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, 2001
Commission File Number
1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 371172197
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri 63005
(Address of principal executive offices) (Zip Code)
(636) 537-9715
Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
Name of each exchange
Title of Class on which registered:
-------------- ---------------------
Common Stock, par value $.001 NASDAQ National Market tier of The
NASDAQ Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. ___X___ Yes _______ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of the Form 10-K or any amendment to the Form 10-K. [ ]
Based upon the closing price of $1.75 per share of Registrant's Common
Stock as reported on NASDAQ National Market tier of The NASDAQ Stock Market at
March 15, 2002, the aggregate market value of the voting stock held by non-
affiliates of the Registrant was then approximately $9,507,369. (Determination
of stock ownership by non-affiliates was made solely for the purpose of
responding to the requirements of the Form and the Registrant is not bound by
this determination for any other purpose.)
The number of shares outstanding of the Registrant's Common Stock as of
March 15, 2002, was 9,540,651 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2002 Annual Meeting of
Shareholders to be filed with the Commission within 120 days of the end of
Registrant's last fiscal year is incorporated by reference into Part III.
INDEX
Part I
Item 1 Business........................................................ 3
Item 2 Properties...................................................... 24
Item 3 Legal Proceedings............................................... 25
Item 4 Submission of Matters to a Vote of Security Holders............. 25
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 25
Item 6 Selected Financial Data......................................... 26
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation.......................... 27
Item 7a Quantitative and Qualitative Disclosures About Market Risk...... 39
Item 8 Financial Statements and Supplementary Data..................... 40
Item 9 Changes in and Disagreements with Accountants on
Accounting Financial Disclosure............................. 40
Part III
Item 10 Directors and Executive Officers of the Registrant.............. 40
Item 11 Executive Compensation.......................................... 40
Item 12 Security Ownership of Certain Beneficial Owners
and Management.............................................. 40
Item 13 Certain Relationships and Related Transactions.................. 40
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Report on
Form 8-K.................................................... 41
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PART I
Item No. 1 - Business
Overview
Reliv International, Inc. (the "Company") produces a line of food products
including nutritional supplements, weight management products, functional foods,
granola bars, sports nutrition and a newly introduced line of skin care
products. Nutritional supplements include vitamins, minerals, dietary
supplements, herbs and compounds derived therefrom. Functional foods are
products designed to influence specific functions of the body. These products
are sold by subsidiaries of the Company to a sales force of independent
distributors who sell products directly to consumers. The Company and its
subsidiaries sell products to distributors throughout the United States,
Australia, Canada, New Zealand, Mexico, the United Kingdom, Ireland and the
Philippines.
The Company's products are distributed primarily through a network
marketing system--a system in which distributors sell products directly to
retail customers and sponsor other individuals as distributors. Distributors
derive compensation both from the direct sales of products and from sales volume
generated by sponsored distributors. Network marketing involves person to person
communication and training on the products and the system. The Company believes
this feature of network marketing is a more effective means of marketing its
products than in-store retail sales. The network marketing system provides
business opportunity to a broad cross-section of people, including those seeking
to simply supplement other income, as well as those who desire a full-time
home-based business.
The Company's stated mission is to "Nourish Our World" by offering a unique
nutritional product line which provides balanced nutrition and promotes better
health as well as by offering an extraordinary entrepreneurial opportunity which
enables financial freedom, long-term security and personal growth to its
distributors.
Background - Corporate Structure
The Company was incorporated in Illinois on February 11, 1985 and commenced
its present business in October, 1988. On April 10, 2000, the Company changed
its state of incorporation from Illinois to Delaware by the merger of the
Company into Reliv Merger Corporation, a wholly-owned subsidiary of the Company,
which was incorporated under the laws of Delaware. Reliv Merger Corporation
changed its name to Reliv International, Inc., thus the name of the Company
remained the same after the merger. Such reincorporation caused certain changes
to the Company's charter and bylaws, all of which were approved at the 1999
annual meeting of shareholders. The Company maintains its principal executive
offices and production facilities at 136 Chesterfield Industrial Boulevard,
Chesterfield, Missouri 63005.
The Company has two wholly-owned subsidiaries, Reliv', Inc. ("Reliv'") and
Reliv' World Corporation ("Reliv' World"). Reliv' World has seven subsidiaries -
Reliv' Australia Pty. Ltd, Reliv'
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Canada Company, Reliv' New Zealand Ltd., Reliv' NOW de Mexico S.A. de R.L. de
C.V., Reliv' Europe, Inc. (which owns Reliv' U.K. Limited Corporation), and
Reliv' Philippines, Inc.
Reliv' was organized as an Illinois corporation on May 24, 1988, as a
wholly-owned subsidiary of the Company, and began selling nutritional supplement
products in October, 1988, in the United States. Sales in the United States
represented approximately 84% of net sales in 2001.
In Australia, Canada, New Zealand, Mexico, the United Kingdom, Ireland and
the Philippines, the Company's products are sold through Reliv' World and its
subsidiaries in each of such countries. Reliv' World was organized as an
Illinois corporation on March 30, 1992, as a wholly-owned subsidiary of Reliv'.
Reliv' World was organized to conduct the foreign sales operations of the
Company and to own foreign sales operations and subsidiaries. On July 1, 1992,
Reliv' declared a dividend of all of the stock of Reliv' World and distributed
all of such stock to its sole shareholder, the Company.
In February, 1991, Reliv' entered into a joint venture agreement with an
Australian corporation and the joint venture began to market, sell and
distribute Reliv' products in Australia in May, 1991. Reliv' Australia Pty, Ltd.
("Reliv' Australia"), a wholly-owned subsidiary of Reliv' World, entered into an
agreement to purchase the joint venture interest of the Australian corporation.
Reliv' Australia also entered into an agreement with the three shareholders of
the Australian corporation under which a partnership of such persons, as a
distributor of Reliv' Australia, was to receive, for a period of 10 years from
March 1, 1992, 2 percent of sales in Australia and New Zealand (defined as the
designated retail selling price of all products, on which commissions are
payable to distributors), up to approximately $10 million (AUS) in 1992, and $12
million (AUS) in all subsequent years during the term, and 3 percent of sales
that exceed those figures. Since March 1, 1992, the business of the Company in
Australia and sales of the Company's products there has been conducted by Reliv'
Australia. In 2001, approximately 3% of the Company's net sales were attributed
to sales in Australia.
During April, 1992, Reliv' New Zealand Limited ("Reliv' New Zealand") was
organized as a New Zealand company and as a wholly-owned subsidiary of Reliv'
World (except for nominal shares held by an officer). In June, 1992, Reliv' New
Zealand began selling the Company's products through independent distributors in
New Zealand. Sales in New Zealand represented less than 1% of the Company's net
sales in 2001.
On June 9, 1992, Reliv' Canada, Ltd. ("Reliv' Canada") was organized as an
Ontario, Canada corporation and as a wholly-owned subsidiary of Reliv' World.
Reliv' Canada commenced operations during October, 1992, and began selling the
Company's products to distributors in Canada in November, 1992. On December 31,
1995, Reliv' Canada was converted to a Nova Scotia, Canada unlimited liability
company, wholly-owned by Reliv' World (except for one percent owned by the
Company), under the name Reliv' Canada Company. In June, 2000, the Company
consolidated Reliv Canada's operations with the Company's operations located in
Chesterfield, Missouri, but maintains and operates a warehouse facility in
Canada which serves as a distribution center for the
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Company's products. In 2001, approximately 2% of the Company's net sales were
attributed to sales in Canada.
On June 28, 1993, Reliv' Mexico S.A. de C.V. ("Reliv' Mexico") was
organized as a Mexican corporation and as a wholly-owned subsidiary of Reliv'
World (except for one share owned by the Company). Reliv' Mexico commenced
operations in June, 1993, and began selling the Company's products to
distributors in Mexico in August, 1993. On December 20, 1994, Reliv' Mexico was
converted to a Mexican limited liability company under the name Reliv' Mexico,
S. de R.L. de C.V. In September, 2000, Reliv NOW de Mexico S.A. de R.L. de C.V.
was organized and now conducts the Company's operations in Mexico. Sales in
Mexico represented approximately 4.5% of the Company's net sales in 2001.
On July 1, 1995, Reliv' UK Limited Corporation ("Reliv UK") began the
marketing and sale of the Company's products in the United Kingdom in accordance
with the Reliv' system under a license and distributor arrangement with the
Company. Pursuant to the terms of the arrangement, Reliv' UK purchased all of
its requirements for products from the Company and paid Reliv' World a royalty
on products sold. On October 1, 1998, Reliv' Europe, Inc., a wholly-owned
subsidiary of Reliv' World, purchased all of Reliv' U.K.'s capital stock in
return for a 1.5% equity ownership in Reliv' Europe. The former owner of Reliv'
U.K. forgave approximately $435,000 in advances to Reliv' U.K. Under the
purchase arrangement, the former owner will receive monthly payments equal to
1.5% of Reliv' Europe's retail sales for a period of ten years. In 2001, less
than 1% of the Company's net sales were attributed to sales in the United
Kingdom.
In June, 2000, Reliv Philippines, Inc. ("Reliv Philippines") was organized
as a Philippine corporation and as a wholly-owned subsidiary of Reliv World
(except for nominal shares which are owned by the five directors of Reliv
Philippines). Reliv Philippines commenced operations in August, 2000, and began
selling the Company's products to distributors in the Philippines in December,
2000. The establishment of Reliv Philippines was partially financed by investor
loans to Reliv World aggregating $240,000, including warrants to purchase up to
12% of the stock of Reliv Philippines. In 2001, Reliv Philippines became the
Company's leading international market for net sales with 6% of the Company's
net sales attributed to the Philippine network.
In July, 1999, Reliv NOW Colombia Ltd. ("Reliv NOW Colombia") was organized
as a Colombian corporation and as a subsidiary of Reliv World with an investor
holding a minority interest. Reliv NOW Colombia commenced set-up operations in
October, 1999, and began selling the Company's products to distributors in
Colombia in March, 2000. In October, 2001, the Company closed its offices and
ceased the subsidiary's operation in Colombia.
New Market
In March 2002, Reliv UK commenced sales of the Company's products to
distributors and customers in the Republic of Ireland. Due to the close
proximity between Ireland and the UK, the operations and fulfillment of Irish
distributors are carried out in London by Reliv UK. Thus, a separate Irish
subsidiary has not been organized. Currently, Reliv UK ships product directly to
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distributors in Ireland with the intent of opening a distribution center in the
near future. The Company is pursuing product registration in Ireland for several
of its products at this time. Reliv Ultrim Plus and Reliv Innergize are products
that did not require government approval and were immediately introduced.
Principal Products
Through its subsidiaries, the Company markets and sells a line of related
products including nutritional supplements, weight control products, functional
foods, granola bars, sports nutrition and a skin care line.
The Company's nutritional supplements include Reliv' NOW(R) and Reliv'
Classic(R). Both products are designed to provide a balanced nutritional
supplement for an individual's diet and contain a variety of vitamins and
minerals, soy and other protein sources and various herbs. Containers of Reliv
NOW and Reliv Classic come in a one month supply, 28 servings, and are in
powdered form to be mixed with juice or other beverages. The Reliv' Classic
formula has a U.S. patent and the Reliv' NOW formula is a no-yeast derivative of
the Reliv' Classic formula. Reliv' NOW is available with all natural flavoring
or in the original formula. In 2001, sales of Reliv Classic and Reliv NOW
represented approximately 29% and 8% of net sales, respectively. Reliv NOW is
available in every country where the Company does business (except Ireland)
while Reliv Classic is only available in the United States, Australia, New
Zealand, Canada and the United Kingdom.
Innergize!(R) is a patented powdered sports drink containing a mixture of
vitamins and minerals designed for performance enhancement. A can of Innergize
contains 28 servings and is available in lemon, orange and cool punch flavors.
In 2001, sales of Innergize represented approximately 12% of net sales.
Innergize is available in every country where the Company does business. In
Canada, the product is called Optain(R) due to local product regulations.
Reliv' Ultrim-Plus(R) is designed as a meal replacement (for a maximum of
two meals per day) in a weight loss program. In January, 2000, the Company
introduced a newly modified formulation of Reliv' Ultrim-Plus to enhance weight
loss for its users. The new product formulation now includes an advanced complex
of thermogenic fat burners, along with an increased level of soy protein. Each
serving of the product provides 35 percent of the recommended daily allowance of
many essential vitamins and minerals. A can of Reliv' Ultrim-Plus contains 14
servings and is available in three flavors - vanilla, chocolate and strawberry.
The product is in powdered form for mixture with water or milk and is sold in
every country where the Company does business. Sales of Reliv Ultrim-Plus made
up approximately 5% of net sales in 2001.
Cellebrate(R) is a patented weight loss aid designed to suppress appetite,
curb the storage of body fat, and facilitate the body's fat burning process.
Cellebrate, which comes in 56 servings per can, is in powdered form and is
recommended to be used alone or with Reliv' Ultrim Plus meal replacement. Sales
of Cellebrate made up approximately 4% of net sales in 2001. Cellebrate is
available in the United States and Canada.
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Fibrestore(R) is a patented nutritional supplement containing fiber,
vitamins, minerals and herbs. A can of Fibrestore contains 28 servings and is in
powdered form for mixture with water or juice. In January, 2000, the Company
introduced a newly modified formulation of Fibrestore to significantly reduce
its calorie intake to just 25 calories per serving. A modified version of the
Fibrestore formula is marketed in Canada under the name Herbal Harmony(R) in
order to comply with that country's nutritional regulations. Fibrestore is
available in all of the Company's countries with the exception of Ireland. Sales
of Fibrestore made up approximately 11% of net sales in 2001.
Arthaffect(R) is a nutritional supplement and functional food containing
Arthred, a patented form of hydrolyzed collagen protein, which is clinically
reported to nutritionally support healthy joint function. A can of Arthaffect
contains 30 servings and is in powdered form for mixture with water, milk or
juice. In 2001, sales of Arthaffect represented approximately 8% of net sales.
The product is available in the United States, Australia, New Zealand, and
Canada. The product is called A-Affect(R) in the countries outside the United
States due to local product regulations.
ProVantage(R) is a nutritional supplement containing soy and is designed to
enhance athletic performance with a balance of nutrients needed to improve
endurance, recovery and repair. ProVantage helps increase muscle mass and
function, reduce fatigue and burn excess body fat for extra energy. The product
is also of benefit to dieters and others wanting to increase their soy intake. A
can of ProVantage contains 11 servings and is in powdered form for mixture with
water or juice. In 2001, sales of ProVantage represented approximately 3% of net
sales. ProVantage is available in the United States, Australia, New Zealand, and
Canada.
Reliv' Ultra Bar(R) is a line of granola bars containing a mixture of
grains and nuts which use the core formulation of Reliv' NOW vitamins, minerals,
proteins and herbs. Flavors include yogurt, chocolate and raspberry carob. The
bars are a snack food and nutritional supplement and are used with Reliv'
Ultrim-Plus as a meal replacement in a weight loss program. Sales of Reliv Ultra
Bars made up approximately 1% of net sales in 2001. The product is available
only in the United States.
SoySentials(R) is a nutritional supplement containing soy as well as other
vitamins, minerals and herbs and is designed for use by women. A can of
SoySentials contains 14 servings and is in powdered form for mixture with water
or juice. The U.S. Food and Drug Administration has identified soy protein as an
effective nutrient for reducing cholesterol levels, and thereby reducing the
risk of heart disease. In 2001, sales of SoySentials represented approximately
4% of net sales. SoySentials is only available in the United States.
Reliv' Soy Sense(TM) is a vanilla flavored nutritional supplement
containing soy as well as other vitamins, minerals and herbs and can be consumed
by men as well as women. A can of Reliv' Soy Sense contains 14 servings and is
in powdered form for mixture with water or juice. In 2001, sales of Reliv Soy
Sense represented approximately .5% of net sales. Reliv Soy Sense is available
in the United States, Australia, New Zealand, Canada, and the United Kingdom.
Due to local regulations, the product is called Reliv' So Sense(TM) in Canada.
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Reliv 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.
The products are in powdered form to be mixed with water or milk. Reliv NOW For
Kids is available in chocolate and vanilla. Sales of Reliv NOW For Kids made up
approximately 3% of net sales in 2001. Reliv NOW For Kids is available in the
United States and the United Kingdom.
ReversAge(R) is an anti-aging dietary supplement designed to slow down the
aging process. Three proprietary complexes form the foundation of the
supplement: longevity complex, antioxidant complex and herbal complex. The
longevity complex is the restorative complex, designed to replenish key hormones
while creating balance within the body's major systems; the antioxidant complex
is designed to halt aging at the cellular level and the herbal complex delivers
a variety of age-defying herbs, including Ginkgo Biloba and Maca. The lime
flavored product is in powdered form for mixture in water and is available in
every country where the Company does business except the United Kingdom, Ireland
and Mexico. In Canada the product is called Nutriversal.(TM) During 2001, sales
of ReversAge represented approximately 9% of net sales.
New Products
In August, 2001, the Company introduced Reliv ReversAge(TM) Performance
Enhancing Skin Care, a line of skin care products including: Facial Cleansing
Gel, Body Lotion, Smooth and Lift Serum, Daily Skin Defense, Eye Renewal Cream,
Nightly Skin Restore and Cleansing Bar. Reliv ReversAge is clinically proven
effective, dermatologist tested and hypoallergenic. Each skin care product is
enriched with the Company's Dermalongevity Complex(TM) and has been specially
formulated to protect and repair when and where a consumer needs it. The Reliv
ReversAge Read and Need(TM) Technology adjusts to different skin types and
delivers the necessary moisture and nutrients to repair and replenish skin. The
patented Nutri-Dynamic Delivery System holds active ingredients in place on the
surface of the skin for up to 12 hours, allowing continuous delivery of
youth-promoting nutrients to the skin. Reliv ReversAge is available in every
market where Reliv currently operates with the exception of the Philippines, the
United Kingdom and Ireland. Even though the Reliv ReversAge Skin Care Line was
sold for only five months in 2001, it represented approximately 2% of annual net
sales.
In March, 2001, the Company introduced Reliv' Delight(TM) in Mexico. Reliv
Delight is a powdered food supplement in the nature of a milk replacement. Due
to the significant level of cross- border sponsoring between Mexico and the
United States and because of the growing U.S.-Hispanic market, the Company
introduced Reliv Delight in the U.S. in July, 2001. During the six months Reliv
Delight was sold in 2001, sales of the product represented less than 1% of net
sales.
The Company conducts ongoing research and development on its product line
and intends to introduce additional product items in the future. See "Research
and Development."
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Patents and Trademarks
The Reliv' Classic formula has a U.S. Patent. Reliv' NOW is a trade secret
formulation which is a derivative of the Reliv' Classic formulation. The core
mixture of Reliv' NOW is incorporated in the Reliv' Ultra Bars. These products
are manufactured and sold by the Company under an Exclusive License Agreement
dated December 1, 1991 ("License Agreement"). The License Agreement is worldwide
in scope and continues through the life of the patent. Pursuant to the License
Agreement, the Company is obligated to pay the owner of the patent and the
developer of the formulations, Dr. Theodore P. Kalogris, a royalty of 5 percent
of the revenues from the sale of products containing the licensed formulas, with
a minimum $10,000 and maximum $22,000 monthly royalty. The Company's obligation
to pay the royalty payments will terminate on the later of (i) 10 years from the
date of the License Agreement or (ii) the death of Dr. Kalogris, and the
royalties under the License Agreement will be deemed to be paid in full at that
time. If both events occur prior to the expiration of the patent, then the
Company shall pay the heirs of Dr. Kalogris $10,000 a year until expiration of
the patent for use of name and likeness.
The Company has obtained U.S. patents on the formulations of Innergize!,
Fibrestore, Cellebrate, Arthaffect and ReversAge.
In January, 2001, the Company was awarded a U.S. Patent on Arthaffect.
Arthaffect promotes healthy joint function and works without the dangerous side
effects of many popular arthritis treatments. A key component of this
comprehensive formula is Arthred(R), a patented ingredient that has been
clinically proven to help rebuild damaged cartilage. Under an agreement dated
November 6, 1996, Traco Labs, Inc. ("Traco"), exclusive licensee of the patent
rights, sublicensed the rights to sell the product to the Company ("Traco
Agreement"). The license is for a term ending upon the later of (i) the
termination of Traco's rights to market the product or (ii) December 31, 2014.
In January, 2002, the Company was awarded a U.S. Patent for its dietary
supplement ReversAge(R). ReversAge is an anti-aging dietary supplement designed
to slow down, and in some cases, reverse the aging process. Three proprietary
complexes form the foundation of the supplement: longevity complex, antioxidant
complex and herbal complex. The longevity complex is the restorative complex,
designed to replenish key hormones while creating balance within the body's
major systems. The three cornerstone ingredients in this complex are 7KETO,
Symbiotropin Growth Hormone Releaser and SAM-e (S-Adenosyl-L-Methionnine).
Second, ReversAge includes an antioxidant complex designed to halt aging at the
cellular level. This proprietary complex delivers some of the most powerful
antioxidants available, including Co Enzyme Q10 and Resveratrol (Protykin).
Finally, the herbal complex delivers a variety of age-defying herbs, including
Ginkgo Bioloba and Maca.
The principal ingredient delivery system of Reliv' ReversAge (skin care) is
the subject of issued U.S. patents. On March 1, 2001, Hydron Technologies, Inc
("Hydron") and the Company entered into an agreement which states that the
Company shall purchase skin care products from or through Hydron and shall have
the right to sell and distribute the products to the Company's
9
distributors (the "Hydron Agreement"). The Hydron Agreement is worldwide in
scope and continues through February, 2004 with a right of renewal by the
Company upon reaching predetermined sales goals. Pursuant to the Hydron
Agreement, the Company was granted an exclusive license to market its line of
skin care products subject to the Agreement, and is obligated to pay Hydron
royalties which vary depending on the volume of product sold.
Trademark registrations for "Reliv'" and for many of the Company's product
names are either issued or pending in the U.S. Patent and Trademark Office.
Currently, the Company has fourteen (14) marks in use and registered with the
USPTO and seven (7) pending final approval. Trademark registrations for selected
marks have been issued or applied for in Australia, New Zealand, Canada, Mexico,
the United Kingdom, Ireland, the Philippines and several other foreign
countries. The Company considers its trademarks and tradenames to be an
important asset of its business.
Business Plan and Strategy
The Company's present business plan is to focus its resources and efforts
on the network marketing of nutritional products and to develop that business
through the application of several principal strategies:
Development and Introduction of New Products. The Company intends to
utilize its research and development capabilities in food technology and
nutrition science to develop and introduce new products. During 2001, the
Company introduced several new products, including Reliv ReversAge
Performance Enhancing Skin Care in the U.S., Australia, New Zealand, Mexico
and Canada; Reliv Delight in the U.S. and Mexico; and ReversAge in
Australia, New Zealand and Canada.
Programs to Attract and Retain Distributors and Customers. In July,
2001, the Company introduced Profit Paid Direct ("PPD"), an enhancement to
the distributor compensation program which has increased the number of
checks sent to distributors for wholesale profit. No longer must
distributors below the rank of Master Affiliate depend upon their upline
Master Affiliate to send commissions earned upon wholesale purchases by
lower ranking downline distributors. The Company is also designing and
implementing a range of support tools to help distributors become more
effective in selling their products; including a newly enhanced distributor
website which makes product purchasing and distributor information more
simple and accessible.
Enter New Markets. The Company plans to pursue targeted expansion into
the most promising international markets. In March, 2002, the Company
entered Ireland--its newest market since opening the Philippines in
December, 2000. The Company's decision to enter new markets in the future
will be based on its assessment of several factors including market size,
anticipated demand for the Company's products, receptivity to direct sales,
ease of entry, and regulatory restrictions regarding products and the
marketing system. The Company intends to maintain its seamless
international distributor compensation plan in new markets to allow
distributors to receive commissions for sales throughout the international
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system. The Company believes this seamless plan will facilitate and enhance
the expansion of the Company's business into various international markets.
Sales and Marketing
The Company believes the nutritional supplement market is driven by several
factors including:
o The general public's heightened awareness and understanding of the
connection between diet and health;
o The aging population, particularly the baby-boomer generation, which
is more likely to consume nutritional supplements; and
o The worldwide trend toward preventive health care.
The Company sells its products through a network marketing system, or to a
network of independent contractors, designated as "distributors", who in turn
sell the products directly to consumers. Network marketing is a form of
person-to-person direct selling through a network of vertically organized
distributors who purchase products at wholesale prices from the manufacturer and
then make retail sales to consumers. The emergence of readily available means of
mass communication such as personal computers, facsimiles, low-cost long
distance telephone services and the Internet have contributed to the rapid
growth of direct selling, including network marketing. The concept of network
marketing is based on the strength of personal recommendations that frequently
come from friends, neighbors, relatives and close acquaintances. The Company
believes that network marketing is an effective way to distribute its products
because it allows person-to- person product education, which is not as readily
available through traditional distribution channels.
Customers who desire to sell the Company's products may become distributors
by being sponsored into the program by another distributor, thereby becoming
part of the sponsoring distributor's down line. The Company believes many of its
distributors are attracted to the Company because of the quality of its products
and its rewarding compensation plan.
The Company's products are marketed and sold to distributors in the United
States, Australia, Canada, New Zealand, Mexico, the United Kingdom, Ireland and
the Philippines through a subsidiary in each country (except Ireland). The
marketing efforts of the Company and these subsidiaries are focused on the
development, training and support of this network of independent distributors.
The Company, through these subsidiaries, supports an active training program for
distributors in which Company representatives and experienced distributors lead
group training sessions. The Company and these subsidiaries also create and
provide distributors with manuals, brochures and other promotional, training and
informational publications. Periodically, each subsidiary sponsors distributor
meetings at which Company representatives provide training and information
concerning the Company's products and business opportunities. Once a year, the
Company sponsors an international conference in St. Louis, Missouri, for the
benefit of distributors worldwide. The Company also sponsors
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national and regional conferences within every market as well as Master
Affiliate Training (MAT) Schools where distributors who have attained the level
of Master Affiliate may attend and learn sales and recruitment strategies from
Ambassadors of the Company and certain corporate personnel. Company subsidiaries
also sponsor group telephone conference calls for training and promotional
activities.
The Company also recommends and encourages the use of Business Opportunity
Meetings ("BOM") throughout its network of distributors. Every month the Company
publishes for its distributors the location, date and time of all opportunity
meetings as well as the distributor who will be hosting such event. These
meetings serve as a forum for teaching new recruits the fundamentals of the
Company's compensation plan as well as introducing them to the Company's
products and their unique benefits.
Distributors consist principally of individuals, although a limited number
of distributors are corporations or partnerships. A new distributor is required
to complete a distributor application and, in most areas, to purchase a package
of distributor materials (for $39.95 in the United States) consisting of a
distributor manual, business forms and promotional materials distributed
throughout the year. New distributors must enter into a written contract, which
obligates them to adhere to the Company's policies and procedures. Distributors
purchase products from Company subsidiaries or from other distributors for
resale or consumption by the distributor or his or her family.
In each country in which the Company conducts business, distributors
operate under a uniform distributor system which compensates distributors at
varying levels based on sales volumes. At the lowest rank, a distributor is
designated as a Retail Distributor and is entitled to purchase products from a
Company subsidiary or other distributors at a discount of 20 percent from the
Company's suggested retail price. A distributor is promoted to higher levels in
the system by increasing his or her sales of the Company's products, directly or
through other distributors sponsored in the distributor's sales group, and by
achieving designated sales volumes. These higher ranks of distributor are
designated in order as Affiliate, Key Affiliate, Senior Affiliate and Master
Affiliate. At each higher level, a distributor is entitled to purchase products
at an increasingly higher discount; a Master Affiliate receives a 40 percent
discount.
Distributors receive retail profits equal to the difference between the
price at which they sell the product to customers and the discounted price they
paid for the product. Distributors also earn wholesale commissions on products
purchased by other distributors in the distributor's sponsored group equal to
the difference between the price at which the distributor is entitled to
purchase product at and the price at which down line distributors purchase
product. In July, 2001, the Company introduced Profit Paid Direct, a system
developed to track and pay wholesale profits to distributors. No longer are
Master Affiliates required to track and distribute wholesale profits to their
personal group. Now, the Company calculates wholesale profits and issues a check
directly to the qualified distributor once a month. For example, Assume A is a
40% discount Master Affiliate who signs up B, a 30% discount Key Affiliate, who
signs up C, a 20% discount Retail Distributor. If C purchases directly from the
Company, a 10% wholesale profit check will be sent to both A and B. Under the
old system, 20% wholesale profit would be sent to A who was responsible for
tracking and paying 10% to B.
12
Master Affiliates are also entitled to receive additional compensation
payments of two percent to eight percent of the retail sales volume of product
purchased from Company subsidiaries by Master Affiliates (and their personal
groups) whom they have sponsored, and for up to five levels of sponsorship. To
qualify for these additional "generation royalty" payments, Master Affiliates
are required to maintain certain monthly sales volumes and to document specified
levels of retail sales. Master Affiliates who sponsor other distributors to the
level of Master Affiliate are entitled to become part of the Director Program,
and attain higher positions in the program based on the size of their additional
compensation payments. The levels of Director, in order, are Director, Key
Director, Senior Director, Master Director and Presidential Director.
Distributors reaching these levels receive pins and/or rings recognizing their
achievement and recognition in Company publications and at Company sponsored
activities.
Effective September 1, 2000, the Company enhanced this compensation plan by
paying an additional five percent in generation royalties. The wholesale
discounts on the purchase of the Company's products were reduced from a range of
25-45% to a range of 20-40%, depending on the level of the distributor making
the purchase. The long term effect of the enhancement allows distributors to
earn more royalties from their yearly efforts. Distributors earning a check from
the Company realized an immediate monthly increase in generation royalties.
The Company has a Star Director Program which allows Directors to receive
increased additional compensation payments based on the number of Master
Affiliates they have sponsored since the program commenced. Directors are
entitled to receive an additional one percent to three percent of additional
compensation on the retail sales volume of Master Affiliates in their
sponsorship.
The Company also sponsors an Ambassador Program. To qualify as an
Ambassador, a distributor must hold the level of Master Director and must assist
personally sponsored Master Affiliates in meeting specified levels of additional
compensation payments. The levels of Ambassador are, in order, Ambassador,
Bronze Ambassador, Silver Ambassador, Gold Ambassador and Platinum Ambassador.
As higher levels are reached, Silver Ambassadors and up are entitled to
additional percentages of the retail sales volume of downline Master Affiliates
in the fourth, fifth and sometimes sixth level of sponsorship. Ambassadors are
also entitled, depending on the level, to additional benefits, such as
participation in Company sponsored events, paid hotel rooms and transportation
for national conventions, health insurance and car allowances. Ambassadors
reaching the level of Silver Ambassador form the "Reliv Inner Circle," a group
which the Company communicates and meets with from time to time to exchange
ideas on new programs, products and marketing opportunities.
The Company's Direct Select program is available for distributors and their
retail customers to order product in less than case lots directly from the
Company by phone. Auto-Ship, an automatic monthly reorder program available for
distributors and customers, provides a simple and convenient ordering process
for consumers as well as distributors wanting to satisfy maintenance
requirements such as Personal Volume Qualification. Product is shipped directly
to the distributor or customer and upline distributors earn a commission on all
Direct Select and Auto-Ship sales.
13
Company subsidiaries also provide a variety of additional incentives or
bonuses to the most productive distributors such as Mometum Bonus Awards in the
form of cash for distributors with the highest personal group volume in a month
and trips for the highest volumes during a sales promotion time period.
As of December 31, 2001, 43,437 persons or entities were registered as
distributors of Company subsidiaries of which 6,657 were Master Affiliates. This
is an increase in the number of distributors from December 31, 2000 totals of
37,200 distributors of which 5,004 were Master Affiliates. The number of
registered distributors and Master Affiliates in each country in which Company
subsidiaries operate is as follows:
Distributors Master Affiliates
------------ -----------------
United States 27,800 3,955
Australia 2,190 169
New Zealand 498 29
Canada 888 134
Mexico 2,437 1,501
United Kingdom 235 80
The Philippines 9,389 789
Not all persons registered as distributors of Company subsidiaries are
active. Reliv' requires that persons wishing to continue as distributors renew
their distributorship annually by the payment of a fee ($30 in the United States
as of February 1, 2002). The number of distributors shown in the preceding table
reflects persons who have become distributors within the past 12 months and
those who renewed their distributorship during 2001.
The Company recognizes that its sales growth is based upon the continued
development of its independent distributor force and it strives to maintain an
active and motivated distributor network through a combination of quality
products, discounts, commissions and bonus payments, sales conventions and
training, personal recognition and a variety of publications and promotional
materials.
The Company has established a suggested retail price for each of the
Company's products in each country in which the Company conducts business, but
distributors are free to determine the price at which they will sell the
Company's products. Distributors are not assigned territories and there are no
restrictions on marketing areas for distributors.
14
Compliance
The Company's distributor organization and compensation system is designed
and intended to promote the sale of the Company's products to consumers by
distributors. Sales training and promotional efforts emphasize that intention.
To that end, and to comply with applicable governmental regulations of
multilevel selling organizations, the Company and each subsidiary have
established specific programs and requirements for distributors including (i)
monitoring by the Company of purchases by distributors to identify potentially
excessive individual purchases, (ii) requiring that distributors certify to a
specified number of retail sales and (iii) requiring that distributors certify
the sale of at least 70 percent of previous purchases prior to the purchase of
additional amounts of product. The Direct Select program, as described above,
further promotes sales of the Company's products to consumers. Distributors are
not required at any time to purchase product, although Master Affiliates are
required to maintain certain minimum sales levels in their personal groups to
continue receiving generation royalty compensation payments.
Each subsidiary maintains a policy that unused product may be returned by
customers to the selling distributor for a full refund or exchange within 30
days after purchase. Each subsidiary also maintains a policy that any
distributor who terminates his distributorship may return resalable product
which was purchased from the Company within twelve months of the return for a
refund of 90 percent of the purchase price less any discounts or commissions
received relating to the purchase of the products. The Company believes this
buy-back policy addresses and satisfies a number of the regulatory compliance
issues pertaining to network marketing systems.
The Company's products and its network marketing system are subject, both
directly and indirectly through distributors' conduct, to numerous federal,
state and local regulations both in the United States and foreign markets. The
Company emphasizes that distributors are prohibited from making therapeutic
claims for its products.
In order to comply with regulations that apply to both the Company and its
distributors, the Company conducts considerable research into the applicable
regulatory framework prior to entering any new market to identify all necessary
licenses and approvals and applicable limitations on operations in that market.
The Company devotes substantial resources to obtaining the necessary licenses
and approvals and bringing its operations into compliance with the applicable
limitations. The Company also researches laws applicable to distributor
operations and revises or alters distributor manuals and other training
materials and programs to provide distributors with guidelines for operating a
business, marketing and distributing products and similar matters, as required
by applicable regulations in each market.
Regulations in existing and new markets often are ambiguous and subject to
considerable interpretive and enforcement discretion by the responsible
regulators. Moreover, even when the Company believes that it is in compliance
with all applicable regulations, new regulations regularly are being added and
the interpretation of existing regulations is subject to change. It is an
ongoing part of the Company's business to anticipate and respond to new and
changing regulations and to make corresponding changes in operations to the
extent practicable.
15
The Company systematically reviews reports of alleged distributor
misbehavior. If the Company determines that a distributor has violated any of
the Company's policies or procedures, it may take a number of disciplinary
actions. For example, the Company may terminate the distributor's rights
completely or impose sanctions such as warnings, fines, probation, withdraw or
deny awards, suspend privileges, withhold commissions until specific conditions
are satisfied, or take other appropriate actions at the Company's discretion.
Manufacturing and Product Sources
The Company established a manufacturing line at its facility in
Chesterfield, Missouri and had begun manufacture of its nutritional products in
early 1993. Shortly after manufacturing commenced, the facility was flooded in
July 1993, as a result of a break in a levee on the Missouri River. The Company
initiated the return of manufacturing to its Chesterfield facility in mid-1995
and currently manufactures all of its products (except granola bars and skin
care) at this facility. The Company expanded its Chesterfield facility in 1997.
At its Chesterfield manufacturing facility, the Company manufactured products
that accounted for approximately 97% of net sales in 2001. The remaining 3% is
comprised of the Company's granola bar and skin care lines which are produced by
third parties. See "Item No. 2 - Properties".
The Company believes that its ability to manufacture its products is a
competitive advantage with respect to competitors not engaged in manufacturing
and contributes to its ability to provide high-quality products for several
reasons:
o The Company is able to control the quality of raw materials and the
purity and potency of its finished products,
o The Company can monitor the manufacturing process to reduce the risk
of product contamination,
o By testing products at several stages in the manufacturing process,
the Company can ensure accurate product labeling, and
o The Company believes it can better control the underlying costs
associated with manufacturing nutritional supplements.
The Company's production process includes the following steps:
o Identifying and evaluating suppliers of raw materials,
o Acquiring premium-quality raw materials,
o Weighing or otherwise measuring the raw materials,
o Mixing raw materials into batches, and
o Canning and labeling the finished products.
16
Most of these processes are performed using automatic and semi-automatic
equipment. The Company conducts sample testing of raw materials and finished
products for purity, potency and composition conforming to the Company's
specifications. The Company's production facility is registered with the Food
and Drug Agency, the United States Department of Agriculture and the Canadian
Health Protection Branch.
In 1996, the Company received approval from the Australian Therapeutic
Goods Authority ("TGA") to manufacture products sold in Australia at its
Chesterfield plant and currently manufactures all of Australia's requirements of
nutritional products at its Chesterfield facility. The certification of the
Company's Chesterfield site by the Australian TGA also satisfied Canadian
manufacturing requirements and the Company manufactures substantially all of the
nutritional products sold in Canada.
The Company has not experienced any difficulty in obtaining supplies of raw
materials for its nutritional products and does not believe it will encounter
any such difficulty in the future.
The Company's granola bars are manufactured by contract manufacturers who
produce the products in accordance with formulas provided by the Company,
subject to quality control requirements and inspections by representatives of
the Company. The Company has had no difficulty in obtaining contract
manufacturing and there has been no material adverse effect due to untimely
supply of goods.
The Company's skin care line is manufactured by a third party, Hydron
Technologies, Inc. Hydron is both owner and licensee of certain proprietary
technology used in the Company's skin care products. The Company and Hydron
entered into an Agreement for the supply of such skin care products through
February, 2004, and beyond if renewed by the Company.
Distributors order product from Company subsidiaries in case lots and
individual quantities and pay for the goods prior to shipment. In the United
States, the Company's products are warehoused and shipped by common carrier to
distributors. A facility in Chesterfield, Missouri serves the east and central
parts of the country and the Company utilizes a public warehouse facility in Las
Vegas, Nevada to supply the West Coast. See "Item No. 2 - Properties". Products
are also warehoused in, and shipped to local distributors from: Sydney,
Australia; Auckland, New Zealand; Oakville, Canada; and London, England. Reliv
Philippines currently has five company owned and operated and one distributor
owned and operated distribution centers located in the following cities: Makati,
Davao, Ortigas, Cebu, Alabang and Legaspi. In Mexico, product is warehoused and
shipped in and from approximately fifty distribution centers located throughout
Mexico. With the exception of Reliv Canada and Reliv New Zealand, each
subsidiary of the Company maintains an office and personnel to receive, record
and fill orders from distributors. Distributors in Ireland order and receive
product from Reliv UK in London.
17
Research and Development
The Company is committed to continuous product innovation and improvement
through sound scientific research. The mission of the Company's research and
development team is to develop superior products that support life-long health.
Products are developed and enhanced using a combination of published scientific
research and in-house studies. The Company periodically consults with a panel of
physicians who advise the Company on product development. The Company intends to
continue to use its resources in the research and development of new products
and reformulation of existing products. At its Chesterfield facility, the
Company conducts research, product development and formulation, testing and
quality control, all relating to food products. Research and development costs
were $355,000 in 2001, $410,000 in 2000, and $393,000 in 1999.
Employees
As of December 31, 2001, the Company and all subsidiaries had approximately
202 full-time employees compared with 229 such employees at the end of 2000.
This decrease is primarily the result of staff reductions in the manufacturing
facility, offset by staffing increases in the Philippines.
Product Regulation
The formulation, labeling and advertising or promotion of the Company's
products are subject to regulation by the Federal Food and Drug Administration
("FDA") which regulates the Company's products under the Federal Food, Drug and
Cosmetic Act (the "FDCA"), the Federal Trade Commission ("FTC") and various
agencies of the states or countries into which the Company's products are
shipped or sold. FDA regulations include requirements and limitations with
respect to the labeling of the Company's food products and also with respect to
the formulation of those products. FDA regulations also limit and control the
extent to which health or other claims can be made with respect to the efficacy
of any food. The FDCA has been amended several times with respect to nutritional
supplements, most recently by the Nutrition Labeling and Education Act of 1990
(the "NLEA") and the Dietary Supplement Health and Education Act of 1994 (the
"DSHEA") and related regulations. Such legislation governs the marketing and
sale of nutritional supplements, including the content and presentation of
health related information included on the labels or labeling of nutritional
supplements. The Company does not believe these laws or regulations will have a
material effect on its products or operations. Nutritional and dietary
supplements such as those manufactured and sold by the Company, for which no
therapeutic claim is made, are not subject to FDA approval prior to their sale.
Products can be removed from the market if shown to be unsafe, and if the FDA
determines, based on the labeling of products, that the intended use of the
product is for the diagnosis, cure, mitigation, treatment or prevention of
disease, it can regulate those products as drugs and require pre-market
clearance. In addition, if the FDA determines that the claims concerning a
product's affect on the "structure or function" of the body do not meet the
requirements of DSHEA, such claims could result in such product being subject to
regulation as a drug. Manufacturers of dietary supplements that make specified
types of statements on dietary supplements, including some product performance
claims, must have substantiation that the statements are truthful and not
misleading.
18
The majority of the products marketed by the Company are classified as
dietary supplements under the FDCA. The adoption of new regulations in the
United States or in any of the international markets, or changes in the
interpretation of existing regulations, could have a material adverse effect on
the Company. In September 1997, the FDA issued regulations governing the
labeling and marketing of dietary supplement products. The regulations cover:
(1) the identification of dietary supplements and their nutrition and ingredient
labeling; (2) the terminology to be used for nutrient content claims, health
content claims, and statements of nutritional support; (3) labeling requirements
for dietary supplements for which "high potency" and "antioxidant" claims are
made; (4) notification procedures for statements on dietary supplements; and (5)
premarket notification requirements for new dietary ingredients in dietary
supplements. The notification procedures became effective in November 1997, and
the new labeling requirements became effective in March 1999.
In January 2000, the FDA published a final rule that defines the types of
statements that can be made concerning the effect of a dietary supplement on the
structure or function of the body pursuant to the DSHEA. Under the DSHEA,
dietary supplement labeling may bear "structure/function" claims, which are
claims that the products affect the structure or function of the body, without
prior FDA review. They may not, without prior FDA review, bear a claim that they
can prevent, treat, cure, mitigate or diagnose disease, otherwise known as a
"disease claim". The new final rule describes how the FDA will distinguish
disease claims from structure/function claims.
The Company's advertising of its products is subject to regulation by the
FTC under the FTC Act. Section 5 of the FTC Act prohibits unfair methods of
competition and unfair or deceptive acts or practices in or affecting commerce.
Section 12 of the FTC Act provides that the dissemination or the causing to be
disseminated of any false advertisement pertaining to drugs or foods, which
would include dietary supplements, is an unfair or deceptive act or practice.
Under the FTC's substantiation doctrine, an advertiser is required to have a
"reasonable basis" for all objective product claims before the claims are made.
Failure to adequately substantiate claims may be considered either deceptive or
unfair practices. Pursuant to this FTC requirement, the Company is required to
have adequate substantiation for all material advertising claims made for its
products.
The FTC, which exercises jurisdiction over the advertising of all of the
Company's products, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of some of their products. These enforcement actions have resulted
in consent decrees and monetary payments by the companies involved. In addition,
the FTC has increased its scrutiny of the use of testimonials, which the Company
also utilizes. Although the Company has not been the target of FTC enforcement
action for the advertising of its products, no assurance can be given that the
FTC will not question its advertising or other operations in the future. In
November 1998, the FTC issued a guide for the dietary supplement industry,
describing how the FTC applies the law that it administers to advertisements for
dietary supplements.
The Company may be subject to additional laws or regulations administered
by the FDA, FTC or other federal, state or foreign regulatory authorities, the
repeal of laws or regulations which the Company considers favorable, such as the
DSHEA, or more stringent interpretations of current
19
laws or regulations, from time to time in the future. The Company is unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental regulations
or administrative orders, when and if promulgated, would have on its business in
the future. They could include, however, requirements for the reformulation of
certain products to meet new standards, the recall or discontinuation of certain
products that cannot be reformulated, additional record keeping, expanded
documentation of the properties of certain products, expanded or different
labeling, and additional scientific substantiation. Any or all such requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is aware that, in some of its international markets, there has
been recent adverse publicity concerning products that contain substances
generally referred to as "genetically modified organisms" ("GMOs"). In some
markets, the possibility of health risks thought to be associated with GMOs has
prompted proposed or actual governmental regulation. When necessary, the Company
has responded to government regulations that forbid products containing GMO's by
changing certain unacceptable ingredients to non-GMO. Some of the Company's
products in certain markets still contain substances that would be or might be
classified as GMOs. The Company cannot anticipate the extent to which
regulations in these markets will restrict the use of GMOs in its products or
the impact of any regulations on business in those markets. In response to any
applicable future regulations, the Company will reformulate its products to
satisfy the regulations. The Company believes, based upon currently available
information, that compliance with regulatory requirements in this area should
not have a material adverse effect on its business. However, because publicity
and governmental scrutiny of GMOs is a relatively new and evolving area, there
can be no assurance in this regard.
Sales Program Regulation
The Company's distribution and sales program is subject to regulation by
the FTC and other federal and state regulation as well as regulations in several
countries in which the Company engages in business. Various state agencies
regulate multi-level distribution activities. The Company is required to
register with, and submit information to, certain of such agencies and has
complied fully. The Company actively strives to comply with all applicable state
and federal laws and regulations affecting its products and its sales and
distribution programs. The Attorney Generals of several states have taken an
active role in investigating and prosecuting companies whose compensation plans
they feel violate local anti-pyramid and/or consumer protection statutes. The
Company is unable to predict the effect such increased activity will have on its
business in the future nor is the Company able to predict the probability of
future laws, regulations or interpretations which may be passed by state or
federal regulatory authorities.
Other laws and regulations affecting the Company have been enacted to
prevent the use of deceptive or fraudulent practices that have sometimes been
inappropriately associated with legitimate direct selling and network marketing
activities. These include anti-pyramiding, securities, lottery, referral
selling, anti-fraud and business opportunity statutes, regulations and court
cases. Illegal schemes, typically referred to as "pyramid," "chain
distribution," or "endless chain" schemes, compensate participants primarily for
the introduction or enrollment of additional participants into
20
the scheme. 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 the
enterprise's products, rather than investments in such organizations or other
non-retail sales related criteria. Where required by law, the Company obtains
regulatory approval of its network marketing system, or, where approval is not
required or available, the favorable opinion of local counsel as to regulatory
compliance.
The Company believes that its network marketing system satisfies the
standards and case law defining a legal marketing system. It is an ongoing part
of the Company's business to monitor and respond to regulatory and legal
developments, including those that may affect its network marketing system.
However, the regulatory requirements concerning network marketing systems do not
include "bright line" rules and are inherently fact-based. An adverse judicial
determination with respect to the Company's network marketing system could have
a material adverse effect on business. An adverse determination could: (1)
require the Company to make modifications to its network marketing system, (2)
result in negative publicity or (3) have a negative impact on distributor
morale. In addition, adverse rulings by courts in any proceedings challenging
the legality of multi-level marketing systems, even in those not involving the
Company directly, could have a material adverse effect on operations.
Under current law, the Company's distributors are treated for federal
income tax purposes as independent contractors and compensation paid to them is
not subject to withholding by the Company. Several bills have been introduced in
Congress which would restrict the definition of independent contractor and
possibly jeopardize the exempt status enjoyed by direct sellers. Such a change
would negatively impact the Company's recruiting efforts. The direct selling
industry is strongly opposing such bills as they relate to direct sellers. The
Company is unable to assess the likelihood of these or similar bills being
enacted. In several states, legislation has been introduced which would narrow
the definition of independent contractor for purposes of income tax withholding
as well as unemployment compensation, worker's compensation and other employee
benefits. To date, the status of direct sellers as independent contractors has
not been affected. States are becoming increasingly active in this area,
however, and there is no assurance that future legislation at the state level
affecting direct sellers will not be enacted.
Competition
The business of developing and distributing nutritional products such as
those offered by the Company is highly competitive. Numerous manufacturers,
distributors and retailers compete for consumers and, in the case of other
network marketing companies, for distributors. The Company competes directly
with other entities that manufacture, market and distribute products in its
product line with substantially greater sales volume and financial resources
than the Company and with brands that are, through advertising and other
methods, better known to consumers. The Company competes with these entities by
emphasizing the underlying science, value and high quality of its products as
well as the convenience and financial benefits afforded by its network marketing
system.
21
The Company's market is highly sensitive to the introduction of new products
that may rapidly capture a significant share of such market.
The Company competes against other direct selling companies and against
companies which sell heavily advertised and promoted products through retail
stores, including supermarkets, drug stores and health food stores. The
Company's ability to remain competitive depends, in significant part, on the
Company's success in recruiting and retaining distributors. The Company believes
that it offers a rewarding compensation plan and attractive benefits and
services. To the extent practicable, the Company's compensation plan is designed
to be seamless, permitting international expansion. There can be no assurance
that the Company's programs for recruiting and retaining distributors will be
successful. The Company competes for the time, attention and commitment of its
independent distributor force. The pool of individuals interested in the
business opportunities presented by direct selling tends to be limited in each
market and is reduced to the extent other network marketing companies
successfully recruit these individuals into their businesses. Although
management believes the Company offers an attractive opportunity for
distributors, there can be no assurance that other network marketing companies
will not be able to recruit the Company's existing distributors or deplete the
pool of potential distributors in a given market.
The Reliv' Ultrim-Plus and Cellebrate products compete with numerous other
products in the weight loss market, including nationally advertised products
such as SlimFast(TM). Many companies have entered, or have plans to enter, the
sports drink market in which Innergize! competes, a market long dominated by
Gatorade(TM) and Met-Rx(TM). Reliv' NOW, Reliv' Classic and Fibrestore compete
with numerous mineral and vitamin supplement products. With Arthaffect,
ReversAge, ProVantage, Reliv Soy Sense, Soy Sentials and the Reliv ReversAge
Performance Enhancing Skin Care, the Company has entered the relatively new
"functional formulas" and "anti-aging" market, which is expected to be extremely
competitive and led by the major food and skin care companies.
New Market Expansion Program
The Company engages in a structured and thorough analysis of potential new
markets, including analysis of regulatory conditions, product approval
procedures, competitive forces, synergies between new and existing countries and
distributor presence or interest in new markets, before selecting markets to
enter. When the Company decides to enter a new market, it first hires local
legal counsel and/or a consultant with expertise in the product approval process
to help ensure that its network marketing system and products comply with all
applicable regulations and that profits may be expatriated. In addition, local
counsel and consultants help to establish favorable public relations in the new
market by acting as an intermediary between the Company and local regulatory
authorities, public officials and business people. Local counsel and consultants
are also responsible for explaining the Company's products and product
ingredients to appropriate regulators and, when necessary, arranging for local
technicians to conduct required ingredient analysis tests of the products.
Where regulatory approval in a foreign market is required, local counsel
and/or consultants work with regulatory agencies to confirm that all of the
ingredients of the Company's products are permissible within the new market.
During the regulatory compliance process, the Company may
22
alter the formulation, packaging or labeling of its products to conform to
applicable regulations as well as local variations in customs and consumer
habits, and the Company may modify some aspects of its network marketing system
as necessary to comply with applicable regulations. Where reformulations of
products are required, the Company attempts to obtain substitute or replacement
ingredients.
Following completion of the regulatory compliance phase, the Company
undertakes the steps necessary to meet the operational requirements of the new
market. In the majority of the Company's new markets, it establishes a sales
center in a major city and provides for product purchases by telephone. Product
is shipped to the purchaser from a warehouse located in the general geographic
region. In addition, the Company initiates plans to satisfy the inventory,
personnel and transportation requirements of the new market, and the Company
modifies its distributor manuals, cassette recordings, video cassettes and other
training materials as necessary to be suitable for the new market.
In some countries, regulations applicable to the activities of the
Company's distributors also may affect its business because in some countries
the Company is, or regulators may assert that the Company is, responsible for
its distributors' conduct. In these countries, regulators may request or require
that the Company take steps to ensure that its distributors comply with local
regulations. The types of regulated conduct include: (1) representations
concerning the Company's products; (2) income representations made by the
Company and/or distributors; (3) public media advertisements, which in foreign
markets may require prior approval by regulators; and (4) sales of products in
markets in which the products have not been approved, licensed or certified for
sale.
The Company's general policy regarding acceptance of distributor
applications from individuals who do not reside in one of the Company's markets
is to refuse to accept the individual's distributor application.
International Operations
Prior to 1991, the Company marketed and sold its products solely within the
United States. In February, 1991, Reliv' entered into a joint venture with an
Australian corporation and the joint venture began marketing and selling the
Company's products in Australia in May, 1991. As of March, 1992, the Company
organized Reliv' World to conduct international operations, acquired the
business of the Australian joint venture and began conducting business in
Australia through Reliv' Australia. In June, 1992, the Company began marketing
and selling its products in New Zealand through Reliv' New Zealand, in November,
1992, began marketing and selling its products in Canada through Reliv' Canada,
and in August, 1993, began marketing and selling its products in Mexico through
Reliv' Mexico. In July, 1995, the Company began marketing and selling its
products in the United Kingdom through Reliv' UK, a licensee. In October, 1998,
Reliv' Europe acquired Reliv' U.K. In December, 2000, Reliv Philippines
commenced business by marketing and selling the Company's products within the
Philippines. As of March, 2002, the Company's products are being sold in the
Republic of Ireland through the Reliv UK operation.
23
Reference is made to Note 19 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on geographical segments.
Manufacturing and Packaging Services
In the last quarter of 1995, the Company commenced providing manufacturing
and packaging services at its Chesterfield manufacturing facility. These
services include blending, processing and packaging food products in accordance
with specifications or materials provided by the customer. Revenues from these
services were $27,292,000 in 1999 as a result of a major customer and obtaining
other business, but decreased to $16,748,000 in 2000 due to the Company's
decision to place less emphasis on this business. In 2001, revenues were
$3,879,000 as production and sales to the last significant customer concluded in
August, 2001.
Reference is made to Note 19 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on business segments.
Item No. 2 - Properties
The Company owns approximately six acres of land and a building containing
approximately 136,000 square feet of office, manufacturing and warehouse space
located at 136 Chesterfield Industrial Boulevard, Chesterfield, Missouri, 63005,
where it currently maintains its corporate headquarters. The original property
was purchased in July, 1991, and, as part of the purchase price for the
premises, the Company assumed the remaining principal balance of $850,108 of a
1984 industrial revenue bond with an original principal sum of $975,000. In
addition, the Company executed a promissory note to the seller in the amount of
$250,000. The principal balances of the bond and promissory note at December 31,
2001, are $327,000 and $205,000, respectively. The promissory note is secured by
a deed of trust on the premises. The Company funds payments under the industrial
revenue bond and promissory note from working capital. In 1992, the Company
completed an addition to its building of approximately 12,000 square feet used
for manufacturing of its products. In May, 1993, the Company purchased 3.4 acres
of land adjacent to the original facility for $400,000.
In 1998, the Company completed an expansion to the Chesterfield facility on
land owned by the Company adjacent to the existing building. Approximately
90,000 square feet of manufacturing, warehouse and office space was added to the
existing 46,000 square foot facility. The Company obtained a construction loan
of $4,430,000 to finance the expansion. As of December 31, 2001, this loan had a
principal balance of $4,062,000.
The Company leases office space in suburban Sydney, Australia; Mexico City,
Mexico; suburban London, England; and Manila, the Philippines to support its
operations in those areas, and has a contract warehouse arrangement in
Mississauga, Ontario, Canada and Auckland, New Zealand.
24
Item No. 3 - Legal Proceedings
In October, 2000, the Company terminated several individual distributors
for breach of their Distributor Agreement. In June, 2001, five of the terminated
distributorships ("Claimants") jointly filed a lawsuit in a St. Louis, Missouri,
state court against the Company claiming breach of the distributor agreement,
tortious breach of the distributor agreement and tortious interference with
business relationship and business expectancy. The Company filed a Motion to
Dismiss the lawsuit based upon the arbitration provision found in all five
Distributor Agreements. The Court granted the Company's Motion in October, 2001
and dismissed the case without prejudice for arbitration to proceed. In
December, 2001, the Claimants refiled their claims in the form of a Demand for
Arbitration and Statement of Claim to ensue before an American Arbitration
Association panel of arbitrators in Chicago, Illinois, seeking monetary damages
for unlawful termination. The Company has filed an Answer to the Claimants'
Demand and believes the claims are without merit and intends to vigorously
defend itself. In response to the Claimants Demand, the Company has filed
counterclaims against the Claimants for defamation, unfair competition and
breach of contract. The Company has engaged outside counsel in Chicago to defend
this arbitration demand. Due to the preliminary nature of the proceeding, the
probable outcome of this matter is uncertain, and a range of loss cannot
reasonably be estimated. However, management believes that the final outcome
will not have a material adverse effect on the financial position or results of
operations of the Company.
Item No. 4 - Submission of Matters to a Vote of Security Holders
N/A
PART II
Item No. 5 - Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock was admitted to trading on the Emerging Company
Market Place at the American Stock Exchange on March 8, 1993 and subsequently
was approved for listing on the American Stock Exchange Main Board. Prior to
that time, there was no established public trading market for the Company's
Common Stock. On September 6, 1996, the Company moved the listing of its Common
Stock to the NASDAQ National Market Tier of the NASDAQ Stock Market under the
symbol: RELV.
2001 and 2000 Quarterly Stock Price Data
HI LO
-- --
2001
----
First Quarter 1.688 1.000
Second Quarter 1.440 1.000
Third Quarter 1.250 0.890
Fourth Quarter 1.500 1.070
25
2000
First Quarter 3.250 0.938
Second Quarter 1.969 1.125
Third Quarter 2.000 1.438
Fourth Quarter 2.000 1.000
As of March 15, 2002, there were approximately 1,730 holders of record of
the Company's Common Stock.
The Company has not paid dividends on its Common Stock in the last 2 years.
The amount and timing of dividends will be subject to declaration of the Board
of Directors consistent with results of operation of the Company and its
financial condition at the time.
In March, 1995, the Company instituted an automatic dividend reinvestment
plan for its shareholders of record. Participation in the plan, which is
voluntary, provides for dividends paid by the Company to be reinvested in shares
of Common Stock at the then current market price. The plan also allows
participants to make additional voluntary purchases of Common Stock at the
market price.
Effective January 1, 1999, the Company instituted a Distributor Stock
Purchase Plan whereby qualified distributors can allocate a portion of their
commission check toward the purchase of the Company's Common Stock and can make
additional purchases of Common Stock through direct contributions. Purchases are
made at the market price. Distributors also are entitled to receive at the end
of each year warrants to purchase the Company's Common Stock based on the number
of shares of Common Stock purchased by the distributor during the year pursuant
to the Plan.
Item No. 6 - Selected Financial Data
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein.
26
Year ended December 31
2001 2000 1999 1998 1997
---------------------------------------------------------------------------
Net Sales $52,943,047 $ 61,279,785 $ 69,278,167 $53,399,929 $46,836,270
Net Income (Loss) $ 308,440 $ (898,428) $ (1,400,181) $ 1,556,929 $ 2,028,988
Earnings (loss) per common share:
Basic $ .03 (.09) (.15) .16 .21
Diluted $ .03 (.09) (.15) .16 .20
Cash Dividends per share of Common Stock $ -- -- .01 .025 .03
Total Assets $16,938,477 $ 20,395,115 $ 20,771,818 $20,252,972 $15,969,948
Long-term debt and capital lease obligations,
less current maturities $ 4,650,246 $ 5,045,688 $ 5,295,720 $ 5,589,562 $ 5,148,625
Item No. 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Income and Net Sales
2001 vs. 2000
The Company's 2001 net income was $308,000 or $.03 per share (basic and
diluted). This compares with net loss of $898,000 or $.09 per share in 2000. Net
income in the United States, the Company's primary market, was $682,000 in 2001,
compared to net income of $198,000 in 2000. The United States operation is
comprised of the network marketing segment and the manufacturing and packaging
services segment. In 2001, the network marketing segment in the United States
had a net income of $558,000, and the manufacturing and packaging segment had
pre-tax income of $175,000. The net loss from international operations was
$392,000 in 2001, compared with a loss of $999,000 in 2000. The Company returned
to profitability in 2001, as the Company took steps to improve the results of
its international operations. The Company also improved the results of its
manufacturing operations, highlighted by the decision to discontinue production
for the Company's significant third party customers. The Company also reduced
its interest expense by $112,000 in 2001, as compared to 2000.
27
Net sales decreased in 2001 to $52,943,000, as compared to $61,280,000 in
2000, as a result of a 20% decrease in net sales in the United States from
$55,997,000 in 2000 to $44,799,000 in 2001. The decrease was the result of a
decrease in net sales in the Company's manufacturing and packaging segment. Net
sales in the United States, which accounted for 84% of total net sales in 2001,
is comprised of network marketing sales and manufacturing and packaging
services. In 2001, the Company's network marketing sales in the United States
were $40,920,000 compared to $39,249,000 in 2000, and net sales from
manufacturing and packaging services decreased to $3,879,000 from $16,748,000 in
2000. Net sales in the foreign operations increased to $8,144,000 in 2001 from
$5,283,000 in 2000.
Net sales for the fourth quarter of 2001 were $12,038,000, a decline from
fourth quarter 2000 net sales of $12,922,000. During the period, the Company's
network marketing sales in the United States increased to $9,995,000, as
compared to $8,181,000 in the fourth quarter 2000. Net sales in manufacturing
and packaging services decreased from $3,465,000 in the fourth quarter of 2000
to $18,000 in the fourth quarter of 2001. Net sales in foreign operations
increased from $1,158,000 in the fourth quarter of 2000 to $2,025,000 in the
fourth quarter of 2001, as the Company's newest market in the Philippines had
approximately $589,000 in sales in the fourth quarter of 2001. Net sales in the
Australia/New Zealand market and Mexico increased by 39% and 26%, respectively,
in the fourth quarter of 2001, as compared to the same quarter in 2000.
In the United States, the Company's largest market, the number of active
distributors declined slightly to 27,800 from 28,300. The retention rate of
distributors who renew their annual agreement improved to 54% in 2001, as
compared to a renewal rate of 45% in the prior year. Master Affiliates,
distributors who have attained the highest level of discount and are eligible
for generation royalties, increased to 3,955 in the United States in 2001 from
3,749 in 2000. In 2001, the Company processed 120,175 wholesale orders at an
average retail price of $428, compared to 109,700 orders at an average of $465
in 2000. The increase in the order count and the decrease in the average order
size is partially due to a change in the Direct Select program effective in
February 2000 which allowed distributors to place orders for individual cans of
product at their specified discount level, rather than at full retail price.
Previously, wholesale orders were defined as distributor orders placed at their
qualified discount level and were in full case quantities.
The Company's Direct Select Program makes products available to consumers
by ordering directly through the Company. These orders are placed at full retail
price and can be ordered in quantities of less than full case lots. In the
United States in 2001, the program processed a total of 23,700 orders for a net
sales total of $2,476,000, compared to $2,494,000 in 2000. The number of orders
combined for wholesale and Direct Select increased by approximately 9,000 orders
in 2001, as compared to 2000.
In August 2001, the Company introduced a line of skin care products
including: Facial Cleansing Gel, Body Lotion, Smooth and Lift Serum, Daily Skin
Defense, Eye Renewal Cream, Nightly Skin Restore and Cleansing Bar. The skin
care products are available in every market where Reliv currently operates, with
the exception of the
28
Philippines, UK and Ireland. The Company also introduced several of its products
in many of the foreign markets, in particular, Reversage and Reliv NOW For Kids.
In July 2001, the Company introduced "Profit Paid Direct", an enhancement to the
distributor compensation program which has increased the number of checks sent
to distributors for wholesale profit. No longer must distributors below the rank
of Master Affiliate depend upon their upline Master Affiliate to send
commissions earned upon wholesale purchases by lower ranking downline
distributors.
The Company is continuing to develop existing marketing programs such as
the "Star Director", "Ambassador" and "Road to Presidential" programs. The Star
Director Program compensates distributors who reach certain levels of sales
organization growth with bonuses based on the retail sales of their distributor
network. In 2001, $1,772,000 was paid through this program compared to
$1,479,000 in 2000. The Ambassador Program compensates distributors at the
highest levels for their leadership and development of sales. At year-end 2001,
there were 120 Ambassadors who shared in bonuses totaling $1,087,000, compared
to 79 Ambassadors at the end of 2000 sharing bonuses of $784,000. The Road to
Presidential Program, through training and rewards, is designed to encourage
distributors to reach the highest level of earnings potential by building
downline organizations.
During 1999, the Company launched its enhanced Internet site, with
e-commerce capabilities. The web site provides a number of features for
distributors, including online ordering, online sponsoring of new distributors,
account information and sales organization activity. In conjunction with the
launch of the Internet site, distributors are also able to establish their own
personal web site, which has enabled distributors to market themselves through
the Internet, as well as place product orders, track shipments, receive Company
e- mails and other interactive functions. Although the volume of sales generated
through Internet orders represents a very small portion of the Company's sales
volume, the web site receives a considerable amount of traffic, as distributors
utilize the other features and information available through the website. As of
December 31, 2001, approximately 700 distributors were enrolled for personal web
sites. In February 2002, the Company introduced several enhancements to its web
site, including an improved shopping cart that allows all distributors to be
able to place product orders, not just Master Affiliates, as before. Also,
included is a premium service, called "Downline Organizer", which provides
Master Affiliates access to the corporate distributor database for their groups.
The site provides a number of features and reports that can be customized by the
Master Affiliate to assist them in building their sales organizations.
Currently, the Company is testing a shipping promotion on Internet orders to
attract more distributor activity to the improved web site. As with most
Internet sites, the Company is continuing to improve its website traffic and
capabilities in meaningful and cost-effective ways.
In Australia and New Zealand, net sales declined to $1,808,000 in 2001 from
$2,012,000 in 2000. However, fourth quarter 2001 sales increased to $492,000
from $353,000 in 2000. New distributor enrollments decreased in Australia and
New Zealand to 1,182 from 1,245 in 2000. Distributor renewals in Australia were
50% and in New Zealand 46% in 2001 as compared to 55% and 45% in 2000,
respectively. A number of factors
29
continue to cause the decline in sales in these markets. The Australian and New
Zealand dollars have continued to decline in value against the United States
dollar. This has had the effect of reducing net sales when reported in US
dollars on a consolidated basis. Nonetheless, net sales in local dollars for
Australia and New Zealand for 2001 declined by 1% and 7%, respectively, as
compared to 2000. The Company was able to introduce a version of its product,
Reversage, in these markets, along with the new skin care line in 2001. Also,
during the third quarter of 2001, the Company promoted its distributor relations
and marketing manager into a sales management position. In response to these
actions, sales in the region improved by 29% and 39% in the third and fourth
quarters of 2001, respectively, as compared the same quarters in 2000.
Net sales in Canada improved in 2001 to $972,000 from $913,000 in 2000.
Fourth quarter sales increased to $248,000 in 2001 compared to $215,000 in 2000.
New distributor enrollments decreased to 477 from 607 in 2000. Currency
fluctuations have also had an impact on Canadian sales, as net sales in local
dollars increased by 11% for 2001, as compared to 2000. During the second
quarter of 2000, the Company closed its Canadian administrative office facility
and has replaced it with a smaller distribution center. All customer service,
sales and marketing support, accounting and other administrative services for
the Canadian operation are being provided from the corporate office in
Chesterfield, Missouri. As a result, the Canadian operation showed net income of
$118,000 in 2001, as compared to a net loss of $88,000 in 2000.
Net sales in Mexico in 2001 were $2,233,000 compared to $1,769,000 in 2000.
Net sales in the fourth quarter 2001 were $584,000 compared to $465,000 in 2000.
New distributor enrollments decreased in 2001 to 3,456 compared to 6,188 in
2000. Net sales continue to grow in Mexico on the strength of the sales
management team in place, as compared to 2000. The distribution center network
in Mexico continues to grow and become more established. The distribution
centers are owned and operated by key distributors in order to facilitate sales
and the delivery of product in cities outside of Mexico City. With the current
inadequate delivery/distribution system in Mexico, this is a common method used
by network marketing companies to distribute their products. The Company has
also introduced Reliv' Delight, a powdered food supplement in the nature of a
milk replacement, along with local versions of other products in the US product
line during 2001. The net loss in this market decreased from $571,000 in 2000 to
$215,000 in 2001 as a result of the improved sales and cost controls.
Sales in the United Kingdom in 2001 were $391,000 compared to $388,000 in
2000. The Company hired a sales manager in January 2000 to improve sales efforts
in this region, but sales growth has nevertheless been difficult to achieve. The
Company is in the process of expanding sales in the region by shipping the
Company's products to distributors and customers in the Republic of Ireland.
Irish sales and fulfillment will be managed from the Reliv UK office.
The Company ceased operations in Colombia effective October 1, 2001. After
opening for business in this market during the first quarter of 2000, sales did
not meet
30
expectations and showed limited prospects for growth due to the increasing
political instability in the country. Net sales for the first nine months of
2001 were only $46,000, compared to sales of $83,000 in 2000. The Company
recognized a pre-tax charge of approximately $80,000 to shut down operations in
Colombia.
In December 2000, the Company began sales in its newest market, the
Philippines. In its first full year of operations, net sales in 2001 were
$2,693,000 with 11,269 distributor enrollments. Sales here have benefited from
the involvement of distributors from the United States, Canada and Australia
with ties to the Philippines. The Philippines operations had net income of
$18,000 in 2001, its first full year of operations.
The Company has provided manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers. In 2001, the Company decided to phase
out this line of business and production for the last significant customer
concluded in the third quarter of 2001. Accordingly, net sales decreased in 2001
to $3,879,000 from $16,748,000 in 2000. Although this segment reported pre-tax
income of $175,000 in 2001, low gross margins and declining production orders
from the final significant customer led to the decision to discontinue the
third-party production work. The results reported in this segment also include
the production of the Reliv' brand products. Higher network marketing production
requirements along with staffing reductions also contributed to the improved
results of the manufacturing and packaging segment in 2001. The segment results
for 2001 compare to pre-tax income of $25,000 in 2000.
The Company's sales to third party customers consist of the Company
purchasing raw materials, customer-specified packaging, and selling a finished
product to the customer. Cost of products sold for the manufacturing and
packaging segment for 2001 was 95.2% of net sales; an improvement from 95.6% in
2000. Even under optimal operating efficiencies, the gross margin for these
customers was substantially less than margins in sales of network marketing
products. In conjunction with the decision to discontinue the third party
production work, the Company has taken steps to reduce payroll through layoffs
and attrition. Over the course of 2001 and early 2002, the Company has reduced
plant employment and related office positions by approximately 50 people, along
with other cost reduction measures.
2000 vs. 1999
The Company's 2000 net loss was $898,000 or $.09 per share. This compares
with net loss of $1,400,000 or $.15 per share in 1999. Net income in the United
States, the Company's primary market, was $198,000 in 2000, compared to net loss
of $915,000 in 1999. The United States operation is comprised of the network
marketing segment and the manufacturing and packaging services segment. In 2000,
the network marketing segment in the United States had a net income of $178,000,
and the manufacturing and packaging segment had pre-tax income of $25,000. Net
loss from international operations was $999,000 in 2000, compared with a loss of
$485,000 in 1999. Although the net loss in 2000 was reduced in comparison to
1999, the Company's results from operations were negatively impacted by losses
in its international operations, highlighted by a pre-tax charge of
31
$407,000 related to the balance of the unamortized goodwill established when the
Company purchased the UK entity in 1998. The Company's results were also
negatively impacted by somewhat higher general and administrative expenses and
higher interest expense.
Net sales decreased in 2000 to $61,280,000, as compared to $69,278,000 in
1999, as a result of a 13% decrease in net sales in the United States from
$64,694,000 in 1999 to $55,997,000 in 2000, the result of a decrease in net
sales in its manufacturing and packaging segment. Net sales in the United
States, which accounts for 91% of total net sales, is comprised of network
marketing sales and manufacturing and packaging services. In 2000, the Company's
network marketing sales in the United States were $39,249,000 compared to
$37,402,000 in 1999, and net sales from manufacturing and packaging services
decreased to $16,748,000 from $27,292,000 in 1999. Net sales in the foreign
operations increased to $5,283,000 in 2000 from $4,584,000 in 1999.
In the United States, the Company's largest market, the number of active
distributors decreased to 28,300 from 30,100. The retention rate of distributors
who renew their annual agreement continued to remain high at 45%, but is a
decline from a renewal rate of 57% in the prior year. Master Affiliates,
distributors who have attained the highest level of discount and are eligible
for generation royalties, increased to 3,749 in the United States in 2000 from
3,250 in 1999. In 2000, the Company processed 109,700 wholesale orders at an
average retail price of $465, compared to 74,103 orders at an average of $603 in
1999. The increase in the order count and the decrease in the average order size
is due to a change in the Direct Select program effective in February 2000 which
allowed distributors to place orders for individual cans at their specified
discount level, rather than at full retail price. Previously, wholesale orders
were defined as distributor orders placed at their qualified discount level and
were in full case quantities.
The Company's Direct Select Program makes products available to consumers
by ordering directly through the Company. These orders are placed at full retail
price and can be ordered in quantities of less than full case lots. In the
United States in 2000, the program processed a total of 25,126 orders for a net
sales total of $2,494,000, compared to $5,807,000 in 1999. This amount has
decreased because of a change in the Direct Select Program effective in February
2000 which allowed distributors to place orders for individual cans of product
at their specified discount level, rather than at full retail price. The number
of orders combined for wholesale and Direct Select increased by approximately
3,000 orders in 2000, as compared to 1999. The change in the Direct Select
program merely changed the classification of the orders.
In January 2000, the Company introduced four new products at its United
States National Convention in Reno, NV. The product introduction included Reliv
NOW for Kids, a nutritional supplement important for growing bodies, Reliv Soy
Sense, a supplement that provides soy protein, a nutrient proven to lower the
risk of heart disease, Reliv Ultrim Plus, a reformulated meal replacement
product to assist in weight loss, and a new formula of Fibrestore, a fiber-rich
antioxidant supplement. In May, 2000, the Company introduced
32
ReversAge, an anti-aging dietary supplement designed to slow down the aging
process.
The Company is continuing to develop existing marketing programs such as
the "Star Director", "Ambassador" and "Road to Presidential" programs. The Star
Director Program compensates distributors who reach certain levels of sales
organization growth with bonuses based on the retail sales of their distributor
network. In 2000, $1,479,000 was paid through this program compared to
$1,315,000 in 1999. The Ambassador Program compensates distributors at the
highest levels for their leadership and development of sales. At year end 2000,
there were 79 Ambassadors who shared in bonuses totaling $784,000, compared to
64 Ambassadors at the end of 1999 sharing bonuses of $584,000. The Road to
Presidential Program, through training and rewards, is designed to encourage
distributors to reach the highest level of earnings potential by building
downline organizations.
In Australia and New Zealand, net sales declined to $2,012,000 in 2000 from
$2,544,000 in 1999. New distributor enrollments increased slightly in Australia
and New Zealand to 1,245 from 1,186 in 1999. Distributor renewals in Australia
were 55% and in New Zealand 45% in 2000 as compared to 56% and 39% in 1999,
respectively. A number of factors continue to cause the decline in sales in
these markets. The Australian and New Zealand dollars have declined in value
against the United States dollar. This has has the effect of reducing net sales
when reported in US dollars on a consolidated basis. Nonetheless, net sales in
local dollars for Australia and New Zealand for 2000 still declined 11% and 19%,
respectively, as compared to 1999. Other factors that have hurt sales in these
markets include a new goods and services tax instituted in Australia effective
July 1, 2000, increased competition from other network marketing companies, and
continued difficulties in introducing new products due to tighter regulatory
control over nutritional and dietary supplements.
Net sales in Canada declined in 2000 to $913,000 from $993,000 in 1999. New
distributor enrollments increased slightly to 607 from 568 in 1999. Currency
fluctuations have also had an impact on Canadian sales. During the second
quarter of 2000, the Company closed its Canadian administrative office facility
and has replaced it with a smaller distribution center. All customer service,
sales and marketing support, accounting and other administrative services for
the Canadian operation are being provided from the corporate office in
Chesterfield, Missouri. Expenses related to the closing of the Canadian
facility, including severance payments to the office and sales staff, were
incurred during the second quarter. The Company incurred approximately US$70,000
in expenses to close the office. The Company's Canadian operation showed a net
profit in the fourth quarter of 2000 as a consequence of the closing.
Net sales in Mexico in 2000 were $1,769,000 compared to $691,000 in 1999.
New distributor enrollment increased in 2000 to 6,188 compared to 2,324 in 1999.
Net sales have been affected positively by the efforts of the sales management
team, plus the establishment of distribution centers owned and operated by key
distributors in order to facilitate sales and the delivery of product in cities
outside of Mexico City. With the inadequate distribution
33
system in Mexico, this is a common method used by network marketing companies to
distribute their products. The Company has submitted several products for
regulatory approval. The net loss in this market increased as the result of
expenses related to sales promotions and other sales and travel expenses that
were greater than originally planned in an effort to build sales momentum.
Sales in the United Kingdom in 2000 were $388,000 compared to $356,000 in
1999. The Company hired a sales manager in January 2000 to improve sales efforts
in this region after having operated during 1999 without a sales manager. Sales
growth has been traditionally difficult to achieve in this area. One factor
affecting sales in the United Kingdom is the resistance in the local market to
products containing genetically modified ingredients (GMO's). Many of the
Company's products contain soy proteins made with genetically modified soy.
During 2000, the Company reformulated its products to eliminate genetically
modified ingredients in the UK, Australia and New Zealand.
During the first quarter of 2000, the Company commenced sales in Colombia.
Net sales for the year were $83,000 and 298 distributors were enrolled. Growth
in this market has not met the Company's expectations. Part of the reason for
this is that in an effort to minimize start-up costs, the Company has not hired
a sales manager for this market, instead using local distributors and the
efforts of the minority partner to bolster sales. A significant portion of the
2000 net loss for Colombia of $137,000 was attributable to start-up costs, which
under current accounting guidance, must be expensed when incurred.
In December 2000, the Company began sales in its newest market, the
Philippines. Net sales in just its first month of operation were $119,000, with
approximately 260 distributors enrolled. Sales here have benefited from the
involvement of distributors from the United States, Canada and Australia with
ties to the Philippines. Sales in the early months of 2001 have continued to
exceed the Company's expectations.
The Company provides manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers. Net sales decreased in 2000 to
$16,748,000 from $27,292,000 in 1999. This decrease follows the Company's
decision to place less emphasis on this business, as unprofitable business was
eliminated and steps were taken to improve the margins with its remaining
customer. The results reported in this segment also include the production of
the Reliv' brand products. This segment reported pre-tax income of $25,000 in
2000, compared to a pre-tax loss of $1,898,000 in 1999.
The Company's sales to third party customers consists of the Company
purchasing raw materials, customer-specified packaging, and selling a finished
product to the customer. Cost of product sold for 2000 was 95.6% of net sales;
an improvement from 101% in 1999. Even under optimal operating efficiencies, the
gross margin for these customers is substantially less than margins in sales of
network marketing products. The Company continues to take steps to better manage
this area, including plant staff reductions, warehouse cost reductions,
elimination of the unprofitable business and review of profit margins by
34
customer and project. Future efforts to develop manufacturing and packaging
services have been discontinued as the Company has placed its efforts in
increasing network marketing sales.
Cost of Sales
During 2001, cost of network marketing products sold was 18.1% of net sales
compared with 20.3% in 2000 and 19.8% in 1999. Cost of network marketing
products sold was 19.9% in the fourth quarter of 2001 and 23.6% in 2000. Cost of
goods for manufacturing and packaging services was 95.2% for 2001 and 95.6% for
2000.
Distributor Royalties and Commissions
Distributor royalties and commissions as a percentage of network marketing
sales increased to 38.3% in 2001 compared to 35.8% in 2000 and 36.5% in 1999. In
the fourth quarter of 2001, distributor royalties and commissions were 38.2%
compared to 38.6% in 2000. The increased percentage for 2001, as compared to
prior years, is due to a change in the distributor compensation plan, effective
September 1, 2000. Previously, distributors could purchase products from the
Company at discounts ranging from 25% to 45%, with total royalties of 18% of
retail sales paid to Master Affiliates on their organization's sales. After the
modification, the discounts at the time of purchase were changed, ranging from
20% to 40%, with royalty payments totaling up to 23% to Master Affiliates. The
effect of this change on the financial statements is that distributor royalties
and commissions will increase as a percentage of net sales. However, this
increase will be offset by improved gross margins on these sales. These expenses
are governed by the distributor agreements and are directly related to the level
of sales. Included in distributor royalties and commissions are royalties of
$1,087,000 for 2001 earned through the Ambassador Program as compared to
$784,000 in 2000 and $584,000 in 1999.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses increased to 38.8% as a
percentage of net sales for 2001, from 33.5% in 2000, and 28.6% in 1999. The
percentage change is primarily due to the decrease in sales of the manufacturing
and packaging business segment in comparison to total SGA expenses. Selling,
general and administrative expenses for 2001 were $10,000 greater than the total
of $20,545,000 in 2000. The total for 2001 also includes $1,046,000 in SGA
expenses for the first full year of operations in the Philippines, as compared
to $147,000 in SGA expenses in the start up year of 2000.
In 2001, total distribution and warehouse expenses increased slightly to
$1,309,000 from $1,297,000 in 2000 due to the added expenses of the full-year
operations of the Philippines. Distribution expenses in the manufacturing and
packaging segment decreased from $741,000 in 2000 to $603,000 in 2001, as the
result of the decrease in volume generated by manufacturing and packaging
services.
35
In 2001, sales incentive bonuses were $396,000, compared to $438,000 in
2000. Promotional trip expenses increased to $815,000 in 2001, as compared to
$743,000 in 2000. All of the increases occurred in the United States market, as
it conducted two major promotional trip programs in 2001. Overall, sales and
marketing expenses increased by $356,000, or 5% in 2001.
Total staff compensation and fringes decreased by 1%, or $90,000, primarily
due to reductions in the US sales staff. The decrease in the sales staff more
than offset the additional $146,000 in compensation expenses from the first full
year of the Philippines operations.
Another significant component of SGA expenses in 2001 was the adjustment of
the cash surrender value of the executive life insurance policies. The Company
incurred a charge of $125,000 as the result of the decline in the market value
of the underlying investments. This corresponds with the overall stock market
decline experienced in 2001. In 2000, the Company took a similar charge of
$168,000.
Interest Expense
Interest expense in 2001 was $527,000, compared to $639,000 in 2000 and
$585,000 in 1999. Interest expense in 2001 was lower as the result of lower
interest rates and a decrease in the use of short-term borrowings. Interest
expense in 2000 increased, as compared to 1999, as the result of increased
short-term borrowings.
Income Taxes
Income taxes expense for 2001 was $219,000. As a result of pre-tax losses,
the income tax benefit in 2000 was $251,000, and the income tax benefit for 1999
was $770,000. The effective tax rate for 2001 was 41.5%. Various non-deductible
expenses, including the reduction in the value of the executive life insurance
policies, resulted in the increase over the U.S. statutory tax rate of 34%.
Effective tax rates for 2000 and 1999 were 22% and 35%, respectively. The 2000
tax benefit was carried back against the 1998 earnings, and the 1999 tax benefit
was carried back against 1997's earnings.
Financial Condition
The Company generated $1,937,000 of net cash during 2001 from operating
activities and increased cash by $40,000 through long-term financing. This
compares to $413,000 of cash provided by operating activities and $365,000
generated through long-term financing and use of the lines of credit in 2000.
Cash and cash equivalents increased by $60,000 to $1,259,000 by year-end 2001.
The Company's net investing activities used $293,000 in 2001. The Company used
$1,462,000 to repay the line of credit, long-term borrowings and capital lease
obligations and $116,000 to purchase treasury stock in 2001.
Current assets decreased to $6,514,000 at December 31, 2001 from $9,276,000
as of December 31, 2000. Cash and cash equivalents increased by $60,000 as
described above.
36
Accounts receivable decreased to $548,000 at December 31, 2001 from $2,447,000
at December 31, 2000. The decrease is due to the Company termination of
production and sales to its last significant third party packaging customer. At
December 31, 2001 and 2000, the Company has reserved $5,000 as an allowance for
uncollectible accounts receivable.
Inventories decreased to $4,142,000 at December 31, 2001 from $4,530,000 at
year-end 2000, primarily as a result of the decrease in raw material inventories
no longer required for the contract packaging business.
Refundable income taxes decreased to $136,000 at the end of 2001 from
$664,000 as of the end of 2000. The decrease is due to the tax benefit from the
loss incurred in 2000, as compared to the net income position of 2001.
Property, plant and equipment, after dispositions, increased $282,000 to
$15,952,000 at December 31, 2001 compared to $15,670,000 at December 31, 2000.
Acquisitions were primarily funded with cash generated from operations.
Current liabilities decreased to $6,047,000 at December 31, 2001 from
$9,291,000 at December 31, 2000. Trade accounts payable decreased to $2,881,000
at December 31, 2001, from $5,265,000 at December 31, 2000, primarily due to the
reduction of purchases for the manufacturing and packaging business. Distributor
commissions payable increased $45,000 to $1,244,000 at year-end 2001 as a result
of increase in net sales in December 2001 as compared to December 2000.
Borrowings under the line of credit decreased to $986,000 from $1,918,000 at
December 31, 2000.
Long-term debt and non-current capital lease obligations decreased to
$4,650,000 at December 31, 2001, from $5,046,000 at December 31, 2000. The
Company has a term loan with an outstanding balance of $4,062,000 as of December
31, 2001. This loan provided financing for the expansion of its facility in
1997. This note was renewed by its lender in March 2001, extending the maturity
to March 2004, with the interest rate continuing at 8.5%. The Company has a term
loan with a principal balance of $90,000 as of December 31, 2001, as well as
long-term debt totaling $531,000, relating to the purchase of its original
building and land. The Company also has a series of private placement notes
payable with a remaining principal balance of $208,000. These notes provided the
initial funding of the Philippines operation and are payable in quarterly
installments equal to 2% of Philippines sales at suggested retail, including
interest at 9% per annum.
Stockholders' equity increased to $5,827,000 at December 31, 2001, compared
with $5,646,000 at December 31, 2000. The increase is primarily due to the 2001
net income of the Company, reduced by treasury stock purchases of $116,000.
Stockholders' equity was also negatively impacted by the strengthening of the
U.S. dollar against the currency of several of its' subsidiaries, in particular,
Australia, New Zealand, Philippines, and Canada. A stronger Mexican peso vs. the
U.S. dollar offset these other weakening currencies . This impact appears in the
form of the decrease in the foreign currency translation adjustment. This
cumulative adjustment declined from a debit balance of $624,000 as of December
31, 2000, to a debit balance of $689,000, as of December 31, 2001.
37
At December 31, 2001, the Company's working capital balance had improved by
$482,000 since December 31, 2000. The current ratio at December 31, 2001
improved to 1.08 from 1.00 at 2000 year-end. The Company also has an operating
line of credit, with a limit based on a collateral-based formula of accounts
receivable and inventory. The maximum borrowing limit is $1,000,000, with an
interest rate of prime plus .50%. At December 31, 2001, the Company had utilized
$986,000 of the line of credit, with no additional borrowings available.
Management believes that the Company's internally generated funds together with
the loan agreement will be sufficient to meet working capital requirements in
2002.
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 judgement areas in the application of our accounting policies that
currently affect our financial condition and results of operations.
Inventories
Inventories are valued at the lower of cost or market. Product cost
includes raw material, labor and overhead costs, and is accounted for
using the first-in, first-out basis. On a periodic basis, the Company reviews
its inventory levels in each country's product line for estimated obsolescence
or unmarketable items, as compared to future demand requirements and the shelf
life of the various products. Based on this review, the Company records
inventory write-downs when necessary.
Legal Proceedings
In the ordinary course of business, we are subject to various legal
proceedings, including lawsuits and other claims related to labor, product and
other matters. We are required to assess the likelihood of adverse judgments and
outcomes to these matters as well as the range of potential loss. Such
assessments are required to determine whether a loss contingency reserve is
required under the provisions of SFAS No. 5, Accounting for Contingencies, and
to determine the amount of required reserves, if any. These assessments are
subjective in nature. Management makes these assessments for each individual
matter based on consultation with outside counsel and based on prior experience
with similar claims. To the extent additional information becomes available or
our strategies or assessments change, our estimates of potential liability for a
given matter may change. Changes to estimates of liability would result in a
corresponding additional charge or benefit recognized in the statement of
operations in the period in which such changes become known. We recognize the
costs associated with legal defense in the periods incurred. Accordingly, the
future costs of defending claims are not included in our estimated liability.
38
Safe Harbor Provision of the Private Securities Litigation Act of 1995 and
Forward Looking Statements.
The statements contained in Item 7 (Management's Discussion and Analysis of
Financial Condition and Results of Operation) that are not historical facts may
be forward- looking statements (as such term is defined in the rules promulgated
pursuant to the Securities Exchange Act of 1934) that are subject to a variety
of risks and uncertainties. The forward-looking statements are based on the
beliefs of the Company's management, as well as assumptions made by, and
information currently available to the Company's management. Accordingly, these
statements are subject to significant risks, uncertainties and contingencies
which could cause the Company's actual growth, results, performance and business
prospects and opportunities in 2000 and beyond to differ materially from those
expressed in, or implied by, any such forward-looking statements. Wherever
possible, words such as "anticipate", "plan", "expect", "believe", "estimate",
and similar expressions have been used to identify these forward-looking
statements, but are not the exclusive means of identifying such statements.
These risks, uncertainties and contingencies include, but are not limited to,
the Company's ability to continue to attract, maintain and motivate its
distributors, changes in the regulatory environment affecting network marketing
sales and sales of food and dietary supplements and other risks and
uncertainties detailed in the Company's other SEC filings.
Item No. 7A - Qualitative And Quantitative Disclosures Regarding Market Risk
The Company's earnings and cash flow are subject to fluctuations due to
changes in foreign currency rates as it has several foreign subsidiaries and
continues to explore expansion into other foreign countries. As a result,
exchange rate fluctuations may have an effect on its sales and the Company's
gross margins. Accounting practices require that the Company's results from
operations be converted to U.S. dollars for reporting purposes. Consequently,
the reported earnings of the Company in future periods may be significantly
affected by fluctuations in currency exchange rates, generally increasing with a
weaker U.S. dollar and decreasing with a strengthening U.S. dollar. Products
manufactured by the Company for sale to the Company's foreign subsidiaries are
transacted in U.S. dollars. As the Company's foreign operations expand, its
operating results will be subject to the risks of exchange rate fluctuations and
the Company may not be able to accurately estimate the impact of such changes on
its future business, product pricing, results of operations or financial
condition.
The Company also is exposed to market risk in changes in interest rates on
its long-term debt arrangements and commodity prices in some of the raw
materials it purchases for
39
its manufacturing needs. However, neither presents a risk that would have a
material effect on the Company's results of operations or financial condition.
The Company also is exposed to market risk in changes in interest rates on
its long- term debt arrangements and commodity prices in some of the raw
materials it purchases for its manufacturing needs. However, neither presents a
risk that would have a material effect on the Company's results of operations or
financial condition.
Item No. 8 - Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements contained in
Part IV hereof.
Item No. 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item No. 10 - Directors and Executive Officers of the Registrant
Information called for by Item 10 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be
held on May 23, 2002, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
Item No. 11 - Executive Compensation
Information called for by Item 11 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be
held on May 23, 2002, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
Item No. 12 - Security Ownership of Certain Beneficial Owners and Management
Information called for by Item 12 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be
held on May 23, 2002, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
Item No. 13 - Certain Relationships and Related Transactions
Information called for by Item 13 of Part III is incorporated by reference to
the definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be
held on May 23, 2002, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
40
PART IV
Item No. 14 - Exhibits, Financial Statement Schedules and Reports on Form 8K
(a) 1. The Consolidated Financial Statements filed as part of this
report on Form 10-K are listed on the accompanying Index to
Consolidated Financial Statements and Consolidated Financial
Statement Schedules.
2. The Consolidated Financial Statement Schedule filed as part of
this report on Form 10-K is listed on the accompanying Index to
Consolidated Financial Statements and Consolidated Financial
Statement Schedules.
3. Exhibits:
Exhibit
Document Number
-------- -------
Certificate of Incorporation (incorporate
by reference Appendix B of the Form 14A
the Registrant filed April 22, 1999) 3.1
By-Laws (incorporate by reference Appendix
C of the Form 14A the Registrant filed
April 22, 1999) 3.2
Amendment to By-Laws dated March 22, 2001 3.3
Amended Exclusive License Agreement
(incorporate by reference Exhibit 10.1
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.1
Asset Purchase Agreement
(Australian Joint Venture)
(incorporate by reference Exhibit 10.2
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.2
Master Agent Agreement
(re: Australia)
(incorporate by reference Exhibit 10.3
to the Form 10-K of the Registrant for year
ended December 31, 1992) 10.3
41
Exhibit
Document Number
-------- -------
1995 Stock Option Plan
(incorporate by reference Exhibit 10.7 to
the Form 10-K of the Registrant for year
ended December 31, 1995) 10.4
Montgomery Employment Agreement dated June 1, 1997
(incorporate by reference Exhibit 10.6 to the
Form 10-K of the Registrant for year ended December 31, 1997) 10.5
Hastings Employment Agreement dated June 1, 1997
(incorporate by reference Exhibit 10.8 to the
Form 10-K of the Registrant for year ended December 31, 1997) 10.6
Kreher Employment Agreement dated April 13, 1994
(incorporate by reference Exhibit 10.14 to the Registrant's
Form 10-Q for quarter ended June 30, 1994). 10.7
Agreement with Traco Labs, Inc.
(incorporate by reference Exhibit 10.14
to the Form 10-K of the Registrant for
year ended December 31, 1996) 10.8
Line of Credit Note dated November 15, 2001 in the
amount of $1,000,000 with Southwest Bank of St. Louis 10.9
Deed of Trust Note dated September 2, 1997 in the amount
of $4,430,000 with Southwest Bank of St. Louis (incorporate
by reference Exhibit 10.18 to the Form 10-K of the Registrant
for year ended December 31, 1998) 10.10
Modification Agreement dated March 1, 2001
with Southwest Bank of St. Louis 10.11
42
Exhibit
Document Number
-------- -------
Reliv' International, Inc. Supplemental Executive
Retirement Plan dated June 1, 1998
(incorporate by reference Exhibit 10.19 to the Form
10-K of the Registrant for year ended December 31, 1998) 10.12
Stock Purchase Agreement dated October 1, 1998 among
Reliv' World Corporation, Reliv' Europe, Inc. and Global
Nutrition, Inc. regarding purchase of Reliv' UK, Ltd.
(incorporate by reference Exhibit 10.20 to the Form
10-K of the Registrant for year ended December 31, 1998) 10.13
1999 Stock Option Plan (incorporate by reference to
Form S-8 Registration Statement the Registrant filed April 7, 2000) 10.14
2001 Stock Option Plan (incorporate by reference to
Form S-8 Registration Statement the Registrant filed August 14, 2001) 10.15
Agreement with Hydron Technologies, Inc.
dated March 1, 2001 10.16
Statement re: computation of per
share earnings (incorporate by reference
to Note 8 of the Consolidated Financial
Statements contained in Part IV) 11
Subsidiaries of the Registrant
(incorporate by reference
the Registrants's Response to
Item 1 of Part I of this Form 10-K) 22
Consent of Ernst & Young L.L.P.,
Independent Auditors 23
(b) No reports on Form 8-K have been filed by the Registrant during the last
quarter of the period covered by this report.
(c) The Exhibits listed in subparagraph (a)(3) of this Item 14 are attached
hereto unless incorporated by reference to a previous filing.
(d) The Schedule listed in subparagraph (a)(2) of this Item 14 is attached
hereto.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RELIV' INTERNATIONAL, INC.
- ------------------------------------
By: /s/Robert L. Montgomery
-----------------------------------------------------------------------------
Robert L. Montgomery, Chairman of the Board of Directors, President and
Chief Executive Officer, Treasurer
Date: March 27, 2002
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ Robert L. Montgomery
-----------------------------------------------------------------------------
Robert L. Montgomery, Chairman of the Board of Directors, President and
Chief Executive Officer, Treasurer
Date: March 27, 2002
By: /s/ David G. Kreher
-----------------------------------------------------------------------------
David G. Kreher, Senior Vice President, Assistant Secretary (principal
financial and accounting officer)
Date: March 27, 2002
By: /s/ Carl W. Hastings
-----------------------------------------------------------------------------
Carl W. Hastings, Executive Vice President, Assistant Secretary, Director
Date: March 27, 2002
By: /s/ Thomas W. Pinnock
-----------------------------------------------------------------------------
Thomas W. Pinnock III, Director
Date: March 27, 2002
By: /s/ Stephen M. Merrick
-----------------------------------------------------------------------------
Stephen M. Merrick, Senior Vice President, Secretary, Director
44
Date: March 27, 2002
By: /s/ Donald L. McCain
-----------------------------------------------------------------------------
Donald L. McCain, Director
Date: March 27, 2002
By: /s/ John Akin
-----------------------------------------------------------------------------
John Akin, Director
Date: March 27, 2002
By: /s/ Sandra S. Montgomery
-----------------------------------------------------------------------------
Sandra S. Montgomery, Director
Date: March 27, 2002
By: /s/ Thomas T. Moody
-----------------------------------------------------------------------------
Thomas T. Moody, Director
Date: March 27, 2002
By: /s/ Marvin W. Solomonson
-----------------------------------------------------------------------------
Marvin W. Solomonson, Director
Date: March 27, 2002
By: /s/ Lynn Stiles
-----------------------------------------------------------------------------
Lynn Stiles, Director
Date: March 27, 2002
45
Reliv' International, Inc.
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2001, 2000, and 1999
Contents
Consolidated Financial Statements:
Report of Independent Auditors.............................................F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000...............F-2
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000, and 1999.......................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2001, 2000, and 1999.......................................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000, and 1999.......................................F-6
Notes to Consolidated Financial Statements - December 31, 2001.............F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2001, 2000, and 1999......................................F-28
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.
Report of Independent Auditors
Board of Directors and Stockholders
Reliv' International, Inc.
We have audited the accompanying consolidated balance sheets of Reliv'
International, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Reliv'
International, Inc. and Subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 8, 2002
F-1
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
2001 2000
-------------------------------
Assets
Current assets:
Cash and cash equivalents $1,258,821 $ 1,198,682
Accounts and notes receivable, less allowances of $5,000 in 2001
and 2000 548,035 2,446,595
Accounts due from employees and distributors 50,200 31,764
Inventories:
Finished goods 2,313,058 2,584,895
Raw materials 1,391,237 1,459,960
Sales aids and promotional materials 437,371 484,936
-------------------------------
Total inventories 4,141,666 4,529,791
Refundable income taxes 136,263 663,735
Prepaid expenses and other current assets 362,287 322,131
Net deferred income taxes 17,000 83,174
-------------------------------
Total current assets 6,514,272 9,275,872
Other assets 646,018 849,691
Note receivable from officer 59,250 59,250
Accounts due from employees and distributors 43,741 88,623
Property, plant, and equipment 15,951,977 15,669,705
Less accumulated depreciation and amortization (6,276,781) (5,548,026)
-------------------------------
9,675,196 10,121,679
-------------------------------
Total assets 16,938,477 $20,395,115
===============================
See accompanying notes.
F-2
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31
2001 2000
--------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 4,640,615 $ 6,864,415
Income taxes payable 6,153 --
Borrowings under line of credit 985,922 1,918,080
Current maturities of long-term debt 279,733 332,466
Current maturities of capital leases 134,682 176,094
--------------------------------
Total current liabilities 6,047,105 9,291,055
Noncurrent liabilities:
Capital lease obligations, less current maturities 8,862 143,900
Long-term debt, less current maturities 4,641,384 4,901,788
Other noncurrent liabilities 414,276 412,610
--------------------------------
Total noncurrent liabilities 5,064,522 5,458,298
Stockholders' equity:
Preferred stock, par value $.001 per share; 3,000,000 shares
authorized; none issued and outstanding -- --
Common stock, par value $.001 per share; 20,000,000 shares
authorized, 9,654,884 shares issued and 9,563,267 shares
outstanding in 2001 and 9,654,505 shares issued and
outstanding in 2000 9,655 9,655
Additional paid-in capital 9,119,934 9,074,756
Notes receivable - officers and directors (19,289) (26,650)
Treasury stock - 91,617 shares in 2001 (115,558) --
Accumulated deficit (2,479,285) (2,787,725)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (688,607) (624,274)
--------------------------------
Total stockholders' equity 5,826,850 5,645,762
--------------------------------
Total liabilities and stockholders' equity $16,938,477 $20,395,115
================================
See accompanying notes.
F-3
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
2001 2000 1999
------------------------------------------------------
Sales at suggested retail $74,410,042 $83,496,234 $90,085,780
Less distributor allowances on
product purchases 21,466,995 22,216,449 20,807,613
------------------------------------------------------
Net sales 52,943,047 61,279,785 69,278,167
Costs and expenses:
Cost of products sold 12,562,385 25,023,444 35,861,931
Distributor royalties and commissions 18,795,153 15,929,756 15,316,965
Selling, general, and administrative 20,555,649 20,545,175 19,834,063
Impairment of goodwill (see Note 2) -- 407,292 --
------------------------------------------------------
51,913,187 61,905,667 71,012,959
------------------------------------------------------
Income (loss) from operations 1,029,860 (625,882) (1,734,792)
Other income (expense):
Interest expense (527,208) (639,172) (585,255)
Other income 24,788 115,626 149,866
------------------------------------------------------
Income (loss) before income taxes 527,440 (1,149,428) (2,170,181)
Provision (benefit) for income taxes 219,000 (251,000) (770,000)
------------------------------------------------------
Net income (loss) $ 308,440 $ (898,428) $(1,400,181)
======================================================
Earnings (loss) per common share $.03 $(.09) $(.15)
======================================================
Earnings (loss) per common share -
Assuming dilution $.03 $(.09) $(.15)
======================================================
See accompanying notes.
F-4
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Common Stock Notes Receivable
---------------------------- Additional - Officers and Accumulated
Shares Amount Paid-In Capital Directors Deficit
--------------------------------------------------------------------------
Balance at December 31, 1998 9,653,502 $9,653 $ 9,170,111 $ (44,746) $ (354,195)
Net loss -- -- -- -- (1,400,181)
Other comprehensive income/(loss):
Foreign currency translation
adjustment -- -- -- -- --
Total comprehensive loss
Common stock purchased for treasury -- -- -- -- --
Cancellation of treasury stock (102,400) (102) (97,280) -- (38,416)
Repayment of loan by officers and
directors -- -- -- 6,529 --
Dividends paid ($.01 per share) -- -- -- -- (96,505)
--------------------------------------------------------------------------
Balance at December 31, 1999 9,551,102 $9,551 $ 9,072,831 $ (38,217) $(1,889,297)
--------------------------------------------------------------------------
Net loss -- -- -- -- (898,428)
Other comprehensive income/(loss):
Foreign currency translation
adjustment -- -- -- -- --
Total comprehensive loss
Repayment of loan by officers and
directors -- -- -- 11,567 --
Warrants granted under distributor
stock purchase plan -- -- 1,140 -- --
Options exercised 102,540 103 (103) -- --
Warrants exercised 863 1 888 -- --
--------------------------------------------------------------------------
Balance at December 31, 2000 9,654,505 $9,655 $ 9,074,756 $ (26,650) $(2,787,725)
--------------------------------------------------------------------------
Net income -- -- -- -- 308,440
Other comprehensive income/(loss):
Foreign currency translation
adjustment -- -- -- -- --
Total comprehensive income -- -- -- -- --
Repayment of loan by officers and
directors -- -- -- 7,361 --
Warrants granted under distributor
stock purchase plan -- -- 9,384 -- --
Tax benefit from exercise of options -- -- 35,404 -- --
Common stock purchased for treasury -- -- -- -- --
Warrants exercised 379 -- 390 -- --
--------------------------------------------------------------------------
Balance at December 31, 2001 9,654,884 $9,655 $ 9,119,934 $ (19,289) $(2,479,285)
==========================================================================
Accumulated
Other Treasury Stock
Comprehensive -------------------------
Income/(Loss) Shares Amount Total
---------------------------------------------------------
Balance at December 31, 1998 $(440,657) -- $ -- $ 8,340,166
Net loss -- -- -- (1,400,181)
Other comprehensive income/(loss):
Foreign currency translation
adjustment 104,507 -- -- 104,507
-----------
Total comprehensive loss $(1,295,674)
-----------
Common stock purchased for treasury -- 102,400 (135,798) (135,798)
Cancellation of treasury stock -- (102,400) 135,798 --
Repayment of loan by officers and
directors -- -- -- 6,529
Dividends paid ($.01 per share) -- -- -- (96,505)
---------------------------------------------------------
Balance at December 31, 1999 $(336,150) -- $ -- $ 6,818,718
---------------------------------------------------------
Net loss -- -- -- (898,428)
Other comprehensive income/(loss):
Foreign currency translation
adjustment (288,124) -- -- (288,124)
-----------
Total comprehensive loss -- -- -- $(1,186,552)
-----------
Repayment of loan by officers and
directors -- -- -- 11,567
Warrants granted under distributor
stock purchase plan -- -- -- 1,140
Options exercised -- -- -- --
Warrants exercised -- -- -- 889
---------------------------------------------------------
Balance at December 31, 2000 $(624,274) -- $ -- $ 5,645,762
---------------------------------------------------------
Net income -- -- -- 308,440
Other comprehensive income/(loss):
Foreign currency translation
adjustment (64,333) -- -- (64,333)
-----------
Total comprehensive income -- -- -- $ 244,107
-----------
Repayment of loan by officers and
directors -- -- -- 7,361
Warrants granted under distributor
stock purchase plan -- -- -- 9,384
Tax benefit from exercise of options -- -- -- 35,404
Common stock purchased for treasury -- 91,617 (115,558) (115,558)
Warrants exercised -- -- -- 390
---------------------------------------------------------
Balance at December 31, 2001 $(688,607) 91,617 $ (115,558) $ 5,826,850
==========================================================
See accompanying notes
F-5
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2001 2000 1999
-----------------------------------------------
Operating activities
Net income (loss) $ 308,440 $ (898,428) $(1,400,181)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 743,078 1,080,247 1,068,471
Amortization of goodwill -- 52,554 52,554
Impairment charge for goodwill -- 407,292 --
Compensation expense for warrants granted 9,384 1,140 --
Tax benefit from exercise of options 35,404 -- --
Provision for losses on accounts receivable -- -- 431,625
Provision for deferred income taxes 66,171 57,098 (61,225)
Foreign currency transaction (gain)/loss (16,547) 21,376 (23,782)
(Increase) decrease in accounts and notes
receivable 1,940,351 (347,245) (561,104)
(Increase) decrease in inventories 358,768 85,966 (740,168)
(Increase) decrease in refundable income taxes 527,202 188,950 (541,074)
(Increase) decrease in prepaid expenses and
other current assets (39,678) (25,084) 138,244
(Increase) decrease in other assets 201,587 150,903 (313,383)
Increase (decrease) in accounts payable and
accrued expenses (2,198,836) (360,404) 834,360
Increase (decrease) in income taxes payable 6,192 (1,370) (55,749)
Decrease in unearned income (5,003) -- (102,712)
-----------------------------------------------
Net cash provided by (used in) operating activities 1,936,513 412,995 (1,274,124)
Investing activities
Proceeds from sale of property, plant, and
equipment -- 23,464 --
Purchase of property, plant, and equipment (300,121) (440,224) (1,081,746)
Repayment of loans by officers and directors 7,361 116,567 6,529
-----------------------------------------------
Net cash used in investing activities (292,760) (300,193) (1,075,217)
Financing activities
Proceeds from long-term borrowings and line of
credit 40,463 365,094 1,779,162
Principal payments on long-term borrowings and
line of credit (1,285,395) (466,829) (419,863)
Principal payments under capital lease obligations (176,450) (137,617) (163,654)
Proceeds from warrants exercised 390 889 --
Dividends paid -- -- (96,505)
Purchase of treasury stock (115,558) -- (135,798)
-----------------------------------------------
Net cash (used in) provided by financing activities (1,536,550) (238,463) 963,342
Effect of exchange rate changes on cash and cash
equivalents (47,064) (207,357) 100,895
-----------------------------------------------
Increase (decrease) in cash and cash equivalents 60,139 (333,018) (1,285,104)
Cash and cash equivalents at beginning of year 1,198,682 1,531,700 2,816,804
-----------------------------------------------
Cash and cash equivalents at end of year $ 1,258,821 $ 1,198,682 $ 1,531,700
===============================================
F-6
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
2001 2000 1999
------------------------------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $532,187 $605,565 $581,235
====================================
Income taxes $200,220 $219,500 $ 55,710
====================================
Noncash investing and financing transactions:
Capital lease obligations entered into -- $ 56,598 $104,285
====================================
See accompanying notes.
F-7
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2001
1. Nature of Business and Significant Accounting Policies
Nature of Business
Reliv' International, Inc. (the Company) produces a line of food products
including nutritional supplements, diet management products, granola bars, and
sports drink mixes. These products are sold by subsidiaries of the Company to a
sales force of independent distributors and licensees of the Company that sell
products directly to consumers. The Company and its subsidiaries sell products
to distributors throughout the United States and in Australia, Canada, New
Zealand, Mexico, the United Kingdom, and the Philippines. In addition, the
Company provides manufacturing and packaging services for unrelated customers.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its foreign and domestic subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Inventories
Inventories are valued at the lower of cost or market. Product cost includes raw
material, labor and overhead costs and is accounted for using the first-in,
first-out basis. On a periodic basis, the Company reviews its inventory levels
in each country, as compared to future demand requirements and the shelf life of
the various products. Based on this review, the Company records inventory
write-downs when necessary.
Property, Plant, and Equipment
Property, plant, and equipment are stated on the cost basis. Depreciation is
computed using the straight-line or an accelerated method over the useful life
of the related assets, including assets recorded under capital leases.
Goodwill
Goodwill represents the cost in excess of the fair value of the net assets
acquired and is being amortized on a straight-line basis over a period of ten
years. On a periodic basis, the Company evaluates goodwill for impairment by
comparing estimated future discounted cash flows of the business to its carrying
value. See Note 2.
F-8
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Revenue Recognition
The Company generally receives its sales price in cash accompanying orders from
independent distributors and makes related commission payments in the following
month. The net sales price is the suggested retail price less the distributor
discount of 20 percent to 40 percent of such suggested retail price. Sales
revenue and commission expenses are recorded when the merchandise is shipped.
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into U.S.
dollars in accordance with the Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency
Translation. All balance sheet accounts have been translated using the exchange
rates in effect at the balance sheet date. Statement of operations amounts have
been translated using the average exchange rate for the year. The gains and
losses resulting from the changes in exchange rates from year to year have been
reported in other comprehensive income/loss. Foreign currency translation
adjustments exclude income tax expense (benefit) given that the earnings of
non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of
time. The effect on the statements of operations of transaction gains and losses
is insignificant for all years presented.
Income Taxes
The provision for income taxes is computed using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. The primary
difference between financial statement and taxable income results from financial
statement accruals and reserves.
Stock-Based Compensation
The Company accounts for employee stock options in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
Since the Company grants stock options at an exercise price not less than the
fair value of the shares at the date of grant, no compensation expense is
recognized. As permitted by SFAS No. 123, Accounting and Disclosure of
Stock-Based Compensation, effective for years beginning after December 1995, the
Company has elected the disclosure-only alternative of this pronouncement in a
note to these financial statements (see Note 9).
The Company accounts for options granted to non-employees and warrants granted
to distributors under the fair value approach prescribed by SFAS No. 123.
F-9
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Business and Significant Accounting Policies (continued)
Basic and Diluted Earnings per Share
Basic and diluted earnings per share are calculated in accordance with SFAS No.
128, Earnings per Share. All earnings per share amounts for all periods have
been presented to conform to the requirements of SFAS No. 128.
Basic earnings per common share are computed using the weighted average number
of common shares outstanding during the year. Diluted earnings per common share
are computed using the weighted average number of common shares and potential
dilutive common shares that were outstanding during the period. Potential
dilutive common shares consist of outstanding stock options and warrants. See
Note 8 for additional information regarding earnings per share.
Shipping and Handling Costs
The Company records shipping and handling costs as a component of cost of
products sold.
Advertising
Costs of sales aids and promotional materials are capitalized as inventories.
All other advertising and promotional costs are expensed when incurred. The
company recorded $32,000, $30,000 and $35,000 of advertising expense in 2001,
2000 and 1999 respectively.
Cash Equivalents
The Company's policy is to consider demand deposits and short-term investments
with a maturity of three months or less when purchased as cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to
conform to the current presentation.
F-10
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
2. Reliv UK, Ltd. - Goodwill Impairment
The Company owns a 98.5% interest in Reliv Europe, the holding company of Reliv
UK, Ltd. (Reliv UK). In December 2000, the Company recorded a noncash accounting
charge related to the unamortized balance of the goodwill established when Reliv
UK was purchased in 1998. The Company performed an impairment review as the
result of the forecast for continuing losses for the entity. As a result of the
Company's review, the Company determined the unamortized goodwill of $407,292
was impaired, and it was written off in full. This nonrecurring charge, which
has been reported as a separate line item in loss from operations in the
accompanying 2000 consolidated statement of operations, had no impact on the
Company's 2000 cash flows or its ability to generate cash flows in the future.
3. Research and Development Expenses
Research and development expenses of $355,000, $410,000, and $393,000 in 2001,
2000 and 1999, respectively, were charged to selling, general, and
administrative expenses as incurred.
4. Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2001 and 2000, consist of the
following:
2001 2000
-------------------------------
Land $ 829,222 $ 829,222
Building 8,441,164 8,399,277
Machinery and equipment 4,030,689 3,984,971
Office equipment 565,085 494,266
Computer equipment and software 2,085,817 1,961,969
-------------------------------
15,951,977 15,669,705
Less accumulated depreciation and amortization (6,276,781) (5,548,026)
-------------------------------
$ 9,675,196 $ 10,121,679
===============================
F-11
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2001 and 2000, consist of
the following:
2001 2000
-------------------------------
Trade payables $ 2,880,565 $ 5,264,706
Distributors commissions 1,244,439 1,199,522
Sales taxes 260,643 171,639
Interest expense 60,499 65,478
Payroll and payroll taxes 192,673 148,573
Other 1,796 14,497
-------------------------------
$ 4,640,615 $ 6,864,415
===============================
6. Short-Term Borrowings
In November 2001, the Company renewed its line of credit with a maximum
borrowing limit of $1,000,000. The limit is based on a collateral-based formula
of accounts receivable and inventory. Borrowings under this line of credit are
due on demand and bear interest, payable monthly, at the prime rate plus .50%,
which was 5.25% at December 31, 2001 and 9.5% at December 31, 2000. The maturity
date of the line is May 2002. A portion of the Company's inventory and property,
plant, and equipment with a net book value of $3,901,400 as of December 31, 2001
are pledged as security under the terms of the agreement. As of December 31,
2001, the Company's outstanding balance was $985,922 on the line of credit and
no additional borrowings were available.
F-12
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Long-Term Debt
Long-term debt at December 31, 2001 and 2000, consists of the following:
2001 2000
-----------------------------
Industrial revenue bonds payable in
monthly installments (including
interest at 85% of prime) not to
exceed $9,611, commencing August 1,
1991; secured by land and building
(net book value $2,641,500 at December
31, 2001); balance due on March 1, 2005 $ 326,559 $ 405,792
Note payable in monthly installments
(including interest at prime and
additional interest at 15% of prime on
the balance of the industrial revenue
bonds) equal to $9,611 less
installment applied to industrial
revenue bond, commencing August 1,
1991; unsecured; balance due on March
1, 2005 204,755 204,755
Term loan payable in monthly
installments of $19,550, including
interest at 8.5% through April 2001;
secured by equipment and inventory
(net book value of $5,075,600 at
December 31, 2000) -- 58,130
Term loan payable in monthly
installments of $38,802, including
interest at 8.5%, with the balance due
March 2004; secured by land and
building (net book value of $5,189,900
at December 31, 2001) 4,061,927 4,158,073
Term loan payable in monthly
installments of $7,303, including
interest at 7.75% with the balance due
February 2003; secured by equipment
(net book value of $134,700 at
December 31, 2001) 90,254 167,504
Private placement notes payable in
quarterly installments equal to 2% of
Philippine sales at suggested retail
(including interest at 9%), commencing
on July 1, 2000; unsecured; balance
due on July 1, 2005 208,092 240,000
Note payable in monthly installments of
$748, including interest at 17.00%
with the balance due June 2004;
secured by equipment (net book value
of $24,600 at December 31, 2001) 16,832 --
Note payable in monthly installments of
$584, including interest at 19.28%
with the balance due April 2004;
secured by equipment (net book value
of $18,600 at December 31, 2001) 12,698 --
-----------------------------
4,921,117 5,234,254
Less current maturities (279,733) (332,466)
-----------------------------
$ 4,641,384 $ 4,901,788
=============================
F-13
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
7. Long-Term Debt (continued)
Principal maturities of long-term debt, at December 31, 2001 are as follows:
2002 $ 279,733
2003 269,399
2004 3,926,332
2005 445,653
----------------
$ 4,921,117
================
8. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31
2001 2000 1999
--------------------------------------------
Numerator:
Numerator for basic and diluted earnings per
share - net income (loss) $ 308,440 $ (898,428) $(1,400,181)
Denominator:
Denominator for basic earnings per share -
weighted average shares 9,642,000 9,563,000 9,633,000
Effect of dilutive securities:
Employee stock options and other warrants 100,000 -- --
--------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares 9,742,000 9,563,000 9,633,000
============================================
Basic earnings (loss) per share $0.03 $(0.09) $(0.15)
============================================
Diluted earnings (loss) per share $0.03 $(0.09) $(0.15)
============================================
The diluted shares base for the years ended December 31, 2000 and 1999, excludes
incremental shares of 347,000 and 59,000, respectively, related to employee
stock options and warrants issued to external parties. These shares are excluded
due to their antidilutive effect as a result of the Company's net losses during
2000 and 1999.
F-14
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stock Options, Warrants, and Distributor Stock Purchase Plan
Stock Options
In May 1999, the Company adopted an incentive stock option plan which provides
for the grant of incentive stock options and nonqualified stock options for
employees (including officers) and other consultants and advisors of the
Company. A maximum of 1,000,000 shares can be purchased at an option price not
less than the fair market value of the stock at the time the options are
granted. In December 1999, options for 922,000 shares were issued at an exercise
price of between $1.125 and $1.2375 per share.
In December 1999, options granted in 1994 from an incentive stock option plan
for key employees expired. These options were reissued as nonqualified stock
options in December 1999, with an expiration date of December 2004. Options for
440,000 shares were issued at an exercise price of $2.045 per share.
In May 2001, the Company adopted another incentive stock option plan similar to
the 1999 plan. A maximum of 1,000,000 shares can be purchased at an option price
not less than the fair market value of the stock at the time the options are
granted. In July 2001, options for 977,000 shares were issued at an exercise
price of between $1.05 and $1.155 per share.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its employee
and nonemployee director stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation, requires the use of option valuation models that
were not developed for use in valuing employee stock options. Under APB Opinion
No. 25, because the exercise price of the Company's employee and nonemployee
director stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Company records expense under the fair value method of SFAS No. 123 for
options and warrants granted to distributors. Total expense recorded for these
options and warrants was $9,384, $1,140 and $0 in 2001, 2000, and 1999,
respectively.
F-15
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stock Options, Warrants, and Distributor Stock Purchase Plan (continued)
Stock Options (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
employee stock options under the fair value method of the statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions: risk-free
interest rates ranging from 3.07% to 4.78% for 2001, 5.11% to 6.87% for 2000,
and 6.12% to 6.29% for 1999; dividend yield of zero for 2001 and 2000, and .50%
for 1999; volatility factor of the expected price of the Company's stock of .729
for 2001, .745 for 2000, and .667 for 1999; and a weighted average expected life
of 4.51 years. The weighted average fair value of stock options granted during
2001, 2000, and 1999 was $.63 , $.98, and $.58 per share, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee and nonemployee director stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee and
nonemployee director stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
and warrants is amortized to expense over the vesting period. The effects of
applying the pro forma disclosure provisions of SFAS No. 123 are not likely to
be representative of the effects on reported net income for future years. The
Company's pro forma information follows:
2001 2000 1999
-------------------------------------------------
Pro forma net income (loss) $ 48,073 $ (1,318,935) $ (1,851,570)
Pro forma earnings (loss) per share:
Basic $.01 $(.14) $(.19)
Diluted $.00 $(.14) $(.19)
F-16
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stock Options, Warrants, and Distributor Stock Purchase Plan (continued)
Stock Options (continued)
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
2001 2000 1999
------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------
Outstanding beginning of
the year 2,039,000 $1.740 2,391,600 $1.663 1,474,850 $2.021
Granted:
Price = fair value 781,000 1.050 69,000 1.612 722,000 1.125
Price > fair value 196,000 1.155 -- -- 640,000 1.793
Exercised -- -- (400,600) 1.262 -- --
Forfeited (203,500) 2.354 (21,000) 1.571 (445,250) 2.165
---------- ---------- ----------
Outstanding at end of
year 2,812,500 $1.463 2,039,000 $1.740 2,391,600 $1.663
========== ========== ==========
Exercisable at end of
year 1,944,681 1,693,679 1,711,031
========== ========== ==========
As of December 31, 2001
Options Outstanding Options Exercisable
------------------------------------- ----------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- -------------------- ------------------- --------------- ------------------
$1.05-$2.00 1,933,500 3.78 $1.127 1,065,681 $1.143
$2.01-$3.00 790,000 2.53 2.101 790,000 2.101
$3.125 89,000 0.96 3.125 89,000 3.125
------------ -----------
$1.05-$3.125 2,812,500 3.34 $1.463 1,944,681 $1.622
============ ===========
F-17
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. Stock Options, Warrants, and Distributor Stock Purchase Plan (continued)
Distributor Stock Purchase Plan
In November 1998, the Company established a Distributor Stock Purchase Plan. The
plan allows distributors who have reached the "Ambassador" status the
opportunity to allocate up to 10% of their monthly compensation into the plan to
be used to purchase the Company's common stock at the current market value. The
plan also states that at the end of each year, the Company will grant warrants
to purchase additional shares of the Company's common stock based on the number
of shares purchased by the distributors under the plan during the year. The
warrant exercise price will equal the market price for the Company's common
stock at the date of issuance. The warrants issued shall be in the amount of 25%
of the total shares purchased under the plan during the year. This plan
commenced in January 1999, and a total of 50,034, 32,837 and 36,075 warrants
were issued during the years ended December 31, 2001, 2000 and 1999,
respectively. The weighted average fair value of warrants granted during 2001,
2000 and 1999 were $.57, $.60 and $.49 per share, respectively.
A summary of the Company's warrant activity and related information for the
years ended December 31 follows:
2001 2000 1999
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
------------------------------------------------------------------------------------
Outstanding beginning of
the year 68,049 $1.137 36,075 $1.031 111,548 $4.360
Granted:
Price = fair value 50,034 1.250 32,837 1.250 36,075 1.031
Exercised (379) 1.031 (863) 1.031 -- --
Forfeited -- -- -- -- (111,548) 4.360
---------- ---------- ------------
Outstanding at end of
year 117,704 $1.185 68,049 $1.137 36,075 $1.031
========== ========== ============
Exercisable at end of
year 33,755 11,163 --
========== ========== ============
As of December 31, 2001
Warrants Outstanding Warrants Exercisable
------------------------------------- -----------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------------------------------------
$1.031-1.25 117,704 2.13 $1.185 33,755 $1.102
F-18
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. Leases
The Company leases certain manufacturing, storage and office facilities and
certain equipment and automobiles. These leases have varying terms, and certain
leases have renewal and/or purchase options. Future minimum payments under
noncancelable leases with initial or remaining terms in excess of one year
consist of the following at December 31, 2001:
Capital Operating
Leases Leases
----------------------------
2002 $142,839 $291,626
2003 11,446 170,487
2004 -- 115,682
2005 -- 29,045
2006 -- --
Thereafter -- --
----------------------------
Total minimum lease payments 154,285 $606,840
=========
Less amount representing interest 10,741
--------
Present value of minimum lease payments
(including current portion of $134,682) $143,544
========
Machinery, office, and computer equipment at December 31, 2001 and 2000, include
approximately $620,187 and $676,784 of equipment under leases that have been
capitalized. Accumulated depreciation and amortization for such equipment
approximated $375,359 and $324,890 at December 31, 2000 and 1999, respectively.
Rent expense for all operating leases was $302,146, $319,802, and $350,029 for
the years ended December 31, 2001, 2000, and 1999, respectively.
11. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments are
as follows:
2001 2000
----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------
Cash and cash equivalents $1,259,000 $1,259,000 $1,199,000 $1,199,000
Long-term debt, including
current maturities 4,921,000 5,466,000 5,234,000 5,239,000
Capital lease obligations,
including current maturities 144,000 146,000 320,000 318,000
F-19
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
11. Fair Value of Financial Instruments (continued)
The carrying amount of cash equivalents approximates fair value because of the
short maturity of those instruments. The fair value of long-term debt and
capital lease obligations is estimated based on the current rates offered to the
Company for debt of the same remaining maturities.
12. License Agreement
The Company has a license agreement with the individual who developed several of
the Company's products. This agreement provides the Company with the exclusive
worldwide license to manufacture and sell all products created by the licensor
and requires monthly royalty payments of 5% of net sales, with a minimum payment
of $10,000 and a maximum payment of $22,000. The agreement terminates upon the
death of the licensor. The amount of expense under this agreement was $264,000
for each of the years ended December 31, 2001, 2000, and 1999.
13. Income Taxes
The components of income (loss) before income taxes are as follows:
Year ended December 31
2001 2000 1999
-----------------------------------------------------
Domestic $ 951,425 $ 303,804 $(1,443,941)
Foreign (423,985) (1,453,232) (726,240)
-----------------------------------------------------
$ 527,440 $(1,149,428) $(2,170,181)
=====================================================
The components of the provision (benefit) for income taxes are as follows:
Year ended December 31
2001 2000 1999
-----------------------------------------------------
Current:
Federal $ 117,000 $ (310,000) $ (642,000)
Foreign 27,000 24,000 (15,000)
State 9,000 (23,000) (51,000)
-----------------------------------------------------
Total current 153,000 (309,000) (708,000)
Deferred:
Federal 66,000 50,000 (75,000)
Foreign -- 8,000 13,000
-----------------------------------------------------
Total deferred 66,000 58,000 (62,000)
-----------------------------------------------------
$ 219,000 $ (251,000) $ (770,000)
=====================================================
F-20
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. Income Taxes (continued)
The provision for income taxes is different from the amounts computed by
applying the United States federal statutory income tax rate of 34%. The reasons
for these differences are as follows:
Year ended December 31
2001 2000 1999
-------------------------------------------------
Income taxes at statutory rate $ 179,000 $(391,000) $(738,000)
Differences between U.S. and foreign tax rates on
foreign income - - (6,000)
State income taxes, net of federal benefit 9,000 (15,000) (34,000)
Tax losses in excess of book losses (54,000) (223,000) --
Goodwill impairment charge - 156,000 --
Effect of foreign losses without an income tax
benefit 19,000 101,000 --
Executive life insurance expense 39,000 53,000 --
Nondeductible foreign development expenses 26,000 31,000 --
Meals and entertainment 16,000 22,000 --
Tax benefit realized from employee exercise of
stock options (35,000) (17,000) --
Other 20,000 32,000 8,000
-------------------------------------------------
$ 219,000 $(251,000) $(770,000)
=================================================
The components of the deferred tax asset and the related tax effects of each
temporary difference at December 31, 2001 and 2000, are as follows:
2001 2000
---------------------------
Deferred tax asset:
Product refund reserve $ 18,000 $ 18,000
Tax over book depreciation (210,000) (178,000)
Deferred compensation 162,000 135,000
Inventory obsolescence reserve -- 73,000
Vacation accrual 11,000 11,000
Charitable contributions 13,000 12,000
Bad debt reserve 2,000 2,000
Miscellaneous accrued expenses 21,000 10,174
---------------------------
$ 17,000 $ 83,174
============================
Federal income taxes have not been provided on the undistributed earnings of the
Company's Australian, New Zealand and Philippine subsidiaries since the Company
has foreign tax credits available to offset any related federal income taxes.
F-21
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
14. Employee Benefit Plans
The Company established a 401(k) employee savings plan which covers
substantially all employees. Employees can contribute up to 8.5% of their gross
income to the plan, and the Company matches 75% of the employee's contribution.
Company contributions under the 401(k) plan totaled $178,000, $179,000, and
$174,000 in 2001, 2000, and 1999, respectively.
15. Incentive Compensation Plans
In July 2001, the Board of Directors approved an incentive compensation plan
effective for fiscal years beginning with 2001. Under the plan, the Company will
establish a bonus pool payable on a semi-annual basis of the Company's fiscal
year an amount equal to 25% of the net income of the Company. Bonuses will be
payable on all profits, but only if the net income for each six-month period
exceeds $250,000. The bonus pool is allocated to executives according to a
specified formula, with a portion allocated to a middle management group
determined by the Executive Committee of the Board of Directors. The Company
paid a total of $112,380 to the participants of the bonus pool in 2001.
The Company paid $76,824 and $0 in 2000 and 1999, respectively, under a previous
incentive compensation plan to its officer/directors.
During 1998, the Company established a supplemental executive retirement plan
which allows certain employees to defer a portion of their annual salary/bonus
into a grantor trust. The participants have a choice of certain investment
vehicles, and earnings/losses on the trust assets accrue, to the
benefit/detriment of the participants. The Company may also match the
participant's deferral amount. In 2001, 2000 and 1999, the Company did not
provide a match.
F-22
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
16. Related Party Transactions
An officer/director of the Company is a principal in a law firm which provides
legal services to the Company. During the years ended December 31, 2001, 2000,
and 1999, the Company incurred fees to the officer/director and his firm of
approximately $242,000, $269,000, and $220,000, respectively.
In the stockholders' equity section of the balance sheet, notes receivable -
officers and directors include amounts due from officers/directors of $19,289
and $26,650 at December 31, 2001 and 2000, respectively.
Note receivable from officer represents amounts due from an officer/director. In
1998, the individual received advances against his anticipated incentive
compensation totaling $89,250. A repayment of $30,000 was made in January 2000.
Accounts due from employees and distributors represent travel and other advances
to employees, as well as advances to distributors.
17. Consulting Agreements
In conjunction with an acquisition, the Company entered into a consulting
agreement with a partnership consisting of three former stockholders. Under the
agreement, which commenced in March 1992 and expires in February 2002, the
Company pays annual consulting fees to the partnership equal to 2% of the gross
sales amount of all products sold by the Company in Australia and New Zealand
determined by the suggested retail price up to approximately $A10,000,000 in
1992 and $A12,000,000 in all subsequent years during the term and 3% of retail
sales that exceed those figures. Total expense under this agreement approximated
$39,000, $51,000, and $65,000 in 2001, 2000, and 1999, respectively.
F-23
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
18. Legal Proceedings
In December 2001, five former distributors of the Company filed for arbitration
claiming unlawful termination, breach of the Distributor Agreement and
interference with business expectancy. The individuals had been terminated by
the Company in October 2000 for violating certain provisions of the Distributor
Agreement. The Company believes the claim is without merit and intends to
vigorously defend itself. At this time, the outcome of this matter is uncertain
and a range of loss cannot be reasonably estimated; however, management believes
that the final outcome will not have a material adverse effect on the financial
position or results of operations of the Company.
19. Segment Information
Description of Products and Services by Segment
The Company has two reportable segments: a network marketing segment and a
manufacturing and packaging segment. The Company's network marketing segment
consists of eight operating units that sell nutritional and dietary products to
a sales force of independent distributors that sell the products directly to
customers. The manufacturing and packaging segment consists of the manufacturing
operation of the Company that produces nearly all of the products sold by the
network marketing segment along with products made for unrelated customers based
on the customers' specifications.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on profit or
loss from operations before interest expense, other nonoperating income and
expense and income taxes. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed-upon
intercompany profit on intersegment sales and transfers.
Factors Management Used to Identify the Enterprise's Reportable Segments
The Company's reportable segments are business units that perform distinctly
different functions. The manufacturing and packaging segment is evaluated on its
sales and profitability to its unrelated outside customers, along with
performance against standard costs for its intersegment sales. The network
marketing segment is evaluated on the sales and profitability of the network
marketing product line to its sales force of independent distributors.
F-24
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
19. Segment Information (continued)
Segment data for the fiscal years ended December 31, 2001, 2000, and 1999
follows:
2001 2000 1999
--------------------------------------------------
Net sales
Net sales to external customers:
Network marketing $ 49,064,076 $ 44,535,717 $ 41,985,765
Manufacturing and packaging 3,878,971 16,744,068 27,292,402
--------------------------------------------------
Total net sales to external customers 52,943,047 61,279,785 69,278,167
Intersegment net sales:
Manufacturing and packaging 6,826,619 6,501,576 6,145,234
--------------------------------------------------
Total net sales 59,769,666 67,781,361 75,423,401
Reconciling items:
Intersegment net sales (6,826,619) (6,501,576) (6,145,234)
--------------------------------------------------
Total consolidated net sales $ 52,943,047 $ 61,279,785 $ 69,278,167
==================================================
Depreciation and amortization
Network marketing $ 250,313 $ 302,624 $ 528,140
Manufacturing and packaging 492,765 830,177 592,885
--------------------------------------------------
Total consolidated depreciation
and amortization expense $ 743,078 $ 1,132,801 $ 1,121,025
==================================================
Segment profit (loss)
Network marketing $ 2,610,296 $ 1,099,872 $ 1,634,492
Manufacturing and packaging 174,780 24,556 (1,897,913)
--------------------------------------------------
Total segment profit (loss) 2,785,076 1,124,428 (263,421)
Reconciling items:
Corporate expenses (1,755,216) (1,750,309) (1,471,371)
Nonoperating-net 24,788 115,625 149,866
Interest expense (527,208) (639,172) (585,255)
--------------------------------------------------
Total consolidated income (loss) before
Income taxes $ 527,440 $ (1,149,428) $ (2,170,181)
==================================================
F-25
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
19. Segment Information (continued)
2001 2000 1999
-------------------------------------------------
Segment assets
Network marketing $13,244,683 $13,418,288 $13,973,132
Manufacturing and packaging 2,434,973 5,778,145 5,266,986
-------------------------------------------------
Total segment assets 15,679,656 19,196,433 19,240,118
Reconciling items:
Corporate assets 1,258,821 1,198,682 1,531,700
-------------------------------------------------
Total consolidated assets 16,938,477 $20,395,115 $20,771,818
=================================================
Capital expenditures
Network marketing $ 251,109 $ 300,017 $ 339,594
Manufacturing and packaging 49,012 140,207 742,152
-------------------------------------------------
Total capital expenditures $ 300,121 $ 440,224 $ 1,081,746
=================================================
Geographic area data
2001 2000 1999
-------------------------------------------------
Net sales to external customers
United States $44,799,429 $55,996,610 $64,694,363
Australia 1,521,482 1,718,929 2,128,156
New Zealand 286,816 292,895 416,178
Canada 972,217 913,051 992,509
Mexico 2,233,088 1,768,570 691,160
United Kingdom 391,033 388,488 355,801
Colombia 45,671 82,638 --
Philippines 2,693,311 118,604 --
-------------------------------------------------
Total net sales to external customers 52,943,047 $61,279,785 $69,278,167
=================================================
Assets by area
United States $13,441,669 $17,689,638 $17,887,685
Australia 665,331 871,155 1,051,248
New Zealand 239,991 341,905 643,405
Canada 221,395 307,071 439,018
Mexico 1,388,319 653,251 586,088
United Kingdom 140,044 100,247 93,565
Colombia 1,278 144,382 70,809
Philippines 840,450 287,466 --
-------------------------------------------------
Total consolidated assets $16,938,477 $20,395,115 $20,771,818
=================================================
F-26
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
19. Segment Information (continued)
Major Customer
Revenues from sales to one customer of the Company's manufacturing and packaging
segment represented approximately $3.8 million and $16.7 million of consolidated
net sales for 2001 and 2000, respectively. Production and sales to this customer
concluded in August 2001.
20. Quarterly Financial Data (Unaudited)
First Second Third Fourth
------------------------------------------------------------------
(In thousands, except per share amounts)
2001
Net sales $14,062 $13,425 $13,418 $12,038
Cost of products sold $ 4,153 $ 3,683 $ 2,291 $ 2,435
Net income (loss) $ (146) $ 13 $ 407 $ 34
Earnings (loss) per share:
Basic $ (.01) $ .00 $ .04 $ .00
Diluted $ (.01) $ .00 $ .04 $ .00
2000
Net sales $15,448 $15,557 $17,353 $12,922
Cost of products sold $ 6,616 $ 6,276 $ 6,578 $ 5,553
Net income (loss) $ 86 $ 63 $ 234 $(1,281)
Earnings (loss) per share:
Basic $ .01 $ .01 $ .02 $ (.13)
Diluted $ .01 $ .01 $ .02 $ (.13)
F-27
Reliv' International, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 2001, 2000, and 1999
Column A Column B Column C Column D Column E Column F
- -------------------------------------------------------------------------------------------------------------------
Additions
Balance at Charged to Charged to Balance at
beginning of costs and Other Deductions end
Classification year expenses Accounts Describe of year
- ------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2001
Deducted from asset accounts:
Allowance for doubtful
accounts 5,000 $ 7,800 -- $ 7,800(1) $ 5,000
Reserve for obsolete
inventory 182,500 -- 502,700 98,400(2) 586,600
Supporting liability accounts:
Reserve for refunds 50,000 252,900 -- 252,900(3) 50,000
-------------------------------------------------------------------------
Year ended December 31, 2000
Deducted from asset accounts:
Allowance for doubtful
accounts $430,000 $ 5,000 -- $430,000(1) $5,000
Reserve for obsolete
inventory 236,000 -- 182,500 236,000(2) 182,500
Supporting liability accounts:
Reserve for refunds 50,000 172,000 -- 172,000(3) 50,000
-------------------------------------------------------------------------
Year ended December 31, 1999
Deducted from asset accounts:
Allowance for doubtful
accounts $ 5,000 $432,000 -- $ 7,000(1) $430,000
Reserve for obsolete
inventory 176,000 151,000 -- 91,000(2) 236,000
Supporting liability accounts:
Reserve for refunds 50,000 270,000 -- 270,000(3) 50,000
-------------------------------------------------------------------------
(1) Uncollectable accounts written off, net of recoveries.
(2) Disposal of obsolete inventory.
(3) Amounts refunded, net of salable amounts returned.
F-28