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EX-23 - RELIV INTERNATIONAL INCv177021_ex23.htm
EX-21 - RELIV INTERNATIONAL INCv177021_ex21.htm
EX-32 - RELIV INTERNATIONAL INCv177021_ex32.htm
EX-31.1 - RELIV INTERNATIONAL INCv177021_ex31-1.htm
EX-31.2 - RELIV INTERNATIONAL INCv177021_ex31-2.htm
 
UNITED STATES
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, 2009
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
 
Commission File Number
000-19932
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)
   

   
 
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) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered
     
Common Stock, par value $0.001
 
NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:  None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨     No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ¨     No þ
 
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.  Yes þ     No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨     No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨     Accelerated filer ¨     Non-accelerated filer ¨  Smaller Reporting Company þ
 
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨     No þ

Based upon the closing price of $3.42 per share of the registrant’s common stock as reported on the NASDAQ Global Select Market on June 30, 2009, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $25.2 million.  (The 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 1, 2010 was 12,380,187 (excluding treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Document
 
Part of Form 10-K into Which
Document Is Incorporated
     
Sections of the registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2010, which is expected to be filed no later than 120 days after December 31, 2009
 
Part III
 


INDEX

Part I
       
         
Item No. 1
Business
  1  
Item No. 2
Properties
  17  
Item No. 3
Legal Proceedings
  17  
Item No. 4
(Removed and Reserved)
  17  
         
Part II
       
         
Item No. 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  17  
Item No. 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  18  
Item No. 8
Financial Statements and Supplementary Data
  26  
Item No. 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  26  
Item No. 9A(T)
Controls and Procedures
  26  
Item No. 9B
Other Information
  27  
         
Part III
       
         
Item No. 10
Directors and Executive Officers of the Registrant
  27  
Item No. 11
Executive Compensation
  27  
Item No. 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  27  
Item No. 13
Certain Relationships and Related Transactions
  27  
Item No. 14
Principal Accounting Fees and Services
  27  
         
Part IV
       
         
Item No. 15
Exhibits and Financial Statement Schedules
  27  
 

 
FORWARD-LOOKING STATEMENTS

This annual report includes both historical and “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  We have based these forward-looking statements on our current expectations and projections about future results.  Words such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or similar words are intended to identify forward-looking statements, although not all forward-looking statements contain these words.  Although we believe that our opinions and expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements, and our actual results may differ substantially from the views and expectations set forth in this annual report.  We disclaim any intent or obligation to update any forward-looking statements after the date of this annual report to conform such statements to actual results or to changes in our opinions or expectations.
 
PART I

Item No. 1 - Business

Overview

We are a developer, manufacturer and marketer of a proprietary line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports nutrition. All but one of our science-based supplements are packaged in powdered form and are not only simple to use but also, when mixed with water, juice or other liquid and consumed, provide an effective means of delivering nutrients to the body. We also offer one encapsulated product and a line of skin care and food products. We sell our products through an international network marketing system using independent distributors. We have sold products in the United States since 1988 and in selected international markets since 1991.

We currently offer 16 nutritional supplements.  In addition, we market a line of 14 skin care and food products under our Relivables brand. We have selectively evolved our product offering over our history. Our core line of nutritional supplements, which represented 62.9% of net product sales for the year ended December 31, 2009, includes the following four products:

 
Reliv Classic and Reliv NOW — two basic nutritional supplements containing a full and balanced blend of vitamins, minerals, proteins and herbs
 
Innergize! — an isotonic sports supplement in three flavors
 
FibRestore — a high-fiber and antioxidant supplement

These are our most successful supplements based on fiscal year 2009 net sales. We have 12 other nutritional supplements that complement these four core products. We periodically refine our products and introduce related new products and product categories. Our internal research and development team has developed most of our products, and we hold U.S. patents on five of these products — Innergize!, FibRestore, Arthaffect, ReversAge and Cellebrate. In addition, we have applied for U.S. patents on our ProVantage, GlucAffect and CardioSentials products.

We believe that our network marketing model is the best method for the marketing and sale of our products because it utilizes ongoing personal contact among our distributors and their retail customers. This enables our distributors to communicate directly regarding the products, the business opportunity we offer and their personal experiences with both. We provide our distributors with a financially rewarding and entrepreneurial opportunity, affording them the ability to earn compensation both from the direct sale of products and from sales volume generated by distributors they sponsor. We actively support our distributors by providing marketing materials, a dependable product fulfillment system and frequent educational, training and motivational programs.

The majority of our sales traditionally has been, and is expected to continue to be, made through our distributors in the United States. We also currently generate sales through distributor networks in Australia, Austria, Brunei, Canada, Germany, Indonesia, Ireland, Malaysia, Mexico, the Netherlands, New Zealand, the Philippines, Singapore and the United Kingdom. In each country in which we conduct business, our distributors operate under a uniform business and compensation model that maintains consistent marketing, sales, fulfillment and compliance procedures. As of December 31, 2009, our network consisted of approximately 67,940 distributors — 54,040 in the United States and 13,900 across our international markets.
 
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We manufacture all of our powdered nutritional supplements at our facility in Chesterfield, Missouri. We believe our ability to formulate and manufacture all but one of our own nutritional supplements enables us to produce our products efficiently while maintaining our high standards of quality assurance and proprietary product composition.

Industry Overview

Nutritional Supplement Market

We operate primarily in the $25.2 billion U.S. nutritional supplement market, which is part of the broader $102 billion U.S. nutrition industry according to 2008 data published by the Nutrition Business Journal, or NBJ, and $270.0 billion global nutrition industry, also according to the NBJ, with sales expected to increase six to ten percent.

A combination of demographic, healthcare and lifestyle trends are expected to drive continued growth in the nutritional supplement market. These trends include:

 
·
Aging Population: The older population (persons 65 years or older) numbered 38.9 million in 2008 according to the Department of Health and Human Services.  They represented 12.8% of the U.S. population, about one in every eight Americans. By 2030, there will be about 71.5 million older persons living in the U.S., more than twice their number in 2000. People 65 years or older represented 12.4% of the population in the year 2000 and are expected to represent 20% of the population by 2030.  We believe this ever-growing population will continue to focus on their nutritional needs as they age.

 
·
Rising Healthcare Costs and Use of Preventative Maintenance: The costs of healthcare in the United States continue to increase rapidly each year.  National health care spending reached $2.5 trillion in 2009 and is expected to reach $4.4 trillion by 2018 according to the National Coalition on Health Care, or NCHC. The NCHC also indicated in a recent report that nearly seven million Americans will lose their health insurance coverage between 2008 and 2010 and The Urban Institute estimates that under a worse case scenario, 66 million Americans will be uninsured by 2019. In addition, the total 2009 medical costs for a typical American family of four topped out at $16,771 which is a 7.4% increase from 2008 according to the Milliman Medical Index.  In order to maintain quality of life as well as reduce medical costs, many consumers take preventative measures to improve their general health, including the use of nutritional supplements.

 
·
Increasing Focus on Weight Management: A 2008 study conducted by the Johns Hopkins Bloomberg School of Public Health showed that by 2030, 86% of Americans could be overweight or obese and the health care costs attributed to obesity are expected to more than double every decade. Being overweight can lead to more serious health concerns such as diabetes, heart disease and other chronic illnesses and individuals who are obese have a 10% to 50% increased risk of death from all causes, compared with healthy weight individuals. Bearing these facts in mind, we believe that there will be an increased need not only for weight loss products but for wellness products as well.

Direct Selling Market

Health and nutrition products are distributed through various market means, including retailers such as supermarkets, drugstores, mass merchants and specialty retailers; direct marketers such as mail order companies and Internet retailers; and direct sellers such as network marketers and healthcare practitioners. We distribute our products through the direct selling channel via our network marketers.

Direct selling involves the marketing of products and services directly to consumers in a person-to-person manner. Direct selling is a significant global industry largely utilized for the sale of a wide range of consumer products from companies such as Avon Products Inc., Alticor Inc. (Amway Corp.) and Tupperware Brands Corporation. According to the World Federation of Direct Selling Associations, or WFDSA, the 2008 global direct selling market (for all product categories) was estimated to be $114.0 billion. The WFDSA estimates that the number of individuals engaged in direct selling nearly doubled between 1998 and 2008, from 33.6 million sellers to 65.3 million in 2007.  The U.S. had 15.1 million direct sellers in 2008.
 
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While the United States is currently the largest direct selling market with $29.6 billion in annual sales in 2008, international markets account for 73% of the entire industry, according to the WFDSA.  Sixteen countries (including the United States) have annual direct sales revenue of at least $1 billion and another 26 countries have annual direct sales revenue of at least $100 million, according to the WFDSA.

For the nutrition industry, the network marketing channel accounted for approximately 7% of the total U.S. nutritional supplements sold in 2008, or approximately $7.1 billion, according to the NBJ.

We believe that we are well positioned to capitalize on the domestic and international growth trends in direct sales, as both a developer and manufacturer of proprietary nutritional products, utilizing our network marketing distribution system.

Our Competitive Strengths

We believe that we possess a number of competitive strengths that have historically supported our growth and enabled us to achieve sustained profitability.

Complete, Simple Nutrition. We focus on the completeness, balance and simplicity of our basic nutritional supplements — Reliv Classic and Reliv NOW — as captured by our slogan, “Nutrition Made Simple. Life Made Rich.” Because these two basic nutritional supplements each contain a full and balanced blend of vitamins, minerals, proteins and herbs, supplementation is made simple for the consumer, who does not have to select and purchase several supplements for his or her basic nutritional needs. For more specific individual needs, we provide 14 additional supplements. We believe that our two basic nutritional supplements, together with our additional supplements and Relivables products, enhance the ability of our distributors to build their businesses by providing a comprehensive, simple product offering.

Powder-Based Nutritional Supplements. We believe that our powder-based nutritional supplements provide a competitive advantage over other supplements such as vitamins, minerals and herbs in pill or tablet form. Our nutritional products are consumed with water, milk or juice and provide an effective means of delivering nutrients to the body. We believe nutrients taken orally in liquid form lead to better absorption at the cellular level, or “bioavailability.”

In-House Development and Production. We have developed substantially all of our nutritional supplement and food products utilizing nutrition science as the basis for product formulation. We maintain an ongoing research and development effort led by Carl W. Hastings, Ph.D., our Chief Scientific Officer and Vice Chairman.  In November 2008, we hired Thomas G. Reynolds, Ph.D., as Director of Research and Development and Technical Affairs, to strengthen our research and development efforts.  In addition, we consult regularly with other industry professionals and with the physicians on our Medical Advisory Board with respect to developments in nutritional science, product enhancements and new products.  Since 1993, we have manufactured substantially all of our nutritional products at our facility in Chesterfield, Missouri. Currently, we outsource only one nutritional supplement product, our Slimplicity accelerator capsules.  We believe our ability to formulate and manufacture all but one of our own nutritional supplement products enables us to maintain our high standards of quality assurance and proprietary product composition.

Experienced Ambassador Team.  Our Ambassador corps consists of distributors who have achieved the level of Master Director, have earned royalty payments of at least $4,000 in consecutive months and meet our leadership and character criteria necessary to garner our invitation to be an Ambassador. Our Ambassadors generally are our most productive distributors and are essential in recruiting, motivating and training our entire distributor network. We, and our Ambassadors, lead hundreds of annual events throughout all of our markets to motivate and train distributors, including regular recruiting meetings, trainings, conference calls, training schools for Master Affiliates and higher levels and regional, national and international distributor conferences. As of December 31, 2009, we had a total of 363 Ambassadors.  The top 10 distributors at the Ambassador level have been with us for an average of 17 years, which provides consistency in training new distributors and contributes to increased sales.
 
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Uniform Distributor Business Model. Our distributor compensation system is essentially uniform throughout our domestic and international markets.  The compensation plan is “seamless” in that distributors in each market all receive discounts and commissions on relatively the same terms, subject to a few variances to address market conditions and cultural preferences.  We also provide consistent distributor documentation and training throughout our system and in all of our markets.  We believe this uniform model is effective in motivating and training distributors to build their businesses and enter new markets.

Experienced and Incentivized Management Team. Our management team is led by our founder, Robert L. Montgomery, who has been our Chief Executive Officer since the inception of our company in 1985. Our executive officers have been employed by our company for an average of 15 years and are experienced in their areas of focus, which include manufacturing, sales, finance, marketing and operations.  As of March 1, 2010, our directors and executive officers beneficially own approximately 40.5% of our common stock.

Our Business Strategy

Our basic objective is to increase our net sales by increasing the number and productivity of our distributors and by periodically improving our existing products and introducing new products. We also intend to invest in our infrastructure to improve our operating efficiencies, provide better service to our distributors and leverage our current operating facilities to improve our profitability. We seek to accomplish these objectives by employing the following strategic initiatives:

Leverage and Expand our Existing Distributor Base Throughout the United States. The United States has been and will continue to be our largest market. Our growth strategy in the United States involves multiple initiatives, such as increased investment in company-sponsored events and training and better utilization of our upper-level distributors across different geographical areas. For example, in 2009 we held 37 meetings in 31 cities as part of our “Financial Freedom Tour” in which we highlighted our business opportunity as an avenue to earn additional income in light of the economic downturn.  Our senior ambassadors led these meetings, often with corporate executives as guests.  We expect to continue to implement these and similar initiatives while focusing on untapped markets in the United States.

Expand in Existing and New International Markets. We believe there is a significant opportunity to increase our net sales in international markets. We have a uniform business model across all of our markets and encourage our distributors to pursue their business in multiple markets.  In selected markets, we have begun investing in additional marketing support for our distributors that is consistent with our successful activities in the United States, including third party advertising materials and company-sponsored distributor meetings. We believe this uniform business model and additional marketing expense will encourage expansion of our distributors in our existing international markets and will provide a framework that facilitates our entry into new international markets. To that end, we continue to monitor business conditions in potential new markets and will selectively expand as timing and conditions are appropriate.

Invest in Improved and New Products. As a developer of nutritional supplements, it is vital to continue to invest in the research and development of new and innovative products. Additionally, we will continue to improve and validate the efficacy of our existing product line. For example, in August 2009 we launched our Relivables brand of products and in November 2008 we introduced GlucAffect to support healthy blood sugar management.  These types of investments should facilitate customer and distributor retention, as well as the recruitment of new distributors.

Expand and Improve our Manufacturing and Distribution Capabilities. We currently manufacture all of our powdered nutritional supplements at our facility in Chesterfield, Missouri. This allows us to precisely control product composition and quality assurance. Periodically, we make appropriate investments that enhance our manufacturing capabilities and capacity to further leverage our existing facilities and trained production staff.  We expect to continue to make appropriate investments in our manufacturing and fulfillment facilities.
 
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Our Products

Product Overview

Our product line includes nutritional supplements that address basic nutrition, specific wellness needs, weight management and sports nutrition. We combine ingredients from science and nature in targeted, well-balanced, easy-to-use formulas that are specifically designed to enhance wellness and increase performance and energy in specific applications. All but one of our supplements are in powdered form that the consumer mixes with water, juice or other liquid. We also have one encapsulated product and a line of skin care and food products marketed under our Relivables brand name.

We currently offer 16 nutritional supplements.  In addition, we offer nine skin care and five food products under our Relivables line. Our basic nutritional supplements are formulated to provide a balanced and complete level of supplementation for the consumer. For more specific needs, we provide other focused product formulations. We have purposely been selective in the number and types of products that we offer. By providing a line of targeted products, we make it simple for our distributors and consumers to choose products appropriate for their objectives. We consider four of our oldest and best selling products — Reliv Classic, Reliv NOW, Innergize! and FibRestore — to be our primary or “core” products.

The following table summarizes our product categories. The net sales figures are for the year ended December 31, 2009:

Product Category
 
Product Name
 
% of 2009
Net Sales(1)
 
Year
Introduced
Basic Nutrition
 
Reliv Classic
    18.7  
1988
   
Reliv NOW
    11.2  
1988
   
NOW for Kids
    3.6  
2000
   
Reliv Delight
    0.3  
2001
               
Specific Wellness
 
FibRestore
    13.3  
1993
   
Arthaffect
    7.0  
1996
   
ReversAge
    4.3  
2000
   
SoySentials
    2.4  
1998
   
CardioSentials
    2.1  
2005
   
GlucAffect
    4.0  
2008
               
Weight Management(2)
 
Slimplicity Meal Replacement
    2.1  
2007
   
Slimplicity Accelerator Capsule
    0.9  
2007
   
Reliv Ultrim Plus
    0.2  
1988
   
Cellebrate
    0.7  
1995
               
Sports Nutrition
 
Innergize!
    11.0  
1991
   
ProVantage
    3.1  
1997
               
Relivables(3)
 
Skin Care
    1.1  
2001
   
Food Products
    0.1  
2009
 

(1)
This table does not include net sales for the year ended December 31, 2009 related to freight and handling and sales of marketing materials, which represented approximately 13.9% of net sales for the year ended December 31, 2009.

(footnotes continue on following page)
 
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 (2)
Since its introduction in February 2007, our Slimplicity Meal Replacement formula has replaced Reliv Ultrim-Plus in all but our Canadian and Mexican markets. Upon introduction of our Slimplicity products in a particular market, our Reliv Ultrim-Plus line was discontinued in that market.
(3)
In August 2009, we introduced our Relivables line of skin care and food products. The Relivables skin care products include science-based updates to our original ReversAge skin care products.  In conjunction with these updates, we have re-branded our skin care products under the Relivables lines.

Basic Nutrition Supplements

                Our four basic nutrition supplements provide consumers with a broad spectrum of essential nutrients. Every formulation is specifically designed to optimize and enhance the benefits of the nutrients it contains.

Reliv Classic is a nutritional supplement containing a variety of vitamins and minerals, soy and other protein sources and various herbs. It is a vegetarian product that contains no animal compounds, artificial preservatives, artificial flavors or added simple sugars. Reliv Classic is available in the United States, Australia, New Zealand, Canada, Germany, Austria, the Netherlands, the United Kingdom, Ireland, Malaysia, Singapore, Brunei and the Philippines. 
 
Reliv NOW is a nutritional supplement containing a variety of vitamins and minerals, soy and other protein sources and various herbs. Reliv NOW is available in every country where we operate except Indonesia.
         
NOW for Kids is a product designed to provide a balanced nutritional supplement for a child’s diet and contains a variety of vitamins and minerals. NOW for Kids is available in Australia, New Zealand, United States, the United Kingdom, Ireland, Austria, the Netherlands, Mexico, Malaysia, Brunei, Indonesia and the Philippines.

Reliv Delight is a powdered nutritional supplement marketed as a milk replacement. Reliv Delight is available in Mexico and the United States.     

Specific Wellness Supplements

                Our line of six specific wellness supplements contains specific compounds that target certain conditions and promote health. Each product is intended to work in conjunction with our basic nutritional supplement formulas to provide an effective, balanced and natural method for sustaining health and well-being.

ReversAge is a patented youth-promoting nutritional 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 restorative and designed to replenish key hormones while creating balance within the body’s major systems; the antioxidant complex is designed to slow aging at the cellular level and the herbal complex delivers a variety of herbs, including Ginkgo Biloba and Maca. ReversAge is available in every country where we operate except Germany, the United Kingdom, Ireland, and Indonesia. In Canada, the product is marketed as Nutriversal.
         
SoySentials is a nutritional supplement containing soy as well as other vitamins, minerals and herbs designed for use by women. SoySentials provides a woman with key nutrients targeted to promote women’s health and ease the symptoms of menopause and PMS. SoySentials is available in the United States and Mexico.
         
CardioSentials is a berry-flavored nutritional supplement introduced in February 2005 that promotes heart health. The product contains 1,500 mg of phytosterols per serving, policosanol and several powerful antioxidants. In a clinical study of this product, participants experienced meaningful reductions in cholesterol as well as improvement in their high-density lipoprotein, or HDL, and low-density lipoprotein, or LDL, ratios. We have applied for a U.S. patent on CardioSentials. CardioSentials is available only in the United States.
         
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Arthaffect is a patented nutritional supplement containing Arthred, a patented form of hydrolyzed collagen protein, which is clinically reported to support healthy joint function. The product is available in the United States, Australia, New Zealand, Mexico, the Philippines, Malaysia, Singapore, Brunei and Canada. The product is marketed as A-Affect in Australia, New Zealand and Canada due to local product regulations.

FibRestore is a patented nutritional supplement containing fiber, vitamins, minerals and herbs. A modified version of the FibRestore formula is marketed in Canada under the name Herbal Harmony to comply with Canada’s nutritional regulations. FibRestore is available in all of the countries in which we operate except Indonesia.    

GlucAffect is a cinnamon cream flavored nutritional supplement launched in November 2008 as our latest product offering.  GlucAffect contains Pycnogenol® and other clinically supported active ingredients. GlucAffect has been clinically proven to assist in healthy blood sugar management and support weight loss.  We have applied for a U.S. patent on GlucAffect.  GlucAffect is available in theUnited States, Canada, the Philippines, Malaysia, Singapore and Brunei.

               
                Our four weight management supplements combine advanced weight loss promoting complexes with scientifically balanced nutrition and health enhancing soy protein. Our ingredients are designed to work together, along with proper diet and exercise, to turn unwanted fat into energy without sacrificing muscle.

Our Slimplicity Weight Loss System was introduced in the United States in February 2007 and includes two products:  (1) Slimplicity meal replacement and (2) Slimplicity accelerator capsules.  Our Slimplicity Weight Loss System incorporates these new products into an overall program that includes proper diet and exercise and is focused on facilitating weight loss and developing healthier lifestyle choices.  Slimplicity is currently available in the United States, Germany, Austria, the Netherlands, Ireland, the United Kingdom, Australia, New Zealand, the Philippines, Malaysia, Singapore and Brunei.  In our European markets, we offer chewable tablets instead of capsules in light of local preferences and formula modifications required to comply with product regulations.  In Australia and New Zealand, the products are marketed as Slimsimply due to trademark availability.

Reliv Ultrim-Plus is designed as a meal replacement (for a maximum of two meals per day) for use in a weight loss program.  Reliv Ultrim-Plus is only sold in Canada and Mexico.  Reliv Ultrim-Plus is no longer available in our other markets due to the introduction of our Slimplicity meal replacement product.  We expect Slimplicity to eventually replace Reliv Ultrim-Plus in all of our markets.

Cellebrate 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 is available in the United States and Canada.     
                                   
Sports Nutrition Supplements

Our two sports nutrition supplements contain a balance of nutrients scientifically designed to improve athletic performance and endurance, as well as muscle recovery and repair.

 
Innergize! is a patented sports supplement, containing vitamins and minerals designed for performance enhancement. Innergize! is available in every country where we operate. In Canada, the product is marketed as Optain due to local product regulations.

 
ProVantage is a nutritional supplement containing soy designed to enhance athletic performance with a balance of nutrients needed to improve endurance, muscle recovery and repair. ProVantage is designed to increase muscle recovery, muscle mass and function, reduce fatigue and burn excess body fat for extra energy. The product also benefits dieters and others seeking to increase their soy intake. We have applied for a U.S. patent on ProVantage. ProVantage is available in the United States and Canada.
 
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Relivables

Our new Relivables product line is comprised of nutritionally sound skin care and food products. The new skin care products, marketed as the “r” skin care collection, are designed to create healthier, more youthful looking skin. Each product in our r collection contains the exclusive RA7 complex, an array of antioxidants, anti-inflammatory and anti-aging nutrients. These nutrients work together to slow the aging process and improve the skin’s appearance. The men’s “r” collection includes a body wash, shave lotion and after shave moisturizer with SPF 15.  The women’s collection includes a cleansing facial wash, eye cream, daytime facial moisturizer with SPF 15, a nighttime facial moisturizer, and a body lotion.  The r products are available in the United States, Australia and New Zealand.

The food products include Relivables All-Natural Sweetener, to be used in place of sugar or other artificial sweeteners.  Its all-natural sweetener, derived from the stevia plant, has no sugar and contains one gram of fiber.  Relivables Fortified Soy Milk is lactose-free and dairy-free and significantly exceeds the amount of calcium and vitamin D in dairy milk, along with six grams of soy protein.  Relivables Soy Nuts are a good source of fiber and soy protein, low in sodium and cholesterol free. Relivables Health Snack Bars, which come in Chocolate-Coated Granola and Cranberry Granola flavors, are a good source of fiber, soy protein and whole grains.

Research and Development

We maintain an ongoing research and development effort led by Carl W. Hastings, Ph.D. and Thomas G. Reynolds, Ph.D. and consult with other industry professionals and with the physicians and professionals on our Medical Advisory Board with respect to developments in nutritional science, product enhancements and new products. Since 2000, we have introduced seven of our current nutritional supplement products, including ReversAge, NOW for Kids, Reliv Delight, GlucAffect, CardioSentials, Slimplicity meal replacement and Slimplicity accelerator capsules. From time to time, we have also reformulated and enhanced our products. Our research and development team consistently evaluates product advancements in the marketplace and advancements in raw materials and ingredients available for new product ideas and developments.

For the years ended December 31, 2009 and 2008, our research and development expenses were $551,000 and $397,000, respectively.

Network Marketing Program

General Overview

We market and sell our products through a network marketing system of independent distributors, who purchase our products from us, or from other distributors, and who then sell our products directly to consumers. In addition to selling our products, our distributors also recruit others to distribute our products. Distributors receive compensation from both the sale of the products they have purchased at wholesale and, in the case of Master Affiliates and above, commissions on the volume of products sold by their downline organization. We believe network marketing is an effective way to distribute our products because it allows and relies on personal contact, education and endorsement of products which are not as readily available through other distribution channels.

We recognize that our sales growth is based on the continued development and growth of our independent distributor force and we strive to maintain an active and motivated distributor network through a combination of quality products, discounts, commissions and bonus payments, sales conventions, training, personal recognition and a variety of publications and promotional materials.

Program Structure

Individuals who desire to market and sell our products may become distributors by being sponsored into the program by an existing distributor, and becoming part of that distributor’s “downline.” We offer a tiered discount and commission, or royalty, format that consists of four principal levels and several sub-levels, which are designed to compensate and motivate distributors to increase their networks and sales volumes.
 
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Our distributors consist principally of individuals, although we also permit entities such as corporations, partnerships, limited liability companies and trusts to become distributors. A new distributor is required to complete a distributor application and, in most areas, to purchase a package of distributor materials (for $39.95 plus shipping in the United States) consisting of a Distributor Guide and CD, business forms and promotional materials. The Distributor Agreement, when accepted by us, becomes the contract between us and the distributor and obligates the distributor to the terms of the agreement, which includes our Policies and Procedures for conduct of their business. All distributors are independent contractors and are not our employees.

In each country in which we conduct business, distributors operate under a uniform compensation system pursuant to which distributors generally are compensated based on their sales volumes. On the basis of sales volume or commission volume, distributors may achieve the following successive levels of achievement and compensation:

Designation
 
Discount
 
Retail Distributor
    20 %
Affiliate
    25 %
Key Affiliate
    30 %
Senior Affiliate
    35 %
Master Affiliate
    40 %(1)
Director
    40 %(1)
Key Director
    40 %(1)
Senior Director
    40 %(1)
Master Director
    40 %(1)
Presidential Director
    40 %(1)
 

(1)
In addition to discounts, these levels also receive commissions based on sales in their downline organization.

Distributors purchase products from us at a discount from the suggested retail price for the products and then may sell the product at retail to customers, sell the product to other distributors at wholesale or consume the product. The amount of the discount varies depending on the distributor’s level of achievement, as indicated above.

Distributors generate income equal to the difference between the price at which they sell the product to customers and the discounted price they pay for the product. Distributors also earn wholesale commissions on products purchased by downline 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. We calculate payments and issue a check directly to the qualified distributor once a month. For example, assume Distributor A is a 40% discount Master Affiliate who signs up Distributor B, a 30% discount Key Affiliate, who signs up Distributor C, a 20% discount Retail Distributor. If Distributor C purchases directly from us, a 10% wholesale profit check will be sent to Distributor A and B.

Upon achieving the level of Master Affiliate, distributors begin to receive additional compensation — “generation royalty” — payments of 8%, 6%, 4%, 3% and 2% of the retail volume of product purchased from us by Master Affiliates and above (and their personal groups) whom they have sponsored, and for each of five downline levels of sponsorship. To qualify for these additional compensation payments, Master Affiliates and above are required to maintain certain monthly sales volumes and to document specified levels of retail sales.

Master Affiliates who sponsor other distributors that achieve the level of Master Affiliate are entitled to become part of the Director Program. Advancement at the Director level is based upon achieving increasing levels of royalties based on sales generated by other distributors in the Director’s downline organization. Distributors achieving each level receive recognition for their achievements at our company-sponsored events and in our publications. We also have a Star Director Program under which distributors achieving the level of Director and above receive additional compensation based on the number of Master Affiliates they have sponsored into the program. Directors receive an additional 1% to 3% royalty on the retail sales volume of Master Affiliates in their downline organization for an unlimited number of levels of sponsorship, until reaching a level that includes a Master Affiliate who also has achieved Star Director status.
 
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Master Directors and Presidential Directors may also be invited to participate in the Ambassador Program. As of December 31, 2009, we had 363 Ambassadors. Qualifications to be invited by us to participate in the Ambassador Program include demonstrated competence and leadership qualities. Ambassadors receive recognition and awards for achieving Ambassador status and can then achieve additional levels of accomplishment. We utilize our Ambassadors to lead meetings and conferences, and to provide training and education to our distributors. Ambassadors achieving the level of Silver and higher also participate in the “Reliv Inner Circle,” which may entitle them to receive additional compensation, paid participation in our sponsored events, health insurance and car allowances.

In addition to the levels of compensation described, we also provide a variety of incentives, bonuses, awards and trips to distributors who achieve high sales volumes and who advance in the distributor ranks.

Distributor Training, Motivation and Management

Our marketing efforts are focused on the development, training, motivation and support of our independent distributors. We support an active training program for our distributors in which our representatives and experienced distributors, usually Ambassadors, lead group training sessions. We provide distributors with manuals, brochures and other promotional, training and informational publications. We encourage distributors to hold regular Tuesday evening recruiting meetings and Saturday training sessions. We sponsor weekly training conference calls in which a significant number of distributors participate.

Our sponsorship generally includes the following:

 
During 2009, we sponsored approximately 59 training schools on a quarterly basis across all of our markets for new Master Affiliates;

 
For each market in which we operate, we sponsor an annual conference for distributors; and

 
In the United States, we sponsor an annual International Conference in summer for all worldwide distributors and a winter conference for U.S. distributors.

During 2009, we invested approximately $3.61 million in training, conferences and promotional events for our distributors worldwide.

Distributor Compliance

Our distributor organization and business model are designed and intended to promote the sale of our 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, we have established specific programs and requirements for distributors, including (1) monitoring by us of purchases by distributors to identify potentially excessive individual purchases, (2) requiring that distributors certify to a minimum number of retail sales, and (3) requiring that distributors certify the sale of at least 70% of previous purchases of a particular product prior to the purchase of additional amounts of such product. Distributors are not required at any time to purchase product, although Master Affiliates and above are required to maintain certain minimum sales levels in their personal groups to continue receiving generation royalty compensation payments.

Distributors may create their own advertising provided that it is within our advertising rules. Unless a distributor is using our designed and approved advertisements, the distributor must submit for approval in writing all advertising (e.g. brochures, flyers, audio tapes, classified or display ads, radio scripts) to our Compliance Department before placing it or arranging for placement.
 
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Pursuant to our Policies and Procedures, which are incorporated by reference into our Distributor Agreement, distributors are permitted to make only those claims about our products that have been approved by us and/or provided in sales and training materials. Distributors acknowledge that our 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 our products to treat or cure, any disease or condition. We do not authorize or permit our distributors to make any express or implied references with regard to our 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 us and our distributors, we conduct 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. We devote substantial resources to obtaining the necessary licenses and approvals and maintaining operations that are in compliance with the applicable limitations. We also research laws applicable to distributor operations and revise or alter distributor materials and products, 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. In addition, regulations affecting our business often change and are subject to varying interpretation and application. We make every effort to monitor and comply with changes in laws and regulations as they occur.

We have a Compliance Department that receives and reviews allegations of distributor misconduct. If we determine that a distributor has violated our Policies and Procedures, we may take a number of disciplinary actions. For example, we may impose sanctions such as warnings or suspensions until specific conditions are satisfied, or take other appropriate actions at our discretion, including termination of the distributor’s agreement.

Geographic Presence

Markets

We currently sell our products throughout the United States and in 14 other countries around the world. We have sold products in the United States since 1988 and sold our first product outside of the United States in 1991 when we entered Australia. In 2009, approximately 12.1% of our net sales were generated outside of the United States.

The table below shows the countries in which we operate and the year we commenced selling products:

Country
 
Year Entered
United States
 
1988
Australia
 
1991
New Zealand
 
1992
Canada
 
1992
Mexico
 
1993
United Kingdom(1)
 
1995
Philippines
 
2000
Malaysia
 
2003
Ireland
 
2003
Singapore
 
2004
Germany
 
2005
Austria
 
2006
Netherlands
 
2006
Brunei
 
2009
Indonesia
 
2009
 

(1)
Includes Great Britain, Scotland, Wales and Northern Ireland.

Within the United States, we sell our products to distributors in all 50 states. We derived 32.1% of our net sales in 2009 in California, Illinois, Kansas, Texas, Missouri and Michigan, with each state contributing at least 4% of net sales. We believe that there is the opportunity to increase the number of our distributors in all markets where we sell our products, as our existing distributor bases grow and expand.
 
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We organize all of our international operations under our wholly owned subsidiary, Reliv’ World. As of December 31, 2009, Reliv’ World consisted of the following market-specific entities: Reliv’ Australia, Reliv’ New Zealand, Reliv’ Canada, Reliv’ Mexico, Reliv’ UK (including Ireland), Reliv’ Philippines, Reliv’ Malaysia, Reliv’ Singapore, Reliv’ Brunei, Reliv’ Germany (including Austria and the Netherlands), and PT Reliv Indonesia. We have utilized this method of separate corporations in most of our markets, as local business licensing and product approvals require a local legal entity.

We believe that there is a significant opportunity to increase sales in all of our current international markets. We have established a uniform business model and compensation plan across all of our markets, and we continue to support our international markets with additional marketing programs and materials.

New Market Entry Process

We constantly evaluate new markets for our products. In order to do so, we perform an analysis of synergies between new and existing countries and distributor presence or interest in new markets, market conditions, regulatory conditions, product approval procedures and competition before selecting markets to enter. Once we decide to enter a new market, we first hire local legal counsel and/or a consultant with appropriate expertise to:

 
help ensure that our network marketing system and products comply with all applicable regulations;

 
help establish favorable public relations in the new market by acting as an intermediary between us and local regulatory authorities, public officials and business people; and

 
explain our products and product ingredients to appropriate regulators and, when necessary, to arrange 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 in our products are permissible within the new market. Where reformulation of one or more of our products is required, we attempt to obtain substitute or replacement ingredients. During the regulatory compliance process, we may alter the formulation, packaging, branding or labeling of our products to conform to applicable regulations as well as local variations in customs and consumer habits, and we may modify some aspects of our network marketing system as necessary to comply with applicable regulations.

Following completion of the regulatory compliance phase, we undertake the steps necessary to meet the operations requirements of the new market. In the majority of our new markets, we establish a sales center in a major city and provide for product purchases by telephone and/or pick up. Product is shipped to the purchaser from a warehouse located in the general geographic market or the distributor may walk in to the local office and purchase products, if a pick up center is available. In addition, we initiate plans to satisfy inventory, personnel and transportation requirements of the new market, and we modify our distributor materials, recordings, videos and other training materials as necessary to be suitable for the new market.

In some countries, regulations applicable to the activities of our distributors also may affect our business because in some countries we are, or regulators may assert that we are, responsible for our distributors’ conduct. In these countries, regulators may request or require that we take steps to ensure that our distributors comply with local regulations.

Manufacturing

We established a manufacturing line at our headquarters facility in Chesterfield, Missouri and began to manufacture all of our nutritional supplements in early 1993. We expanded our Chesterfield facility in 1997 to now include 126,000 square feet of total space. At this facility, we manufacture all of our powdered nutritional supplements for distribution both domestically and internationally. Our Slimplicity accelerator capsules and Relivables soy nuts and snack bars are manufactured by a third party and our Relivables skin care line is manufactured by a third party that is both owner and licensee of certain proprietary technology used in our skin care products.
 
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Our ability to manufacture our powdered nutritional supplements is a competitive advantage over competitors not engaged in manufacturing and contributes to our ability to provide high-quality products. Our 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 we carefully select our ingredient suppliers, we are able to control the quality of raw materials and our finished products. We have not experienced any significant difficulty in obtaining supplies of raw materials for our nutritional supplements or finished product of our Slimplicity accelerator capsules. By monitoring and testing products at all stages of the manufacturing process, we precisely control product composition. In addition, we can control costs by manufacturing our own powdered nutritional supplements.

In 1996, we received approval from the Australian Therapeutic Goods Administration, or TGA, to manufacture products sold in Australia at our Chesterfield plant. The certification of our Chesterfield site by the Australian TGA also satisfied Canadian requirements.  In 2008, our Chesterfield plant was audited and re-certified by the Australian TGA.

Fulfillment

Distributors order product in case lots of individual quantities and pay for the goods prior to shipment. We offer our Direct Advantage for distributors and their retail customers to order product in less than case lots directly from us by phone. Direct Advantage, 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. Product is shipped directly to the distributor or customer and upline distributors earn wholesale profits or, if applicable, a commission on all Direct Advantage sales.

In the United States, our products are warehoused at our Chesterfield facility and shipped by common carrier to distributors upon order. Our facility in Chesterfield, Missouri serves all parts of the country. Our products are also warehoused in, and shipped to local distributors from: Sydney, Australia; Auckland, New Zealand; Oakville, Canada; Birmingham, England; Petaling Jaya, Malaysia; Singapore; Frankfurt, Germany; Brunei; and Jakarta, Indonesia. Our Philippines subsidiary currently has approximately six product pick-up centers located throughout the country which are operated by local business contractors and a company-owned and operated business center located in Makati. In Mexico, product is warehoused in and shipped from approximately five distribution centers located throughout the country. With the exception of our Canada, New Zealand, Singapore, and German subsidiaries, each of our subsidiaries maintains an office and personnel to receive, record, and fill orders from distributors. Distributors in Ireland order and receive product from our UK subsidiary.  Distributors in Austria and the Netherlands order and receive product from our Germany distribution center.

We maintain a policy that unused product may be returned by a customer to the selling distributor for a full refund or exchange within 30 days after purchase. We also maintain a policy that any distributor who terminates his or her distributorship may return saleable product which was purchased from us within twelve months of the termination for a refund of 90% of the purchase price less any compensation received relating to the purchase of the products. We believe this buyback policy addresses and satisfies a number of regulatory compliance issues pertaining to network marketing systems.

Historically, product returns and buy backs have not been significant. Product returns and buy backs have been approximately 0.70% and 0.86% of net sales in 2009 and 2008, respectively.

Information Technology Systems

In order to facilitate our continued growth and support distributor activities, we continually upgrade our management information and telecommunication systems, along with increasing our internet-based capabilities. These systems include: (1) a centralized host computer in our Chesterfield headquarters, which is linked to our international offices via secure frame relay connections that provide real-time order entry and information to respond to distributor inquiries, as well as financial and inventory management systems; (2) local area networks of personal computers within our markets, serving our local administrative staffs; (3) an international e-mail system through which our employees communicate; (4) an Avaya telecommunication system that services the U.S. market; and (5) internet capabilities that provide a variety of online services to distributors, including product ordering, product information, event information and other related announcements, and tools to assist distributor leaders in managing their downline distributor group. We continue to pursue initiatives to increase the percentage of distributor orders placed via the internet. To accomplish this goal, we continue to make improvements to our shopping cart platform, and we have run periodic incentives to encourage distributors to place their orders via the internet. As a result of these initiatives, approximately 40% of our order volume in the U.S. is placed via internet.
 
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These systems are designed to provide financial and operating data for management, timely and accurate product ordering, generation royalty payment calculation and processing, inventory management, and detailed distributor records. We intend to continue to invest in our systems in order to help meet our business strategies.

Intellectual Property

Our formulas are protected as trade secrets and, to the extent necessary, by confidentiality agreements.  In addition, we have obtained U.S. patents on five products as set forth below:

Product
 
Patent Expiration Date
Innergize!
 
November 2012
FibRestore
 
June 2014
Cellebrate
 
June 2015
Arthaffect
 
March 2018
ReversAge
 
May 2021

Currently, we have 21 trademarks registered with the U.S. Patent and Trademark Office, or USPTO, including Reliv and the names of 15 of our 16 nutritional products. NOW for Kids is not registered with the USPTO. 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, Germany and several other foreign countries that offer network marketing opportunities. We consider our trademarks to be an important asset of our business.

Regulation

Product Regulation

The formulation, manufacturing, labeling and advertising or promotion of our products are subject to regulation by the Food and Drug Administration, or FDA, which regulates our products under the federal Food, Drug and Cosmetic Act, or FDCA, the Federal Trade Commission, or FTC, and various agencies of the states or countries into which our products are shipped or sold. FDA regulations include requirements and limitations with respect to the labeling of our food and cosmetic 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 or cosmetic. The FDCA has been amended several times with respect to dietary supplements, most recently by the Nutrition Labeling and Education Act of 1990, or NLEA, and the Dietary Supplement Health and Education Act of 1994, or DSHEA, and related regulations. Such legislation governs the formulation, manufacturing, 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 majority of the products we market are classified as dietary supplements under the FDCA. Dietary supplements such as those we manufacture and sell, for which no “drug” claim is made, are not subject to FDA approval prior to their sale. However, DSHEA established a pre-market notification process for dietary supplements that contain a “new dietary ingredient,” or NDI, a term that is defined as “a dietary ingredient that was not marketed in the United States before October 15, 1994,” the date on which DSHEA was signed into law. Certain NDIs that have been “present in the food supply” are exempt from the notification requirement. For those NDIs that are not exempt, DSHEA requires the manufacturer or distributor of a dietary supplement containing an NDI to submit to the FDA, at least 75 days prior to marketing, a notification containing the basis for concluding that the dietary supplement containing the NDI will “reasonably be expected to be safe.” Dietary supplement products can be removed from the market if shown to be unsafe, or 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. The FDA can regulate those products as “drugs” and require premarket approval of a “new drug application.” Manufacturers of dietary supplements that make any claims for dietary supplements, including product performance and health benefit claims, must have substantiation that the statements are truthful and not misleading.
 
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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 approval. They may not, without prior FDA approval, bear a claim that they can prevent, treat, cure, mitigate or diagnose disease, otherwise known as a “drug claim.” The final rule describes how the FDA will distinguish drug claims from structure/function claims. Dietary supplements, like conventional foods, are also permitted to make “health claims,” which are claims that are exempt from regulation as “drug” claims pursuant to the amendments to the FDCA established by the NLEA in 1990. A “health claim” is a claim, ordinarily approved by FDA regulation, on a food or dietary supplement product’s labeling that “characterizes the relationship of any substance to a disease or health-related condition.” To help assure that foods, dietary supplements and cosmetics comply with the provisions of the FDCA and FDA’s regulations, the FDA has numerous enforcement tools, including the ability to issue warning letters, initiate product seizures and injunctions and pursue criminal penalties.

The manufacture of dietary supplements is subject to existing FDA current good manufacturing practice, or cGMP, regulations for food.  In June 2007, the FDA issued new regulations relating to more detailed cGMP specifically for dietary supplements.  Under the new regulations, we qualified as a small business and were not subject to the regulations until June 2009.  We have evaluated our systems and facilities in light of the regulations and believe we are in full compliance.

Advertisements for our products are 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, cosmetics or foods, including dietary supplements, is an unfair or deceptive practice. Under the FTC’s substantiation doctrine, an advertiser must have a “reasonable basis” for all claims made about a product. The 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, we endeavor to assure that we have adequate substantiation for all advertising claims made for our products. In addition, the FTC has increased its scrutiny of the use of distributor testimonials. Although it is impossible for us to monitor all the product claims made by our independent distributors, we make efforts to monitor distributor testimonials and restrict inappropriate distributor claims. The FTC has been more aggressive in pursuing enforcement against dietary supplement products since the passage of DSHEA in 1994, and has brought numerous actions against dietary supplement companies, some resulting in several million dollar civil penalties and/or restitution as well as court-ordered injunctions.

We are aware that, in some of our international markets, there has been recent adverse publicity concerning products that contain substances generally referred to as “genetically modified organisms,” or GMOs. In some markets, the possibility of health risks thought to be associated with GMOs has prompted proposed or actual governmental regulation. When necessary, we have responded to government regulations that forbid products containing GMOs by changing certain unacceptable ingredients to non-GMO substitutes. Some of our products in certain markets still contain substances that would be or might be classified as GMOs. We cannot anticipate the extent to which future regulations in these markets will restrict the use of GMOs in our products or the impact of any regulations on our business in those markets. In response to any applicable future regulations, we intend to reformulate our products to satisfy the regulations. Compliance with regulatory requirements in this area should not have a material adverse effect on our business.

Sales Program Regulation

Our 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 we conduct business. Various state agencies regulate multi-level distribution services. We are required to register with, and submit information to, certain of such agencies and we believe we have complied fully with such requirements. We actively strive to comply with all applicable state and federal laws and regulations affecting our products and our sales and distribution programs. The Attorneys General of several states have taken an active role in investigating and prosecuting companies whose compensation plans they claim violate local anti-pyramid and/or consumer protection statutes. We are unable to predict the effect such increased activity will have on our business in the future nor are we able to predict the probability of future laws, regulations or interpretations which may be passed by state or federal regulatory authorities.
 
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Federal and state laws directed at network marketing programs have been adopted throughout the years to prevent the use of fraudulent practices often characterized as “pyramid schemes.” 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. We have obtained approval of our marketing program as required in all of the markets where we operate and do so for each country we enter.

We believe that our network marketing system satisfies the standards and case law defining a legal marketing system. It is an ongoing part of our business to monitor and respond to regulatory and legal developments, including those that may affect our network marketing system. However, the regulatory and legal requirements concerning network marketing systems do not include “bright line” rules and are inherently fact-based.

Competition

The business of developing and distributing nutritional and skin care products such as those we offer is highly competitive. Numerous manufacturers, distributors and retailers compete for consumers and, in the case of other network marketing companies, for distributors. Our competitors include both network marketing companies such as Alticor Inc. (Amway Corp.), Avon Products Inc., Herbalife Ltd., Mary Kay Inc., Melaleuca, Inc., Mannatech, Inc., Nature’s Sunshine Products Inc., NuSkin Enterprises Inc. and USANA Health Sciences Inc., as well as specialty and mass retail establishments. Our ability to remain competitive depends on the underlying science and high quality of our products and our success in recruiting and retaining distributors. The pool of individuals interested in network marketing tends to be limited in each market and may be reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. We believe that we offer a rewarding compensation plan with attractive financial benefits to compete for the time, attention and commitment of distributors. Our compensation plan is seamless, permitting international expansion.

Reliv NOW and Reliv Classic compete with numerous supplements that offer multi-vitamin benefits. The Reliv Ultrim-Plus, Slimplicity and Cellebrate products compete with other products in the weight loss market, including nationally advertised products such as SlimFast. Many companies have entered, or have plans to enter, the sports drink market in which Innergize! and ProVantage compete, a market led by Gatorade. With Arthaffect, FibRestore, ReversAge, GlucAffect, CardioSentials, SoySentials and the Relivables skin care and food products, we are in the specific wellness needs, food and anti-aging markets, which are extremely competitive and led by the major food and skin care companies.

Employees

As of December 31, 2009, we and all of our subsidiaries had approximately 239 full-time employees compared with 247 such employees at the end of 2008.

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.
 
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Item No. 2 – Properties

We own approximately six acres of land and a building containing approximately 126,000 square feet of office, manufacturing and warehouse space located in Chesterfield, Missouri, where we maintain our corporate headquarters and sole manufacturing facility. We believe that our 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, 2009:

Location
 
Nature of Use
 
Square Feet
 
Owned/Leased
             
Chesterfield, MO, USA
 
corporate headquarters/call center/manufacturing/warehouse
    126,000  
Owned
Seven Hills (Sydney), Australia
 
central office/ warehouse/distribution
    8,900  
Leased
Oakville, Ontario, Canada
 
warehouse/distribution
    2,100  
Leased
Mexico City, Mexico
 
central office/ warehouse/distribution
    28,000  
Leased
Makati City (Manila), Philippines
 
central office/ warehouse/distribution
    3,900  
Leased
Birmingham, England, UK
 
central office/ warehouse/distribution
    2,200  
Leased
Petaling Jaya, Malaysia
 
central office/call center warehouse/distribution
    4,000  
Leased
Dietzenbach (Frankfurt), Germany
 
warehouse/distribution
    8,300  
Leased
Jakarta, Indonesia
 
central office/ warehouse/distribution
    1,600  
Leased

Item No. 3 - Legal Proceedings
 
From time to time, we are involved in litigation incidental to the conduct of our business.  We do not believe that any current proceedings will have a material adverse effect on our business, financial condition, results of operations or cash flows.

Item No. 4 - (Removed and Reserved)

PART II

Item No. 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the NASDAQ Global Select Market under the symbol: RELV.  The following table sets forth the high and low sales prices of our common stock and the quarterly dividends per share paid on our common stock during the years ended December 31, 2009 and 2008.

   
High
   
Low
   
Dividend
 
                   
Year Ending December 31, 2009
                 
Fourth Quarter
  $ 3.75     $ 2.97     $ 0.02  
Third Quarter
    4.12       2.85       -  
Second Quarter
    4.80       2.08       0.05  
First Quarter
    5.04       3.40       -  
                         
Year Ending December 31, 2008
                       
Fourth Quarter
  $ 5.95     $ 3.85     $ 0.05  
Third Quarter
    6.90       5.00       -  
Second Quarter
    7.47       5.45       0.05  
First Quarter
    8.75       6.03       -  
 
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As of March 1, 2010, there were approximately 1,899 holders of record of our common stock and an additional 4,000 beneficial owners, including shares of common stock held in street name.

During the fourth quarter of 2009, we did not repurchase any shares of our common stock under our share repurchase plan authorized by our Board of Directors in May 2007 that provides for share repurchases of up to $15 million through April 2010.  The amount still available for purchase under this plan is approximately $12 million as of December 31, 2009.

Item No. 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K.  The following discussion and analysis discusses the financial condition and results of our operations on a consolidated basis, unless otherwise indicated.

 
Overview

 
We are a developer, manufacturer and marketer of a proprietary line of nutritional supplements addressing basic nutrition, specific wellness needs, weight management and sports nutrition. We also offer a line of skin care and food products under our Relivables brand. We sell our products through an international network marketing system utilizing independent distributors. Sales in the United States represented approximately 87.9% of worldwide net sales for the year ended December 31, 2009 compared to approximately 87.0% for the year ended December 31, 2008. Our international operations currently generate sales through distributor networks in Australia, Canada, Germany, Indonesia, Ireland, Malaysia, Mexico, New Zealand, the Philippines, Singapore and the United Kingdom.  We also operate on a limited basis in Austria and the Netherlands from our German distribution center and in Brunei from our Malaysia office.

We derive our revenues principally through product sales made by our global independent distributor base, which, as of December 31, 2009, consisted of approximately 67,940 distributors. Our sales can be affected by several factors, including our ability to attract new distributors and retain our existing distributor base, our ability to properly train and motivate our distributor base and our ability to develop new products and successfully maintain our current product line.

All of our sales to distributors outside the United States are made in the respective local currency; therefore, our earnings and cash flows are subject to fluctuations due to changes in foreign currency rates as compared to the U.S. dollar. As a result, exchange rate fluctuations may have an effect on sales and gross margins. Accounting practices require that our results from operations be converted to U.S. dollars for reporting purposes. Consequently, our reported earnings 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 us for sale to our foreign subsidiaries are transacted in U.S. dollars. From time to time, we enter into foreign exchange forward contracts to mitigate our foreign currency exchange risk.

Components of Net Sales and Expense

Product sales represent the actual product purchase price typically paid by our distributors, after giving effect to distributor allowances, which can range between 20% to 40% of suggested retail price, depending on the rank of a particular distributor.  Handling and freight income represents the amounts billed to distributors for shipping costs.  We record net sales and the related commission expense when the merchandise is shipped.

Our primary expenses include cost of products sold, distributor royalties and commissions and selling, general and administrative expenses.

Cost of products sold primarily consists of expenses related to raw materials, labor, quality control and overhead directly associated with production of our products and sales materials, as well as shipping costs relating to the shipment of products to distributors, and duties and taxes associated with product exports.  Cost of products sold is impacted by the cost of the ingredients used in our products, the cost of shipping distributors’ orders, along with our efficiency in managing the production of our products.

 
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Distributor royalties and commissions are monthly payments made to Master Affiliates and above, based on products sold in their downline organization. Based on our distributor agreements, these expenses typically approximate 23% of sales at suggested retail. Also, we include other sales leadership bonuses, such as Ambassador bonuses, in this line item. Distributor royalties and commissions are directly related to the level of our sales and, absent any changes in our distributor compensation plan, should continue at comparable levels as a percentage of net sales as in recent periods. However, in 2008, we adjusted the commission structure on our newest product, GlucAffect, and other higher priced products in our line.  We reduced the value of the product used to determine purchase discounts and commission payouts on these products.  This, in turn, allows us to sell these products at a lower suggested retail price.  This adjustment appears as a slight reduction in the percentage of distributor royalties and commissions as a percentage of net sales.  

Selling, general and administrative expenses include the compensation and benefits paid to our employees, all other selling expenses, marketing, promotional expenses, travel and other corporate administrative expenses. These other corporate administrative expenses include professional fees, depreciation and amortization, occupancy costs, communication costs and other similar operating expenses. Selling, general and administrative expenses can be affected by a number of factors, including staffing levels and the cost of providing competitive salaries and benefits; the amount we decide to invest in distributor training and motivational initiatives; the cost of regulatory compliance, such as the costs incurred to comply with the various provisions of the Sarbanes-Oxley Act of 2002; and other administrative costs.

Results of Operations

               The following table sets forth selected results of our operations expressed as a percentage of net sales for the years ended December 31, 2009 and 2008. Our results of operations for the periods described below are not necessarily indicative of results of operations for future periods.
 
   
2009
   
2008
 
             
Net sales
    100.0 %     100.0 %
Costs and expenses:
               
Cost of products sold
    19.7       17.8  
Distributor royalties and commissions
    37.7       38.9  
Selling, general and administrative
    38.1       37.5  
                 
Income from operations
    4.5       5.8  
Interest income
    0.1       0.3  
Interest expense
    (0.3 )     (0.0 )
Loss on limited partnership investment
    0.0       (0.6 )
Other income
    0.4       0.0  
                 
Income before income taxes
    4.7       5.5  
Provision for income taxes
    1.7       2.6  
                 
Net income
    3.0 %     2.9 %
 
 
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Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

Net Sales.  Overall, sales decreased by 13.0% worldwide, as sales in the United States decreased by 12.1% in the year ended December 31, 2009 compared to 2008.  During 2009, our international sales decreased by 19.2% over the prior year. All of our international markets showed a decrease in sales during 2009 compared to the prior year.

The following table summarizes net sales by geographic market for the years ended December 31, 2009 and 2008. Beginning in 2009, we have condensed the sales and distributor count data for the various countries where we operate within Europe and Asia into single line items for each region.
 
   
Year Ended December 31,
       
   
2009
   
2008
   
Change from prior year
 
   
Amount
   
% of Net
Sales
   
Amount
   
% of Net
Sales
   
Amount
   
%
 
   
(dollars in thousands)
 
United States
  $ 75,041       87.9 %   $ 85,382       87.0 %   $ (10,341 )     (12.1 )%
Australia/New Zealand
    2,459       2.9       2,681       2.7       (222 )     (8.3 )
Canada
    1,548       1.8       1,660       1.7       (112 )     (6.7 )
Mexico
    1,371       1.6       1,543       1.6       (172 )     (11.1 )
Europe
    1,335       1.5       1,528       1.5       (193 )     (12.6 )
Asia
    3,645       4.3       5,401       5.5       (1,756     (32.5
Consolidated total
  $ 85,399       100.0 %   $ 98,195       100.0 %   $ (12,796 )     (13.0 )%

The following table sets forth, as of December 31, 2009 and 2008, the number of our active distributors and Master Affiliates and above.  The total number of active distributors includes Master Affiliates and above. We define an active distributor as one that enrolls as a distributor or renews its distributorship during the prior twelve months.  Master Affiliates and above are distributors that have attained the highest level of discount and are eligible for royalties generated by Master Affiliates and above in their downline organization.  Growth in the number of active distributors and Master Affiliates and above is a key factor in continuing the growth of our business.

   
December 31, 2009
   
December 31, 2008
   
% Change
 
   
Active
Distributors
   
Master
Affiliates and
Above
   
Active
Distributors
   
Master
Affiliates and
Above
   
Active
Distributors
   
Master
Affiliates and
Above
 
                                     
United States
    54,040       8,640       53,450       10,910       1.1 %     (20.8 )%
Australia/New Zealand
    2,540       210       2,390       240       6.3       (12.5 )
Canada
    1,170       140       1,260       170       (7.1 )     (17.6 )
Mexico
    2,200       260       1,480       240       48.6       8.3  
Europe
    1,150       180       1,100       200       4.5       (10.0 )
Asia
    6,840       720       7,660       1,040       (10.7 )     (30.8 )
Consolidated total
    67,940       10,150       67,340       12,800       0.9 %     (20.7 )%

Sales in the United States continue to be adversely impacted by the downturn in the economy.  First, the broad reduction in consumer spending in the United States has negatively impacted our sales.  Second, we believe the credit problems in the U.S. financial markets, and the reduced availability of consumer credit, continue to play a role in our sales decline, resulting in the lower number of distributors qualifying for the level of Master Affiliate.     In 2009, approximately 2,570 distributors qualified as new Master Affiliates and 55.6% of the Master Affiliates and above as of December 31, 2008 requalified as Master Affiliates and above during 2009.  This compares to approximately 3,890 new Master Affiliates and a requalification rate of 50.5% in 2008.  The net number of Master Affiliates and above as of December 31, 2009 decreased by 20.8%, compared to the number as of December 31, 2008.

Another impact to our business of the downturn in the economy is the average order size.   In the United States during 2009, we processed approximately 275,000 orders for products at an average order of $353 at suggested retail.  In 2008, we processed approximately 284,000 product orders at an average order of $388 at suggested retail.  This decline in the average order size is another indicator of the impact of the current economic conditions and a contributing factor in the lower numbers of distributors reaching the Master Affiliate level.

 
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The net number of active Distributors in the United States as of December 31, 2009 increased by 1.1% to 54,040, compared to the number of active Distributors as of December 31, 2008. In January 2009, we launched an initiative to increase new distributor enrollments by offering an enrollment fee of $20, half of the normal $39.95 fee. This initiative ran through August 2009 and again during the month of December 2009. As a result of this initiative in 2009, approximately 19,580 new distributors were enrolled in the United States, as compared to approximately 17,200 in 2008. Distributor retention in the United States remained fairly steady at approximately 63.1% for 2009 compared to a rate of 64.7% for 2008.

At our international distributor conference held in St. Louis, Missouri in August 2009, we introduced a new line of products called Relivables that include a broader, improved skincare line with both women’s and men’s products; a sunscreen; a soy milk product; and an all-natural sweetener. Net sales of the new Relivables line were $590,000 in the second half of 2009.

During the year ended December 31, 2009, net sales in our international operations decreased in aggregate by 19.2% to $10.36 million compared to $12.81 million for the year ended December 31, 2008. Net sales decreased in all of our international markets; however, the most significant decrease took place in our Asian markets, where net sales in 2009 decreased by 32.5% When net sales for the full year of 2009 are converted using the 2008 exchange rate for both 2009 and 2008, international net sales decreased by 10.3% for 2009 compared to the prior year. The average exchange rate for the U.S. dollar for all of 2009 was stronger against all currencies of the countries we conduct business, compared to the average exchange rates for all of 2008.

Net sales in the Australia/New Zealand market decreased by 8.3% in 2009 compared to 2008. New distributor enrollments were 952 in 2009 compared to 808 in 2008. In 2009, 67 distributors qualified as new Master Affiliates, the same number when compared to the prior year. When net sales are converted using the 2008 exchange rate for both 2009 and 2008, net sales in this market increased by 0.9%. Net income for the Australia/New Zealand market was $7,000 in 2009, compared to net income of $45,000 in 2008. In February 2009, the Slimplicity weight control line was introduced in the Australia/New Zealand market. It is marketed under the name, Slimsimply, in this region due to local trademark restrictions.

Net sales in Canada decreased by 6.7% in 2009 compared to 2008. When measured in local currency, Canadian net sales increased by 0.7% in 2009 compared to 2008, as sales remained consistent when compared to distributor activity. New distributor enrollments were 476 in 2009 compared to 474 in 2008. In 2009, 48 distributors qualified as new Master Affiliates, compared to 60 in the prior year. Net income in Canada was $35,000 for 2009, compared to a net loss of $147,000 in 2008. This change was primarily due to foreign currency transaction gains of $126,000 for all of 2009, compared to transaction losses of $91,000 for 2008.

Net sales in Mexico decreased 11.1% in 2009 compared to 2008. New distributor enrollments were 1,700 in 2009 compared to 1,007 in 2008, and 140 distributors qualified as new Master Affiliates in 2009, compared to 132 in the prior year. When measured in local currency, 2009 net sales increased by 8.5%, as the Mexican peso weakened slightly on average for 2009 when compared to the U.S. dollar. The net loss in Mexico for 2009 was $316,000, compared to a net loss of $405,000 in 2008. The net loss decrease in 2009 is primarily due to the weaker Mexican peso.

Our European region includes sales from operations in United Kingdom, Ireland, Germany, Austria and the Netherlands. Net sales in Europe decreased by 12.6% for 2009 compared to 2008. However, when measured in local currency, net sales in Europe increased by 1.1% in 2009 compared to the prior year. New distributor enrollments were 617 in 2009 compared to 457 in 2008, and 96 distributors qualified as new Master Affiliates in 2009, compared to 73 in 2008. The net loss incurred in Europe was $478,000 in 2009, compared to a net loss of $872,000 in 2008. During the second quarter of 2008, we centralized all European call center and administrative functions to our office in the United Kingdom. While our corporate office in Germany was closed, our distribution facility there continued to ship product orders for the European continent. The improvement in the net loss is primarily due to the reduction in SG&A expenses as a result of the restructuring.

 
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Our Asian region includes sales from operations from the Philippines, Malaysia, Singapore, Brunei, and Indonesia.  Net sales in Asia decreased by 32.5% in 2009 compared to the prior year.  New distributor enrollments were 4,941 in 2009 compared to 5,885 in 2008, and 336 distributors qualified as new Master Affiliates in 2009, compared to 718 in 2008.  When measured in local currency, 2009 net sales decreased by 27.8%.  Activity declined in Malaysia, in particular, as a number of our distributors did not remain active with us and left for other competing direct selling companies.  The net loss in Asia for 2009 was $437,000, compared to a net loss of $235,000 in 2008, as the result of decline in sales.  Our sales manager for the Malaysia/Singapore/Brunei markets is no longer employed by us, and we are in the process of replacing that position on a permanent basis.

Cost of Products Sold. Cost of products sold as a percentage of net sales increased to 19.7% for the year ended December 31, 2009 compared to 17.8% for the year ended December 31, 2008.  Gross margins declined in 2009 compared to 2008 due to changes in revenue mix, raw material price increases, increased reformulation costs in some products, and lower production levels corresponding with the decrease in sales.

Distributor Royalties and Commissions. Distributor royalties and commissions as a percentage of net sales decreased slightly to 37.7% for the year ended December 31, 2009 compared to 38.9% for the same period in 2008. The decrease as a percentage of net sales is the result of changes made to our commission payout structure on GlucAffect and certain other higher priced products in our line beginning with the fourth quarter of 2008 and first quarter of 2009, along with the new Relivables product line.

Selling, General and Administrative Expenses. For 2009, selling, general and administrative, or SGA, expenses decreased by $4.32 million compared to 2008.  However, SGA expenses as a percentage of net sales increased slightly to 38.1% in 2009 compared to 37.5% in 2008, as a function of the 13% decline in consolidated net sales.

Sales expenses decreased by $1.62 million in 2009. Of that amount, $951,000 represented the decrease in expenses directly related to sales volume, such as star director bonuses, other sales production bonuses, and credit card fees. Marketing expenses decreased by $799,000 in 2009 compared to 2008. Components of the change included a decrease of $235,000 for our international and regional leadership conferences, a decrease of $442,000 in promotional bonuses and trips, and a decrease of $52,000 for distributor newsletter costs.

Distribution and warehouse expenses decreased by $305,000, primarily from lower wages and a decrease in the cost of shipping supplies.  General and administrative expenses decreased by approximately $1.60 million in 2009 compared to 2008.  Significant decreases were in salaries, incentive compensation expense and benefits of $496,000, general travel expenses of $180,000, utilities expenses of $185,000, facility and equipment lease expenses of $175,000; legal, accounting and professional fees of $139,000; business insurance expenses of $94,000; and directors’ fees of $53,000.  Amortization expense increased by $69,000, related to intangible assets associated with the acquisition of a Reliv distributorship.  This transaction is described in greater detail in the Financial Condition section below.

Interest Income/Expense. Interest income decreased to $52,000 for the year ended December 31, 2009, compared to $328,000 for the same period in 2008.  The decrease in interest income is the result of lower interest rates and lower investable balances during 2009.  Interest expense increased to $174,000 for 2009 compared to $37,000 for 2008, as we entered into two long-term debt agreements during 2009.

Loss on investment in a limited partnership. We invested $1 million as a limited partner in a private equity fund during 2006.  We recognized unrealized gains of $52,000 and $32,000 in 2007 and 2006, respectively, based on our share of the market value of the investments net of expenses accrued in the fund.  During 2008, we incurred an unrealized loss of $596,000 on our investment.  During the first quarter of 2009, the fund was liquidated and we received back our net recorded December 31, 2008 account balance of $489,000.

Income Taxes. We recorded income tax expense of $1.47 million for 2009, representing an effective rate of 36.9%. In 2008, we recorded income tax expense of $2.51 million, representing an effective rate of 46.6%.  The higher effective rate in 2008 was the result of 2008 capital losses incurred on the limited partnership investment and other investments for which we do not expect to have sufficient future capital gains to offset and, therefore, had placed a valuation allowance on the income tax benefit of these capital losses.

 
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Net Income. Our net income decreased to $2.52 million ($0.20 per share basic and diluted) for the year ended December 31, 2009 compared to $2.88 million ($0.19 per share basic and diluted) for 2008. Profitability decreased commensurate with the decrease in net sales in the United States, as discussed above, offset by the reduction in the net loss from international operations. Earnings per share in 2009 benefited from a significant stock purchase during the year. Net income in the United States was $3.70 million in 2009, compared to $4.50 million in 2008.  The net loss from international operations was $1.19 million in 2009, compared a net loss of $1.61 million in 2008.

Financial Condition, Liquidity and Capital Resources

We generated $5.51 million of net cash during 2009 from operating activities, $761,000 was used in investing activities, and we used $3.65 million in financing activities. This compares to $3.75 million of net cash provided by operating activities, $503,000 used in investing activities, and $10.29 million used in financing activities in 2008.  Cash and cash equivalents increased by $1.30 million to $5.76 million as of December 31, 2009 compared to December 31, 2008.

Significant changes in working capital items consisted of a decrease in accounts and notes receivable and accounts due from employees and distributors of $506,000, a decrease in inventory of $1.24 million, and a decrease in accounts payable and accrued expenses of $604,000 in 2009.  Accounts and notes receivable decreased due to collections on VAT refunds due to us in Mexico and the balance of a loan to a distributor was credited to the purchase price of their distributorship.  The decrease in inventory is primarily due to the result of a planned reduction in production levels to better align inventory with current sales levels.  The decrease in accounts payable and accrued expenses is related to a lower level of payables with production vendors, consistent with the decrease in inventory.  Furthermore, accrued commission expense is approximately $135,000 lower at the end of 2009 compared to the end of 2008.

Our net investing activities included $534,000 and $901,000 in net capital expenditures for the years ended December 31, 2009 and 2008, respectively.  Investing activities in 2009 also included $716,000 in cash and the loan balance credited to the purchase of a distributorship, along with proceeds of $489,000 from the final withdrawal in a limited partnership investment. Investing activities for 2008 also included net proceeds of $399,000 in short-term investments.  

 Financing activities in 2009 included $5.01 million in payments for purchases of our common stock into treasury and $856,000 in common stock dividends paid. We borrowed $6.00 million on our line of credit in April 2009 through July 2009, which was repaid in full by November 2009.  We also incurred long-term debt of $4.12 million, offset by repayments of $1.90 million in 2009.  Financing activities in 2008 included $8.79 million in purchases of our common stock into treasury and $1.51 million in common stock dividends paid.  We also borrowed $4.00 million on our line of credit in July 2008, which was repaid in full by September 2008.

Stockholders’ equity decreased to $12.27 million at December 31, 2009 compared with $16.11 million at December 31, 2008. The decrease is due to the purchase of treasury stock from a significant shareholder for $6.12 million and our cash dividend of $856,000 for 2009, offset by our net income of $2.52 million for 2009.  Other changes to equity include the contribution of treasury shares to our ESOP of $465,000, and other equity-based compensation of $121,000.

Our working capital balance was $5.47 million at December 31, 2009 compared to $6.25 million at December 31, 2008. The current ratio at December 31, 2009 was 1.81 compared to 1.85 at previous year-end.

In late June 2009, we entered into a term loan with our primary lender in the principal amount of $4.12 million.  The term of the loan is for a period of two years with interest accruing on the outstanding principal balance at a floating interest rate based on the 30-day LIBOR plus 3.0%, subject to a 3.75% floor.  As of December 31, 2009, we are subject to the 3.75% floor.  Monthly principal and interest payments are based on a ten-year amortization.  The aggregate outstanding balance of principal and interest is due and payable on June 29, 2011.  The loan includes revised financial covenants under which we are required to (1) maintain at all times a tangible net worth of not less than $10 million and (2) maintain at all times a ratio of total funded debt to EBITDA of not greater than 2.5 to 1.  The proceeds of the term loan were used to reduce the outstanding balance on the revolving credit facility we have with the lender.

 
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The revolving credit facility is a $5 million secured revolving credit facility with the same lender that provided our term loan. This facility was renewed in September 2009 for a one-year term, and any advances accrue interest at a variable interest rate based on the 30-day LIBOR plus 3.0%, subject to a 4.0% floor. The term loan and revolving credit facility are secured by all of our tangible and intangible assets and also by a mortgage on our building and real estate located in Chesterfield, Missouri. This facility bears the same financial covenants as the term loan. At December 31, 2009, we had no outstanding borrowings on the revolving line of credit facility and were in compliance with all financial covenants.

On August 31, 2009, we acquired an independent Reliv distributorship from its owner for an aggregate purchase price of $2,060,000.  We paid $500,000 of the purchase price to the owner at closing, credited the owner’s $216,119 outstanding loan balance due to us, and will pay the balance of the purchase price, $1,343,881, over a period of seven years at an annual rate of 5% with monthly payments of principal and interest totaling $18,994.

Management believes that our internally generated funds coupled with the bank loan facilities will be sufficient to meet working capital requirements for the remainder of 2010.

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.

Revenue

We receive payment by credit card, personal check, or guaranteed funds for orders from independent distributors and make related commission payments in the following month. Net sales reflect product sales at suggested retail price less the distributor discount of 20% to 40%. 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 FASB ASC, Topic 650-50, “Revenue Recognition-Customer Payments and Incentives,” we present 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.  We estimate and accrue a reserve for product returns based on our return policy and historical experience. Our return policy allows for distributors to return product only upon termination of his or her distributorship.  Allowable returns are limited to saleable product which was purchased within twelve months of the termination for a refund of 90% of the original purchase price less any distributor royalties and commission received relating to the original purchase of the returned products. Total returns have been approximately 0.70% and 0.86% of net sales in 2009 and 2008, respectively.  We record handling and freight income as a component of net sales and record handling and freight costs as a component of cost of products sold.  Total revenues do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting applicable sales taxes.

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, we review our inventory levels in each country for estimated obsolescence or unmarketable items, as compared to future demand requirements and the shelf life of the various products. Based on this review, we record inventory write-downs when costs exceed expected net realizable value. Historically, our estimates of obsolete or unmarketable items have been materially accurate.

Sales aids and promotional materials inventories represent distributor kits, product brochures, and other sales and business development materials which are held for sale to distributors.  Costs of the sales aids and promotional materials held for sale are capitalized as inventories and subsequently recorded to cost of goods sold upon recognition of revenue when sold to distributors.  All other advertising and promotional costs are expensed when incurred.

 
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Foreign Currency Translation

All balance sheet accounts are translated using the exchange rates in effect at the balance sheet date. Statements of operations amounts are translated using the average exchange rate for the year-to-date periods. The gains and losses resulting from the changes in exchange rates during the period have been reported in other comprehensive loss. Foreign currency translation adjustments exclude income tax expense (benefit) given that our 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 FASB ASC Topic 450, “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.

Stock-Based Compensation

We have stock-based incentive plans which may grant stock option, restricted stock, and unrestricted stock awards.  We recognize stock-based compensation expense based on the grant date fair value of the award and the related vesting terms as proscribed in FASB ASC Topic 718, “Compensation-Stock Compensation.”  We use the Black-Scholes option pricing model to determine the fair value of stock options which requires us to estimate certain key assumptions.  For the years ended December 31, 2009 and 2008, we incurred employee stock-based compensation cost of $192,000 ($126,000 net of tax), and $186,000 ($123,000 net of tax), respectively.

Income Tax Matters

We account for income taxes in accordance with FASB ASC Topic 740, “Income Taxes,” (ASC Topic 740) which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities.  ASC Topic 740 also requires that deferred tax assets be reduced by a valuation allowance if it is “more likely than not” that some portion or all of the deferred tax asset will not be realized.  In our annual evaluation of the need for a valuation allowance, we take into account various factors, including the expected level of future taxable income and available tax planning strategies.  If actual results differ from the assumptions made in our annual evaluation of our valuation allowance, we may record a change in valuation allowance through income tax expense in the period this determination is made.

At December 31, 2009, we had deferred tax assets related to net operating loss carryforwards and other income tax credits with a tax value of $3.94 million. These net operating loss carryforwards have various expiration dates, depending on the country and period in which they occurred. A valuation allowance of $3.94 million has been established for these deferred tax assets based on projected future taxable income and the expiration dates of these carryforwards.

At December 31, 2009, we also had deferred tax assets related to 2008 capital losses on investments with a tax value of $343,000. We have established a corresponding valuation allowance of $343,000 against this deferred tax asset as we do not anticipate having sufficient future capital gains to offset these capital losses.

 
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The calculations of our tax liabilities involve dealing with uncertainties in the application of complex tax regulations. On January 1, 2007, we adopted provisions of ASC Topic 740 related to uncertain tax positions. As a result of the implementation of the provisions, we recognize liabilities for uncertain tax positions based on the two-step process prescribed in the guidance. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, or new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

Fair Value

Effective January 1, 2008, we adopted the provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” (ASC Topic 820) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements required under other accounting pronouncements.  ASC Topic 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  ASC Topic 820 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or liability based on the best information available.  Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model.  The adoption of ASC Topic 820 did not have a significant impact on our consolidated financial statements.

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(T) - Controls and Procedures

Effectiveness of  Controls and Procedures

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has reviewed and evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009.  Based on such review and evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of December 31, 2009, to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (a) is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms and (b) is accumulated and communicated to our management, including the officers, as appropriate to allow timely decisions regarding required disclosure.  There were no material changes in our internal control over financial reporting during the fourth quarter of 2009 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting.  Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operation effectiveness of controls and a conclusion on this evaluation.  Although there are inherent limitations in the effectiveness of any system of internal control over financial reporting, based on our evaluation, management has concluded our internal controls over financial reporting were effective as of December 31, 2009.

 
26

 

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

Item No. 9B - Other Information

None

PART III

Item No. 10 - Directors and Executive Officers of the Registrant

Information called for by Item 10 of Part III is incorporated by reference to the definitive Proxy Statement for the 2010 Annual Meeting of Shareholders to be held on May 20, 2010, which is expected to be filed with the Commission within 120 days after December 31, 2009.

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 2010 Annual Meeting of Shareholders to be held on May 20, 2010, which is expected to be filed with the Commission within 120 days after December 31, 2009.

Item No. 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information called for by Item 12 of Part III is incorporated by reference to the definitive Proxy Statement for the 2010 Annual Meeting of Shareholders to be held on May 20, 2010, which is expected to be filed with the Commission within 120 days after December 31, 2009.

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 2010 Annual Meeting of Shareholders to be held on May 20, 2010, which is expected to be filed with the Commission within 120 days after December 31, 2009.

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 2010 Annual Meeting of Shareholders to be held on May 20, 2010, which is expected to be filed with the Commission within 120 days after December 31, 2009.

PART IV

Item No. 15 - Exhibits and Financial Statement Schedules

 
(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.
Financial schedules required to be filed by Item 8 of this form, and by Item 15(d) below:

All other financial schedules are not required under the related instructions or are inapplicable and therefore have been omitted.

 
27

 

 
3.
Exhibits:

   
Number
 
Document
     
3.1
 
Second Amended and Restated Certificate of Incorporation (incorporated by reference to Appendix B of Schedule 14A of the Registrant filed on April 17, 2003).
     
3.2
 
By-Laws (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).
     
3.3
 
Amendment to By-Laws dated March 22, 2001 (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).
     
3.4
 
Certificate of Designation to Create a Class of Series A Preferred Stock for Reliv’ International, Inc. (incorporated by reference to Exhibit 3.1 to the Form 10-Q of the Registrant for quarter ended March 31, 2003).
     
4.1
 
Form of Reliv International, Inc. common stock certificate (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).
     
10.1
 
Amended Exclusive License Agreement with Theodore P. Kalogris dated December 1, 1991 (incorporated by reference to Exhibit 10.1 to the Form 10-K of the Registrant for the year ended December 31, 1992).
     
10.2*
 
Robert L. Montgomery Employment Agreement dated June 19, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed June 25, 2007).
     
10.3*
 
Carl W. Hastings Employment Agreement dated July 26, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed July 27, 2007).
     
10.4
 
Letter Agreement with Southwest Bank of St. Louis dated June 29, 2009 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed July 6, 2009).
     
10.5
 
Promissory Note with Southwest Bank of St. Louis dated June 29, 2009 (incorporated by reference to Exhibit 10.2 to the Form 8-K of the Registrant filed July 6, 2009).
     
10.6*
 
Reliv’ International, Inc. Supplemental Executive Retirement Plan dated June 1, 1998 (incorporated by reference to Exhibit 10.19 to the Form10-K of the Registrant for year ended December 31, 1998).
     
10.7*
    
Reliv International, Inc. Employee Stock Ownership Plan and Trust dated August 24, 2006 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed August 30, 2006).
     
10.8
 
Agreement with Hydron Technologies, Inc. dated March 1, 2001 (incorporated by reference to Exhibit 10.16 to the Form 10-K of the Registrant for year ended December 31, 2001).
     
10.9*
 
Amended and Restated Distributor Stock Purchase Plan (incorporated by reference to Form S-8 Registration Statement the Registrant filed May 9, 2002).
     
10.10*
 
2003 Stock Option Plan (incorporated by reference to Form S-8 Registration Statement the Registrant filed August 13, 2003).
     
10.11*
 
Reliv International, Inc. Incentive Compensation Plan effective January 1, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed May 31, 2007).

 
28

 

10.12*
 
R. Scott Montgomery Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.13*
 
Ryan A. Montgomery Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.2 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.14*
 
Steven G. Hastings Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.3 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.15*
 
Steven D. Albright Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.4 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.16*
 
Brett M. Hastings Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.5 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.17
 
Rule 10b5-1 Stock Repurchase Plan dated June 12, 2008 between the Registrant and Canaccord Adams, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed June 13, 2008).
     
10.18
 
Stock Purchase Agreement dated July 24, 2008 by and between the Paul and Jane Meyer Family Foundation and Reliv International, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed July 30, 2008).
     
10.19
 
Stock Purchase Agreement dated July 24, 2008 by and between Centre Island Properties, Ltd. and Reliv International, Inc. (incorporated by reference to Exhibit 10.2 to the Form 8-K of the Registrant filed July 30, 2008).
     
10.20
 
Standstill Letter from Paul J. Meyer to Robert L. Montgomery dated July 25, 2008 (incorporated by reference to Exhibit 10.3 to the Form 8-K of the Registrant filed July 30, 2008).
     
10.21
 
Stock Purchase Agreement among the Paul and Jane Meyer Family Foundation and Reliv International, Inc. dated April 23, 2009 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed April 28, 2009).
     
10.22
 
Purchase Agreement by and among Michael G. Williams, Julie T. Williams and Reliv International, Inc. dated August 31, 2009 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed September 3, 2009).
     
11
 
Statement re: computation of per share earnings (incorporated by reference to Note 8 of the Consolidated Financial Statements contained in Part IV).
     
21
 
Subsidiaries of the Registrant (filed herewith).
     
23
 
Consent of Ernst & Young LLP, Independent Auditors (filed herewith).
     
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
     
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
     
32
 
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 (filed herewith).

*Indicates management compensation plan, contract or arrangement.

 
29

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RELIV’ INTERNATIONAL, INC.
  
By:   
/s/ Robert L. Montgomery
 
Robert L. Montgomery, Chairman of the Board of Directors, President and Chief Executive Officer
 
Date: March 12, 2010
 
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 12, 2010
 
By:
/s/ Steven D. Albright
 
Steven D. Albright, Chief Financial Officer (and accounting officer)
 
Date:
March 12, 2010
 
By:
/s/ Carl W. Hastings
 
Carl W. Hastings, Vice Chairman, Chief Scientific Officer, Director
 
Date: March 12, 2010
 
By:
/s/ Stephen M. Merrick
 
Stephen M. Merrick, Senior Vice President, Secretary, Director
 
Date: March 12, 2010
 
By:
/s/ Donald L. McCain
 
Donald L. McCain, Director
 
Date: March 12, 2010
 
By:
/s/ John B. Akin
 
John B. Akin, Director
 
Date: March 12, 2010
 
By:
/s/ Robert M. Henry
 
Robert M. Henry, Director
 
Date: March 12, 2010
 
By:
/s/ Denis St. John
 
Denis St. John, Director
 
Date: March 12, 2010

 
30

 
 
By:   
/s/ Michael D. Smith
 
Michael D. Smith, Director
 
Date: March 12, 2010

Exhibit Index

Exhibit
   
Number
 
Document
     
3.1
 
Second Amended and Restated Certificate of Incorporation (incorporated by reference to Appendix B of Schedule 14A of the Registrant filed on April 17, 2003).
     
3.2
 
By-Laws (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).
     
3.3
 
Amendment to By-Laws dated March 22, 2001 (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).
     
3.4
 
Certificate of Designation to Create a Class of Series A Preferred Stock for Reliv’ International, Inc. (incorporated by reference to Exhibit 3.1 to the Form 10-Q of the Registrant for quarter ended March 31, 2003).
     
4.1
 
Form of Reliv International, Inc. common stock certificate (incorporated by reference to the Registration Statement on Form S-3 of the Registrant filed on February 21, 2006).
     
10.1
 
Amended Exclusive License Agreement with Theodore P. Kalogris dated December 1, 1991 (incorporated by reference to Exhibit 10.1 to the Form 10-K of the Registrant for the year ended December 31, 1992).
     
10.2*
 
Robert L. Montgomery Employment Agreement dated June 19, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed June 25, 2007).
     
10.3*
 
Carl W. Hastings Employment Agreement dated July 26, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed July 27, 2007).
     
10.4
 
Letter Agreement with Southwest Bank of St. Louis dated June 29, 2009 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed July 6, 2009).
     
10.5
 
Promissory Note with Southwest Bank of St. Louis dated June 29, 2009 (incorporated by reference to Exhibit 10.2 to the Form 8-K of the Registrant filed July 6, 2009).
     
10.6*
 
Reliv’ International, Inc. Supplemental Executive Retirement Plan dated June 1, 1998 (incorporated by reference to Exhibit 10.19 to the Form10-K of the Registrant for year ended December 31, 1998).
     
10.7*
 
Reliv International, Inc. Employee Stock Ownership Plan and Trust dated August 24, 2006 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed August 30, 2006).
     
10.8
 
Agreement with Hydron Technologies, Inc. dated March 1, 2001 (incorporated by reference to Exhibit 10.16 to the Form 10-K of the Registrant for year ended December 31, 2001).
     
10.9*
 
Amended and Restated Distributor Stock Purchase Plan (incorporated by reference to Form S-8 Registration Statement the Registrant filed May 9, 2002).
 
31

 
10.10*
 
2003 Stock Option Plan (incorporated by reference to Form S-8 Registration Statement the Registrant filed August 13, 2003).
     
10.11*
 
Reliv International, Inc. Incentive Compensation Plan effective January 1, 2007 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed May 31, 2007).
     
10.12*
 
R. Scott Montgomery Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.13*
 
Ryan A. Montgomery Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.2 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.14*
 
Steven G. Hastings Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.3 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.15*
 
Steven D. Albright Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.4 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.16*
 
Brett M. Hastings Employment Agreement dated January 2, 2008 (incorporated by reference to Exhibit 10.5 to the Form 8-K of the Registrant filed January 4, 2008).
     
10.17
 
Rule 10b5-1 Stock Repurchase Plan dated June 12, 2008 between the Registrant and Canaccord Adams, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed June 13, 2008).
     
10.18
 
Stock Purchase Agreement dated July 24, 2008 by and between the Paul and Jane Meyer Family Foundation and Reliv International, Inc. (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed July 30, 2008).
     
10.19
 
Stock Purchase Agreement dated July 24, 2008 by and between Centre Island Properties, Ltd. and Reliv International, Inc. (incorporated by reference to Exhibit 10.2 to the Form 8-K of the Registrant filed July 30, 2008).
     
10.20
 
Standstill Letter from Paul J. Meyer to Robert L. Montgomery dated July 25, 2008 (incorporated by reference to Exhibit 10.3 to the Form 8-K of the Registrant filed July 30, 2008).
     
10.21
 
Stock Purchase Agreement among the Paul and Jane Meyer Family Foundation and Reliv International, Inc. dated April 23, 2009 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed April 28, 2009).
     
10.22
 
Purchase Agreement by and among Michael G. Williams, Julie T. Williams and Reliv International, Inc. dated August 31, 2009 (incorporated by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed September 3, 2009).
     
11
 
Statement re: computation of per share earnings (incorporated by reference to Note 8 of the Consolidated Financial Statements contained in Part IV).
     
21
 
Subsidiaries of the Registrant (filed herewith).
     
23
 
Consent of Ernst & Young LLP, Independent Auditors (filed herewith).
     
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
     
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith).
 
32

 
32
 
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 (filed herewith).
 
*Indicates management compensation plan, contract or arrangement.

 
33

 
 
Reliv’ International, Inc.
and Subsidiaries

Consolidated Financial Statements
 
Years ended December 31, 2009 and 2008

Contents

Consolidated Financial Statements:
     
Report of Independent Registered Public Accounting Firm
    F-1  
Consolidated Balance Sheets as of December 31, 2009 and 2008
    F-2  
Consolidated Statements of Income for the years ended December 31, 2009 and 2008
    F-4  
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009 and 2008
    F-5  
Consolidated Statements of Cash Flows for the years ended December 31, 2009 and 2008
    F-6  
Notes to Consolidated Financial Statements – December 31, 2009
    F-8  

 
 

 

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Reliv’ International, Inc.

We have audited the accompanying consolidated balance sheets of Reliv’ International, Inc. and Subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2009.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. We were not engaged in 2009 to perform an audit of the Company's internal control over financial reporting. Our 2009 audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

 
/s/ Ernst & Young LLP
   
St. Louis, Missouri
 
March 12, 2010
 

 
F-1

 

Reliv’ International, Inc. and Subsidiaries

Consolidated Balance Sheets

   
December 31
 
   
2009
   
2008
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 5,760,913     $ 4,460,637  
Accounts and notes receivable, less allowances of $59,700 in 2009 and $10,200 in 2008
    326,022       494,689  
Accounts due from employees and distributors
    78,500       241,532  
Inventories:
               
Finished goods
    3,073,570       3,533,371  
Raw materials
    1,388,140       1,710,319  
Sales aids and promotional materials
    622,694       978,264  
Total inventories
    5,084,404       6,221,954  
                 
Refundable income taxes
    23,789       129,137  
Prepaid expenses and other current assets
    652,544       1,525,665  
Deferred income taxes
    303,000       522,000  
Total current assets
    12,229,172       13,595,614  
                 
Other assets
    1,569,079       1,220,546  
Accounts due from employees and distributors
    -       164,462  
Intangible assets, net
    1,991,497       -  
                 
Property, plant, and equipment
    18,629,377       18,288,571  
Less accumulated depreciation
    10,264,692       9,376,414  
      8,364,685       8,912,157  
                 
Total assets
  $ 24,154,433     $ 23,892,779  

 
F-2

 

Reliv’ International, Inc. and Subsidiaries

Consolidated Balance Sheets (continued)

   
December 31
 
   
2009
   
2008
 
             
Liabilities and stockholders’ equity
           
Current liabilities:
           
Accounts payable and accrued expenses
  $ 6,242,289     $ 6,780,824  
Current maturities of long-term debt
    519,192       569,375  
Total current liabilities
    6,761,481       7,350,199  
                 
Noncurrent liabilities:
               
Long-term debt, less current maturities
    4,719,542       -  
Noncurrent deferred income taxes
    -       70,000  
Other noncurrent liabilities
    406,544       364,990  
Total noncurrent liabilities
    5,126,086       434,990  
                 
Stockholders’ equity:
               
Preferred stock, par value $0.001 per share; 3,000,000 shares authorized; -0- shares issued and outstanding in 2009 and 2008
    -       -  
Common stock, par value $0.001 per share; 30,000,000 shares authorized, 14,425,185 shares issued and 12,380,187 shares outstanding in 2009; 14,425,185 shares issued and 14,302,160 shares outstanding in 2008
    14,425       14,425  
Additional paid-in capital
    30,228,573       30,321,066  
Accumulated deficit
    (11,279,526 )     (12,938,430 )
Accumulated other comprehensive loss:
               
Foreign currency translation adjustment
    (627,704 )     (663,478 )
Treasury stock
    (6,068,902 )     (625,993 )
Total stockholders’ equity
    12,266,866       16,107,590  
                 
Total liabilities and stockholders’ equity
  $ 24,154,433     $ 23,892,779  

See accompanying notes.

 
F-3

 

Reliv’ International, Inc. and Subsidiaries

Consolidated Statements of Income

   
Year ended December 31
 
   
2009
   
2008
 
             
Product sales
  $ 75,845,599     $ 87,348,915  
Handling & freight income
    9,553,471       10,845,903  
Net sales
    85,399,070       98,194,818  
                 
Costs and expenses:
               
Cost of products sold
    16,862,622       17,437,133  
Distributor royalties and commissions
    32,172,148       38,207,889  
Selling, general, and administrative
    32,557,704       36,881,041  
Income from operations
    3,806,596       5,668,755  
                 
Other income (expense):
               
Interest income
    52,292       328,057  
Interest expense
    (173,867 )     (37,327 )
Loss on limited partnership investment
    -       (595,887 )
Other income
    300,260       30,353  
Income before income taxes
    3,985,281       5,393,951  
Provision for income taxes
    1,470,000       2,513,000  
                 
Net income available to common
               
shareholders
  $ 2,515,281     $ 2,880,951  
                 
Earnings per common share - Basic
  $ 0.20     $ 0.19  
Weighted average shares
    12,894,000       15,213,000  
                 
Earnings per common share - Diluted
  $ 0.20     $ 0.19  
Weighted average shares
    12,894,000       15,223,000  

See accompanying notes.

 
F-4

 

Reliv’ International, Inc. and Subsidiaries

Consolidated Statements of Stockholders’ Equity

                           
Accumulated
                   
               
Additional
         
Other
                   
   
Common Stock
   
Paid-In
   
Accumulated
   
Comprehensive
   
Treasury Stock
       
   
Shares
   
Amount
   
Capital
   
Deficit
   
Loss
   
Shares
   
Amount
   
Total
 
Balance at December 31, 2007
    15,877,179     $ 15,877     $ 33,100,351     $ (8,869,332 )   $ (419,179 )     3,425     $ (22,516 )   $ 23,805,201  
Net income
    -       -               2,880,951       -       -       -       2,880,951  
Other comprehensive income:
                                                               
Foreign currency translation adjustment
    -       -       -       -       (244,299 )     -       -       (244,299 )
Total comprehensive income
                                                            2,636,652  
Common stock dividends paid, $0.10 per share
    -       -       -       (1,514,016 )     -       -       -       (1,514,016 )
Warrants granted under DSPP
    -       -       92,229       -       -       -       -       92,229  
Stock-based compensation
    -       -       185,635       -       -       -       -       185,635  
Contribution of treasury shares to ESOP
    -       -       (21,073 )     -       -       (53,500 )     271,453       250,380  
Common stock purchased for treasury
    -       -       -       -       -       1,626,609       (9,357,732 )     (9,357,732 )
Retirement of treasury stock
    (1,453,509 )     (1,454 )     (3,045,315 )     (5,436,033 )     -       (1,453,509 )