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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
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 Identification Number)
incorporation or organization)
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri 63005
(Address of principal executive offices) (Zip Code)
(636) 537-9715
Registrant's telephone number, including area code
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. |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) |_| Yes |X| No
Based upon the closing price of $3.7408 per share of Registrant's Common
Stock as reported on NASDAQ National Market tier of The NASDAQ Stock Market at
June 30, 2003, (the last business day of the Registrant's most recently
completed second fiscal quarter). The aggregate market value of the voting stock
held by non-affiliates of the Registrant was then approximately $31,172,329.
(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 19, 2004, was 15,186,552 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2004 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.......................................................21
Item No. 3 Legal Proceedings................................................22
Item No. 4 Submission of Matters to a Vote of Security Holders..............22
Part II
Item No. 5 Market for Registrant's Common Equity and
Related stockholder Matters....................................22
Item No. 6 Selected Financial Data..........................................24
Item No. 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations..................24
Item No. 7A Qualitative and Quantitative Disclosures Regarding Market Risk...36
Item No. 8 Financial Statements and Supplementary Data......................38
Item No. 9 Changes in and Disagreements with Accountants
On Accounting and Financial Disclosure.........................38
Item No. 9A Controls and Procedures..........................................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 Principal Accountant Fees and Services...........................39
Part IV
Item No. 15 Exhibits, Financial Statement Schedules and
Reports on Form 8K.............................................39
2
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, 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, the Philippines, Malaysia and Singapore.
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 nine 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), Reliv' Philippines, Inc., Reliv International
Sdn Bhd (Malaysia) and Reliv Singapore Pte. Ltd.
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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 2003, sales in the United
States represented approximately 86% of net sales.
In Australia, Canada, New Zealand, Mexico, the United Kingdom, Ireland,
the Philippines, Malaysia and Singapore 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
on March 1, 1992. In 2003, approximately 2% 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 2003.
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
2003, approximately 2% of the Company's net sales were attributed to sales in
Canada.
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.
4
was organized and now conducts the Company's operations in Mexico. Sales in
Mexico represented approximately 4% of the Company's net sales in 2003.
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 Company's 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 2003, 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 2003, Reliv Philippines accounted for
4% of the Company's net sales.
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 and the Irish sales totals are included
above with the United Kingdom.
In September, 2003, Reliv International Sdn. Bhd ("Reliv Malaysia") began
operations and sales of the Company's products in Malaysia. Prior to this date,
Reliv Malaysia submitted its application for a Direct Sales License to the
Ministry of Domestic Trade and Consumer Affairs and received a five year license
to do business in Malaysia. Reliv Malaysia's office is located in suburban Kuala
Lumpur and provides a full range of services for the Company and local
distributors, including sales and marketing, product pickup, warehousing, and
distributor relations. In 2003, Reliv Malaysia accounted for 1% of the Company's
net sales.
In March, 2004, Reliv Singapore Pte. Ltd ("Reliv Singapore") commenced
operations and sales in Singapore. Reliv Singapore's office is located in the
financial district of Singapore and offers product pickup and warehousing,
distributor relations, and a meeting room for local distributors. Reliv
Singapore is the fifth Asia-Pacific market opened by the Company and is expected
to add significant international expansion opportunities for its distributors.
5
Principal Products
Through its subsidiaries, the Company markets and sells a line of related
products including nutritional supplements, weight control products, functional
foods, sports nutrition and a skin care line.
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. Reliv NOW and Reliv Classic are sold in
containers with a one month supply, 28 servings, 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 derivative of the Reliv' Classic formula. In 2003,
sales of Reliv Classic and Reliv NOW represented approximately 27% and 11% of
net sales, respectively. Reliv NOW is available in every country where the
Company operates while Reliv Classic is available in the United States,
Australia, New Zealand, Canada, the United Kingdom, Malaysia, Singapore and the
Philippines.
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 2003, sales of Innergize represented approximately 14% of net sales.
Innergize is available in every country where the Company operates. In Canada,
the product is marketed as 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 operates. Sales of Reliv
Ultrim-Plus represented approximately 4% of net sales in 2003.
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 represented approximately 3% of net sales in 2003. 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 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) to
comply with that country's nutritional regulations. FibRestore is available in
all of the countries in which the Company operates with the exception of
Ireland. Sales of FibRestore represented approximately 15% of net sales in 2003.
6
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 in powdered form for mixture with water, milk or juice. In
2003, 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 marketed as A-Affect(R) in the countries
outside the United States due to local product regulations.
ProVantage(R) is a nutritional supplement containing soy 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
also benefits dieters and others wanting to increase their soy intake. 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.
A can of ProVantage contains 11 servings in powdered form for mixture with water
or juice. In 2003, sales of ProVantage represented approximately 4% of net
sales. ProVantage is available in the United States and Canada.
SoySentials(R) is a nutritional supplement containing soy as well as other
vitamins, minerals and herbs designed for use by women. A can of SoySentials
contains 14 servings in powdered form for mixture with water or juice.
SoySentials provides a woman with key nutrients needed to protect herself
against serious health problems and ease the symptoms of menopause and PMS. In
2003, sales of SoySentials represented approximately 4% of net sales.
SoySentials is available in the United States and Mexico.
Reliv' Soy Sense(TM) is a vanilla flavored nutritional supplement
containing soy as well as other vitamins, minerals and herbs. A can of Reliv'
Soy Sense contains 14 servings and is in powdered form for mixture with water or
juice. In 2003, sales of Reliv Soy Sense represented approximately less than 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 marketed as 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 4% of net sales in 2003. 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 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
7
flavored product is in powdered form for mixture in water, available in every
country where the Company operates except the United Kingdom and Ireland. In
Canada the product is marketed as Nutriversal(TM). During 2003, sales of
ReversAge represented approximately 5% 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 Skin Care is clinically proven effective, dermatologist tested and
hypoallergenic. Each skin care product is enriched with the Company's
Dermalongevity Complex, and the ReversAge Read and Need 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 the United States, Australia, New Zealand and Canada. In 2003,
ReversAge skin care represented approximately 2% of annual net sales.
Reliv Delight(R) is a powdered food supplement sold as 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 2003, sales of Reliv Delight
represented less than 1% of net sales.
The Company discontinued its coated granola bar line, Reliv Ultra Bar(R),
in December 2003 due to low sales volume.
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. The principal ingredient delivery system of Reversage (skin care) is
licensed exclusively under issued U.S. patents.
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.
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 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 in 2007 for use of
name and likeness.
8
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.
During 2003, Traco was acquired by Degussa Bioactives and the rights and
obligations under the Traco Agreement were assigned to the successor.
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.
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 fifteen marks in use and registered with
the USPTO and several marks 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, Malaysia,
Singapore 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.
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
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 through customizable reports; timely alerts about a distributor's
current activity; e-mail; a calendar, etc.
9
The Company plans to expand into the most promising international markets.
In September, 2003, the Company entered Malaysia --its newest Asian market since
opening the Philippines in December, 2000. On March 22, 2004, the Company opened
Singapore - its tenth worldwide market and fifth Asia Pacific market. 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 1 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. During
2003, the Company introduced several products into foreign markets, including
Reliv Classic in the Philippines and SoySentials 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 Company's products may become distributors by
being sponsored into the program by another distributor, thereby becoming part
of the sponsoring distributor's downline.
The Company's products are marketed and sold to distributors in the United
States, Australia, Canada, New Zealand, Mexico, the United Kingdom, Ireland, the
Philippines, Malaysia and Singapore through a subsidiary in each country (except
Ireland). Distributors are not assigned territories and there are no
restrictions on marketing areas for distributors. 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 1 distributors worldwide. The Company also sponsors national and
regional conferences within every market
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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 business
model and 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 Guide and CD, 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 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 and the price at which downline distributors purchase product.
The Company has developed an automated system to track and pay wholesale profits
to distributors, such that Master Affiliates are not required to track and
distribute wholesale profits to their personal group. 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
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purchases directly from the Company, a 10% wholesale profit check wi 1 ll 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
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 reach the level of Master Director and must
exhibit leadership characteristics to warrant invitation to the Ambassador
Program. 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, potentially, 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 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.
12
Data on the Company's active distributors and Master Affiliates as of
December 31, 2003 is provided in Item No. 7--Management's Discussion and
Analysis
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.
Compliance
The Company's distributor organization and business model 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 of a particular product prior to the
purchase of additional amounts of such 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 termination for
a refund of 90 percent of the purchase price less any compensation 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.
Distributors may create their own advertising provided it is within the
Company's advertising rules. Unless a Distributor is using Company designed and
approved advertisements, he/she must submit for approval in writing all
advertising (e.g. brochures, flyers, audio tapes, classified or display ads,
radio scripts) to the Compliance Department before placing it or arranging for
placement.
Distributors may make claims about the Company's products that have been
approved by the Company and/or provided in sales and training materials.
Distributors acknowledge that Reliv products are not represented as drugs and
they are not authorized to make any diagnosis of any medical condition, make
drug-type claims for, or prescribe Reliv products to treat or cure
13
any disease or condition. Distributors shall not make any express or implied
references with regard to Reliv products that they cure, prevent or relieve
disease, replace or augment medication, provide therapy, promote healing,
alleviate illnesses or symptoms of illnesses, or make any other medical claims
for specific ailments.
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 maintaining its operations in compliance with the applicable
limitations. The Company also researches laws applicable to distributor
operations and revises or alters distributor materials and programs to 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) for all subsidiaries in early 1993. The
Company expanded its Chesterfield facility in 1997. At its Chesterfield
manufacturing facility, the Company manufactured products that accounted for
approximately 98% of net product sales in 2003. The remaining 2% is comprised of
the Company's granola bar and skin care lines. 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
14
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 controlled 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.
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.
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; Birmingham, England; Petaling Jaya, Malaysia; and Singapore,
Singapore. The Philippines subsidiary 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 the Canada and New Zealand subsidiaries, 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 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. In 2001, revenues were
$3,879,000 as production and sales to the last significant customer concluded in
August, 2001.
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
15
development. The Company intends to continue the use of 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 $493,000 in 2003, $431,000 in
2002, and $355,000 in 2001.
Employees
As of December 31, 2003, the Company and all subsidiaries had
approximately 221 full-time employees compared with 205 such employees at the
end of 2002.
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.
16
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
17
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
18
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 or 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.
19
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 and/or
pick up. Product is shipped to the purchaser from a warehouse located in the
general geographic region or the distributor may walk in to the local office and
purchase products, if a pick up center is available. In addition, the Company
initiates plans to satisfy the inventory, personnel and transportation
requirements of the new market, and the Company modifies its distributor
materials, 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.
20
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' UK. 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. In September, 2003, operations and sales
commenced in Malaysia shortly followed by Singapore in March, 2004.
Reference is made to Note 16 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on geographical segments.
Additional Available Information
We make available, free of charge, copies of our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to these reports as soon as reasonably practicable after such
material is electronically filed with, or furnished to the SEC pursuant to
Section 13(a) or 15(d) of the Exchange Act. This information is available on our
corporate web site at www.reliv.com under the "Investor Relations" section. This
information may also be obtained from the SEC's on-line database located at
www.sec.gov.
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 in Chesterfield, Missouri, where it maintains its
corporate headquarters and sole manufacturing facility. The building is subject
to a deed of trust as collateral on a term loan with a balance of approximately
$3.8 million as of December 31, 2003. The Company believes that its worldwide
facilities are suitable and adequate in relation to our present and immediate
future needs.
The following table summarizes information related to our worldwide facilities
as of December 31, 2003:
21
Location Nature of Use Square Feet Owned/Leased
-------- ------------- ----------- ------------
Chesterfield, MO, USA corporate headquarters/call 136,000 owned
center/manufacturing/warehouse
Seven Hills (Sydney), Australia central office/warehouse/distribution 6,900 leased
Oakville, Ontario, Canada warehouse/distribution 2,100 leased
Mexico City, Mexico central office/warehouse/distribution 21,000 leased
Makati City (Manila), Philippines central office/warehouse/distribution 8,100 leased
Birmingham, England, UK central office/warehouse/distribution 3,300 leased
Petaling Jaya, Malaysia central office/call center 8,000 leased
Item No. 3 - Legal Proceedings
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.
22
2003 and 2002 Quarterly Stock Price Data
HIGH LOW
---- ---
2003
First Quarter $ 3.94 $ 3.01
Second Quarter 4.02 2.60
Third Quarter 4.80 3.44
Fourth Quarter 6.90 3.86
2002
First Quarter $ 1.45 $ 0.77
Second Quarter 2.01 1.07
Third Quarter 4.60 1.10
Fourth Quarter 4.89 2.45
- ----------
Note: All stock price data has been restated for the five-for-four stock split
paid on November 14, 2003.
As of March 9, 2004, there were approximately 2,014 holders of record of
the Company's Common Stock, and an additional 3,200 beneficial owners, including
shares of Common Stock held in street name.
The Company declared a one share for 5.25 shares of 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 declared a five-for-four stock split (25%) on September 4,
2003. Shares issuable to this split were distributed on November 14, 2003 to
stockholders of record on October 29, 2003.
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.
23
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.
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) 2003 2002 2001 2000 1999
-------------------------------------------------------------------------
Net sales $ 76,960 $ 62,927 $ 52,943 $ 61,280 $ 69,278
Net income (loss) $ 4,397 $ 2,493 $ 308 $ (898) $ (1,400)
Preferred dividends accrued and paid $ 56 $ -- $ -- $ -- $ --
Net income (loss) available to common
shareholders $ 4,341 $ 2,493 $ 308 $ (898) $ (1,400)
Earnings (loss) per common share(1):
Basic $ 0.29 $ 0.18 $ 0.02 $ (0.06) $ (0.10)
Diluted $ 0.26 $ 0.15 $ 0.02 $ (0.06) $ (0.10)
Cash dividends per share of common stock $ -- $ -- $ -- $ -- $ 0.01
Total assets $ 24,681 $ 18,446 $ 16,987 $ 20,395 $ 20,772
Long-term debt and capital lease
obligations, less current maturities $ 3,700 $ 4,057 $ 4,650 $ 5,046 $ 5,296
- ----------
(1) Earnings (loss) per common share for 1999-2002 have been restated for the
2002 stock dividend and the 2003 stock split.
Item No. 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company produces a line of food products including nutritional
supplements, diet management products, and sports drink mixes. The Company also
sells a line of skin care products. These products are sold by subsidiaries of
the Company to a sales force of independent distributors of the Company that
sell products directly to consumers. The Company
24
and its subsidiaries sell products to distributors throughout the United States
and in Australia/New Zealand, Canada, Mexico, the United Kingdom/Ireland, the
Philippines, and Malaysia. As of December 31, 2003, the Company had
approximately 61,550 distributors worldwide.
The Company receives payment by credit card, personal check, or guaranteed
funds for 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. In 2003, sales in the United States made up
approximately 86% of worldwide net sales, with the remainder from our
international operations. The sales breakdown by country is given in greater
detail in the "Net Sales by Region" table in the 2003 vs. 2002 section below.
Cost of products sold primarily consists of expenses related to raw
materials, labor, quality control, and overhead directly associated with the
production and distribution of products and sales materials, as well as shipping
costs, duties, and taxes associated with product exports.
Distributor royalties and commissions are paid to Master Affiliates
monthly, based on the sales of their distributor organization in the prior
month. These expenses are governed by the distributor agreements. Also, included
in this expense item are other sales leadership bonuses that are directly
related to the level of sales.
Selling, general, and administrative expenses include compensation and
benefits, all other selling expenses, marketing, promotional expenses, travel,
and other corporate administrative expenses.
Results of Operations
Net Income and Net Sales
2003 vs. 2002
The Company's 2003 net income available to common shareholders was
$4,341,000 or $0.29 per share basic and $0.26 per share diluted. This compares
with net income of $2,493,000 or $0.18 per share basic and $0.15 per share
diluted in 2002. Net income in the United States, the Company's primary market,
was $4,741,000 in 2003, compared to net income of $2,640,000 in 2002. The net
loss from international operations was $344,000 in 2003, compared with a loss of
$147,000 in 2002. The net loss in the Company's newest operation, Malaysia, made
up $237,000 of the net loss from international operations in 2003. The Company
experienced strong improvements in both sales and profitability, led by the
results in the United States. Sales in the United States, the Company's largest
market, grew by 24% in 2003, compared to 2002. The Company's foreign operations
continue to show improved results, with overall international sales increasing
by 15%, and the net loss in markets opened at least one year improved slightly
from the prior year.
25
The following table summarizes the net sales by geographic region for the
years ended December 31, 2003 and 2002. The net sales total for the United
States for 2002 includes $137,000 in net sales of the previously reported
manufacturing and packaging segment.
Net Sales by Region 2003 2002 Change from
(in thousands) $ % of sales $ % of sales prior year Change in %
------------------------------------------------------------------------------------
United States 65,832 85.6% 53,210 84.5% $ 12,622 23.7%
Australia/New Zealand 2,060 2.7% 1,923 3.1% 137 7.1%
Canada 1,256 1.6% 983 1.6% 273 27.8%
Mexico 3,338 4.3% 2,905 4.6% 433 14.9%
United Kingdom/Ireland 475 0.6% 446 0.7% 29 6.5%
Philippines 3,419 4.4% 3,460 5.5% (41) -1.2%
Malaysia 580 0.8% -- 0.0% 580 N/A
--------------------- -----------------------------------------------------
Consolidated total 76,960 100.0% 62,927 100.0% $ 14,033 22.3%
===================== =====================================================
The following table illustrates the Company's active distributors and
Master Affiliates as of December 31, 2003 and 2002. The Company defines an
active distributor as one that enrolls as a distributor or renews their
distributorship during the year. Growth in the number of active distributors and
Master Affiliates is a key factor in continuing the growth of the business.
Active Distributors and Master Affiliates by Region
2003 2002 Change in %
Master Master Master
Distributors Affiliates Distributors Affiliates Distributors Affiliates
------------------------------------------------------- ---------------------------
United States 41,000 9,150 36,400 6,470 12.6% 41.4%
Australia/New Zealand 2,570 230 2,550 240 0.8% -4.2%
Canada 1,140 180 950 170 20.0% 5.9%
Mexico 7,700 1,370 6,030 1,170 27.7% 17.1%
United Kingdom/Ireland 410 70 390 80 5.1% -12.5%
Philippines 7,380 810 11,980 1,060 -38.4% -23.6%
Malaysia 1,350 200 N/A N/A N/A N/A
------------------------------------------------------ ---------------------------
Consolidated total 61,550 12,010 58,300 9,190 5.6% 30.7%
====================================================== ===========================
In the United States, the Company's largest market, the number of active
distributors increased to 41,000 from 36,400 during 2003. New distributor
enrollments increased to 20,800 in 2003, compared to 18,148 in 2002. The
retention rate of distributors who renew their annual agreement was 54% in 2003,
as compared to a renewal rate of 64% in the prior year. Although the renewal
rate decreased, it was comparable to the average renewal rate over the last five
years of 55%. Master Affiliates, distributors who have attained the highest
level of discount and are eligible for generation royalties, increased to 9,150
in the United States as of December 31, 2003 from 6,470 as of December 31, 2002,
as nearly 5,000 distributors qualified as new Master Affiliates and 65% of the
Master Affiliates as of December 31, 2002 requalified as Master Affilates during
2003. In 2003, the Company processed 171,900 wholesale orders in the
26
United States at an average retail price of $480, compared to 145,680 orders at
an average of $452 in 2002.
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. In the United States in 2003, the program processed a total of 40,300
orders for a net sales total of $4,284,000, compared to $3,055,000 in 2002. The
average order size increased slightly in 2003 to $106, as compared to $104 in
2002.
The Company attributes the increase in sales and other operating results
in part to its increased support provided to the distributor force in the form
of increased sales meetings and other distributor training events. The Company
is holding its quarterly Master Affiliate training seminars in more cities and
has lengthened the program to a full day of training, compared to a half-day
training session used previously. The Company has also modified the frequency of
its national conferences. In the past, the Company invited distributors to
attend two major conferences a year. Beginning in early 2003, the Company
replaced its winter conference with a series of regional conferences in areas of
significant distributor groups in order to present the Reliv product line and
business opportunity to more people. The Company's annual international
distributor conference in St. Louis, MO, was held in July with a record
attendance of approximately 5,000 distributors.
The Company is continuing to reinforce existing marketing programs
designed to incentivize and reward distributors to expand their sales efforts
and add distributors to their downline organization, 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
2003, $2,786,000 was paid through this program compared to $2,097,000 in 2002.
The Ambassador Program compensates distributors at the highest levels for their
leadership and development of sales. At year-end 2003, there were 210
Ambassadors who shared in bonuses totaling $1,494,000, compared to 174
Ambassadors at the end of 2002 sharing bonuses of $1,300,000. 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, where the Company operates on a regional
basis, net sales increased to $2,060,000 in 2003 from $1,923,000 in 2002. New
distributor enrollments during 2003 in Australia/New Zealand were 905, as
compared to 908 in 2002. Distributor renewals in Australia were 67% and in New
Zealand 56% in 2003 as compared to 61% and 47% in 2002, respectively. The
increase in sales is due entirely to the strengthening of the Australian and New
Zealand dollars relative to the US dollar. On a local currency basis, sales in
Australia decreased by 10% in 2003, compared to 2002, whereas local currency
sales in New Zealand decreased by 21% in 2003, compared to 2002. In September
2003, the Company announced a new sales manager for this market, as well as a
change to the compensation plan, in which royalties will be paid based on the
full retail price of products. This change in the compensation plan is part of
the Company's worldwide plan to make the business model appear seamless from
country to country. This will encourage more cross-border sales and sponsorship
activity.
27
Similar changes were made in Canada and the United Kingdom earlier in 2003, and
similar changes are being gradually phased in for the Mexican and Philippine
markets. Combined net income for Australia and New Zealand was $2,000 in 2003,
compared to $11,000 in 2002.
Net sales in Canada improved in 2003 to $1,256,000 from $983,000 in 2002.
During 2003, the Canadian dollar strengthened considerably compared to the US
dollar, and this caused a portion of the net sales improvement, when expressed
in US dollars. In Canadian dollars, net sales improved by 14% in 2003, compared
to 2002. New distributor enrollments were 594 in 2003, compared to 469 in 2002.
The Canadian operation showed an increase in net income in 2003 to $155,000, as
compared to a net income of $132,000 in 2002.
Net sales in Mexico in 2003 were $3,338,000 compared to $2,905,000 in
2002. New distributor enrollments increased in 2003 to 5,939 compared to 4,495
in 2002. The net loss in this market increased to $134,000 in 2003, as compared
to $53,000 in 2002, as a result of costs incurred in relocating the main office
in Mexico City, along with higher staffing costs.
Sales in the United Kingdom in 2003 were $475,000 compared to $446,000 in
2002. As in Australia/New Zealand, the increase in sales is entirely due to the
stronger UK pound, compared to the US dollar. Net sales in UK pounds for 2003
decreased by 2%, compared to 2002. New distributor enrollments were 166 in 2003,
compared to 161 in 2002. The net loss incurred in this market increased from
$67,000 in 2002 to $115,000 in 2003. The increase in sales was offset by higher
commission expenses, as the Company made a change to the UK compensation plan,
similar to Australia/New Zealand, to pay royalties on the full retail value of
the products. Also, contributing to the loss were higher office and staffing
expenses in 2003, compared to 2002.
Net sales in the Philippines in 2003 were $3,419,000, compared to
$3,460,000 in 2002. New distributor enrollments were 6,311 in 2003, compared to
10,665 in 2002. The Philippines operations had a net loss of $15,000 in 2003,
compared to a net loss of $137,000 in 2002. Sales in the Philippines in 2003
were affected by a price increase and additional shipping charge that went into
effect on March 1, 2003.
The Company's newest market, Malaysia, opened in September 2003, and had
$580,000 in sales during the remainder of 2003. Approximately 1,200 new
distributors signed up during that same period.
During 2003, the Company did not introduce any new products in the United
States, however, it introduced some of its core products into its foreign
markets, including Reliv Classic in the Philippines and SoySentials in Mexico.
In December 2003, the Company discontinued its line of coated granola bars due
to low sales volume.
28
2002 vs. 2001
The Company's 2002 net income was $2,493,000 or $0.18 per share basic and
$0.15 per share diluted. This compares with net income of $308,000 or $0.02 per
share (basic and diluted) 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.
The following table summarizes the net sales by operating segment and
geographic region for the years ended December 31, 2002 and 2001.
Net Sales by segment/region 2002 2001 Change from
(in thousands) $ % of sales $ % of sales prior year Change in %
---------------------- ---------------------- ---------------------------
United States 53,073 84.3% 40,920 77.3% $ 12,153 29.7%
Australia/New Zealand 1,923 3.1% 1,808 3.5% 115 6.4%
Canada 983 1.6% 973 1.8% 10 1.0%
Mexico 2,905 4.6% 2,233 4.2% 672 30.1%
United Kingdom/Ireland 446 0.7% 391 0.7% 55 14.1%
Philippines 3,460 5.5% 2,693 5.1% 767 28.5%
Colombia -- 0.0% 46 0.1% (46) -100.0%
-------------------- ---------------------------------------------------
Network marketing total 62,790 99.8% 49,064 92.7% 13,726 28.0%
Manufacturing & packaging 137 0.2% 3,879 7.3% (3,742) -96.5%
---------------------------------------------------------------------------------
Consolidated total 62,927 100.0% 52,943 100.0% $ 9,984 18.9%
==================== ===================================================
The following table illustrates the Company's active distributors and
Master Affiliates as of December 31, 2002 and 2001.
29
Active Distributors and Master Affiliates by Region
2002 2001 Change in %
Master Master Master
Distributors Affiliates Distributors Affiliates Distributors Affiliates
-------------------------- --------------------------- ---------------------------
United States 36,400 6,470 27,800 3,960 30.9% 63.4%
Australia/New Zealand 2,550 240 2,690 200 -5.2% 20.0%
Canada 950 170 890 130 6.7% 30.8%
Mexico 6,030 1,170 2,440 1,500 147.1% -22.0%
United Kingdom/Ireland 390 80 230 80 69.6% 0.0%
Philippines 11,980 1,060 9,390 790 27.6% 34.2%
-------------------------- --------------------------- ---------------------------
Consolidated total 58,300 9,190 43,440 6,660 34.2% 38.0%
========================== =========================== ===========================
In the United States, the Company's largest market, the number of active
distributors increased significantly to 36,400 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 6,470 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 is available for distributors and
their retail customers to order product in less than case lots directly from the
Company. 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 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 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.
30
In Australia and New Zealand, net sales increased to $1,923,000 in 2002
from $1,808,000 in 2001. New distributor enrollments decreased in Australia and
New Zealand to 908 from 1,182 in 2001, offset by the fact that 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. 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. 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.
Net sales in Mexico in 2002 were $2,905,000 compared to $2,233,000 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.
31
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 as 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 following table summarizes selected items from the consolidated
statement of operations, expressed as a percentage of net sales, for the periods
indicated, and should be read in conjunction with the discussion of the
components of the consolidated statements of operations that follow:
Selected data from the Consolidated Year Ended December 31
Statements of Operations 2003 2002 2001
------------------------
Cost of network marketing products sold 17.2% 18.4% 18.1%
Distributor royalties and commissions 38.9% 38.5% 38.3%
Selling, general, and administrative 34.4% 36.4% 38.9%
Provision for income taxes 3.8% 2.5% 0.4%
Net income 5.7% 4.0% 0.6%
Cost of Sales
During 2003, cost of network marketing products sold was 17.2% of net
sales compared with 18.4% in 2002 and 18.1% in 2001. The decrease in the
percentage of cost of goods sold is the result of greater efficiencies gained in
the production facility from increased production levels needed to support the
growth in sales. Overall ingredient costs have remained stable. However,
efficiencies are being gained as production levels have increased with minimal
staffing increases and improved coverage of the fixed manufacturing costs. Also,
as the Company has introduced more of its core products in a larger can size,
this has also had a favorable impact on production efficiencies.
Distributor Royalties and Commissions
Distributor royalties and commissions as a percentage of network marketing
sales increased to 38.9% in 2003 compared to 38.5% in 2002 and 38.3% in 2001.
The increase in the percentage in 2003, as compared to 2002, is the result of
royalty payments being made on the full retail value of the products in Canada,
United Kingdom, and Australia/New Zealand. These
32
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 $1,494,000 for 2003 earned through the Ambassador Program as
compared to $1,300,000 in 2002 and $1,087,000 in 2001.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses as a percentage of net
sales were 34.4% for 2003, 36.4% in 2002, and 38.9% in 2001. The percentage
decreases for each successive year is due to the increase in the net sales of
the Company. Total SGA expenses were $26,438,000, $22,898,000, and $20,615,000
in 2003, 2002, and 2001, respectively. The SGA expense total in 2003 also
includes $540,000 for Malaysia, its first year of operations.
In 2003, total distribution and warehouse expenses increased slightly to
$1,487,000 from $1,347,000 in 2002 primarily due to increased expenses in the
United States to support the growth in sales.
Total sales and marketing expenses in 2003 were $11,870,000, compared to
$9,845,000 in 2002, an increase of 21% in 2003. Promotional trip expenses
increased to $1,260,000 in 2003, as compared to $829,000 in 2002. Credit card
processing fees also increased by $304,000 in 2003 as compared to 2002 as the
result of increased sales. Sales and marketing expenses, as a percentage of net
sales, were 15.4% in 2003 and 12.7% in 2002.
Total general and administrative (G&A) expenses in 2003 were $13,081,000,
compared to $11,706,000 in 2002. G&A expenses in Malaysia were approximately
$540,000 in 2003, its first year of operations. Total staff compensation and
fringes increased by 14%, or $1,202,000, in 2003 compared to 2002, due to the
increase in incentive compensation bonuses paid during 2003, the addition of
Malaysia, and various staffing increases, primarily in the United States.
Significant changes in G&A expenses included an increase in travel expenses by
$179,000 in 2003, compared to 2002; general and franchise taxes increased by
$100,000 in 2003, compared to 2002; investor relations and other expenses
related to being a publicly traded company increased by $113,000; however, legal
expenses decreased by $225,000 in 2003, compared to 2002.
Interest Expense
Interest expense in 2003 was $235,000, compared to $340,000 in 2002 and
$527,000 in 2001. Interest expense continued to decrease in 2003, as the Company
realized a full year of reduced interest expense on the term loan for its
headquarters facility, which was renegotiated in mid-2002. Under the revised
agreement, the interest 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.
33
Income Taxes
Income tax expense was $2,902,000, $1,542,000, and $219,000 for 2003,
2002, and 2001, respectively. The effective tax rate for 2003 was 39.8%. State
income taxes, along with foreign losses with no U.S. tax benefit, represent most
of the increase over the U.S. statutory tax rate of 34%. Effective tax rates for
2002 and 2001 were 38.2% and 41.5%, respectively.
Liquidity and Capital Resources
The Company generated $5,359,000 of net cash during 2003 from operating
activities and used $123,000 in financing activities. This compares to
$4,680,000 of net cash provided by operating activities and used $2,034,000 in
financing activities in 2002. Cash and cash equivalents increased by $4,538,000
to $7,903,000 by year-end 2003. Significant changes in working capital items
were an increase in inventory of $1,188,000 in 2003 and a corresponding increase
in accounts payable and accrued expenses of $1,384,000. The increase in
inventory is needed to support the increased sales levels of the Company and its
newest operation in Malaysia. The Company's net investing activities used
$904,000 in 2003 and $640,000 in 2002 for capital expenditures. In 2003, the
Company received $975,000 in net proceeds in the issuance and partial redemption
of preferred stock, and paid $57,000 in preferred stock dividends. The Company
used a net of $1,058,000 to purchase treasury stock and received $328,000 in
proceeds from the exercise of options and warrants. Most of this treasury stock
was purchased from related parties and is described in greater detail in Note 15
of the Consolidated Financial Statements. During 2002, the Company used $626,000
to purchase treasury stock and received $135,000 in proceeds from the exercise
of options and warrants.
Stockholders' equity increased to $13,072,000 at December 31, 2003,
compared with $7,798,000 at December 31, 2002. The increase is primarily due to
the 2003 net income of the Company, net preferred stock proceeds of $975,000,
reduced by net treasury stock purchases of $1,058,000. Stockholders' equity was
also positively impacted by the weakening of the U.S. dollar against the
Australian, New Zealand, Canadian dollars, and UK pound sterling during 2003.
This impact appears in the form of the improvement in the foreign currency
translation adjustment, which is reflected in accumulated other comprehensive
loss. These gains were partially offset by weaker Mexican and Philippine pesos
during 2003, relative to the U.S. dollar. This cumulative adjustment improved
from an accumulated loss of $775,000 as of December 31, 2002, to an accumulated
loss of $715,000, as of December 31, 2003.
The Company's working capital balance was $7,256,000 at December 31, 2003,
compared to $2,393,000 at December 31, 2002. The current ratio at December 31,
2003 improved to 2.01 from 1.40 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, 2003, the
Company had not utilized any of the line of credit, with approximately $672,000
available under the line based on the Company's borrowing base formula.
Management believes that the Company's internally generated funds and borrowing
capacity under the loan agreement will be sufficient to meet working capital
requirements in 2004.
34
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.
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 costs exceed expected net realizable value. Historically, the
Company's estimates of its obsolete or unmarketable items have been materially
accurate.
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.
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.
35
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 2004 and beyond to differ materially from those
expressed in, or implied by, any such forward-looking statements. Wherever
possible, words such as "anticipate", "plan", "expect", "believe", "estimate",
and similar expressions have been used to identify these forward-looking
statements, but are not the exclusive means of identifying such statements.
These risks, uncertainties and contingencies include, but are not limited to,
the Company's ability to continue to attract, maintain and motivate its
distributors, changes in the regulatory environment affecting network marketing
sales and sales of food and dietary supplements and other risks and
uncertainties detailed in the Company's other SEC filings.
Item 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 14%, 15%, and 15% of total net
sales in 2003, 2002, and 2001, 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, 2003, the Company had a net
investment in its foreign subsidiaries of $4.88 million (in U.S. dollars).
36
During the second quarter of 2003, the Company entered into foreign
exchange forward contracts with a financial institution to sell Canadian dollars
in order to protect against currency exchange risk associated with expected
future cash flows. Contracts have a maturity of fifteen months or less. As of
December 31, 2003, the Company had Canadian dollar forward sale contracts to
hedge approximately 60% of our expected Canadian cash flows. The exchange rate
for the Canadian dollar to the U.S. dollar as of December 31, 2003 had
strengthened by 21.3%, compared to the exchange rate as of December 31, 2002.
Greater detail on these forward contacts is provided in Note 10 of the
Consolidated Financial Statements. As of December 31, 2003, the Company had no
hedging instruments in place to offset exposure to the Australian or New Zealand
dollars, Mexican or Philippine pesos, or the British pound.
We have performed a sensitivity analysis as of December 31, 2003 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
2003 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 $147,000 and reduce the value of the net investment in the
foreign subsidiaries by $488,000.
Interest Rate Risk
The Company has $4.12 million in long-term debt with a weighted average
effective interest rate of 4.18% at December 31, 2003. Of this amount, $3.88
million is debt with a variable interest rate, generally based on the prime
rate. This long-term debt matures at the rate of $313,000 in 2004, $299,000 in
2005 and 2006, and $2.97 million in 2007. A hypothetical 100 basis point
increase in interest rates on all of the variable rate debt instruments would
result in an increase in annual interest expense of approximately $39,000
($26,000, net of tax).
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 and interest 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, 2003. This information should be read in conjunction with Notes 5
and 8 of the Consolidated Financial Statements.
37
Contractual obligations and commercial commitments
Outstanding as of December
31, 2003 (in thousands) 2004 2005 2006 2007 2008 Total
- ----------------------- ---- ---- ---- ---- ---- -----
Bank term loan-4.0% interest rate
(variable)-principal and interest $ 455 $ 437 $ 425 $2,999 $ -- $4,316
Private placement notes-9% interest rate (fixed) 48 -- -- -- -- 48
Other U.S. debt 36 32 35 31 20 154
Other foreign debt 24 14 -- -- -- 38
Operating leases 80 40 40 36 19 215
------------------------------------------------------------------
$ 643 $ 523 $ 500 $3,066 $ 39 $4,771
==================================================================
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
Item No. 9A - Controls and Procedures
Disclosure 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-15(e) and 15d-15(e)) as of December 31, 2003 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. During the fourth quarter of 2003, 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.
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 2004 Annual Meeting of Shareholders to be
held on May 27, 2004, 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 2004 Annual Meeting of Shareholders to be
held on May 27, 2004, 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 2004 Annual Meeting of Shareholders to be
held on May 27, 2004, 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 2004 Annual Meeting of Shareholders to be
held on May 27, 2004, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
Item No. 14 - Principal Accountant Fees and Services
Information called for by Item 14 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2004 Annual Meeting of Shareholders to be
held on May 27, 2004, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
PART IV
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.
39
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
1995 Stock Option Plan
(incorporate by reference Exhibit 10.7 to
the Form 10-K of the Registrant for year
ended December 31, 1995) 10.2
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) 10.3
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) 10.4
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). 10.5
40
Exhibit
Document Number
-------- ------
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). 10.6
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) 10.7
Line of Credit Note dated November 15, 2002 in the
amount of $1,000,000 with Southwest Bank of St. Louis
(incorporate by reference Exhibit 10.10 to the Form 10-K
of the Registrant for year ended December 31, 2002) 10.8
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) 10.9
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) 10.10
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) 10.11
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) 10.12
1999 Stock Option Plan (incorporate by reference to
Form S-8 Registration Statement the Registrant
filed April 7, 2000) 10.13
41
Exhibit
Document Number
-------- ------
2001 Stock Option Plan (incorporate by reference to
Form S-8 Registration Statement the Registrant
filed August 14, 2001) 10.14
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) 10.15
Amended and Restated Distributor Stock Purchase
Plan (incorporate by reference to Form S-8 Registration
Statement the Registrant filed May 9, 2002) 10.16
Statement re: computation of per
share earnings (incorporate by reference
to Note 7 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
- Certification of Chief Executive Officer pursuant
to Rules 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended 31.1
- Certification of Chief Financial Officer pursuant
to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended 31.2
- Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 32
(b) One report on Form 8-K (disclosing earnings) filed by the Registrant
during the last quarter of the period covered by this report.
(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.
42
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 26, 2004
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 26, 2004
By: /s/ David G. Kreher
--------------------------------------------------------------------
David G. Kreher, Senior Vice President, Assistant Secretary
(Chief Financial Officer and accounting officer)
Date: March 26, 2004
By: /s/ Carl W. Hastings
--------------------------------------------------------------------
Carl W. Hastings, Vice President, Assistant Secretary, Director
Date: March 26, 2004
By: /s/ Thomas W. Pinnock
--------------------------------------------------------------------
Thomas W. Pinnock III, Director
Date: March 26, 2004
By: /s/ Stephen M. Merrick
--------------------------------------------------------------------
Stephen M. Merrick, Senior Vice President, Secretary, Director
Date: March 26, 2004
43
By: /s/ Donald L. McCain
---------------------------------------------------------
Donald L. McCain, Director
Date: March 26, 2004
By: /s/ John Akin
---------------------------------------------------------
John Akin, Director
Date: March 26, 2004
By: /s/ Sandra S. Montgomery
---------------------------------------------------------
Sandra S. Montgomery, Director
Date: March 26, 2004
By: /s/ Thomas T. Moody
---------------------------------------------------------
Thomas T. Moody, Director
Date: March 26, 2004
By: /s/ Marvin W. Solomonson
---------------------------------------------------------
Marvin W. Solomonson, Director
Date: March 26, 2004
44
Reliv' International, Inc.
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2003, 2002, and 2001
Contents
Consolidated Financial Statements:
Report of Independent Auditors........................................... F-1
Consolidated Balance Sheets as of December 31, 2003 and 2002............. F-2
Consolidated Statements of Operations for the years ended
December 31, 2003, 2002, and 2001..................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2003, 2002, and 2001..................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001...................................... F-8
Notes to Consolidated Financial Statements - December 31, 2003........... F-10
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2003, 2002, and 2001........................................ F-29
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
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, 2003 and 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 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 17, 2004
F-1
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
2003 2002
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 7,902,508 $ 3,364,484
Accounts and notes receivable, less allowances of
$8,600 in 2003 and $10,000 in 2002 751,887 688,898
Accounts due from employees and distributors 72,846 104,000
Inventories:
Finished goods 3,171,185 2,361,064
Raw materials 1,047,068 680,516
Sales aids and promotional materials 452,066 415,565
----------------------------
Total inventories 4,670,319 3,457,145
Refundable income taxes -- 8,072
Prepaid expenses and other current assets 727,939 637,968
Deferred income taxes 296,164 171,873
----------------------------
Total current assets 14,421,663 8,432,440
Other assets 793,091 442,927
Note receivable from officer -- 48,250
Accounts due from employees and distributors 52,291 78,000
Property, plant, and equipment 17,214,909 16,484,644
Less accumulated depreciation and amortization 7,801,038 7,040,275
----------------------------
9,413,871 9,444,369
----------------------------
Total assets $24,680,916 $18,445,986
============================
F-2
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31
2003 2002
------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 6,596,785 $ 5,358,082
Income taxes payable 147,520 257,441
Current maturities of long-term debt 421,063 415,235
Current maturities of capital leases -- 8,755
------------------------------------
Total current liabilities 7,165,368 6,039,513
Noncurrent liabilities:
Long-term debt, less current maturities 3,700,138 4,057,042
Deferred income taxes 77,000 84,435
Other noncurrent liabilities 666,032 467,350
------------------------------------
Total noncurrent liabilities 4,443,170 4,608,827
Stockholders' equity:
Preferred stock, par value $0.001 per share; 3,000,000
shares authorized; 97,500 shares issued and outstanding in 2003 975,000 --
Common stock, par value $0.001 per share; 30,000,000
shares authorized, 15,143,961 shares issued and
15,141,224 shares outstanding in 2003 and
15,008,451 shares issued and 14,902,415 outstanding in 2002 15,144 12,007
Additional paid-in capital 18,684,338 17,863,505
Notes receivable - officers and directors -- (2,449)
Accumulated deficit (5,878,869) (8,960,782)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (714,527) (775,383)
Treasury stock (8,708) (339,252)
------------------------------------
Total stockholders' equity 13,072,378 7,797,646
------------------------------------
Total liabilities and stockholders' equity $ 24,680,916 $ 18,445,986
====================================
See accompanying notes.
F-3
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
2003 2002 2001
-----------------------------------------------------
Sales at suggested retail $ 110,569,576 $ 90,110,444 $ 74,410,042
Less distributor allowances on
product purchases 33,609,853 27,183,581 21,466,995
-----------------------------------------------------
Net sales 76,959,723 62,926,863 52,943,047
Costs and expenses:
Cost of products sold 13,228,050 11,569,163 12,562,385
Distributor royalties and commissions 29,916,744 24,205,030 18,795,153
Selling, general, and administrative 26,438,447 22,898,359 20,614,626
-----------------------------------------------------
Income from operations 7,376,482 4,254,311 970,883
Other income (expense):
Interest expense (234,956) (340,343) (527,208)
Other income 157,914 120,839 83,765
-----------------------------------------------------
Income before income taxes 7,299,440 4,034,807 527,440
Provision for income taxes 2,902,000 1,542,000 219,000
-----------------------------------------------------
Net income 4,397,440 2,492,807 308,440
Preferred dividends accrued and paid 56,762 -- --
-----------------------------------------------------
Net income available to common shareholders $ 4,340,678 $ 2,492,807 $ 308,440
=====================================================
Earnings per common share - Basic $ 0.29 $ 0.18 $ 0.02
=====================================================
Weighted average shares 14,969,000 14,144,000 14,349,000
=====================================================
Earnings per common share - Diluted $ 0.26 $ 0.15 $ 0.02
=====================================================
Weighted average shares 16,706,000 16,111,000 14,498,000
=====================================================
2002 and 2001 earnings per common share have been restated for the 2003 stock
split; see Note 6.
See accompanying notes.
F-4
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Preferred Stock Common Stock
-----------------------------------------------------------
Shares Amount Shares Amount
-----------------------------------------------------------
Balance at December 31, 2000 -- $ -- 9,654,505 $ 9,655
Net income -- -- -- --
Other comprehensive loss:
Foreign currency translation adjustment -- -- -- --
Total comprenhensive income
Repayment of loans by officers/directors -- -- -- --
Warrants granted under distributor stock
purchase plan (DSPP) -- -- -- --
Tax benefit from exercise of options -- -- -- --
Common stock purchased for treasury -- -- -- --
Warrants exercised -- -- 379 --
-----------------------------------------------------------
Balance at December 31, 2001 -- -- 9,654,884 9,655
-----------------------------------------------------------
Net income -- -- -- --
Other comprehensive loss:
Foreign currency translation adjustment -- -- -- --
Total comprehensive income
Repayment of loans by officers/directors -- -- -- --
Warrants granted under DSPP -- -- -- --
Common stock purchased for treasury -- -- -- --
Retirement of treasury stock -- -- (227,008) (227)
Options and warrants exercised -- -- 778,822 779
Tax benefit from exercise of options -- -- -- --
Stock dividend declared September 19, 2002 -- -- 1,800,063 1,800
-----------------------------------------------------------
Balance at December 31, 2002 -- -- 12,006,761 12,007
-----------------------------------------------------------
Net income -- --
Other comprehensive income:
Foreign currency translation adjustment -- --
Total comprehensive income
Proceeds from sales of preferred stock 150,000 1,500,000 -- --
Redemption of preferred stock (52,500) (525,000) -- --
Preferred stock dividends paid -- -- -- --
Repayment of loans by officers/directors -- -- -- --
Warrants granted under DSPP -- -- -- --
Common stock purchased for treasury -- -- -- --
Retirement of treasury stock -- -- (306,698) (307)
Proceeds from sale of treasury stock -- -- -- --
Options and warrants exercised -- -- 448,906 449
Tax benefit from exercise of options and warrants -- -- -- --
Stock split declared September 4, 2003 -- -- 2,994,992 2,995
-----------------------------------------------------------
Balance at December 31, 2003 97,500 $ 975,000 15,143,961 $ 15,144
===========================================================
F-5
Notes Accumulated
Additional Receivable Other
Paid-In - Officers and Accumulated Comprehesive
Capital Directors Deficit Loss
--------------------------------------------------------------
Balance at December 31, 2000 $ 9,074,756 $(26,650) $(2,787,725) $ (624,274)
Net income -- -- 308,440 --
Other comprehensive loss:
Foreign currency translation adjustment -- -- -- (64,333)
Total comprenhensive income
Repayment of loans by officers/directors -- 7,361 -- --
Warrants granted under distributor stock
purchase plan (DSPP) 9,384 -- -- --
Tax benefit from exercise of options 35,404
Common stock purchased for treasury -- -- -- --
Warrants exercised 390 -- -- --
-------------------------------------------------------------
Balance at December 31, 2001 9,119,934 (19,289) (2,479,285) (688,607)
-------------------------------------------------------------
Net income -- -- 2,492,807 --
Other comprehensive loss:
Foreign currency translation adjustment -- -- -- (86,776)
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 (209,846) -- (192,283) --
Options and warrants exercised 1,014,225 -- (879,744) --
Tax benefit from exercise of options 18,842 -- -- --
Stock dividend declared September 19, 2002 7,900,477 -- (7,902,277) --
-------------------------------------------------------------
Balance at December 31, 2002 17,863,505 (2,449) (8,960,782) (775,383)
-------------------------------------------------------------
Net income -- 4,397,440 --
Other comprehensive income:
Foreign currency translation adjustment -- -- -- 60,856
Total comprehensive income
Proceeds from sales of preferred stock -- -- --
Redemption of preferred stock -- -- --
Preferred stock dividends paid -- -- (56,762)
Repayment of loans by officers/directors -- 2,449 -- --
Warrants granted under DSPP 90,068 -- -- --
Common stock purchased for treasury -- -- -- --
Retirement of treasury stock (424,436) -- (1,059,674) --
Proceeds from sale of treasury stock 96,200 -- -- --
Options and warrants exercised 523,418 -- (196,096) --
Tax benefit from exercise of options and warrants 535,583 -- -- --
Stock split declared September 4, 2003 -- -- (2,995) --
-------------------------------------------------------------
Balance at December 31, 2003 $ 18,684,338 $ -- $(5,878,869) $ (714,527)
=============================================================
F-6
Treasury Stock
---------------------
Shares Amount Total
--------------------------------------------
Balance at December 31, 2000 -- $ -- $ 5,645,762
Net income -- -- 308,440
Other comprehensive loss:
Foreign currency translation adjustment -- -- (64,333)
------------
Total comprenhensive income 244,107
------------
Repayment of loans by officers/directors -- -- 7,361
Warrants granted under distributor stock
purchase plan (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 91,617 (115,558) 5,826,850
--------------------------------------------
Net income -- -- 2,492,807
Other comprehensive loss:
Foreign currency translation adjustment -- -- (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 84,829 (339,252) 7,797,646
--------------------------------------------
Net income -- -- 4,397,440
Other comprehensive income:
Foreign currency translation adjustment -- -- 60,856
------------
Total comprehensive income 4,458,296
------------
Proceeds from sales of preferred stock 1,500,000
Redemption of preferred stock (525,000)
Preferred stock dividends paid (56,762)
Repayment of loans by officers/directors -- -- 2,449
Warrants granted under DSPP -- -- 90,068
Common stock purchased for treasury 244,059 (1,199,913) (1,199,913)
Retirement of treasury stock (306,698) 1,484,417 --
Proceeds from sale of treasury stock (20,000) 46,040 142,240
Options and warrants exercised -- -- 327,771
Tax benefit from exercise of options and warrants -- -- 535,583
Stock split declared September 4, 2003 547 -- --
--------------------------------------------
Balance at December 31, 2003 2,737 $ (8,708) $ 13,072,378
============================================
See accompanying notes.
F-7
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2003 2002 2001
---------------------------------------------
Operating activities
Net income $ 4,397,440 $ 2,492,807 $ 308,440
Adjustments to reconcile net income to net
Cash provided by operating activities:
Depreciation and amortization 935,292 866,397 743,078
Compensation expense for warrants granted 90,068 19,873 9,384
Tax benefit from exercise of options 535,583 18,842 35,404
Deferred income taxes (132,189) (71,896) 66,171
Foreign currency transaction gain (63,273) (93,880) (16,547)
(Increase) decrease in accounts and notes receivable (46,951) (288,693) 1,940,351
(Increase) decrease in inventories (1,188,179) 649,592 358,768
Decrease in refundable income taxes 7,942 127,920 527,202
Increase in prepaid expenses and other current assets (94,995) (278,238) (48,713)
(Increase) decrease in other assets (350,164) 202,973 201,587
Increase (decrease) in accounts payable and accrued
expenses 1,384,499 784,517 (2,203,839)
Increase (decrease) in income taxes payable (116,109) 250,192 6,192
---------------------------------------------
Net cash provided by operating activities 5,358,964 4,680,406 1,927,478
Investing activities
Proceeds from sale of property, plant, and equipment 79,414 28,295 --
Purchase of property, plant, and equipment (983,269) (668,488) (300,121)
---------------------------------------------
Net cash used in investing activities (903,855) (640,193) (300,121)
Financing activities
Proceeds from long-term borrowings and line of credit 218,343 32,871 40,463
Principal payments on long-term borrowings and
line of credit (513,330) (1,469,296) (1,285,395)
Principal payments under capital lease obligations (67,155) (134,789) (176,450)
Proceeds from issuance of preferred stock 1,500,000 -- --
Redemption of preferred stock (525,000) -- --
Preferred stock dividends paid (56,762) -- --
Proceeds from options and warrants exercised 327,771 135,260 390
Repayment of loans by officers and directors 50,699 27,840 7,361
Purchase of stock for treasury (1,199,913) (626,050) (115,558)
Proceeds from sale of treasury stock 142,240 -- --
---------------------------------------------
Net cash used in financing activities (123,107) (2,034,164) (1,529,189)
Effect of exchange rate changes on cash and cash
equivalents 206,022 108,649 (47,064)
---------------------------------------------
Increase in cash and cash equivalents 4,538,024 2,114,698 51,104
Cash and cash equivalents at beginning of year 3,364,484 1,249,786 1,198,682
---------------------------------------------
Cash and cash equivalents at end of year $ 7,902,508 $ 3,364,484 $ 1,249,786
=============================================
F-8
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
2003 2002 2001
----------------------------------------
Supplemental disclosures of cash flow Information:
Cash paid during the year for:
Interest $ 247,385 $ 345,604 $532,187
========================================
Income taxes $2,582,000 $1,231,000 $200,220
========================================
Noncash investing and financing transactions:
Capital lease obligations entered into $ 64,150 $ -- $ --
========================================
See accompanying notes.
F-9
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003
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, 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/Ireland, the Philippines, and Malaysia.
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.
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. The foreign currency translation
adjustment is the only component of accumulated 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 were $63,273,
$93,880, and $16,547 for 2003, 2002, and 2001, respectively.
F-10
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Revenue Recognition
The Company receives payment by credit card, personal check, or guaranteed funds
for 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, as this is the point title and risk of loss pass. In accordance with
EITF 01-09, the Company presents distributor royalty and commission expense as
an operating expense, rather than a reduction to net sales, as these payments
are not made to the purchasing distributor.
Actual and estimated returns are classified as a reduction of net sales. The
Company estimates and accrues a reserve for product returns based on the
Company's return policy and historical experience. The Company records shipping
and handling costs as a component of cost of products sold.
Income Taxes
The provision for income taxes is computed using the liability method. The
primary differences between financial statement and taxable income result from
financial statement accruals and reserves and differences between depreciation
for book and tax purposes.
Basic and Diluted Earnings per Share
Basic earnings per common share are computed using the weighted average number
of common shares outstanding during the year, as restated for the five-for-four
stock split declared on September 4, 2003 and issued on November 14, 2003.
Diluted earnings per common share are computed using the weighted average number
of common shares and potential dilutive common shares that were outstanding
during the period, as restated for the stock split. Potential dilutive common
shares consist of outstanding stock options, outstanding stock warrants, and
convertible preferred stock. See Note 7 for additional information regarding
earnings per share.
F-11
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Stock-Based Compensation
The Company accounts for its employee stock-based compensation plans, which also
includes directors, under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Year ended December 31
2003 2002 2001
----------------------------------------
Basic:
Net income available to common
Shareholders, as reported $4,340,678 $2,492,807 $308,440
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 194,507 269,120 260,367
----------------------------------------
Pro forma net income available to common
shareholders $4,146,171 $2,223,687 $ 48,073
========================================
Diluted:
Net income available to common
shareholders, as reported $4,397,440 $2,492,807 $308,440
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects 194,507 269,120 260,367
----------------------------------------
Pro forma net income available to common
shareholders $4,202,933 $2,223,687 $ 48,073
========================================
Earnings per share:
Basic--as reported
$ 0.29 $ 0.18 $ 0.02
========================================
Basic--pro forma
$ 0.28 $ 0.16 $ 0.00
========================================
Diluted--as reported
$ 0.26 $ 0.15 $ 0.02
========================================
Diluted--pro forma
$ 0.25 $ 0.14 $ 0.00
========================================
The Company accounts for options granted to nonemployees and warrants granted to
distributors under the fair value approach required by EITF No. 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods, or Services.
F-12
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
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 $35,000, $26,000 and $32,000 of advertising expense in 2003,
2002, and 2001, respectively.
Research and Development Expenses
Research and development expenses which are charged to selling, general, and
administrative expenses as incurred were, $493,000, $431,000, and $355,000 in
2003, 2002 and 2001, respectively.
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 2002 and 2001 financial
statements to conform to the 2003 presentation.
F-13
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2003 and 2002, consist of the
following:
2003 2002
----------------------------
Land $ 829,222 $ 829,222
Building 8,801,913 8,583,444
Machinery and equipment 3,926,613 4,057,983
Office equipment 1,093,106 738,976
Computer equipment and software 2,564,055 2,275,019
----------------------------
17,214,909 16,484,644
Less accumulated depreciation and amortization 7,801,038 7,040,275
----------------------------
$ 9,413,871 $ 9,444,369
============================
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2003 and 2002, consist of
the following:
2003 2002
----------------------------
Trade payables $ 2,778,898 $ 2,456,569
Distributors' commissions 2,701,542 2,065,327
Sales taxes 446,872 393,413
Interest expense 42,808 55,238
Payroll and payroll taxes 626,665 381,748
Other -- 5,787
----------------------------
$ 6,596,785 $ 5,358,082
============================
4. Short-Term Borrowings
In December 2003, 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
4.00% at December 31, 2003. The maturity date of the line is April 2004. A
portion of the Company's inventories and property, plant, and equipment with a
net book value of $3,830,600 as of December 31, 2003 are pledged as security
under the terms of the agreement. The Company had no outstanding balance on the
line of credit as of December 31, 2003 and approximately $672,000 was available
under the line of credit based on the Company's borrowing base formula.
F-14
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Long-Term Debt
Long-term debt at December 31, 2003 and 2002, consists of the following:
2003 2002
--------------------------
Industrial revenue bonds payable in monthly installments (including
interest at 85% of prime) not to exceed $9,611, commencing July 1,
1991; secured by land and building (net book value $2,450,000 at
December 31, 2003); final payment due on March 1, 2005 $ 148,328 $ 234,001
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 July 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
$4,916,000 at December 31, 2003); balance due March 2004 3,528,388 3,839,681
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 47,721 135,323
Notes payable - primarily vehicle loans 192,009 58,517
--------------------------
4,121,201 4,472,277
Less current maturities 421,063 415,235
--------------------------
$3,700,138 $4,057,042
==========================
On March 10, 2004, the Company renewed its term loan, which had a balance of
$3,528,388. The loan renewal extended the maturity of the loan until March 2007,
with monthly installments of $24,955 plus interest at prime rate. In addition,
the Company consolidated the other loans related to its headquarters facility,
with balances of $148,328 and $204,755 as of December 31, 2003, into this
renewed loan. Accordingly, current and future maturities have been adjusted for
this refinancing.
Principal maturities of long-term debt at December 31, 2003, as adjusted, are as
follows:
2004 $ 421,063
2005 345,118
2006 334,003
2007 3,001,367
2008 19,650
-----------
$ 4,121,201
===========
F-15
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Stockholders' Equity
Stock Split
The Board of Directors declared a five-for-four stock split on September 4,
2003. The dividends were paid on November 14, 2003 to stockholders of record on
October 29, 2003. 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 split.
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 1,488,000 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.
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 (see Note 1). 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 in 2001:
risk-free interest rates ranging from 3.07% to 4.78%; dividend yield of zero;
volatility factor of the expected price of the Company's stock of 0.729; and a
weighted average expected life of 4.51 years. The weighted average fair value of
stock options granted during 2001 was $0.42. No stock options were granted
during 2002 or 2003.
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-16
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. 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.
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
2003 2002 2001
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------
Outstanding beginning
of the year 2,897,171 $0.94 4,185,267 $0.98 3,034,226 $1.17
Granted:
Price = fair value -- -- -- -- 1,162,203 0.71
Price > fair value -- -- -- -- 291,666 0.78
Exercised (483,738) 1.08 (1,179,381) 0.99 -- --
Forfeited -- -- (108,715) 2.08 (302,828) 1.58
--------- --------- ---------
Outstanding at end of year 2,413,433 $0.91 2,897,171 $0.94 4,185,267 $0.98
========= ========= =========
Exercisable at end of year 2,034,671 2,199,166 2,893,870
========= ========= =========
As of December 31, 2003
-------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------- ------------------------------
$0.71-$1.00 1,744,272 2.01 $0.74 1,365,510 $0.73
$1.01-$2.00 669,161 1.04 1.35 669,161 1.35
--------- ---------
$0.71-$2.00 2,413,433 1.74 $0.91 2,034,671 $0.94
========= =========
Of the options exercised in 2003, options for 202,248 shares were paid with
42,332 mature shares of Company stock, owned six months or greater. In 2002,
options for 867,713 shares were paid with 201,242 mature shares. These shares
tendered as payment were valued at the fair market price on the date of
exercise.
F-17
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Stockholders' Equity (continued)
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 27,279, 40,604, and 74,455 warrants
were issued during the years ended December 31, 2003, 2002, and 2001,
respectively. The warrants granted in 2001 have a three-year vesting period, and
the warrants granted in 2002 and 2003 are fully vested upon grant. The weighted
average fair values of warrants granted during 2003, 2002, and 2001 were $2.33,
$1.71 and $0.38 per share, respectively.
The Company records expense under the fair value method of SFAS No. 123 for
warrants granted to distributors. Total expense recorded for these warrants was
$90,068, $19,873, and $9,384 in 2003, 2002, and 2001, respectively. The fair
value of the warrants was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions:
Year ended December 31
2003 2002 2001
------------------------------
Expected warrant life (years) 2.5 2.5 2.5
Risk-free weighted average interest rate 1.84% 1.61% 3.07%
Stock price volatility 0.743 0.752 0.729
Dividend yield 0.0% 0.0% 0.0%
F-18
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Stockholders' Equity (continued)
Distributor Stock Purchase Plan (continued)
A summary of the Company's warrant activity and related information for the
years ended December 31 follows:
2003 2002 2001
---------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
---------------------------------------------------------------------------
Outstanding beginning
of the year 162,679 $1.56 175,155 $0.80 101,264 $0.76
Granted 27,279 5.12 40,604 3.73 74,455 0.84
Exercised (52,001) 0.92 (52,586) 0.70 (564) 0.69
Forfeited -- -- (494) 0.69 -- --
------- -------- --------
Outstanding at end of year 137,957 $2.51 162,679 $1.56 175,155 $0.80
======= ======== ========
Exercisable at end of year 113,899 96,948 50,231
======= ======== ========
As of December 31, 2003
------------------------------------------------------------------------------------------------
Warrants Outstanding Warrants Exercisable
----------------------------------------------------- ------------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------ ------------------------------
$0.84 71,465 1.00 $ 0.84 47,407 $0.84
$3.73 39,213 2.00 3.73 39,213 3.73
$5.12 27,279 3.00 5.12 27,279 5.12
------- -------
$0.84-$5.12 137,957 1.68 $2.51 113,899 $2.86
======= =======
Sale of Preferred Stock
On March 31, 2003, the Company sold an aggregate of 150,000 shares of preferred
stock to three executive officers/directors. The "Series A Preferred Stock"
("Preferred Stock"), were designated by the Company's Board of Directors out of
the 3,000,000 previously authorized shares of $.001 par value preferred stock.
Each of the preferred stockholders purchased 50,000 shares of Preferred Stock
for $500,000 ($10.00 per share).
The Preferred stockholders are entitled to receive dividends at an annual rate
of 6% of the shares' purchase price. These dividends shall accrue on a daily
basis and are payable quarterly when declared by the Company's Board of
Directors. All dividends on shares of Preferred Stock are cumulative.
In August 2003, the Company redeemed 17,500 shares from each executive
officer/director for a total redemption of 52,500 shares at a value of
$525,000. The remaining shares of
F-19
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. Stockholders' Equity (continued)
Sale of Preferred Stock (continued)
Preferred Stock as of December 31, 2003 have no voting rights, and are
convertible, at the option of the shareholder, into 241,935 shares of the
Company's $.001 par value common stock effective January 1, 2006. The Preferred
Stock may be redeemed at any time by the Company, and has a liquidation
preference over common stock.
In February 2004, the Company redeemed an additional 15,000 shares from each
executive officer/director for a total redemption of 45,000 shares at a value of
$450,000.
7. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31
2003 2002 2001
---------------------------------------------
Numerator:
Numerator for basic and diluted earnings per
share - net income available to common
shareholders $ 4,340,678 $ 2,492,807 $ 308,440
Effect of convertible preferred stock:
Dividends on preferred stock 56,762 -- --
---------------------------------------------
Numerator for diluted earnings per share $ 4,397,440 $ 2,492,807 $ 308,440
Denominator:
Denominator for basic earnings per share -
weighted average shares 14,969,000 14,144,000 14,349,000
Effect of convertible preferred stock and
dilutive securities:
Convertible preferred stock 237,000 -- --
Employee stock options and warrants 1,500,000 1,967,000 149,000
---------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares 16,706,000 16,111,000 14,498,000
=============================================
Basic earnings per share $ 0.29 $ 0.18 $ 0.02
=============================================
Diluted earnings per share $ 0.26 $ 0.15 $ 0.02
=============================================
8. Leases
The Company leases certain manufacturing, storage, office facilities, equipment
and automobiles. These leases have varying terms, and certain leases have
renewal and/or purchase options. Future minimum payments under noncancelable
leases with
F-20
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Leases (continued)
initial or remaining terms in excess of one year consist of the following at
December 31, 2003:
2004 $ 80,229
2005 39,408
2006 39,408
2007 36,076
2008 19,416
---------
$ 214,537
=========
Machinery, office, and computer equipment at December 31, 2003 and 2002,
includes approximately $64,150 and $104,287 of equipment under leases that have
been capitalized. Accumulated depreciation and amortization for such equipment
approximated $9,164 and $71,711 at December 31, 2003 and 2002, respectively.
Rent expense for all operating leases was $161,792, $275,130, and $302,146 for
the years ended December 31, 2003, 2002, and 2001, respectively.
9. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments are
approximately as follows:
2003 2002
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------- --------------------------
Cash and cash equivalents $7,903,000 $7,903,000 $3,438,000 $3,438,000
Long-term debt, including
Current maturities 4,121,000 4,123,000 4,472,000 4,472,000
Capital lease obligations, including
current maturities -- -- 9,000 9,000
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.
10. Derivative Financial Instruments
The Company has various transactions with its foreign subsidiaries that are
denominated in US dollars and are subject to foreign currency exchange risk on
these transactions.
F-21
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Derivative Financial Instruments (continued)
During 2003, the Company began using foreign currency exchange contracts to
reduce its exposure to fluctuations in foreign exchange rates. The Company bases
these contracts on the amount of cash flows that it expects to be remitted to
the United States from its foreign operations and does not use such derivative
financial instruments for trading or speculative purposes. The Company has
accounted for these contracts as free standing derivatives, such that gains or
losses on the fair market value of these forward exchange contracts are recorded
as other income and expense in the consolidated statements of operations.
At December 31, 2003, the Company held forward exchange contracts totaling
$571,000 with maturities through March 2005. All such contracts were denominated
in Canadian dollars. For the year ended December 31, 2003, the Company recorded
expense of $46,000, based on the net change in fair value of these contracts.
11. Income Taxes
The components of income before income taxes are as follows:
Year ended December 31
2003 2002 2001
-------------------------------------------------
Domestic $ 7,731,363 $ 4,244,927 $ 951,425
Foreign (431,923) (210,120) (423,985)
-------------------------------------------------
$ 7,299,440 $ 4,034,807 $ 527,440
=================================================
The components of the provision for income taxes are as follows:
Year ended December 31
2003 2002 2001
-------------------------------------------------
Current:
Federal $ 2,657,000 $ 1,492,000 $ 117,000
Foreign 26,000 12,000 27,000
State 351,000 110,000 9,000
-------------------------------------------------
Total current 3,034,000 1,614,000 153,000
Deferred:
Federal (88,000) 11,000 66,000
Foreign (32,000) (82,000) --
State (12,000) (1,000) --
-------------------------------------------------
Total deferred (132,000) (72,000) 66,000
-------------------------------------------------
$ 2,902,000 $ 1,542,000 $ 219,000
=================================================
F-22
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Income Taxes (continued)
The provision for income taxes is different from the amounts computed by
applying the United States federal statutory income tax rate of 34%. The reasons
for these differences are as follows:
Year ended December 31
2003 2002 2001
---------------------------------------------
Income taxes at statutory rate $ 2,482,000 $ 1,372,000 $ 179,000
State income taxes, net of federal benefit 339,000 110,000 9,000
U.S. tax benefit of foreign losses -- (8,000) (54,000)
Effect of foreign losses without an income tax benefit 58,000 9,000 19,000
Executive life insurance expense (8,000) 54,000 39,000
Nondeductible foreign development expenses 6,000 -- 26,000
Meals and entertainment 37,000 24,000 16,000
Other (12,000) (19,000) (15,000)
---------------------------------------------
$ 2,902,000 $ 1,542,000 $ 219,000
=============================================
The components of the deferred tax assets and liabilities, and the related tax
effects of each temporary difference at December 31, 2003 and 2002, are as
follows:
2003 2002
----------------------
Deferred tax assets:
Product refund reserve $ 58,000 $ 32,000
Inventory obsolescence reserve 18,000 21,000
Vacation accrual 20,000 15,000
Compensation expense for warrants granted 27,000 11,000
Organization costs 31,000 --
Bad debt reserve 2,000 2,000
Philippine net operating loss carryforward 68,000 63,000
Deferred compensation 230,000 189,565
Miscellaneous accrued expenses 72,164 27,873
----------------------
$526,164 $361,438
----------------------
Deferred tax liabilities:
Depreciation $307,000 $274,000
----------------------
Net deferred tax assets $219,164 $ 87,438
======================
F-23
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Income Taxes (continued)
The Company's $211,000 net operating loss carryforward related to its Philippine
subsidiary expires in 2005 and 2006.
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 $504,000 at
December 31, 2003. 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.
12. 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 and 2001.
The agreement expires in February 2007. The royalty payments terminated 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. As a result, the
amount of the expense in the year ended December 31, 2003 was $54,000.
13. Employee Benefit Plans
The Company sponsors 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 $288,000, $246,000, and $178,000 in
2003, 2002, and 2001, respectively.
F-24
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. 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
established a bonus pool payable on a semi-annual basis equal to 25% of the net
income of the Company. Bonuses are 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 accrued a total of $1,309,500, $741,250 and $112,380 to
the participants of the bonus pool in 2003, 2002 and 2001, respectively.
The Company sponsors a Supplemental Executive Retirement Plan (SERP) 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.
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 also
provides for a discretionary matching contribution by the Company not to exceed
100% of the participant's annual contribution. In 2003, 2002, and 2001, the
Company did not provide a match. The participants fully vest in the deferred
compensation three years from the date they enter the SERP. The participants are
not eligible to receive distribution under the SERP until retirement, death, or
disability of the participant.
15. Related Party Transactions
An officer/director of the Company is a principal in a law firm which provides
legal services to the Company. During the years ended December 31, 2003, 2002,
and 2001, the Company incurred consulting fees to the officer/director and legal
fees to his firm totaling approximately $372,000, $315,000, and $344,000,
respectively.
Note receivable from officer represented amounts due from an officer/director.
In 1998, the individual received advances against his anticipated incentive
compensation totaling $89,250. Repayments of $48,250, $11,000, and $30,000 were
made in 2003, 2002 and 2000, respectively. Accounts due from employees and
distributors represent travel and other advances to employees and advances to
distributors.
During 2003, the Company purchased a total of 218,059 shares of its common stock
from three officer/directors, one director, and one officer. The total cost of
the purchases was $1,080,000, for a weighted average purchase price of $4.95 per
share. The price per share of each purchase was based on a discount from the
market price per share at the time of purchase in order to approximate the
dilutive impact of their shares on the open market.
F-25
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
16. Segment Information
Description of Products and Services by Segment
The Company operates in one reportable segment, a network marketing segment
consisting of eight operating units that sell nutritional and dietary products
to a sales force of independent distributors that sell the products directly to
customers. These operating units are based on geographic regions.
Geographic area data for the years ended December 31, 2003, 2002, and 2001,
follows:
2003 2002 2001
---------------------------------------------
Net sales to external customers
United States $65,832,045 $53,210,463 $44,799,429
Australia/New Zealand 2,059,928 1,922,764 1,808,298
Canada 1,255,836 982,925 972,217
Mexico 3,338,071 2,904,722 2,233,088
United Kingdom 475,319 446,465 391,033
Colombia -- -- 45,671
Malaysia 579,988 -- --
Philippines 3,418,536 3,459,524 2,693,311
---------------------------------------------
Total net sales $76,959,723 $62,926,863 $52,943,047
=============================================
Assets by area
United States $18,738,771 $14,350,790 $13,489,793
Australia/New Zealand 865,823 983,905 905,322
Canada 252,443 256,055 221,395
Mexico 2,300,299 1,619,941 1,388,319
United Kingdom 247,740 189,081 140,044
Colombia -- -- 1,278
Malaysia 1,353,677 -- --
Philippines 922,163 1,046,214 840,450
---------------------------------------------
Total consolidated assets $24,680,916 $18,445,986 $16,986,601
=============================================
F-26
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
16. Segment Information (continued)
The Company classifies its sales into three categories of products. Net sales by
product category data for the years ended December 31, 2003, 2002, and 2001,
follows:
2003 2002 2001
---------------------------------------------
Net sales by product category
Nutritional and dietary supplements $66,597,426 $53,704,567 $41,972,580
Skin care products 1,056,133 1,319,618 919,295
Sales aids and other 9,306,164 7,902,678 10,051,172
---------------------------------------------
Total net sales $76,959,723 $62,926,863 $52,943,047
=============================================
F-27
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
17. Quarterly Financial Data (Unaudited)
First Second Third Fourth
----------------------------------------------------------
(In thousands, except per share amounts)
2003
Net sales $ 18,671 $ 17,767 $ 19,614 $ 20,908
Gross profit $ 15,364 $ 14,758 $ 16,314 $ 17,296
Net income $ 978 $ 931 $ 1,213 $ 1,275
Preferred dividends $ -- $ 22 $ 20 $ 14
Net income available to common
shareholders $ 978 $ 909 $ 1,193 $ 1,261
Earnings per share:
Basic $ 0.06 $ 0.06 $ 0.08 $ 0.09
Diluted $ 0.06 $ 0.06 $ 0.07 $ 0.07
2002
Net sales $ 14,484 $ 15,449 $ 16,237 $ 16,756
Gross profit $ 11,727 $ 12,533 $ 13,463 $ 13,634
Net income $ 459 $ 625 $ 741 $ 668
Earnings per share:
Basic $ 0.03 $ 0.04 $ 0.06 $ 0.05
Diluted $ 0.02 $ 0.04 $ 0.05 $ 0.04
Earnings per share data for 2002 has been restated for the five-for-four stock
split declared September 4, 2003.
F-28
Reliv' International, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 2003, 2002, and 2001
Column A Column B Column C Column D Column E Column F
- ------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Charged to Balance at
beginning of costs and Other Deductions end
Classification year expenses Accounts Describe of year
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2003
Deducted from asset accounts:
Allowance for doubtful
accounts $ 10,000 $ 22,000 -- $ 23,400(1) $ 8,600
Reserve for obsolete
inventory 57,900 18,200 -- 29,300(2) 46,800
Liability accounts:
Reserve for refunds 88,000 626,000 -- 564,000(3) 150,000
--------------------------------------------------------------------------
Year ended December 31, 2002
Deducted from asset accounts:
Allowance for doubtful
accounts $ 28,900 $ 16,100 -- $ 35,000(1) $ 10,000
Reserve for obsolete
inventory 586,800 57,900 -- 586,800(2) 57,900
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 $ 33,300 -- $ 9,400(1) $ 28,900
Reserve for obsolete
inventory 182,500 -- 502,700 98,400(2) 586,800
Liability accounts:
Reserve for refunds 50,000 252,900 -- 252,900(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-29