance with
regulatory requirements in this area should not have a material adverse effect
on the Company's business.
Sales Program Regulation
The Company's distribution and sales program is subject to regulation by
the FTC and other federal and state regulation as well as regulations in several
countries in which the Company engages in business. 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.
Federal and state laws have been adopted throughout the years to prevent
the use of fraudulent practices and have sometimes been inappropriately directed
at legitimate network marketing programs. Illegal pyramid schemes compensate
participants primarily for the introduction or enrollment of additional
participants into the program. Often, these schemes are characterized by large
up-front entry or sign-up fees, over-priced products of low value, little or no
emphasis on the sale or use of products, high-pressure recruiting tactics and
claims of huge and quick financial rewards with little or no effort. Generally,
these laws are directed at ensuring that product sales ultimately are made to
consumers and that advancement within such sales organizations is based on sales
of products. The Company has obtained approval of its marketing program in all
of the markets where it operates and does so for each country it enters.
The Company believes that its network marketing system satisfies the
standards and case law defining a legal marketing system. It is an ongoing part
of the Company's business to monitor and respond to regulatory and legal
developments, including those that may affect its network marketing system.
However, the regulatory requirements concerning network marketing systems do not
include "bright line" rules and are inherently fact-based. An adverse judicial
determination with respect to the Company's network marketing system could have
a material adverse effect on business. An adverse determination could: (1)
require the Company to make modifications to its network marketing system, (2)
result in negative publicity or (3) have a negative impact on distributor
morale. In addition, adverse rulings by courts in any proceedings
19
challenging the legality of multi-level marketing systems, even in those not
involving the Company directly, could have a material adverse effect on
operations.
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. The definition of independent
contractor has been challenged in the past and any changes could possibly
jeopardize the exempt status enjoyed by direct sellers and negatively impact the
Company's recruiting efforts. The direct selling industry has strongly opposed
such bills as they relate to direct sellers. States have become increasingly
active in this area as well. To date, the status of direct sellers as
independent contractors has not been affected. However, there is no assurance
that future legislation at the federal or state level affecting direct sellers
will not be enacted.
Competition
The business of developing and distributing nutritional and skin care
products such as those offered by the Company is highly competitive. Numerous
manufacturers, distributors and retailers compete for consumers and, in the case
of other network marketing companies, for distributors. The Company's ability to
remain competitive depends on its underlying science and high quality of
products and its success in recruiting and retaining distributors. The pool of
individuals interested in network marketing tends to be limited in each market
and is reduced to the extent other network marketing companies successfully
recruit these individuals into their businesses. The Company believes that it
offers a rewarding compensation plan with attractive financial benefits to
compete for the time, attention and commitment of distributors. To the extent
practicable, the Company's compensation plan is designed to be seamless,
permitting international expansion.
Reliv' NOW, Reliv' Classic and FibRestore compete with numerous
supplements that offer multi-vitamin benefits. The Reliv' Ultrim-Plus and
Cellebrate products compete with 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
Innergize! and ProVantage compete, a market led by Gatorade(TM) and Met-Rx(TM).
With Arthaffect, ReversAge, Reliv Soy Sense, Soy Sentials and the Reliv
ReversAge Performance Enhancing Skin Care, the Company has entered the
relatively new "functional formulas" and "anti-aging" markets, which is expected
to be extremely competitive and led by the major food and skin care companies.
The Company believes that its powder nutritional supplements are a
competitive advantage over other supplement manufacturers who deliver vitamins,
minerals and herbs in pill form. The Company's nutritional products are consumed
with water, milk and juice and deliver nutrients more effectively throughout the
body than pills or tablets. Nutrients taken orally in liquid form leads to
better absorption at the cellular level, or "bioavailability." Numerous
scientific studies concur that liquid form is the more effective way to deliver
nutrients to the body.
20
New Market Expansion Program
The Company engages in a structured and thorough analysis of potential new
markets, including analysis of regulatory conditions, product approval
procedures, competitive forces, synergies between new and existing countries and
distributor presence or interest in new markets, before selecting markets to
enter. When the Company decides to enter a new market, it first hires local
legal counsel and/or a consultant with expertise in the product approval process
to help ensure that its network marketing system and products comply with all
applicable regulations. In addition, local counsel and consultants help to
establish favorable public relations in the new market by acting as an
intermediary between the Company and local regulatory authorities, public
officials and business people. Local counsel and consultants are also
responsible for explaining the Company's products and product ingredients to
appropriate regulators and, when necessary, arranging for local technicians to
conduct required ingredient analysis tests of the products.
Where regulatory approval in a foreign market is required, local counsel
and/or consultants work with regulatory agencies to confirm that all of the
ingredients of the Company's products are permissible within the new market.
During the regulatory compliance process, the Company may alter the formulation,
packaging or labeling of its products to conform to applicable regulations as
well as local variations in customs and consumer habits, and the Company may
modify some aspects of its network marketing system as necessary to comply with
applicable regulations. Where reformulations of products are required, the
Company attempts to obtain substitute or replacement ingredients.
Following completion of the regulatory compliance phase, the Company
undertakes the steps necessary to meet the operational requirements of the new
market. In the majority of the Company's new markets, it establishes a sales
center in a major city and provides for product purchases by telephone. Product
is shipped to the purchaser from a warehouse located in the general geographic
region. In addition, the Company initiates plans to satisfy the inventory,
personnel and transportation requirements of the new market, and the Company
modifies its distributor manuals, cassette recordings, video cassettes and other
training materials as necessary to be suitable for the new market.
In some countries, regulations applicable to the activities of the
Company's distributors also may affect its business because in some countries
the Company is, or regulators may assert that the Company is, responsible for
its distributors' conduct. In these countries, regulators may request or require
that the Company take steps to ensure that its distributors comply with local
regulations.
The Company's general policy regarding acceptance of distributor
applications from individuals who do not reside in one of the Company's markets
is to refuse to accept the individual's distributor application.
21
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. In December, 2000, Reliv Philippines
commenced business by marketing and selling the Company's products within the
Philippines. As of March, 2002, the Company's products are being sold in the
Republic of Ireland through the Reliv UK operation.
Reference is made to Note 19 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on geographical 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 Industrial Boulevard, Chesterfield, Missouri, 63005,
where it currently maintains its corporate headquarters. 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,
2002, are $234,000 and $205,000, respectively. 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.
In 1998, the Company completed an expansion to the Chesterfield facility
on land owned by the Company adjacent to the 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, 2002, this loan had a
principal balance of $3,840,000.
The Company leases office space in suburban Sydney, Australia; Mexico
City, Mexico; Birmingham, England; and Manila, the Philippines to support its
operations in those areas, and has a contract warehouse arrangement in
Mississauga, Ontario, Canada and Auckland, New Zealand.
22
Item No. 3 - Legal Proceedings
In October, 2000, the Company terminated several individual distributors
for breach of their Distributor Agreement. In December, 2001, five of the
terminated distributorships ("Claimants") jointly filed a Demand for Arbitration
and Statement of Claim to ensue before an American Arbitration Association panel
of arbitrators in Chicago, Illinois, seeking monetary damages for unlawful
termination. In response to the Claimants demand, the Company filed
counterclaims against the Claimants for defamation, unfair competition and
breach of contract. The Company engaged outside counsel in Chicago to defend the
arbitration demand. In January, 2003, the Company and Claimants resolved their
claims before the arbitration hearing had commenced and all claims by and
against the Company were dismissed pursuant to a settlement agreement. The
settlement was properly accrued in the financial statements in 2002, and it did
not have a material adverse affect on the financial position or results of
operations of the Company.
The Company has no current litigation against it that could have a
material adverse effect on its financial position or results of operations.
Item No. 4 - Submission of Matters to a Vote of Security Holders
N/A
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.
23
2002 and 2001 Quarterly Stock Price Data
HI LO
-- --
2002
First Quarter $1.81 $0.96
Second Quarter 2.51 1.34
Third Quarter 5.75 1.37
Fourth Quarter 6.11 3.06
2001
First Quarter $1.42 $0.84
Second Quarter 1.21 0.84
Third Quarter 1.05 0.75
Fourth Quarter 1.26 0.90
- --------------
Note: All stock price data has been restated for the 19% stock dividend declared
in September 2002.
As of March 12, 2003, there were approximately 1,876 holders of record of
the Company's Common Stock.
The Company declared a one share for 5.25 shares stock dividend (19%) on
September 19, 2002. The dividends were distributed on October 25, 2002 to
stockholders of record on October 11, 2002.
The Company has not paid cash dividends on its Common Stock in the last 2
years. The amount and timing of dividends will be subject to declaration of the
Board of Directors consistent with results of operations 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 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.
24
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
(In thousands, except per share amounts) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Net sales $ 62,927 $ 52,943 $ 61,280 $ 69,278 $ 53,400
Net income (loss) $ 2,493 $ 308 $ (898) $ (1,400) $ 1,557
Earnings (loss) per common share(1)
Basic $ 0.22 $ 0.03 $ (0.08) $ (0.13) $ 0.13
Diluted $ 0.19 $ 0.03 $ (0.08) $ (0.13) $ 0.13
Cash dividends per share of common stock $ -- $ -- $ -- $ 0.01 $ 0.025
Total assets $ 18,446 $ 16,987 $ 20,395 $ 20,772 $ 20,253
Long-term debt and capital lease
obligations, less current maturities $ 4,057 $ 4,650 $ 5,046 $ 5,296 $ 5,590
- --------
(1) Earnings (loss) per common share for 1998-2001 have been restated for the
2002 stock dividend.
Item No. 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Income and Net Sales
2002 vs. 2001
The Company's 2002 net income was $2,493,000 or $.22 per share basic and
$.19 per share diluted. This compares with net income of $308,000 or $.03 per
share in 2001. Net income in the United States, the Company's primary market,
was $2,640,000 in 2002, compared to net income of $682,000 in 2001. The net loss
from international operations was $147,000 in 2002, compared with a loss of
$374,000 in 2001. The Company experienced strong improvements in both sales and
profitability, led by the results in the United States. The Company's new
distributor enrollments in the US increased by 44% in 2002, compared to 2001,
and the Company's distributor retention rate improved, as well. The Company's
foreign operations continue to show improved results, led by the sales increases
in the Philippines and Mexico.
Net sales increased in 2002 to $62,927,000, as compared to $52,943,000 in
2001, as a result of a 19% increase in net sales in the United States from
$44,799,000 in 2001 to
25
$53,210,000 in 2002. Net sales in the United States, which accounted for 85% of
total net sales in 2002, is comprised of network marketing sales and
manufacturing and packaging services. In 2002, network marketing sales in the
United States were $53,074,000 compared to $40,920,000 in 2001, and net sales in
the foreign operations increased to $9,716,000 in 2002 from $8,144,000 in 2001.
Net sales to external customers from manufacturing and packaging services
decreased to $137,000 from $3,879,000 in 2001.
Net sales for the fourth quarter of 2002 were $16,756,000, an increase
from the fourth quarter 2001 net sales of $12,038,000. During the period,
network marketing sales in the United States increased to $14,271,000, as
compared to $9,995,000 in the fourth quarter 2001. Net sales in foreign
operations increased from $2,025,000 in the fourth quarter of 2001 to $2,474,000
in the fourth quarter of 2002. Net sales in the Philippines and Mexico increased
by 46% and 22%, respectively, in the fourth quarter of 2002, as compared to the
same quarter in 2001.
In the United States, the Company's largest market, the number of active
distributors increased significantly to 36,100 from 27,800 during 2002. New
distributor enrollments increased to 18,148 in 2002, compared to 12,588 in 2001.
The retention rate of distributors who renew their annual agreement also
improved to 64% in 2002, as compared to a renewal rate of 54% in the prior year.
Master Affiliates, distributors who have attained the highest level of discount
and are eligible for generation royalties, increased to 5,255 in the United
States as of December 31, 2002 from 3,955 as of December 31, 2001. In 2002, the
Company processed 145,680 wholesale orders at an average retail price of $452,
compared to 120,175 orders at an average of $428 in 2001.
The Company's Direct Select Program makes products available to consumers
by ordering directly through the Company. These orders are placed at full retail
price and can be ordered in quantities of less than full case lots. In the
United States in 2002, the program processed a total of 29,400 orders for a net
sales total of $3,055,000, compared to $2,494,000 in 2001. The average order
size remained consistent at $104 in both 2002 and 2001.
In 2002, the Company did not introduce any new products in the United
States but continued its recent trend of reformulating and improving its current
product line. In 2002, the Company reformulated its Reliv NOW product in the
United States and increased the can size to 28 servings. This is a key part of
the Company's marketing strategy to simplify the business for the distributor.
With this change, all of the Company's lead products, Reliv NOW, Classic,
Innergize, and Fibrestore, all have the same number of servings per can, a
four-week supply. This makes it easier for the distributors to present the Reliv
product line and distributorship opportunity.
The Company is continuing to develop existing marketing programs such as
the "Star Director", "Ambassador" and "Road to Presidential" 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 2002, $2,097,000 was paid through this program compared to
$1,772,000 in 2001. The Ambassador Program compensates distributors at the
highest levels for their leadership and development of sales. At year-end 2002,
there were
26
174 Ambassadors who shared in bonuses totaling $1,300,000, compared to 120
Ambassadors at the end of 2001 sharing bonuses of $1,087,000. The Road to
Presidential Program, through training and rewards, is designed to encourage
distributors to reach the highest level of earnings potential by building
downline organizations.
The Company has an Internet site, with e-commerce capabilities for
distributors, including online ordering, online sponsoring of new distributors,
order tracking, account information and sales organization activity.
Distributors are also able to establish their own personal Internet site, which
enables them to market themselves through the Internet, as well as place product
orders, receive Company e-mails and other interactive functions. The Company has
been able to gradually increase the volume of sales generated through Internet
orders through routine advertising of the Internet capabilities to the
distributor force and occasional shipping promotions. Orders placed through the
Internet currently represents approximately 8% of US sales. The web site also
receives a considerable amount of traffic from distributors utilizing the other
features and information available through the Internet site. In February 2002,
the Company introduced several enhancements to its Internet site, including an
improved shopping cart that allows all distributors to be able to place product
orders, not just Master Affiliates, as before. Also, included is a premium
service, called "Downline Organizer", which provides Master Affiliates access to
the corporate distributor database for their groups. The Internet site provides
a number of features and reports that can be customized by the Master Affiliate
to assist them in building their sales organizations. The Company is continuing
to improve its Internet site traffic and capabilities in meaningful and
cost-effective ways.
In Australia and New Zealand, net sales increased to $1,923,000 in 2002
from $1,808,000 in 2001, and fourth quarter 2002 sales increased to $522,000
from $492,000 in 2001. New distributor enrollments decreased in Australia and
New Zealand to 908 from 1,182 in 2001. Distributor renewals in Australia were
61% and in New Zealand 47% in 2002 as compared to 50% and 46% in 2001,
respectively. Most of the increase in sales is due to the strengthening of the
Australian and New Zealand dollars relative to the US dollar. On a local
currency basis, sales in Australia increased by less than 2% in 2002, compared
to 2001. Local currency sales in New Zealand decreased by 17% in 2002, compared
to 2001. The Company continues to look for ways to attract new people to the
Reliv business opportunity and product lines in these markets to follow with the
success the Company is experiencing in its other markets. Combined net income
for these markets improved to $11,000 in 2002, compared to a net loss of $53,000
in 2001.
Net sales in Canada improved slightly in 2002 to $983,000 from $972,000 in
2001. Fourth quarter sales increased to $276,000 in 2002 compared to $248,000 in
2001. New distributor enrollments were 469 in 2002, compared to 477 in 2001.
Comparable to the slight increase in sales, the Canadian operation showed an
increase in net income in 2002 to $132,000, as compared to a net income of
$118,000 in 2001. The Company's focus for Canada is to continue to refine its
business model in order for the business opportunity from the distributor's
point-of-view to be seamless from the model in the United States. This will
encourage more cross-border sponsorship and other distributor activity in Canada
from the United States and will help improve Canadian new distributor
enrollments.
27
Net sales in Mexico in 2002 were $2,905,000 compared to $2,233,000 in
2001. Net sales in the fourth quarter 2002 were $711,000 compared to $584,000 in
2001. New distributor enrollments increased in 2002 to 4,495 compared to 3,456
in 2001. The distribution center network in Mexico has become an important part
of the Mexican business model and is a contributing factor in the sales growth.
The distribution centers are owned and operated by key distributors to
facilitate sales and the delivery of product in cities outside of Mexico City.
With an inadequate package delivery system in Mexico, this is a common method
used by network marketing companies to distribute their products. The Company
has also introduced local versions of Reversage and Arthaffect in Mexico during
2002. The net loss in this market decreased to $53,000 in 2002, as compared to
$215,000 in 2001, as a result of the improved sales.
Sales in the United Kingdom in 2002 were $446,000 compared to $391,000 in
2001. New distributor enrollments were 161 in 2002, compared to 150 in 2001. In
December 2002, the Company moved its UK facility from suburban London to
Birmingham, England. The expenses of this move were a contributing factor in
increasing the net loss in the UK to $67,000 for 2002, as compared to $53,000 in
2001. In March 2002, the Company began shipping some of the Company's products
to distributors and customers in the Republic of Ireland and is working to
obtain approvals to sell additional products in the Irish market. Irish sales
and fulfillment will be managed from the Reliv UK office.
Net sales in the Philippines in 2002 were $3,460,000, compared to
$2,693,000 in 2001. New distributor enrollments were 10,665 in 2002, compared to
11,269 in 2001. Sales in the Philippines have improved as the operations mature
and local versions of U.S. products are introduced in the Philippine market.
However, the profitability of this entity was adversely affected by the expenses
of an office move and the write-off of the remaining value of the leasehold
improvements of the previous facility, along with higher sales and marketing
expenses. The growth of the operations here necessitated the move to a larger
facility. The Philippines operations had a net loss of $137,000 in 2002,
compared to net income of $18,000 in 2001.
The Company has provided manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers. In 2001, the Company decided to
significantly reduce this line of business and production for the last major
customer concluded in the third quarter of 2001. Accordingly, net sales to
external customers continued to decrease in 2002 to $137,000 from $3,879,000 in
2001. Low gross margins and declining production orders from the final
significant customer led to the decision to eliminate most of the third-party
production work. The results reported in this segment also include the
production of the Reliv' brand products. Higher network marketing production
requirements along with staffing reductions improved the results of the
manufacturing and packaging segment in 2002. The segment reported a pre-tax
profit of $441,000 in 2002, as compared to a pre-tax profit of $175,000 in 2001.
28
2001 vs. 2000
The Company's 2001 net income was $308,000 or $.03 per share (basic and
diluted). This compares with net loss of $898,000 or $.08 per share in 2000. Net
income in the United States, the Company's primary market, was $682,000 in 2001,
compared to net income of $198,000 in 2000. The United States operation is
comprised of the network marketing segment and the manufacturing and packaging
services segment. In 2001, the network marketing segment in the United States
had net income of $558,000, and the manufacturing and packaging segment had
pre-tax income of $175,000. The net loss from international operations was
$374,000 in 2001, compared with a loss of $999,000 in 2000. The Company returned
to profitability in 2001, as the Company took steps to improve the results of
the international operations. The Company also improved the results from its
manufacturing operations, highlighted by the decision to eliminate production
for its significant third party customers. The Company also reduced its interest
expense by $112,000 in 2001, as compared to 2000.
Net sales decreased in 2001 to $52,943,000, as compared to $61,280,000 in
2000, as a result of a 20% decrease in net sales in the United States from
$55,997,000 in 2000 to $44,799,000 in 2001. The decrease was the result of a
decrease in net sales in its manufacturing and packaging segment. Net sales in
the United States, which accounted for 84% of total net sales in 2001, is
comprised of network marketing sales and manufacturing and packaging services.
In 2001, network marketing sales in the United States were $40,920,000 compared
to $39,253,000 in 2000, and net sales from manufacturing and packaging services
decreased to $3,879,000 from $16,744,000 in 2000. Net sales in the foreign
operations increased to $8,144,000 in 2001 from $5,283,000 in 2000.
Net sales for the fourth quarter of 2001 were $12,038,000, a decline from
the fourth quarter 2000 net sales of $12,922,000. During the period, network
marketing sales in the United States increased to $9,995,000, as compared to
$8,181,000 in the fourth quarter 2000. Net sales in manufacturing and packaging
services decreased from $3,465,000 to $18,000. Net sales in foreign operations
increased from $1,158,000 in the fourth quarter of 2000 to $2,025,000 in the
fourth quarter of 2001, as the Company's newest market in the Philippines had
approximately $589,000 in sales in the fourth quarter of 2001, its first full
year of operations. Net sales in the Australia/New Zealand market and Mexico
increased by 39% and 26%, respectively, in the fourth quarter of 2001, as
compared to the same quarter in 2000.
In the United States, the Company's largest market, the number of active
distributors declined slightly to 27,800 from 28,300. The retention rate of
distributors who renew their annual agreement improved to 54% in 2001, as
compared to a renewal rate of 45% in the prior year. Master Affiliates,
distributors who have attained the highest level of discount and are eligible
for generation royalties, increased to 3,955 in the United States in 2001 from
3,749 in 2000. In 2001, the Company processed 120,175 wholesale orders at an
average retail price of $428, compared to 109,700 orders at an average of $465
in 2000. The increase in the order count and the decrease in the average order
size is partially due to a change in the Direct Select program effective in
February 2000 which allowed distributors to place orders for individual cans at
their specified discount level, rather than at full retail price. Previously,
wholesale orders
29
were defined as distributor orders placed at their qualified discount level and
were in full case quantities.
The Company's Direct Select Program makes products available to consumers
by ordering directly through the Company. These orders are placed at full retail
price and can be ordered in quantities of less than full case lots. In the
United States in 2001, the program processed a total of 23,700 orders for a net
sales total of $2,494,000, compared to $2,500,000 in 2000. This amount has
decreased slightly because of the change in the Direct Select Program in
February 2000 described above. The number of orders combined for wholesale and
Direct Select increased by approximately 9,000 orders in 2001, as compared to
2000.
In August 2001, the Company introduced a line of skin care products
including: Facial Cleansing Gel, Body Lotion, Smooth and Lift Serum, Daily Skin
Defense, Eye Renewal Cream, Nightly Skin Restore, and Cleansing Bar. The skin
care products are available in every market where Reliv currently operates, with
the exception of the Philippines, UK and Ireland. The Company also introduced
several of its products in many of the foreign markets, in particular, Reversage
and Reliv NOW For Kids. In July 2001, the Company introduced "Profit Paid
Direct", an enhancement to the distributor compensation program which has
increased the number of checks sent to distributors for wholesale profit. No
longer must distributors below the rank of Master Affiliate depend upon their
upline Master Affiliate to send commissions earned upon wholesale purchases by
lower ranking downline distributors.
The Company is continuing to develop existing marketing programs such as
the "Star Director", "Ambassador" and "Road to Presidential" 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 2001, $1,772,000 was paid through this program compared to
$1,479,000 in 2000. The Ambassador Program compensates distributors at the
highest levels for their leadership and development of sales. At year-end 2001,
there were 120 Ambassadors who shared in bonuses totaling $1,087,000, compared
to 79 Ambassadors at the end of 2000 sharing bonuses of $784,000. The Road to
Presidential Program, through training and rewards, is designed to encourage
distributors to reach the highest level of earnings potential by building
downline organizations.
In Australia and New Zealand net sales declined to $1,808,000 in 2001 from
$2,012,000 in 2000. However, fourth quarter 2001 sales increased to $492,000
from $353,000 in 2000. New distributor enrollments decreased in Australia and
New Zealand to 1,182 from 1,245 in 2000. Distributor renewals in Australia were
50% and in New Zealand 46% in 2001 as compared to 55% and 45% in 2000,
respectively. A number of factors continue to cause the decline in sales in
these markets. The Australian and New Zealand dollars have continued to decline
in value against the United States dollar. This has the effect of reducing net
sales when reported in US dollars on a consolidated basis. Nonetheless, net
sales in local currency for Australia and New Zealand for 2001 declined by 1%
and 7%, respectively, as compared to 2000. The Company was able to introduce a
version of its product, Reversage, in these markets, along with the new skin
care line in 2001. Also, during the third quarter of 2001, the Company promoted
its distributor relations and marketing manager into the sales management
position. In response to
30
these actions, sales in the region improved by 29% and 39% in the third and
fourth quarters of 2001, respectively, as compared to the same quarters in 2000.
Net sales in Canada improved in 2001 to $972,000 from $913,000 in 2000.
Fourth quarter sales increased to $248,000 in 2001 compared to $215,000 in 2000.
New distributor enrollments decreased to 477 from 607 in 2000. Currency
fluctuations have also had an impact on Canadian sales, as net sales in local
currency increased by 11% for 2001, as compared to 2000. During the second
quarter of 2000, the Company closed its Canadian administrative office facility
and has replaced it with a smaller distribution center. All customer service,
sales and marketing support, accounting and other administrative services for
the Canadian operation are being provided from the corporate office in
Chesterfield, Missouri. As a result, the Canadian operation showed net income of
$118,000 in 2001, as compared to a net loss of $88,000 in 2000.
Net sales in Mexico in 2001 were $2,233,000 compared to $1,769,000 in
2000. Net sales in the fourth quarter 2001 were $584,000 compared to $465,000 in
2000. New distributor enrollments decreased in 2001 to 3,456 compared to 6,188
in 2000. Net sales continue to grow in Mexico on the strength of the sales
management team in place, as compared to 2000. The distribution center network
in Mexico continues to grow and become more established. The Company has also
introduced Reliv' Delight, a powdered food supplement in the nature of a milk
replacement, along with local versions of other products in the US product line
during 2001. The net loss in this market decreased from $571,000 in 2000 to
$215,000 in 2001, as a result of the improved sales and cost controls put in
place.
Sales in the United Kingdom in 2001 were $391,000 compared to $388,000 in
2000. The Company hired a sales manager in January 2000 to improve sales efforts
in this region, but sales growth has still been difficult to achieve in this
area. The Company is in the process of expanding sales in the region by shipping
the Company's products to distributors and customers in the Republic of Ireland.
Irish sales and fulfillment will be managed from the Reliv UK office.
The Company ceased operations in Colombia effective October 1, 2001. After
opening for business in this market during the first quarter of 2000, sales did
not meet expectations and showed limited prospects for growth due to the
increasing political instability in the country. Net sales for the first nine
months of 2001 were only $46,000, compared to sales of $83,000 in 2000. The
Company recognized a pre-tax charge of approximately $80,000 to shut down
operations in Colombia.
In December 2000, the Company began sales in its newest market, the
Philippines. In its first full year of operations, net sales in 2001 were
$2,693,000 with 11,269 distributor enrollments. Sales here have benefited from
the involvement of distributors from the United States, Canada and Australia
with ties to the Philippines. The Philippines operations had net income of
$18,000 in 2001, its first full year of operations.
The Company has provided manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers. In 2001, the Company decided to phase
out this line of business and production for
31
the last significant customer concluded in the third quarter of 2001.
Accordingly, net sales decreased in 2001 to $3,879,000 from $16,744,000 in 2000.
Although this segment reported a pre-tax income of $175,000 in 2001, low gross
margins and declining production orders from the final significant customer led
to the decision to eliminate a majority of the third-party production work. The
results reported in this segment also include the production of the Reliv' brand
products. Higher network marketing production requirements along with staffing
reductions also contributed to the improved results of the manufacturing and
packaging segment in 2001. The segment results for 2001 compared to pre-tax
income of $25,000 in 2000.
The Company's sales to third party customers consists of the Company
purchasing raw materials, customer-specified packaging, and selling a finished
product to the customer. Cost of products sold for the manufacturing and
packaging segment for 2001 was 95.2% of net sales; an improvement from 95.6% in
2000. Even under optimal operating efficiencies, the gross margin for these
customers was substantially less than margins in sales of network marketing
products. In conjunction with the decision to eliminate a majority of the third
party production work, the Company has taken steps to reduce payroll through
layoffs and attrition. Over the course of 2001 and early 2002, the Company has
reduced plant employment and related office positions by approximately 50
people, along with other cost reduction measures.
Cost of Sales
During 2002, cost of network marketing products sold was 18.3% of net
sales compared with 18.1% in 2001 and 20.3% in 2000. Cost of network marketing
products sold was 18.6% in the fourth quarter of 2002 and 19.9% in 2001. Cost of
goods for manufacturing and packaging services was 95.2% for 2001 and 95.6% for
2000. For 2002, a cost of goods percentage for manufacturing and packaging
services is not meaningful, given the low volume of external sales.
Distributor Royalties and Commissions
Distributor royalties and commissions as a percentage of network marketing
sales increased to 38.5% in 2002 compared to 38.3% in 2001 and 35.8% in 2000. In
the fourth quarter of 2002, distributor royalties and commissions were 38.8%
compared to 38.2% in 2001. The increased percentage for 2001 and 2002, as
compared to 2000, is due to a change in the distributor compensation plan,
effective September 1, 2000. Previously, distributors could purchase products
from the Company at discounts ranging from 25% to 45%, with total royalties of
18% of retail sales paid to Master Affiliates on their organization's sales.
After the modification, the discounts at the time of purchase were changed,
ranging from 20% to 40%, with royalty payments totaling up to 23% to Master
Affiliates. The effect of this change on the financial statements is that
distributor royalties and commissions will increase as a percentage of net
sales. However, this increase will be offset by improved gross margins on these
sales. These expenses are governed by the distributor agreements and are
directly related to the level of sales. Included in distributor royalties and
commissions are royalties of $1,300,000 for 2002 earned through the Ambassador
Program as compared to $1,087,000 in 2001 and $784,000 in 2000.
32
Selling, General and Administrative
Selling, general and administrative (SGA) expenses as a percentage of net
sales were 36.4% for 2002, 38.8% in 2001, and 33.5% in 2000. The percentage
decrease from 2001 to 2002 is due to the increase in the net sales of Company.
The percentage increase from 2000 to 2001 is primarily due to the decrease in
sales of the manufacturing and packaging business segment in comparison to total
SGA expenses. Total SGA expenses increased from $20,556,000 in 2001 to
$22,876,000 in 2002. SGA expenses for 2001 were $11,000 greater than the total
of $20,545,000 in 2000. The total for 2001 also includes $1,046,000 in SGA
expenses for the first full year of operations in the Philippines, as compared
to $147,000 in SGA expenses in the start up year of 2000.
In 2002, total distribution and warehouse expenses increased slightly to
$1,347,000 from $1,309,000 in 2001 due to increased expenses in the Philippines.
Distribution expenses in the United States decreased as the result of the
elimination of a separate public warehouse and shipping facility located in Las
Vegas during 2002 and reduced salary expense, once the Company completed its
plant related employment reductions in early 2002.
In 2002, sales incentive bonuses were $636,000, compared to $396,000 in
2001. Promotional trip expenses increased to $829,000 in 2002, as compared to
$815,000 in 2001. Credit card processing fees also increased by $246,000 in 2002
as compared to 2001 as the result of increased sales. Overall, sales and
marketing expenses increased by $893,000, or 13% in 2002. Sales and marketing
expenses, as a percentage of network marketing net sales, were 12.7% in 2002 and
14.4% in 2001.
Total staff compensation and fringes increased by 9%, or $691,000,
primarily due to the incentive compensation bonuses paid during 2002. All other
general and administrative expenses (G&A) increased by $697,000 in 2002, or 14%,
compared to 2001. Other significant changes in G&A expenses included an increase
in the cost of the various business insurance coverages by $94,000 in 2002,
compared to 2001; consulting fees increased by $86,000 in 2002, compared to
2001; investor relations and other expenses related to being a publicly traded
company increased by $71,000.
Another significant component of the G&A expense increase in 2002 was the
adjustment of the cash surrender value of the executive life insurance policies,
which is included in other assets on the consolidated balance sheet. The Company
incurred a charge of $170,000 as the result of the decline in the market value
of the underlying investments. This corresponds with the overall stock market
decline experienced in 2002. In 2001, the Company took a similar charge of
$125,000.
Interest Expense
Interest expense in 2002 was $340,000, compared to $527,000 in 2001 and
$639,000 in 2000. Interest expense continued to decrease in 2002, as the Company
renegotiated the terms of its term loan on the new portion of its headquarters
facility during the year. Under the revised
33
agreement, the interest has been changed from 8.5% to a variable rate equal to
the prime rate. Additionally, the Company did not utilize any short-term
borrowings after the first quarter of 2002, due to the Company's improved
financial condition. Interest expense in 2001 was lower as the result of lower
interest rates and a decrease in the use of short-term borrowings.
Income Taxes
Income tax expense for 2002 was $1,542,000. Income tax expense for 2001
was $219,000, and as a result of pre-tax losses, the income tax benefit in 2000
was $251,000. The effective tax rate for 2002 was 38.2%. State income taxes,
along with various non-deductible expenses, including the reduction in the value
of the executive life insurance policies, represent most of the increase over
the U.S. statutory tax rate of 34%. Effective tax rates for 2001 and 2000 were
41.5% and 21.8%, respectively. The 2000 tax benefit was carried back against the
1998 earnings.
Financial Condition
The Company generated $4,745,000 of net cash during 2002 from operating
activities and increased cash by $33,000 through long-term financing. This
compares to $1,937,000 of cash provided by operating activities and $40,000
generated through long-term financing in 2001. Cash and cash equivalents
increased by $2,179,000 to $3,438,000 by year-end 2002. The Company's net
investing activities used $640,000. The Company used $1,604,000 to repay the
line of credit, long-term borrowings and capital lease obligations. The Company
also used $626,000 to purchase treasury stock and received $135,000 in proceeds
from the exercise of options and warrants.
Current assets increased to $8,432,000 at December 31, 2002 from
$6,562,000 as of December 31, 2001. Cash and cash equivalents increased by
$2,179,000 as described above. Accounts receivable increased to $689,000 at
December 31, 2002 from $548,000 at December 31, 2001 as the result of the
increase in worldwide sales. At December 31, 2002 and 2001, the Company has
reserved $5,000 as an allowance for uncollectible accounts receivable.
Inventories decreased to $3,457,000 at December 31, 2002 from $4,142,000
at year-end 2001, primarily due to the decrease in raw material inventories as
the result of better inventory controls.
Refundable income taxes decreased to $8,000 at the end of 2002 from
$136,000 as of the end of 2001. The decrease is due to the tax liability
incurred as the result of the improved profitability in the fourth quarter of
2002, as compared to 2001.
Property, plant and equipment, after dispositions, increased $533,000
during 2002 to $16,485,000 at December 31, 2002. A majority of the acquisitions
related to the office moves in the Philippines and United Kingdom and were
funded with cash generated from operations.
34
Current liabilities decreased to $6,040,000 at December 31, 2002 from
$6,047,000 at December 31, 2001. Trade accounts payable decreased to $2,457,000
from $2,881,000 at December 31, 2001 consistent with the reduction in inventory
levels. Distributor commissions payable increased $821,000 to $2,065,000 at
year-end as a result of increase in net sales in December 2002 as compared to
December 2001. Borrowings under the line of credit decreased to zero from
$986,000 at December 31, 2001.
Long-term debt and non-current capital lease obligations decreased to
$4,057,000 from $4,650,000 at December 31, 2001, primarily as the result of
scheduled principal payments. The Company has a term loan with an outstanding
balance of $3,840,000 as of December 31, 2002. This loan provided financing for
the expansion of its facility in 1997. The terms of this note were renegotiated
during the year. Under the revised agreement, the interest has been changed from
8.5% to a variable rate equal to the prime rate. The Company has long-term debt
totaling $439,000, relating to the purchase of its original building and land.
The Company also has a series of private placement notes payable with a
remaining principal balance of $135,000. These notes provided the initial
funding of the Philippines operation and are payable in quarterly installments
equal to 2% of Philippines sales at suggested retail, including interest at 9%
per annum.
Stockholders' equity increased to $7,798,000 compared with $5,827,000 at
December 31, 2001. The increase is primarily due to the 2002 net income of the
Company, reduced by treasury stock purchases of $626,000. Stockholders' equity
was also negatively impacted by the strengthening of the U.S. dollar against the
Mexican and Philippine pesos. This impact appears in the form of the decrease in
the foreign currency translation adjustment, which is reflected in accumulated
other comprehensive loss. The Australian, New Zealand, and Canadian dollars all
improved during 2002, relative to the U.S. dollar. This cumulative adjustment
declined from a debit balance of $689,000 as of December 31, 2001, to a debit
balance of $775,000, as of December 31, 2002.
The Company's working capital balance has improved by $1,878,000 since
December 31, 2001. The current ratio at December 31, 2002 improved to 1.40 from
1.09 at previous year-end. The Company also has an operating line of credit,
with a limit based on a collateral-based formula of accounts receivable and
inventory. The maximum borrowing limit is $1,000,000, with a variable interest
rate equal to the prime rate. At December 31, 2002, the Company had not utilized
any of the line of credit, with approximately $513,000 available under the line
based on the Company's borrowing base formula. Management believes that the
Company's internally generated funds together with the loan agreement will be
sufficient to meet working capital requirements in 2003.
Critical Accounting Policies
Our financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. We believe that the following are some of the more
critical judgment areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
35
Inventories
Inventories are valued at the lower of cost or market. Product cost
includes raw material, labor, and overhead costs and is accounted for using the
first-in, first-out basis. On a periodic basis, the Company reviews its
inventory levels in each country's product line for estimated obsolescence or
unmarketable items, as compared to future demand requirements and the shelf life
of the various products. Based on this review, the Company records inventory
write-downs when necessary.
Legal proceedings
In the ordinary course of business, we are subject to various legal
proceedings, including lawsuits and other claims related to labor, product and
other matters. We are required to assess the likelihood of adverse judgments and
outcomes to these matters as well as the range of potential loss. Such
assessments are required to determine whether a loss contingency reserve is
required under the provisions of SFAS No. 5, Accounting for Contingencies, and
to determine the amount of required reserves, if any. These assessments are
subjective in nature. Management makes these assessments for each individual
matter based on consultation with outside counsel and based on prior experience
with similar claims. To the extent additional information becomes available or
our strategies or assessments change, our estimates of potential liability for a
given matter may change. Changes to estimates of liability would result in a
corresponding additional charge or benefit recognized in the statement of
operations in the period in which such changes become known. We recognize the
costs associated with legal defense in the periods incurred. Accordingly, the
future costs of defending claims are not included in our estimated liability.
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 2003 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
36
marketing sales and sales of food and dietary supplements and other risks and
uncertainties detailed in the Company's other SEC filings.
Item No. 7A - Qualitative And Quantitative Disclosures Regarding Market Risk
The Company is exposed to various market risks, primarily foreign currency
risks and interest rate risks.
Foreign Currency Risk
The Company's earnings and cash flows are subject to fluctuations due to
changes in foreign currency rates as it has several foreign subsidiaries and
continues to explore expansion into other foreign countries. As a result,
exchange rate fluctuations may have an effect on sales and gross margins.
Accounting practices require that the Company's results from operations be
converted to U.S. dollars for reporting purposes. Consequently, the reported
earnings of the Company in future periods may be significantly affected by
fluctuations in currency exchange rates, generally increasing with a weaker U.S.
dollar and decreasing with a strengthening U.S. dollar. Products manufactured by
the Company for sale to the Company's foreign subsidiaries are transacted in
U.S. dollars.
Sales outside the United States represented 15%, 15%, and 9% of total net
sales in 2002, 2001, and 2000, respectively. The Company's primary exposures to
adverse currency fluctuations would result in an increase in the cost of goods
sold, relative to foreign net sales, as the vast majority of the products sold
are purchased from the parent company in the United States, with prices
denominated in US dollars. As of December 31, 2002, the Company had a net
investment in its foreign subsidiaries of $3.23 million (in U.S. dollars). As of
December 31, 2002 and during the entire year of 2002, the Company had no hedging
instruments in place to offset exposure to the Canadian, Australian, or New
Zealand dollars, Mexican or Philippine pesos, or the British pound.
We have performed a sensitivity analysis as of December 31, 2002 that
measures the change in the results of our foreign operations arising from a
hypothetical 10% adverse movement in the exchange rate of all of the currencies
the Company presently has operations in. Using the results of operations for
2002 for the Company's foreign operations as a basis for comparison, an adverse
movement of 10% would create a potential reduction in the Company's net income
of approximately $150,000.
Interest Rate Risk
The Company currently carries $4.47 million in long-term debt with a
weighted average effective interest rate of 4.539%. Of this amount, $4.28
million is debt with a variable interest rate, generally based on the prime
rate. This long-term debt matures at the rate of $415,000 in 2003, $3.68 million
in 2004, and $377,000 in 2005. A hypothetical 100 basis point increase in
interest rates on all of the variable rate debt instruments would result in an
annual after tax increase in interest expense of approximately $28,000.
37
The Company also is exposed to market risk in changes in commodity prices
in some of the raw materials it purchases for its manufacturing needs. However,
this presents a risk that would not have a material effect on the Company's
results of operations or financial condition.
The table below presents the Company's contractual obligations and
commercial commitments. This consists of the Company's long-term debt, capital,
and operating leases. For the long-term debt, the amounts shown represent the
principal amounts by year of anticipated maturity for our debt obligations and
related average interest rates based on the weighted average interest rates at
the end of the period. Variable interest rates disclosed do not attempt to
project future interest rates. For the capital and operating leases, the amounts
shown represent the future minimum payments under noncancelable leases with
initial or remaining terms in excess of one year as of December 31, 2002. This
information should be read in conjunction with Notes 7 and 10 of the
Consolidated Financial Statements.
Contractual obligations and commercial commitments
Outstanding as of December 31, Fair
2002 (in thousands) 2003 2004 2005 2006 2007 Total Value
- ------------------- ---- ---- ---- ---- ---- ----- -----
Bank term loan-4.25% interest rate (variable) $ 287 $3,553 $ -- $ -- $ -- $3,840 $3,840
Industrial revenue bonds-4.25% (variable) 98 110 26 -- -- 234 234
Other U.S. note payable-5% interest rate
(variable) -- -- 205 -- -- 205 205
Private placement notes-9% interest rate
(fixed) -- -- 135 -- -- 135 135
Other U.S. debt 7 -- -- -- -- 7 7
Other foreign debt 23 17 11 -- -- 51 51
Capital and operating leases 149 99 21 20 17 306 N/A
------------------------------------------------------------------------------
$ 564 $3,779 $ 398 $ 20 $ 17 $4,778 $4,472
==============================================================================
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.
38
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 2003 Annual Meeting of Shareholders to be
held on May 22, 2003, 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 2003 Annual Meeting of Shareholders to be
held on May 22, 2003, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
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 2003 Annual Meeting of Shareholders to be
held on May 22, 2003, 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 2003 Annual Meeting of Shareholders to be
held on May 22, 2003, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
Item No. 14 - Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14(c) and 15d-14(c)) as of a date within ninety days before the
filing date of this report, have concluded that, as of such date our disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company would be made known to them by others within
the Company.
(b) Changes in internal controls. There were no significant changes in our
internal controls or in other factors that could significantly affect the
Company's disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material weaknesses
in the Company's internal controls. As a result, no corrective actions were
required or undertaken.
39
Item No. 15 - 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 Schedule filed as part of
this report on Form 10-K is listed on the accompanying Index
to Consolidated Financial Statements and Consolidated
Financial Statement Schedules.
3. Exhibits:
Exhibit
Document Number
Certificate of Incorporation (incorporate by
reference Appendix B of the Form 14A
the Registrant filed April 22, 1999) 3.1
By-Laws (incorporate by reference Appendix C of
the Form 14A the Registrant filed
April 22, 1999) 3.2
Amendment to By-Laws dated March 22, 2001
(incorporate by reference Exhibit
3.3 to the Form 10-K of the Registrant
for year ended December 31, 2001) 3.3
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
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
40
Exhibit
Document Number
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 Service Agreement dated June 1, 2002
(incorporate by reference Exhibit 10.1 to the
Form 10-Q of the Registrant for quarter ended
June 30, 2002) 10.6
Kreher Employment Agreement dated April 18, 2002
(incorporate by reference Exhibit 10.2 to the
Registrant's Form 10-Q for quarter ended March
31, 2002). 10.7
Gibbons Employment Agreement dated April 18, 2002
(incorporate by Reference Exhibit 10.1 to the
Registrant's Form 10-Q for the quarter ended
March 31, 2002). 10.8
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) 10.9
Line of Credit Note dated November 15, 2002 in
the amount of $1,000,000 with Southwest Bank of
St. Louis 10.10
Deed of Trust Note dated September 2, 1997 in the
amount of $4,430,000 with Southwest Bank of St.
Louis (incorporate by reference Exhibit 10.18 to
the Form 10-K of the Registrant for year ended
December 31, 1998) 10.11
Modification Agreement dated June 1, 2002 with
Southwest Bank of St. Louis (incorporate by
reference Exhibit 10.2 to the Form 10-Q of the
Registrant for quarter ended June 30, 2002) 10.12
41
Exhibit
Document Number
Reliv' International, Inc. Supplemental Executive
Retirement Plan dated June 1, 1998 (incorporate
by reference Exhibit 10.19 to the Form 10-K of
the Registrant for year ended December 31, 1998) 10.13
Stock Purchase Agreement dated October 1, 1998
among Reliv' World Corporation, Reliv' Europe,
Inc. and Global Nutrition, Inc. regarding
purchase of Reliv' UK, Ltd. (incorporate by
reference Exhibit 10.20 to the Form 10-K of the
Registrant for year ended December 31, 1998) 10.14
1999 Stock Option Plan (incorporate by reference
to Form S-8 Registration Statement the Registrant
filed April 7, 2000) 10.15
2001 Stock Option Plan (incorporate by reference
to Form S-8 Registration Statement the Registrant
filed August 14, 2001) 10.16
Agreement with Hydron Technologies, Inc. dated
March 1, 2001 (incorporate by reference Exhibit
10.16 to the Form 10-K of the Registrant for year
ended December 31, 2001) 10.17
Amended and Restated Distributor Stock Purchase
Plan (incorporate by reference to Form S-8
Registration Statement the Registrant filed May
9, 2002) 10.18
Statement re: computation of per share earnings
(incorporate by reference to Note 9 of the
Consolidated Financial Statements contained in
Part IV) 11
Subsidiaries of the Registrant (incorporate by
reference 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) No reports on Form 8-K have been filed by the Registrant during the
last quarter of the period covered by this report.
42
(c) The Exhibits listed in subparagraph (a)(3) of this Item 15 are
attached hereto unless incorporated by reference to a previous
filing.
(d) The Schedule listed in subparagraph (a)(2) of this Item 15 is
attached hereto.
43
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
Date: March 28, 2003
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
Date: March 28, 2003
By: /s/ David G. Kreher
-----------------------------------------------------------------------------
David G. Kreher, Senior Vice President, Assistant Secretary (Chief
Financial Officer and accounting officer)
Date: March 28, 2003
By: /s/ Carl W. Hastings
-----------------------------------------------------------------------------
Carl W. Hastings, Vice President, Assistant Secretary, Director
Date: March 28, 2003
By: /s/ Thomas W. Pinnock
-----------------------------------------------------------------------------
Thomas W. Pinnock III, Director
Date: March 28, 2003
By: /s/ Stephen M. Merrick
-----------------------------------------------------------------------------
Stephen M. Merrick, Senior Vice President, Secretary, Director
Date: March 28, 2003
44
By: /s/ Donald L. McCain
------------------------------------------------------------------------------
Donald L. McCain, Director
Date: March 28, 2003
By: /s/ John Akin
-----------------------------------------------------------------------------
John Akin, Director
Date: March 28, 2003
By: /s/ Sandra S. Montgomery
-----------------------------------------------------------------------------
Sandra S. Montgomery, Director
Date: March 28, 2003
By: /s/ Thomas T. Moody
-----------------------------------------------------------------------------
Thomas T. Moody, Director
Date: March 28, 2003
By: /s/ Marvin W. Solomonson
-----------------------------------------------------------------------------
Marvin W. Solomonson, Director
Date: March 28, 2003
45
CERTIFICATIONS
I, Robert L. Montgomery, Chief Executive Officer of Reliv' International,
Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Reliv International,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
46
Date: March 28, 2003
RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
-----------------------------------
Robert L. Montgomery Chief Executive
Officer
47
CERTIFICATIONS
I, David G. Kreher, Chief Financial Officer of Reliv' International, Inc.,
certify that:
1. I have reviewed this annual report on Form 10-K of Reliv International,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
48
Date: March 28, 2003
RELIV' INTERNATIONAL, INC.
By: /s/ David G. Kreher
-----------------------------------
David G. Kreher, Chief Financial
Officer
49
SARBANES-OXLEY ACT
SECTION 906 CERTIFICATION
I certify that the periodic report on Form 10-K containing the financial
statements fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)) and that information
contained in the periodic report on Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of the issuer.
RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
--------------------------------------
Robert L. Montgomery,
Chief Executive Officer
50
SARBANES-OXLEY ACT
SECTION 906 CERTIFICATION
I certify that the periodic report on Form 10-K containing the financial
statements fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)) and that information
contained in the periodic report on Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of the issuer.
RELIV' INTERNATIONAL, INC.
By: /s/ David G. Kreher
----------------------------------------
David G. Kreher, Chief Financial Officer
51
Reliv' International, Inc.
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2002, 2001, and 2000
Contents
Consolidated Financial Statements:
Report of Independent Auditors................................................................. F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001, and 2000........................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001, and 2000........................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001, and 2000............................................................ F-6
Notes to Consolidated Financial Statements - December 31, 2002................................. F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2002, 2001, and 2000...............................................................F-26
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.
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, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. Our
audits also included the financial statement schedule listed in the index at
Item 15(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 auditing standards generally accepted
in the United States. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Reliv'
International, Inc. and Subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States. 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
St. Louis, Missouri
March 10, 2003
F-1
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
2002 2001
-------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 3,437,966 $ 1,258,821
Accounts and notes receivable, less allowances of $5,000 in 2002
and 2001 688,898 548,035
Accounts due from employees and distributors 104,000 50,200
Inventories:
Finished goods 2,361,064 2,313,058
Raw materials 680,516 1,391,237
Sales aids and promotional materials 415,565 437,371
-------------------------------------------
Total inventories 3,457,145 4,141,666
Refundable income taxes 8,072 136,263
Prepaid expenses and other current assets 564,486 362,287
Deferred income taxes 171,873 65,124
-------------------------------------------
Total current assets 8,432,440 6,562,396
Other assets 442,927 646,018
Note receivable from officer 48,250 59,250
Accounts due from employees and distributors 78,000 43,741
Property, plant, and equipment 16,484,644 15,951,977
Less accumulated depreciation and amortization 7,040,275 6,276,781
-------------------------------------------
9,444,369 9,675,196
-------------------------------------------
Total assets $18,445,986 $16,986,601
===========================================
F-2
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31
2002 2001
-------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 5,358,082 $ 4,640,615
Income taxes payable 257,441 6,153
Borrowings under line of credit - 985,922
Current maturities of long-term debt 415,235 279,733
Current maturities of capital leases 8,755 134,682
-------------------------------------------
Total current liabilities 6,039,513 6,047,105
Noncurrent liabilities:
Capital lease obligations, less current maturities - 8,862
Long-term debt, less current maturities 4,057,042 4,641,384
Deferred income taxes 84,435 48,124
Other noncurrent liabilities 467,350 414,276
-------------------------------------------
Total noncurrent liabilities 4,608,827 5,112,646
Stockholders' equity:
Preferred stock, par value $0.001 per share; 3,000,000 shares
authorized; none issued and outstanding - -
Common stock, par value $0.001 per share; 20,000,000 shares
authorized, 12,006,761 shares issued and 11,921,932 shares
outstanding in 2002 and 9,654,884 shares issued and 9,563,267
outstanding in 2001 12,007 9,655
Additional paid-in capital 17,863,505 9,119,934
Notes receivable - officers and directors (2,449) (19,289)
Accumulated deficit (8,960,782) (2,479,285)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (775,383) (688,607)
Treasury stock (339,252) (115,558)
-------------------------------------------
Total stockholders' equity 7,797,646 5,826,850
-------------------------------------------
Total liabilities and stockholders' equity $18,445,986 $16,986,601
===========================================
See accompanying notes.
F-3
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
2002 2001 2000
----------------------------------------------------------------
Sales at suggested retail $90,110,444 $74,410,042 $83,496,234
Less distributor allowances on
product purchases 27,183,581 21,466,995 22,216,449
----------------------------------------------------------------
Net sales 62,926,863 52,943,047 61,279,785
Costs and expenses:
Cost of products sold 11,569,163 12,562,385 25,023,444
Distributor royalties and commissions 24,205,030 18,795,153 15,929,756
Selling, general, and administrative 22,875,719 20,555,649 20,545,175
Impairment of goodwill (see Note 2) - - 407,292
----------------------------------------------------------------
Income (loss) from operations 4,276,951 1,029,860 (625,882)
Other income (expense):
Interest expense (340,343) (527,208) (639,172)
Other income 98,199 24,788 115,626
----------------------------------------------------------------
Income (loss) before income taxes 4,034,807 527,440 (1,149,428)
Provision (benefit) for income taxes 1,542,000 219,000 (251,000)
----------------------------------------------------------------
Net income (loss) $ 2,492,807 $ 308,440 $ (898,428)
================================================================
Earnings (loss) per common share $0.22 $0.03 $(0.08)
================================================================
Earnings (loss) per common share -
assuming dilution $0.19 $0.03 $(0.08)
================================================================
2001 and 2000 earnings (loss) per common share have been restated for the 2002
stock dividend; see Note 8.
See accompanying notes.
F-4
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Notes Receivable
Common Stock Additional Officers and Accumulated
Shares Amount Paid-In Capital Directors Deficit
------------------------------------------------------------------------------------
Balance at December 31, 1999 9,551,102 $ 9,551 $9,072,831 $(38,217) $(1,889,297)
Net loss - - - - (898,428)
Other comprehensive loss:
Foreign currency translation adjustment - - - - -
Total comprehensive loss
Repayment of loans by officers/directors - - - 11,567 -
Warrants granted under distributor
stock purchase plan (DSPP) - - 1,140 - -
Options and warrants exercised 103,403 104 785 - -
------------------------------------------------------------------------------------
Balance at December 31, 2000 9,654,505 9,655 9,074,756 (26,650) (2,787,725)
------------------------------------------------------------------------------------
Net income - - - - 308,440
Other comprehensive loss:
Foreign currency translation adjustment - - - - -
Total comprehensive income
Repayment of loans by officers/directors - - - 7,361 -
Warrants granted under DSPP - - 9,384 - -
Tax benefit from exercise of options - - 35,404 - -
Common stock purchased for treasury - - - - -
Warrants exercised 379 - 390 - -
------------------------------------------------------------------------------------
Balance at December 31, 2001 9,654,884 9,655 9,119,934 (19,289) (2,479,285)
------------------------------------------------------------------------------------
Net income - - - - 2,492,807
Other comprehensive loss:
Foreign currency translation adjustment - - - - -
Total comprehensive income
Repayment of loans by officers/directors - - - 16,840 -
Warrants granted under DSPP - - 19,873 - -
Common stock purchased for treasury - - - - -
Retirement of treasury stock (227,008) (227) (209,846) - (192,283)
Options and warrants exercised 778,882 779 1,014,225 - (879,744)
Tax benefit from exercise of options - - 18,842 - -
Stock dividend declared September 19, 2002 1,800,063 1,800 7,900,477 - (7,902,277)
------------------------------------------------------------------------------------
Balance at December 31, 2002 12,006,761 $12,007 $17,863,505 $(2,449) $(8,960,782)
====================================================================================
See accompanying notes.
Accumulated
Other Treasury Stock
Comprehensive -------------------------
Loss Shares Amount Total
---------------------------------------------------------
Balance at December 31, 1999 $ (336,150) - $ - $6,818,718
Net loss - - - (898,428)
Other comprehensive loss:
Foreign currency translation adjustment (288,124) - - (288,124)
-----------
Total comprehensive loss (1,186,552)
-----------
Repayment of loans by officers/directors - - - 11,567
Warrants granted under distributor
stock purchase plan (DSPP) - - - 1,140
Options and warrants exercised - - - 889
----------------------------------------------------------
Balance at December 31, 2000 (624,274) - - 5,645,762
----------------------------------------------------------
Net income - - - 308,440
Other comprehensive loss:
Foreign currency translation adjustment (64,333) - - (64,333)
-----------
Total comprehensive income 244,107
-----------
Repayment of loans by officers/directors - - - 7,361
Warrants granted under DSPP - - - 9,384
Tax benefit from exercise of options - - - 35,404
Common stock purchased for treasury - 91,617 (115,558) (115,558)
Warrants exercised - - - 390
----------------------------------------------------------
Balance at December 31, 2001 (688,607) 91,617 (115,558) 5,826,850
----------------------------------------------------------
Net income - - - 2,492,807
Other comprehensive loss:
Foreign currency translation adjustment (86,776) - - (86,776)
----------
Total comprehensive income 2,406,031
----------
Repayment of loans by officers/directors - - - 16,840
Warrants granted under DSPP - - - 19,873
Common stock purchased for treasury - 220,220 (626,050) (626,050)
Retirement of treasury stock - (227,008) 402,356 -
Options and warrants exercised - - - 135,260
Tax benefit from exercise of options - - - 18,842
Stock dividend declared September 19, 2002 - - - -
----------------------------------------------------------
Balance at December 31, 2002 $(775,383) 84,829 $(339,252) $7,797,646
==========================================================
See accompanying notes.
F-5
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2002 2001 2000
---------------------------------------------------------------
Operating activities
Net income (loss) $2,492,807 $308,440 $(898,428)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 866,397 743,078 1,080,247
Amortization of goodwill - - 52,554
Impairment charge for goodwill - - 407,292
Compensation expense for warrants granted 19,873 9,384 1,140
Tax benefit from exercise of options 18,842 35,404 -
Deferred income taxes (71,896) 66,171 57,098
Foreign currency transaction (gain)/loss (93,880) (16,547) 21,376
(Increase) decrease in accounts and notes
receivable (288,693) 1,940,351 (347,245)
(Increase) decrease in inventories 649,592 358,768 85,966
(Increase) decrease in refundable income taxes 127,920 527,202 188,950
(Increase) decrease in prepaid expenses and
other current assets (213,792) (39,678) (25,084)
(Increase) decrease in other assets 202,973 201,587 150,903
Increase (decrease) in accounts payable and
accrued expenses 784,518 (2,203,839) (360,404)
Increase (decrease) in income taxes payable 250,192 6,192 (1,370)
---------------------------------------------------------------
Net cash provided by operating activities 4,744,853 1,936,513 412,995
Investing activities
Proceeds from sale of property, plant, and
equipment 28,295 - 23,464
Purchase of property, plant, and equipment (668,488) (300,121) (440,224)
---------------------------------------------------------------
Net cash used in investing activities (640,193) (300,121) (416,760)
Financing activities
Proceeds from long-term borrowings and line of
credit 32,871 40,463 365,094
Principal payments on long-term borrowings and
line of credit (1,469,296) (1,285,395) (466,829)
Principal payments under capital lease obligations (134,789) (176,450) (137,617)
Proceeds from options and warrants exercised 135,260 390 889
Repayment of loans by officers and directors 27,840 7,361 116,567
Purchase of stock for treasury (626,050) (115,558) -
---------------------------------------------------------------
Net cash used in financing activities (2,034,164) (1,529,189) (121,896)
Effect of exchange rate changes on cash and cash
equivalents 108,649 (47,064) (207,357)
---------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,179,145 60,139 (333,018)
Cash and cash equivalents at beginning of year 1,258,821 1,198,682 1,531,700
---------------------------------------------------------------
Cash and cash equivalents at end of year $3,437,966 $1,258,821 $1,198,682
===============================================================
F-6
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
2002 2001 2000
----------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 345,604 $ 532,187 $ 605,565
================================================================
Income taxes $ 1,231,000 $ 200,220 $ 219,500
================================================================
Noncash investing and financing transactions:
Capital lease obligations entered into $ - $ - $ 56,598
================================================================
See accompanying notes.
F-7
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002
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. 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, the United Kingdom, and the Philippines. 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 includes raw
materials, labor, and overhead costs and is accounted for using the first-in,
first-out basis. On a periodic basis, the Company reviews its inventory levels
in each country, as compared to future demand requirements and the shelf life of
the various products. Based on this review, the Company records inventory
write-downs when necessary.
Property, Plant, and Equipment
Property, plant, and equipment are stated on the cost basis. Depreciation is
computed using the straight-line or an accelerated method over the useful life
of the related assets, including assets recorded under capital leases.
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 20 percent to 40 percent of such suggested retail price. Sales
revenue and commission expenses are recorded when the merchandise is shipped.
F-8
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Foreign Currency Translation
All balance sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Statements of operations 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 loss. Foreign currency translation adjustments
exclude income tax expense (benefit) given that the Company's investments in
non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of
time. The transaction gains and (losses) were $93,880, $16,547, and $(21,376)
for 2002, 2001, and 2000, respectively.
Income Taxes
The provision for income taxes is computed using the liability method. The
primary differences between financial statement and taxable income (loss) result
from financial statement accruals and reserves and differences between
depreciation for book and tax purposes.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
using the intrinsic value method. 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. As permitted by SFAS No. 123, Accounting
and Disclosure of Stock-Based Compensation, the Company has elected the
disclosure-only alternative of this pronouncement in a note to these financial
statements (see Note 8).
The Company accounts for options granted to nonemployees and warrants granted to
distributors under the fair value approach required by SFAS No. 123.
Advertising
Costs of sales aids and promotional materials are capitalized as inventories.
All other advertising and promotional costs are expensed when incurred. The
Company recorded $26,000, $32,000 and $30,000 of advertising expense in 2002,
2001, and 2000, respectively.
Shipping and Handling Costs
The Company records shipping and handling costs as a component of cost of
products sold.
F-9
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Basic and Diluted Earnings (Loss) per Share
Basic earnings (loss) per common share are computed using the weighted average
number of common shares outstanding during the year, as restated for the stock
dividend declared on September 19, 2002. Diluted earnings (loss) per common
share are computed using the weighted average number of common shares and
potential dilutive common shares that were outstanding during the period, as
restated for the stock dividend declared on September 19, 2002. Potential
dilutive common shares consist of outstanding stock options and warrants. See
Note 9 for additional information regarding earnings per share.
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 accounting principles
generally accepted in the United States 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 the 2001 and 2000 financial
statements to conform to the 2002 presentation.
2. Reliv UK, Ltd. - Goodwill Impairment
The Company owns a 98.5% interest in Reliv Europe, the holding company of Reliv
UK, Ltd. In December 2000, the Company recorded a noncash accounting charge and
wrote off the unamortized balance of $407,292. This impairment charge was
reported as a separate line item in loss from operations in the accompanying
2000 consolidated statement of operations.
3. Research and Development Expenses
Research and development expenses of $431,000, $355,000, and $410,000 in 2002,
2001 and 2000, respectively, were charged to selling, general, and
administrative expenses as incurred.
F-10
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
4. Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2002 and 2001, consist of the
following:
2002 2001
----------------------------------------
Land $ 829,222 $ 829,222
Building 8,583,444 8,441,164
Machinery and equipment 4,057,983 4,030,689
Office equipment 738,976 565,085
Computer equipment and software 2,275,019 2,085,817
----------------------------------------
16,484,644 15,951,977
Less accumulated depreciation and amortization 7,040,275 6,276,781
----------------------------------------
$ 9,444,369 $ 9,675,196
========================================
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2002 and 2001, consist of
the following:
2002 2001
----------------------------------------
Trade payables $2,456,569 $2,880,565
Distributors' commissions 2,065,327 1,244,439
Sales taxes 393,413 260,643
Interest expense 55,238 60,499
Payroll and payroll taxes 381,748 192,673
Other 5,787 1,796
----------------------------------------
$5,358,082 $4,640,615
========================================
6. Short-Term Borrowings
In November 2001, the Company renewed its line of credit with a maximum
borrowing limit of $1,000,000. The limit is based on a collateral-based formula
of accounts receivable and inventories. Borrowings under this line of credit are
due on demand and bear interest, payable monthly, at the prime rate, which was
4.25% at December 31, 2002. The maturity date of the line is December 2003. A
portion of the Company's inventories and property, plant, and equipment with a
net book value of $3,624,700 as of December 31, 2002 are pledged as security
under the terms of the agreement. As of December 31, 2002, the Company had no
outstanding balance on the line of credit. As of December 31, 2002,
approximately $513,000 was available under the line of credit based on the
Company's borrowing base formula.
F-11
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Long-Term Debt
Long-term debt at December 31, 2002 and 2001, consists of the following:
2002 2001
------------------------------
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
$2,545,700 at December 31, 2002); final payment due on
March 1, 2005 $ 234,001 $ 326,559
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 $38,802, (including
interest at prime); secured by land and building (net book value
of $5,052,900 at December 31, 2002) balance due March 2004 3,839,681 4,061,927
Term loan payable in monthly installments of $7,303, (including
interest at 7.75%); secured by equipment (net book value of
$96,200 at December 31, 2002) final payment due February 2003 6,784 90,254
Private placement notes payable in quarterly installments equal to 2%
of Philippine sales at suggested retail (including interest at
9%), unsecured; balance due on July 1, 2005 135,323 208,092
Notes payable - other 51,733 29,530
------------------------------
4,472,277 4,921,117
Less current maturities 415,235 279,733
------------------------------
$4,057,042 $4,641,384
==============================
During 2002, the Company renegotiated the terms of its term loan payable due
March 2004. Accordingly, the interest rate has been changed from 8.5% to a
variable rate equal to the prime rate. The monthly installments remain the same.
Principal maturities of long-term debt at December 31, 2002 are as follows:
2003 $ 415,235
2004 3,679,544
2005 377,498
--------------------
$ 4,472,277
====================
F-12
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stockholders' Equity
Stock Dividend
The Board of Directors declared a one share for 5.25 shares stock dividend on
September 19, 2002. The dividends were payable on October 25, 2002 to
stockholders of record on October 11, 2002. Average shares outstanding, all per
share amounts, and stock option and warrant data included in the accompanying
consolidated financial statements and notes are based on the increased number of
shares as restated for the stock dividend.
Stock Options
In May 2001, the Company adopted a stock option plan which provides for the
grant of both incentive stock options and non-qualified stock options for
employees (including officers) and other consultants and advisors of the
Company. A maximum of 1,190,000 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.
The Company follows APB Opinion No. 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, requires the use of option valuation models that were not developed for
use in valuing employee stock options. Under APB Opinion No. 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.
The Company records expense under the fair value method of SFAS No. 123 for
options and warrants granted to distributors. Total expense recorded for these
options and warrants was $19,873, $9,384, and $1,140 in 2002, 2001, and 2000,
respectively.
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. 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 3.07% to 4.78% for 2001 and 5.11% to 6.87% for 2000; dividend yield
of zero for 2001 and 2000; volatility factor of the expected price of the
Company's stock of 0.729 for 2001, and 0.745 for 2000; and a weighted average
expected life of 4.51 years for 2001 and 2000. The weighted average fair value
of stock options granted during 2001 and 2000 was $0.53 and $0.82 per share,
respectively. No stock options were granted during 2002.
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
F-13
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Stock Options (continued)
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.
For purposes of pro forma disclosures, the estimated fair value of the options
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 for the years ended December 31 follows:
2002 2001 2000
------------------------------------------------------------------
Pro forma net income (loss) $2,223,687 $ 48,073 $(1,318,935)
Pro forma earnings (loss) per share:
Basic $0.20 $ - $(0.12)
Diluted $0.17 $ - $(0.12)
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
2002 2001 2000
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------
Outstanding beginning of
the year 3,348,214 $1.229 2,427,381 $1.462 2,847,143 $1.397
Granted:
Price = fair value - - 929,762 0.882 82,143 1.354
Price > fair value - - 233,333 0.970 - -
Exercised (943,505) 1.234 - - (476,905) 1.060
Forfeited (86,972) 2.598 (242,262) 1.977 (25,000) 1.320
-------------- -------------- --------------
Outstanding at end of
year 2,317,737 $1.175 3,348,214 $1.229 2,427,381 $1.462
============== ============== ==============
Exercisable at end of
year 1,759,333 2,315,096 2,016,285
============== ============== ==============
F-14
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Stock Options (continued)
As of December 31, 2002
--------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------ ---------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- ------------------- ----------------- -------------- ------------------
$0.882-$1.00 1,396,563 3.13 $0.913 1,004,897 $0.905
$1.01-$2.00 921,174 1.86 1.575 754,436 1.693
---------------- --------------
$0.882-$2.00 2,317,737 2.63 $1.175 1,759,333 $1.243
================ ==============
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 each 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
commenced in January 1999, and a total of 32,483, 59,564, and 39,092 warrants
were issued during the years ended December 31, 2002, 2001, and 2000,
respectively. The weighted average fair values of warrants granted during 2002,
2001, and 2000 were $2.14, $0.48 and $0.50 per share, respectively.
A summary of the Company's warrant activity and related information for the
years ended December 31 follows:
2002 2001 2000
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
------------------------------------------------------------------------------------
Outstanding beginning of
the year 140,124 $0.995 81,011 $0.954 42,946 $0.865
Granted:
Price = fair value 32,483 4.660 59,564 1.050 39,092 1.050
Exercised (42,069) 0.869 (451) 0.865 (1,027) 0.865
Forfeited (395) 0.865 - - - -
-------------- -------------- --------------
Outstanding at end of
year 130,143 $1.951 140,124 $0.995 81,011 $0.954
============== ============== ==============
Exercisable at end of
year 77,558 40,185 13,289
============== ============== ==============
F-15
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Distributor Stock Purchase Plan (continued)
As of December 31, 2002
--------------------------------------------------------------------------------------------
Warrants Outstanding Warrants Exercisable
------------------------------------------------------ ---------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- ------------------- ----------------- -------------- ------------------
$1.05 97,660 1.61 $1.05 45,075 $1.05
$4.66 32,483 3.00 4.66 32,483 4.66
---------------- --------------
$1.05-$4.66 130,143 1.96 $1.951 77,558 $2.562
================ ==============
9. Earnings (Loss) per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Year ended December 31
2002 2001 2000
-----------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings per
share - net income (loss) $ 2,492,807 $ 308,440 $ (898,428)
Denominator:
Denominator for basic earnings (loss) per
share - weighted average shares 11,315,000 11,479,000 11,385,000
Effect of dilutive securities:
Employee stock options and warrants 1,574,000 119,000 -
-----------------------------------------------------------
Denominator for diluted earnings (loss) per
share - adjusted weighted average shares 12,889,000 11,598,000 11,385,000
===========================================================
Basic earnings (loss) per share $0.22 $0.03 $(0.08)
===========================================================
Diluted earnings (loss) per share $0.19 $0.03 $(0.08)
===========================================================
The diluted shares for the year ended December 31, 2000 exclude incremental
shares of 413,000 related to employee stock options and warrants issued to
external parties. These shares are excluded due to their antidilutive effect as
a result of the Company's net loss during 2000.
F-16
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. 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, 2002:
Capital Operating Leases
Leases
--------------------------------------
2003 $8,902 $139,821
2004 - 99,283
2005 - 21,649
2006 - 19,992
2007 - 16,660
-----------------------------------
Total minimum lease payments 8,902 $297,405
==================
Less amount representing interest 147
---------------
Present value of minimum lease payments $8,755
===============
Machinery, office, and computer equipment at December 31, 2002 and 2001,
includes approximately $104,287 and $620,187 of equipment under leases that have
been capitalized. Accumulated depreciation and amortization for such equipment
approximated $71,711 and $375,359 at December 31, 2002 and 2001, respectively.
Rent expense for all operating leases was $275,130, $302,146, and $319,802 for
the years ended December 31, 2002, 2001, and 2000, respectively.
11. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments are
approximately as follows:
2002 2001
----------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------- ----------------------------------
Cash and cash equivalents $ 3,438,000 $ 3,438,000 $ 1,259,000 $ 1,259,000
Long-term debt, including
current maturities 4,472,000 4,472,000 4,921,000 5,466,000
Capital lease obligations,
including current maturities 9,000 9,000 144,000 146,000
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Fair Value of Financial Instruments (continued)
The carrying amount of cash equivalents approximates fair value because of the
short maturity of those instruments. The fair value of long-term debt and
capital lease obligations is estimated based on the current rates offered to the
Company for debt of the same remaining maturities.
12. Income Taxes
The components of income (loss) before income taxes are as follows:
Year ended December 31
2002 2001 2000
------------------------------------------------------------
Domestic $ 4,244,927 $ 951,425 $ 303,804
Foreign (210,120) (423,985) (1,453,232)
------------------------------------------------------------
$ 4,034,807 $ 527,440 $(1,149,428)
============================================================
The components of the provision (benefit) for income taxes are as follows:
Year ended December 31
2002 2001 2000
------------------------------------------------------------
Current:
Federal $ 1,492,000 $ 117,000 $(310,000)
Foreign 12,000 27,000 24,000
State 110,000 9,000 (23,000)
------------------------------------------------------------
Total current 1,614,000 153,000 (309,000)
Deferred:
Federal 11,000 66,000 50,000
Foreign (82,000) - 8,000
State (1,000) - -
------------------------------------------------------------
Total deferred (72,000) 66,000 58,000
------------------------------------------------------------
$ 1,542,000 $ 219,000 $(251,000)
============================================================
F-18
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. 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%. The reasons
for these differences are as follows:
Year ended December 31
2002 2001 2000
------------------------------------------------------------
Income taxes at statutory rate $ 1,372,000 $ 179,000 $(391,000)
State income taxes, net of federal benefit 110,000 9,000 (15,000)
U.S. tax benefit of foreign losses (8,000) (54,000) (223,000)
Goodwill impairment charge - - 156,000
Effect of foreign losses without an income tax
benefit 9,000 19,000 101,000
Executive life insurance expense 54,000 39,000 53,000
Nondeductible foreign development expenses - 26,000 31,000
Meals and entertainment 24,000 16,000 22,000
Other (19,000) (15,000) 15,000
------------------------------------------------------------
$ 1,542,000 $ 219,000 $(251,000)
============================================================
The components of the deferred tax assets and liabilities, and the related tax
effects of each temporary difference at December 31, 2002 and 2001, are as
follows:
2002 2001
---------------------------------------
Deferred tax assets:
Product refund reserve $ 32,000 $ 18,000
Inventory obsolescence reserve 21,000 -
Vacation accrual 15,000 11,000
Charitable contributions - 13,000
Bad debt reserve 2,000 2,000
Philippine net operating loss carryforward 63,000 -
Miscellaneous accrued expenses 38,873 21,124
Deferred compensation 189,565 161,876
---------------------------------------
$ 361,438 $ 227,000
=======================================
Deferred tax liabilities:
Depreciation 274,000 210,000
---------------------------------------
$ 274,000 $ 210,000
=======================================
The Company's $63,000 net operating loss carryforward related to its Philippine
subsidiary expires in 2006.
F-19
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
12. Income Taxes (continued)
United States income tax has not been provided on the unremitted earnings of the
foreign subsidiaries since it is the intention of the Company to indefinitely
reinvest these earnings in the growth of these foreign subsidiaries. Applicable
foreign taxes have been provided. The cumulative amount of unremitted earnings
on which the Company has not recognized United States income tax was $269,000 at
December 31, 2002. Although it is not practicable to determine the deferred tax
liability on the unremitted earnings, credits for foreign income taxes paid will
be available to significantly reduce any U.S. tax liability if foreign earnings
are remitted.
13. License Agreement
The Company has a license agreement with the individual who developed several 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% of net sales, with a minimum payment
of $10,000 and a maximum payment of $22,000. The amount of expense under this
agreement was $264,000 for each of the years ended December 31, 2002, 2001, and
2000. The agreement expires in February 2007. The royalty payments terminate
upon the death of the licensor, which occurred in February 2003. However, under
the terms of the license agreement, the Company has the right to continue to use
the name and likeness of the licensor in connection with marketing the related
products for an annual fee of $10,000 for the duration of the agreement.
14. Employee Benefit Plans
The Company established a 401(k) employee savings plan which covers
substantially all employees. Employees can contribute up to 15% of their gross
income to the plan, and the Company matches 75% of the employee's contribution.
Company contributions under the 401(k) plan totaled $246,000, $178,000, and
$179,000 in 2002, 2001, and 2000, respectively.
15. Incentive Compensation Plans
In July 2001, the Board of Directors approved an incentive compensation plan
effective for fiscal years beginning with 2001. Under the plan, the Company will
establish a bonus pool payable on a semi-annual basis equal to 25% of the net
income of the Company. Bonuses will be payable on all profits, but only if the
net income for each six-month period exceeds $250,000. The bonus pool is
allocated to executives according to a specified formula, with a portion
allocated to a middle management group determined by the Executive Committee of
the Board of Directors. The Company paid a total of $741,250 and $112,380 to the
participants of the bonus pool in 2002 and 2001, respectively. The Company paid
$76,824 in 2000 under a previous incentive compensation plan to its
officers/directors.
F-20
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
15. Incentive Compensation Plans (continued)
The Company sponsors a Supplemental Executive Retirement Plan (SERP plan) to
allow certain executives to defer a portion of their annual salary and bonus
into a grantor trust. A grantor trust was established to hold the assets of the
SERP plan. The Company funds the grantor trust by paying the amount deferred by
the participant into the trust at the time of deferral. Investment earnings and
losses accrue to the benefit or detriment of the participants. The SERP plan
also provides for a discretionary matching contribution by the Company not to
exceed 100% of the participant's annual contribution. In 2002, 2001, and 2000,
the Company did not provide a match. The participants fully vest in the deferred
compensation three years from the date they enter the SERP plan. The
participants are not eligible to receive distribution under the SERP plan until
retirement, death, or disability of the participant.
16. 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, 2002, 2001,
and 2000, the Company incurred consulting fees to the officer/director and legal
fees to his firm totaling approximately $315,000, $344,000, and $358,000,
respectively.
Note receivable from officer represents amounts due from an officer/director. In
1998, the individual received advances against his anticipated incentive
compensation totaling $89,250. Repayments of $11,000 and $30,000 were made in
2002 and 2000, respectively. Accounts due from employees and distributors
represent travel and other advances to employees, as well as advances to
distributors.
In February 2003, the Company purchased 25,000 shares of the Company's common
stock from an officer/director at a price of $3.895 per share. The total amount
paid for the stock was $97,375.
17. 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 expired in February 2002, the
Company paid annual consulting fees to the partnership equal to 2% 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% of retail
sales that exceed those figures. Total expense under this agreement approximated
$7,000, $39,000, and $51,000 in 2002, 2001, and 2000, respectively.
F-21
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
18. Legal Proceedings
In December 2001, five former distributors of the Company filed for arbitration
claiming unlawful termination, breach of the Distributor Agreement, and
interference with business expectancy. The individuals had been terminated by
the Company in October 2000 for violating certain provisions of the Distributor
Agreement. This claim was settled in January 2003 and was properly accrued in
the financial statements in 2002. The settlement did not have a material adverse
effect on the financial position or results of operations of the Company.
19. 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 eight operating units that sell nutritional and dietary products to
a sales force of independent distributors that 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 nonoperating 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-22
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
19. Segment Information (continued)
Segment data for the years ended December 31, 2002, 2001, and 2000, follows:
2002 2001 2000
--------------------------------------------------------------------
Net sales
Net sales to external customers:
Network marketing $62,790,307 $49,064,076 $44,535,717
Manufacturing and packaging 136,556 3,878,971 16,744,068
--------------------------------------------------------------------
Total net sales to external customers 62,926,863 52,943,047 61,279,785
Intersegment net sales:
Manufacturing and packaging 9,098,304 6,826,619 6,501,576
--------------------------------------------------------------------
Total net sales 72,025,167 59,769,666 67,781,361
Reconciling items:
Intersegment net sales (9,098,304) (6,826,619) (6,501,576)
--------------------------------------------------------------------
Total consolidated net sales $62,926,863 $52,943,047 $61,279,785
====================================================================
Depreciation and amortization
Network marketing $ 260,613 $ 250,313 $ 302,624
Manufacturing and packaging 605,784 492,765 830,177
--------------------------------------------------------------------
Total consolidated depreciation
and amortization expense $ 866,397 $ 743,078 $1,132,801
====================================================================
Segment profit
Network marketing $5,617,915 $2,610,296 $1,099,872
Manufacturing and packaging 441,402 174,780 24,556
--------------------------------------------------------------------
Total segment profit 6,059,317 2,785,076 1,124,428
Reconciling items:
Corporate expenses (1,782,366) (1,755,216) (1,750,309)
Nonoperating-net 98,199 24,788 115,625
Interest expense (340,343) (527,208) (639,172)
--------------------------------------------------------------------
Total consolidated income (loss) before
income taxes $4,034,807 $527,440 $(1,149,428)
====================================================================
F-23
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
19. Segment Information (continued)
2002 2001 2000
--------------------------------------------------------------------
Segment assets
Network marketing $12,960,082 $13,244,683 $13,418,288
Manufacturing and packaging 1,963,503 2,434,973 5,778,145
--------------------------------------------------------------------
Total segment assets 14,923,585 15,679,656 19,196,433
Reconciling items:
Corporate assets 3,522,401 1,306,945 1,198,682
--------------------------------------------------------------------
Total consolidated assets $18,445,986 $16,986,601 $20,395,115
====================================================================
Capital expenditures
Network marketing $482,962 $251,109 $300,017
Manufacturing and packaging 185,526 49,012 140,207
--------------------------------------------------------------------
Total capital expenditures $668,488 $300,121 $440,224
====================================================================
Geographic area data
2002 2001 2000
--------------------------------------------------------------------
Net sales to external customers
United States $53,210,463 $44,799,429 $55,996,610
Australia 1,660,561 1,521,482 1,718,929
New Zealand 262,203 286,816 292,895
Canada 982,925 972,217 913,051
Mexico 2,904,722 2,233,088 1,768,570
United Kingdom 446,465 391,033 388,488
Colombia - 45,671 82,638
Philippines 3,459,524 2,693,311 118,604
--------------------------------------------------------------------
Total net sales to external customers $62,926,863 $52,943,047 $61,279,785
====================================================================
Assets by area
United States $14,348,519 $13,489,793 $17,689,638
Australia 807,094 665,331 871,155
New Zealand 176,811 239,991 341,905
Canada 256,055 221,395 307,071
Mexico 1,619,941 1,388,319 653,251
United Kingdom 189,081 140,044 100,247
Colombia 2,271 1,278 144,382
Philippines 1,046,214 840,450 287,466
--------------------------------------------------------------------
Total consolidated assets $18,445,986 $16,986,601 $20,395,115
====================================================================
F-24
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
19. Segment Information (continued)
Major Customer
Revenues from sales to one customer of the Company's manufacturing and packaging
segment represented approximately $3.8 million and $16.7 million of consolidated
net sales for 2001 and 2000, respectively. Production and sales to this customer
concluded in August 2001.
20. Quarterly Financial Data (Unaudited)
First Second Third Fourth
--------------------------------------------------------------------------------
(In thousands, except per share amounts)
2002
Net sales $ 14,484 $ 15,449 $ 16,237 $ 16,756
Cost of products sold $ 2,757 $ 2,916 $ 2,774 $ 3,122
Net income $ 459 $ 625 $ 741 $ 668
Earnings per share:
Basic $ 0.04 $ 0.05 $ 0.07 $ 0.06
Diluted $ 0.03 $ 0.05 $ 0.06 $ 0.05
2001
Net sales $ 14,062 $ 13,425 $ 13,418 $ 12,038
Cost of products sold $ 4,153 $ 3,683 $ 2,291 $ 2,435
Net income (loss) $ (146) $ 13 $ 407 $ 34
Earnings (loss) per share:
Basic $ (0.01) $ 0.00 $ 0.04 $ 0.00
Diluted $ (0.01) $ 0.00 $ 0.04 $ 0.00
Earnings per share data for 2001 has been restated for the stock dividend
declared September 19, 2002.
F-25
Reliv' International, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 2002, 2001, and 2000
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, 2002
Deducted from asset accounts:
Allowance for doubtful
accounts $ 5,000 $ 9,900 - $ 9,900(1) $ 5,000
Reserve for obsolete
inventory 586,600 57,900 - 586,600(2) 57,900
Supporting liability accounts:
Reserve for refunds 50,000 423,500 - 385,500(3) 88,000
------------------------------------------------------------------------------------
Year ended December 31, 2001
Deducted from asset accounts:
Allowance for doubtful
accounts $ 5,000 $ 7,800 - $ 7,800(1) $ 5,000
Reserve for obsolete
inventory 182,500 - 502,700 98,400(2) 586,600
Supporting liability accounts:
Reserve for refunds 50,000 252,900 - 252,900(3) 50,000
------------------------------------------------------------------------------------
Year ended December 31, 2000
Deducted from asset accounts:
Allowance for doubtful
accounts $ 430,000 $ 5,000 $ - $ 430,000(1) $ 5,000
Reserve for obsolete
inventory 236,000 - 182,500 236,000(2) 182,500
Supporting liability accounts:
Reserve for refunds 50,000 172,000 - 172,000(3) 50,000
------------------------------------------------------------------------------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Disposal of obsolete inventory.
(3) Amounts refunded, net of salable amounts returned.
F-28