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, 2000
Commission File Number
1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 371172197
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri 63005
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(Address of principal executive offices) (Zip Code)
(636) 537-9715
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Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
Name of each exchange
Title of Class on which registered:
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Common Stock, 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
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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 $1.50 per share of Registrant's Common
Stock as reported on NASDAQ National Market tier of The NASDAQ Stock Market at
March 15, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was then approximately $8,407,607.
(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, 2001, was 9,654,505 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 2001 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 Page
Item 1 Business............................................................ 3
Item 2 Properties.......................................................... 21
Item 3 Legal Proceedings................................................... 22
Item 4 Submission of Matters to a Vote of Security Holders................. 22
Part II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 22
Item 6 Selected Financial Data............................................. 23
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation.............................. 24
Item 7a Quantitative and Qualitative Disclosures About Market Risk.......... 33
Item 8 Financial Statements and Supplementary Data......................... 33
Item 9 Changes in and Disagreements with Accountants on
Accounting Financial Disclosure..................................... 33
Part III
Item 10 Directors and Executive Officers of the Registrant.................. 33
Item 11 Executive Compensation.............................................. 33
Item 12 Security Ownership of Certain Beneficial Owners
and Management.................................................. 34
Item 13 Certain Relationships and Related Transactions...................... 34
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Report on
Form 8-K........................................................ 34
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, a line of granola bars and a sports drink mix. 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, Colombia 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. The name of the
Company was not changed 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, Reliv' Canada, Reliv' New Zealand, Reliv' NOW
de Mexico, Reliv' Europe (which owns Reliv' U.K. Limited Corporation), Reliv NOW
Colombia Ltda. 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 91% of net sales in 2000.
In Australia, Canada, New Zealand, Mexico, the United Kingdom, Colombia
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, is to receive, for a period of 10 years from
March 1, 1992, 2 percent of sales in Australia and New Zealand (defined as the
designated retail selling price of all products, on which commissions are
payable to distributors), up to approximately $10 million (AUS) in 1992, and $12
million (AUS) in 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 2000, 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 2000.
On June 9, 1992, Reliv' Canada, Ltd. ("Reliv' Canada") was organized as
an Ontario, Canada corporation and as a wholly-owned subsidiary of Reliv' World.
Reliv' Canada commenced operations during October, 1992, and began selling the
Company's products to distributors in Canada in November, 1992. On December 31,
1995, Reliv' Canada was converted to a Nova Scotia, Canada unlimited liability
company, wholly-owned by Reliv' World (except for one percent owned by the
Company), under the name Reliv' Canada Company. In June, 2000, the Company
consolidated Reliv Canada's operations with the Company's operations located in
Chesterfield, Missouri, but maintains and operates a warehouse facility in
Canada which serves as a distribution center for the Company's products. In
2000, approximately 1% 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 3% of the Company's net sales in 2000.
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 2.5% 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 2000,
approximately 1% of the Company's net sales were attributed to sales in the
United Kingdom.
In July, 1999, Reliv NOW Colombia Ltda. ("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 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.
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, and sports drink mixes.
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 2000, sales of Reliv Classic and Reliv NOW
represented approximately 26% and 9% of net sales, respectively. Reliv NOW is
available in every country where the Company does business while Reliv Classic
is only available in the United States, Australia, New Zealand, Canada and the
United Kingdom.
Reliv' Innergize!(R) is a patented powdered sports drink containing a
mixture of vitamins and minerals. A can of Reliv' Innergize contains 28 servings
and is available in lemon, orange and cool punch flavors. In 2000, sales of
Reliv Innergize represented approximately 10% of net sales. Reliv 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 in 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 7% of net sales in 2000.
Reliv' Cellebrate(R) is a patented weight loss aid designed to suppress
appetite, curb the storage of body fat, and facilitate the body's fat burning
process. Reliv' Cellebrate, 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 Reliv Cellebrate made up approximately 4% of net sales in
2000. Reliv Cellebrate is available in the United States and Canada.
Reliv' 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 Reliv' Fibrestore to
significantly reduce its calorie intake to just 25 calories per serving. A
modified version of the Reliv' Fibrestore formula is marketed in Canada under
the name Herbal Harmony(R) in order to comply with that country's nutritional
regulations. Reliv Fibrestore is available in all of the Company's countries
with the exception of Colombia. Sales of Reliv Fibrestore made up approximately
11% of net sales in 2000.
Reliv' 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. Reliv' Arthaffect was introduced in October, 1996. In 2000, sales
of Reliv Arthaffect represented approximately 7% 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.
Reliv' ProVantage(R) is a nutritional supplement containing soy and is
designed to enhance athletic performance. 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.
Reliv' ProVantage was introduced in October, 1997. In 2000, sales of Reliv
ProVantage represented approximately 3% of net sales. Reliv 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 2000. The product is available
only in the United States.
In November, 1998, the Company introduced Reliv' SoySentials(R), a
nutritional supplement containing soy as well as other vitamins, minerals and
herbs designed for use by women. A can of SoySentials contains 14 servings 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 2000,
sales of Reliv SoySentials represented approximately 5% of net sales. Reliv
SoySentials is only available in the United States.
In January, 2000, the Company introduced Reliv' SoySense(TM), a vanilla
flavored nutritional supplement containing soy as well as other vitamins,
minerals and herbs to be consumed by men as well as women. A can of SoySense
contains 14 servings and is in powdered form for mixture with water or juice. In
2000, sales of Reliv SoySense represented approximately 1% of net sales. Reliv
SoySense is available in the United States, Australia, New Zealand, Canada, and
the United Kingdom. Due to local regulations, the product is called SoSense(R)
in Canada.
In January, 2000, the Company introduced Reliv NOW For Kids, a product
designed to provide a balanced nutritional supplement for a child's diet which
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
2000. Reliv NOW For Kids is available in the United States and the United
Kingdom.
In May, 2000, the Company introduced ReversAge(TM), 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-Methionine). Second, ReversAge includes an antioxidant complex
designed to halt aging at the cellular level. This proprietary complex delivers
some of the most powerful antioxidants available, including Co Enzyme Q10 and
Resveratrol (Protykin). Finally, the herbal complex delivers a variety of
age-defying herbs, including Ginkgo Biloba and Maca. The lime flavored product
is in powdered form for mixture in water and is available in the United States
and the Philippines. In the eight months ReversAge was available during 2000,
sales represented approximately 11% of net sales.
The Company conducts ongoing research and development on its product
line and intends to introduce additional product items. See "Research and
Development."
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 2000, the Company introduced several new products, including
ReversAge in the United States and the Philippines, SoySense in the
United States, United Kingdom, Australia and Canada and Reliv NOW For
Kids in the United States and United Kingdom.
Programs to Attract and Retain Distributors and Customers.
During 2000, the Company introduced enhancements to the distributor
compensation program which have increased levels of distributor
compensation. The Company is now designing a range of support tools to
help distributors become more effective in selling its products.
Enter New Markets. The Company plans to pursue targeted
expansion into the most promising international markets. During 2000,
the Company entered two new markets -- the Philippines and Colombia.
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 system. The
Company believes this seamless plan will facilitate and enhance the
expansion of the Company's business into various international markets.
Patents and Trademarks
The Company has obtained U.S. patents on the formulations of Reliv'
Innergize!, Reliv' Fibrestore, Reliv' Cellebrate and Reliv Arthaffect.
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 License Agreement will be deemed to be paid in full at that
time.
In January, 2001, the Company was awarded a U.S. Patent on Reliv
Arthaffect. Reliv Arthaffect now becomes the fifth patented product in the
Company's line of nutritional products. Reliv 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 exclusive
for direct sales in certain sales areas and is for a term ending upon the later
of (i) the termination of Traco's rights to market the product or (ii) December
31, 2014. The Traco Agreement provides that the Company will purchase its
requirements of the product from Traco, and the exclusivity of the license is
contingent on minimum purchases of the product being made by the Company.
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. Trademark registrations for selected marks have been issued or applied
for in Australia, New Zealand, Canada, Mexico, the United Kingdom, Colombia, the
Philippines and several other foreign countries. The Company considers its
trademarks and tradenames to be an important asset of its business.
Sales and Marketing
The Company 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 downline. 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,
Colombia and the Philippines through a subsidiary in each country. The marketing
efforts of the Company and these subsidiaries are focused on the development,
training and support of this network of independent distributors. The Company,
through these subsidiaries, supports an active training program for distributors
in which Company representatives and experienced distributors lead group
training sessions. The Company and these subsidiaries also create and provide
distributors with manuals, brochures and other promotional, training and
informational publications. Periodically, each subsidiary sponsors distributor
meetings at which Company representatives provide training and information
concerning the Company's products and business opportunities. In 2000, the
Company sponsored 58 Master Affiliate Training (MAT) Schools within the United
States where distributors who have attained the level of Master Affiliate may
attend and learn sales and recruitment strategies from corporate management and
certain Ambassadors of the Company. Company subsidiaries also sponsor group
telephone conference calls for training and promotional activities.
The Company also recommends and encourages the use of opportunity
meetings 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. 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. Initially, 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 downline distributors purchase
product. The Company pays a Master Affiliate a commission with respect to
products purchased directly from the Company by Retail Distributors, Affiliates,
Key Affiliates or Senior Affiliates directly sponsored by them or who are in
their personally sponsored group (i.e., individuals sponsored by the Master
Affiliate's distributors, directly or indirectly). The commission is equal to
the difference between the prices at which such distributors were entitled to
purchase products and the 40 percent discounted price available to Master
Affiliates. Senior Affiliates, Key Affiliates and Affiliates are entitled to
receive from their Master Affiliate a portion of the commission paid to the
Master Affiliate, based upon the purchases of products from Company subsidiaries
by distributors sponsored by them or by distributors in their personal group.
Master Affiliates are also entitled to receive additional compensation
payments of two percent to 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.
In mid-1996, the Company introduced the Star Director Program, which
allows Directors to receive increased additional compensation payments based on
the number of Master Affiliates they have sponsored since the program commenced.
Directors are entitled to receive an additional one percent to three percent of
additional compensation on the retail sales volume of Master Affiliates in their
sponsorship.
The Company also sponsors an Ambassador Program. To qualify as an
Ambassador, a distributor must hold the level of Master Director and must assist
personally sponsored Master Affiliates in meeting specified levels of additional
compensation payments. The levels of Ambassador are, in order, Ambassador,
Bronze Ambassador, Silver Ambassador, Gold Ambassador and Platinum Ambassador.
As higher levels are reached, Ambassadors are entitled to increased percentages
of the retail sales volume of Master Affiliates below them through five levels
of sponsorship, and at the two highest levels, a percentage of the sixth level
of sponsorship below their personally sponsored Master Affiliates. Ambassadors
are also entitled, depending on the level, to additional benefits, such as
participation in Company sponsored events, paid hotel rooms at conventions,
health insurance and car allowances. Periodically, a group of high level
Ambassadors meet with Company executives in the "Reliv Inner Circle" to exchange
ideas on new programs, products and marketing opportunities.
The Company's Direct Selectsm program is available in the United States
whereby distributors and their retail customers may order product in less than
case lots directly from the Company by phone. An automatic monthly reorder
program is also available. Product is shipped directly to the customer and
distributors earn a commission on Direct Select sales made to their customers.
Company subsidiaries also provide a variety of additional incentives or
bonuses to the most productive distributors.
As of December 31, 2000, 37,200 persons or entities were registered as
distributors of Company subsidiaries of which 5,004 were Master Affiliates. This
is an increase in the number of distributors from December 31, 1999 totals of
37,018 distributors of which 4,227 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 28,300 3,749
Australia 2,512 204
New Zealand 521 25
Canada 900 115
Mexico 4,163 793
United Kingdom 244 82
Colombia 298 24
The Philippines 262 12
Not all persons registered as distributors of Company subsidiaries are
active. Reliv' requires that persons wishing to continue as distributors renew
their distributorship annually by the payment of a fee ($20 in the United
States). The number of distributors shown in the preceding table reflects
persons who have become distributors within the past 12 months and those who
renewed their distributorship during 2000.
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's distributor organization and compensation system is
designed and intended to promote the sale of the Company's products to consumers
by distributors. Sales training and promotional efforts emphasize that
intention. To that end, and to comply with applicable governmental regulations
of multilevel selling organizations, the Company and each subsidiary have
established specific programs and requirements for distributors including (i)
monitoring by the Company of purchases by distributors to identify potentially
excessive individual purchases, (ii) requiring that distributors certify to a
specified amount of retail sales to receive commissions, and (iii) requiring
that distributors certify the sale of at least 70 percent of previous purchases
prior to the purchase of additional amounts of product. The Direct Select
program, as described above, further promotes sales of the Company's products to
consumers. Distributors are not required at any time to purchase product,
although Master Affiliates are required to maintain certain minimum sales levels
in their personal groups to continue receiving generation royalty compensation
payments.
Each subsidiary maintains a policy that unused product may be returned
by customers to the selling distributor or the subsidiary for a full refund
within 30 days after purchase. Each subsidiary also maintains a policy that any
distributor who terminates his distributorship may return resalable product
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 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.
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) at this
facility. The Company expanded its Chesterfield facility in 1997. At its
Chesterfield manufacturing facility, the Company manufactured products that
accounted for approximately 99% of net sales in 2000. The remaining 1% is
comprised of the Company's granola bar line which is produced by a third party.
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.
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 ("FDA") 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,
predominantly located in the United States, who produce the products in
accordance with formulas provided by the Company, subject to quality control
requirements and inspections by representatives of the Company. The Company has
had no difficulty in obtaining contract manufacturing and there has been no
material adverse effect due to untimely supply of goods.
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;
London, England, Medellin, Colombia and Manila, the Philippines. In Mexico,
product is warehoused and shipped in and from 64 distribution centers located
throughout Mexico. With the exception of Reliv Canada, each subsidiary of the
Company maintains an office and personnel to receive, record and fill orders
from distributors. Distributors order product from Company subsidiaries in case
lots and pay for the goods prior to shipment.
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 $410,000 in 2000, $393,000 in 1999, and
$319,000 in 1998.
Employees
As of December 31, 2000, the Company and all subsidiaries had
approximately 229 full-time employees compared with 194 such employees at the
end of 1999. This increase is primarily the result of additional employees added
as the Company established offices in Colombia and 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.
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 or other federal, state or foreign regulatory
authorities, the repeal of laws or regulations which the Company considers
favorable, such as the DSHEA, or more stringent interpretations of current laws
or regulations, from time to time in the future. The Company is unable to
predict the nature of such future laws, regulations, interpretations or
applications, nor can it predict what effect additional governmental regulations
or administrative orders, when and if promulgated, would have on its business in
the future. 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. Some of the Company's
products contain substances that would be or might be classified as GMOs. The
Company cannot anticipate the extent to which regulations in its 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 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 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.
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.
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.
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. 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 Reliv' Innergize! and ProVantage
compete, a market long dominated by Gatorade(tm). Reliv' NOW, Reliv' Classic and
Reliv' Fibrestore compete with numerous mineral and vitamin supplement products.
With Arthaffect and ReversAge, the Company has entered the relatively new
"functional foods" and "anti-aging" market, which is expected to be extremely
competitive and led by the major food 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 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 helps 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 is 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 works with regulatory agencies to confirm that all of the ingredients of
the Company's products are permissible within the new market. During the
regulatory compliance process, the Company may alter the formulation, packaging
or labeling of its products to conform to applicable regulations as well as
local variations in customs and consumer habits, and the Company may modify some
aspects of its network marketing system as necessary to comply with applicable
regulations. Where reformulations of products are required, the Company attempts
to obtain substitute or replacement ingredients.
Following completion of the regulatory compliance phase, the Company
undertakes the steps necessary to meet the operational requirements of the new
market. In the majority of the Company's new markets, it establishes a sales
center in a major city and provides for product purchases by telephone. Product
is shipped to the purchaser from a warehouse located in the general geographic
region. In addition, the Company initiates plans to satisfy the inventory,
personnel and transportation requirements of the new market, and the Company
modifies its distributor manuals, cassette recordings, video cassettes and other
training materials as necessary to be suitable for the new market. In some
instances where the Company has achieved rapid sales growth in a new product,
such as in Mexico, the Company has experienced inventory shortages as a result
of the large demand for products.
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.
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 March, 2000, the Company began marketing
and selling its products in Colombia through Reliv Now Colombia. In December,
2000, Reliv Philippines commenced business by marketing and selling the
Company's products within the Philippines.
Each foreign subsidiary markets, sells and uses substantially the same
line of products, labeling and method of distribution as Reliv' in the United
States, although not all of the Company's products are available in each country
and the formulation of some of the products vary to comply with local
governmental regulations or requirements.
In markets outside the United States, prior to commencing operations or
marketing its products, the Company may be required to obtain approvals,
licenses, or certifications from a country's ministry of health or comparable
agency. Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Such regulations have caused delays in introducing certain
of the Company's products in the past and such delays have had negative effects
on sales. The Company must also comply with local product labeling and packaging
regulations that vary from country to country.
Reference is made to Note 20 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on geographical segments.
Manufacturing and Packaging Services
In the last quarter of 1995, the Company commenced providing
manufacturing and packaging services at its Chesterfield manufacturing facility.
These services include blending, processing and packaging food products in
accordance with specifications or materials provided by the customer. Revenues
from these services during 1998 were $6,332,000, increased to $27,300,000 in
1999 as a result of a major customer and obtaining other business, but decreased
to $16,700,000 in 2000 due to the Company's decision to place less emphasis on
this business. In 2000 and 1999, one customer, Rexall Sundown, Inc., accounted
for $16,700,000 and $21,350,000 of the Company's total sales, respectively.
During early 2000, Rexall Sundown, Inc. completed an acquisition of Met-Rx USA,
Inc.
Reference is made to Note 20 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. 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, 2000, this loan had a
principal balance of $4,158,000.
The original property was purchased in July, 1991, and, as part of the
purchase price for the premises, the Company assumed the remaining principal
balance of $850,108 of a 1984 industrial revenue bond with an original principal
sum of $975,000. In addition, the Company executed a promissory note to the
seller in the amount of $250,000. The principal balances of the bond and
promissory note at December 31, 2000, are $406,000 and $205,000, respectively.
The promissory note is secured by a deed of trust on the premises. The Company
funds payments under the industrial revenue bond and promissory note from
working capital. In 1992, the Company completed an addition to its building of
approximately 12,000 square feet used for manufacturing of its products. In May,
1993, the Company purchased 3.4 acres of land adjacent to the original facility
for $400,000.
The Company leases office space in suburban Sydney, Australia; Mexico
City, Mexico; suburban London, England; Medellin, Colombia; 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.
Item No. 3 - Legal Proceedings
In May, 1998, the former sales/general manager of the Company's
Canadian subsidiary filed a lawsuit claiming unlawful termination and breach of
contract. The individual had been terminated by the Company in March, 1998. The
Company engaged Canadian counsel to defend the suit. On September 28, 2000, all
claims against the Company brought by the individual were dismissed by the
Canadian Court, which also awarded the Company its legal costs of the
proceedings. The period of time for commencing an appeal of the order of
dismissal under Canadian rules has expired.
The Company believes that no litigation currently pending against it
will have a material adverse effect on the Company's financial position and
results of operations.
Item No. 4 - Submission of Matters to a Vote of Security Holders
N/A
PART II
Item No. 5 - Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock was admitted to trading on the Emerging
Company Market Place at the American Stock Exchange on March 8, 1993 and
subsequently was approved for listing on the American Stock Exchange Main Board.
Prior to that time, there was no established public trading market for the
Company's Common Stock. On September 6, 1996, the Company moved the listing of
its Common Stock to the NASDAQ National Market Tier of the NASDAQ Stock Market
under the symbol: RELV.
2000 and 1999 Quarterly Stock Price Data
HI LO
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
1999
First Quarter 2.625 1.875
Second Quarter 2.000 1.313
Third Quarter 1.750 1.063
Fourth Quarter 1.625 0.750
As of March 15, 2001, there were approximately 1,743 holders of record
of the Company's Common Stock.
On March 20, 1999, a cash dividend of $.01 per share was paid to
shareholders of record. The amount and timing of future dividends will be
subject to declaration of the Board of Directors consistent with results of
operation of the Company and its financial condition at the time.
In March, 1995, the Company instituted an automatic dividend
reinvestment plan for its shareholders of record. Participation in the plan,
which is voluntary, provides for dividends paid by the Company to be reinvested
in shares of Common Stock at the then current market price. The plan also allows
participants to make additional voluntary purchases of Common Stock at the
market price.
Effective January 1, 1999, the Company instituted a Distributor Stock
Purchase Plan whereby qualified distributors can allocate a portion of their
commission check toward the purchase of the Company's Common Stock and can make
additional purchases of Common Stock through direct contributions. Purchases are
made at the market price. Distributors also are entitled to receive at the end
of each year warrants to purchase the Company's Common Stock based on the number
of shares of Common Stock purchased by the distributor during the year pursuant
to the Plan.
Item No. 6 - Selected Financial Data
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein.
Year ended December 31
2000 1999 1998 1997 1996
------------------------------------------------------------------------
Net Sales(2) $61,279,785 $69,278,167 $53,399,929 $46,836,270 $40,729,993
Net Income (Loss) $ (898,428) $(1,400,181) $ 1,556,929 $ 2,028,988 $ 1,507,014
Earnings (loss) per common share(1):
Basic (.09) (.15) .16 .21 .15
Diluted (.09) (.15) .16 .20 .15
Cash Dividends per share of Common -- .01 .025 .03 .02
Stock
Total Assets $20,395,115 $20,771,818 $20,252,972 $15,969,948 $11,401,665
Long-term debt and capital lease
obligations, less current maturities $ 5,045,688 $ 5,295,720 $ 5,589,562 $ 5,148,625 $ 1,478,079
- ---------------------------------------------
(1) All earnings per share data has been retroactively adjusted
for the pro forma effect of the Company's 10% stock dividend
issued in February 1997.
(2) Net sales for all periods have been restated to comply with
EITF 00-10, "Accounting for Shipping and Handling Fees and
Costs." Previously, the Company recognized shipping and
handling costs as a reduction to net sales.
Item No. 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net Income and Net Sales
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 a net income of
$20,000. 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 $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 $61,300,000, as compared to $69,300,000
in 1999, as a result of a 13% decrease in net sales in the United States from
$64,700,000 in 1999 to $56,000,000 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, network
marketing sales in the United States were $39,200,000 compared to $37,400,000 in
1999, and net sales from manufacturing and packaging services decreased to
$16,700,000 from $27,300,000 in 1999. Net sales in the foreign operations
increased to $5,300,000 in 2000 from $4,600,000 in 1999.
Net sales for the fourth quarter of 2000 were $12,900,000, a decline
from the fourth quarter 1999 net sales of $14,700,000. During the period,
network marketing sales in the United States decreased to $8,200,000, as
compared to $8,800,000 in the fourth quarter 1999. Net sales in manufacturing
and packaging services decreased from $4,700,000 to $3,500,000. Net sales in
foreign operations increased from $1,200,000 in the fourth quarter of 1999 to
$1,300,000 in the fourth quarter of 2000, as the Company's newest market in the
Philippines had approximately $119,000 in sales in its first full month of
operation in December 2000.
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 $2,500,000, compared to $5,800,000 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 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 NOW
for Kids, a nutritional supplement important for growing bodies, SoySense, a
supplement that provides soy protein, a nutrient proven to lower the risk of
heart disease, 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 ReversAge(TM), 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 product is being
sold only in the United States and the Philippines at this time. Currently, this
product is the second best-selling product in the US market, behind Classic. The
Company is working to obtain approval to sell versions of this product in most
of its markets.
The Company is continuing to develop existing marketing programs such
as the "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.
During 1999, the Company launched its enhanced Internet site, with
e-commerce capabilities. The web site allows 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 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. The
Company is continuing to improve its website traffic and capabilities in
meaningful and cost-effective ways. As of December 31, 2000, approximately 850
distributors have signed up for personal web sites.
In Australia and New Zealand net sales declined to $2,012,000 in 2000
from $2,544,000 in 1999. Fourth quarter 2000 sales decreased to $353,000 from
$630,000 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 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. As of March 2001, the Company
has not yet been able to introduce a version of its product, ReversAge(TM), in
these markets.
Net sales in Canada declined in 2000 to $913,000 from $993,000 in 1999.
Fourth quarter sales decreased to $215,000 in 2000 compared to $258,000 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 benefits of this closing are being
realized, as the Canadian operation showed a net profit in the fourth quarter of
2000.
Net sales in Mexico in 2000 were $1,769,000 compared to $691,000 in
1999. Net sales in the fourth quarter 2000 were $465,000 compared to $215,000 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 to facilitate sales and the delivery of product in
cities outside of Mexico City. With the inadequate distribution 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. During 1999, the Company operated without a sales
manager, but sales growth has been 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
$16,700,000 from $27,300,000 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. This segment reported a net income of $20,000 in 2000, compared to a
net loss of $1,253,000 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
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.
1999 vs. 1998
The Company's 1999 net loss was $1,400,000 or $.15 per share. This
compares with net income of $1,557,000 or $.16 per share in 1998. Net loss in
the United States, the Company's primary market, was $915,000 in 1999, compared
to net income of $1,659,000 in 1998. The United States operation is comprised of
the network marketing segment and the manufacturing and packaging services
segment. In 1999, the network marketing segment in the United States had net
income of $338,000, and the manufacturing and packaging segment incurred a loss
of $1,253,000. Net loss from international operations was $485,000 in 1999,
compared with a loss of $102,000 in 1998.
Net sales increased in 1999 to $69,300,000, as compared to $53,400,000
in 1998, as a result of a 32% increase in net sales in the United States from
$48,900,000 in 1998 to $64,700,000 in 1999. Net sales in the United States,
which accounts for 93% of total net sales, is comprised of network marketing
sales and manufacturing and packaging services. In 1999, network marketing sales
in the United States were $37,400,000 compared to $42,500,000 in 1998, and net
sales from manufacturing and packaging services increased to $27,300,000 from
$6,300,000 in 1998. Net sales in the foreign operations increased to $4,600,000
in 1999 from $4,500,000 in 1998.
Net sales for the fourth quarter of 1999 were $14,700,000, a decrease
from the fourth quarter 1998 net sales of $15,300,000. During the period,
network marketing sales in the United States declined to $8,800,000, as compared
to $9,800,000 in the fourth quarter 1998. Net sales in manufacturing and
packaging services increased from $4,400,000 to $4,700,000. Net sales in foreign
operations remained constant at $1,200,000 for the quarter.
In the United States, the Company's largest market, the number of
active distributors increased slightly to 30,100 from 29,200. The retention rate
of distributors who renew their annual agreement continued to remain high at
57%. Master Affiliates, distributors who have attained the highest level of
discount and are eligible for generation royalties, decreased to 3,250 in the
United States in 1999 from 4,123 in 1998. In 1999, the Company processed 74,103
wholesale orders at an average retail price of $603, compared to 78,609 orders
at an average of $663 in 1998.
The Company's Direct Select Program makes products available to
consumers by ordering directly through the Company. In the United States in
1999, the program processed a total of 57,598 orders for a net sales total of
$5,800,000, compared to $6,300,000 in 1998.
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 1999, $1,315,000 was paid through this program
compared to $1,345,000 in 1998. The Ambassador Program compensates distributors
at the highest levels for their leadership and development of sales. At year end
1999, there were 64 Ambassadors who shared in bonuses totaling $584,000,
compared to 58 Ambassadors at the end of 1998 sharing bonuses of $799,000.
Contributing to the decrease in United States net sales in 1999 was the
lack of a new product introduction during the year. In January 2000, the Company
introduced four new products at its United States National Convention in Reno,
NV. The product introduction included NOW for Kids, a nutritional supplement
important for growing bodies, SoySense, a supplement that provides soy protein,
a nutrient proven to lower the risk of heart disease, Ultrim Plus, a
reformulated meal replacement product to assist in weight loss, and a new
formula of Fibrestore, a fiber-rich antioxidant supplement.
In Australia and New Zealand net sales declined to $2,544,000 in 1999
from $2,897,000 in 1998. Fourth quarter 1999 sales decreased to $630,000 from
$687,000 in 1998. New distributor enrollments declined in Australia and New
Zealand to 1,186 from 1,814 in 1998. Distributor renewals in Australia were 56%
and in New Zealand 39% in 1999 as compared to 54% and 38% in 1998, respectively.
Net sales in Canada decreased in 1999 to $993,000 from $1,214,000 in
1998. Fourth quarter sales decreased to $258,000 in 1999 compared to $274,000 in
1998. New distributor enrollments declined to 568 in 1999 from 797 in 1998.
Net sales in Mexico in 1999 were $691,000 compared to $317,000 in 1998.
Net sales in the fourth quarter 1999 were $215,000 compared to $81,000 in 1998.
New distributor enrollment increased in 1999 to 2,324 compared to 445 in 1998.
Net sales were affected positively by the efforts of the sales management team,
plus the establishment of distribution centers owned and operated by key
distributors to facilitate sales and the delivery of product in cities outside
of Mexico City.
The Company began marketing its products in the United Kingdom in July
1995, through a licensee. Revenues under the license agreement in 1996, 1997 and
1998 were minimal and in October 1998, the Company, through a subsidiary,
assumed ownership and control of the United Kingdom operations. The United
Kingdom subsidiary reported net sales of $109,000 in the fourth quarter of 1998.
Sales in the United Kingdom in 1999 were $356,000.
The Company announced that in the first quarter 2000 it would commence
sales in Colombia, with intentions of expanding into other Latin and South
American countries.
The Company provides manufacturing and packaging services, including
blending, processing and packaging food products in accordance with
specifications provided by its customers. Net sales increased in 1999 to
$27,300,000 from $6,300,000 in 1998. Despite the increase in net sales, the
Company experienced significant setbacks in profitability reporting a net loss
of $1,253,000, compared to a net loss of $407,000 in 1998. The Company's growth
in net sales led to production capacity and warehousing problems, and related
labor inefficiencies. Cost of goods for 1999 were 101% of net sales.
Cost of Sales
During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs." Previously, the Company
recognized shipping and handling costs as a reduction to net sales. Effective
with the adoption of Staff Accounting Bulletin No. 101 on October 1, 2000, the
EITF requires shipping and handling costs to be included in cost of sales. The
effect of adopting EITF 00-10 increased net sales and cost of products sold from
previously reported amounts by $1,305,000 in 1999 and $1,506,000 in 1998.
Percentages shown below in the discussion on specific line items of the
statement of operations have been recalculated for prior years based on the
reclassification.
During 2000, cost of network marketing products sold was 20.3% of net
sales compared with 19.8% in 1999 and 20.0% in 1998. Cost of network marketing
products sold was 23.6% in the fourth quarter of 2000 and 19.5% in 1999. Cost of
goods for manufacturing and packaging services was 95.6% for 2000 and 101% for
1999.
Distributor Royalties and Discounts
Distributor royalties and discounts as a percentage of network
marketing sales decreased to 35.8% in 2000 compared to 36.5% in 1999 and 35.4%
in 1998. In the fourth quarter of 2000, distributor royalties and discounts
increased to 38.6% from 36.9% in 1999. The increased percentage in the fourth
quarter of 2000 is due to 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 discounts are royalties of
$784,000 for 2000 earned through the Ambassador Program as compared to $584,000
in 1999 and $799,000 in 1998.
Selling, General and Administrative
Selling, general and administrative (SGA) expenses increased to 33.5%
as a percentage of net sales for 2000, from 28.6% in 1999, and 33.8% in 1998.
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 2000 were $20,500,000
compared to $19,800,000 in 1999.
In 2000, distribution and warehouse expenses decreased to $1,297,000
from $1,524,000 in 1999 primarily due to the decrease in volume generated by
manufacturing and packaging services, as expenses in this segment decreased from
$972,000 in 1999 to $741,000 in 2000.
In 2000, sales incentive bonuses were $438,000, compared to $653,000 in
1999. However, promotional trip expenses increased to $743,000 in 2000, as
compared to $635,000 in 1999. Most of the increase was incurred by the Mexican
subsidiary, as part of a plan to increase sales. Overall, sales and marketing
expenses increased by $135,000, or 2% in 2000.
Staff compensation and fringes increased by 6%, or $446,000, primarily
in the sales staff, due to staffing increases in the United States, Mexico and
new sales staff in the UK and the Philippines. During the latter part of 2000,
changes were made to the US sales staff, which will decrease its expense on an
ongoing basis.
Another significant component of SGA expenses in 2000 was the
adjustment of the cash surrender value of the executive life insurance policies.
The Company incurred a charge of $168,000 as the result of the decline in the
market value of the underlying investments. This corresponds with the overall
stock market decline experienced during the fourth quarter of 2000. In 1999, SGA
expenses were affected by a $425,000 increase in the reserve for bad debts as a
result of financial difficulties experienced by one of the Company's
manufacturing and packaging customers. As of December 31, 2000, the Company had
a bad debt reserve of $5,000.
Interest Expense
Interest expense in 2000 was $639,000, compared to $585,000 in 1999 and
$509,000 in 1998. Interest expense in 2000 and 1999 increased in comparison to
the prior year as the result of increased short-term borrowings and the impact
of higher interest rates.
Income Taxes
Income taxes for 2000 reflects a benefit of $251,000 due to the pretax
loss of $1,149,000. The income tax benefit in 1999 was $770,000, and the income
tax expense for 1998 was $941,000. The effective tax rate for 2000 was only 22%.
Losses in the foreign operations for which there is no current tax benefit
negatively impacted the effective tax rate by approximately 9%. The reduction in
the value of the executive life insurance policies, a non-deductible charge,
negatively impacted the effective tax rate by an additional 4.6%. Effective tax
rates for 1999 and 1998 were 35% and 38%, respectively. The 2000 tax benefit
will be carried back against the 1998 earnings, and the 1999 tax benefit was
carried back against 1997's earnings.
Financial Condition
The Company generated $412,000 of net cash during 2000 from operating
activities and increased cash by $365,000 through long-term financing and use of
its lines of credit. This compares to $1,274,000 of cash utilized for operating
activities and $1,779,000 generated through long-term financing and use of the
lines of credit in 1999. Cash and cash equivalents decreased $333,000 to
$1,199,000 by year-end 2000. The Company's net investing activities used
$300,000, primarily in the acquisition of machinery and plant equipment. The
Company used $604,000 to repay long-term borrowings and capital lease
obligations.
Current assets increased to $9,424,000 at December 31, 2000 from
$8,497,000 as of December 31, 1999. Cash and cash equivalents decreased $333,000
as described above. Accounts receivable increased to $2,567,000 at December 31,
2000 from $794,000 at December 31, 1999. The increase is due to the Company
implementing a "full turnkey" operation for its remaining third party packaging
customer. This means the Company is responsible for purchasing all ingredients
and packaging for this customer's product. Previously, the Company only
purchased a portion of the ingredients. Trade accounts payable has also
increased as a result of this "turnkey" arrangement. At December 31, 2000, the
Company has reserved $5,000 as an allowance for uncollectible accounts
receivable. This compares to $430,000 at year-end 1999.
Inventories decreased to $4,530,000 at December 31, 2000 from
$4,705,000 at year-end 1999, primarily as a result of the decrease in raw
material inventories required for the contract packaging business.
Refundable income taxes decreased to $664,000 at the end of 2000 from
$855,000 as of the end of 1999. The decrease is due to reduced tax benefit from
the loss incurred in 2000, as compared to 1999.
Property, plant and equipment, after dispositions, increased $307,000
to $15,670,000 at December 31, 2000. Capital expenditures decreased
significantly compared to prior years due to the Company's decision to reduce
the emphasis on the manufacturing and packaging segment. Acquisitions were
primarily funded with cash generated from operations, as well as use of the
Company's line of credit.
Current liabilities increased to $9,291,000 at December 31, 2000 from
$8,307,000 at December 31, 1999. Trade accounts payable increased to $5,264,000
from $4,097,000 at December 31, 1999 primarily due to the "turnkey" program for
purchasing materials for the manufacturing and packaging business. Distributor
commissions payable decreased $221,000 to $1,200,000 at year-end as a result of
decrease in net sales in December 2000 as compared to December 1999. Borrowings
under the line of credit increased to $1,918,000 from $1,793,000 at December 31,
1999.
Long-term debt and non-current capital lease obligations decreased to
$5,046,000 from $5,296,000 at December 31, 1999. Principal payments of $604,000
were offset by private placement notes payable of $240,000 used to set up the
Philippines operation. These notes are payable in quarterly installments equal
to 2% of Philippine sales at suggested retail, including interest at 9% per
annum. The Company has a term loan with an outstanding balance of $4,158,000 as
of December 31, 2000. This loan provided financing for the expansion of its
facility in 1997. This note was recently renewed by its lender, extending the
maturity to March 2004, with the interest rate continuing at 8.5%. The Company
has term loans with principal balances of $58,000 and $168,000 as of December
31, 2000, as well as long-term debt totaling $610,000, relating to the purchase
of its original building and land.
Stockholders' equity decreased to $5,646,000 compared with $6,800,000
at December 31, 1999. The decrease is primarily due to the 2000 net loss of the
Company. Stockholders' equity was also negatively impacted by the strengthening
of the US dollar against the currency of several of its' subsidiaries, in
particular, Australia, New Zealand, and to a lesser extent, Canada. This impact
appears in the form of the decrease in the foreign currency translation
adjustment. This cumulative adjustment declined from a debit balance of $336,000
as of December 31, 1999, to a debit balance of $624,000, as of December 31,
2000.
The Company's working capital balance has decreased by $57,000 since
December 31, 1999. The current ratio at December 31, 2000 declined to 1.01 from
1.02 at previous year-end. The Company also has an operating line of credit,
with a limit based on a collateral-based formula of accounts receivable and
inventory. The maximum borrowing limit is $3,000,000. At December 31, 2000, the
Company had utilized $1,918,000 of the line of credit, with an available balance
of $534,000. Management believes that the Company's internally generated funds
together with the loan agreement will be sufficient to meet working capital
requirements in 2000.
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 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 2001 Annual Meeting of Shareholders to be
held on May 24, 2001, 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 2001 Annual Meeting of Shareholders to be
held on May 24, 2001, 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 2001 Annual Meeting of Shareholders to be
held on May 24, 2001, 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 2001 Annual Meeting of Shareholders to be
held on May 24, 2001, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
PART IV
Item No. 14 - Exhibits, Financial Statement Schedules and Reports on Form 8K
(a) 1. The Consolidated Financial Statements filed as part of this
report on Form 10-K are listed on the accompanying Index to
Consolidated Financial Statements and Consolidated Financial
Statement Schedules.
2. The Consolidated Financial Statement Schedules filed as part
of this report on Form 10-K are listed on the accompanying
Index to Consolidated Financial Statements and Consolidated
Financial Statement Schedules.
3. Exhibits:
Exhibit
Document Number
-------- -------
Articles of Incorporation, as amended
(incorporate by reference Exhibit 3.1 to
the Form 10-K of the Registrant for year
ended December 31, 1995) 3.1
By-laws, as amended
(incorporate by reference Exhibit 3.2
to the Form 10-K of the Registrant for
year ended December 31, 1992) 3.2
Certificate of Incorporation (incorporate
by reference Appendix B of the Form 14A
the Registrant filed April 22, 1999) 3.3
Exhibit
Document Number
-------- -------
By-Laws (incorporate by reference Appendix
C of the Form 14A the Registrant filed
April 22, 1999) 3.4
Amended Exclusive License Agreement
(incorporate by reference Exhibit 10.1
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.1
Asset Purchase Agreement
(Australian Joint Venture)
(incorporate by reference Exhibit 10.2
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.2
Master Agent Agreement
(re: Australia)
(incorporate by reference Exhibit 10.3
to the Form 10-K of the Registrant for year
ended December 31, 1992) 10.3
1995 Stock Option Plan
(incorporate by reference Exhibit 10.7 to
the Form 10-K of the Registrant for year
ended December 31, 1995) 10.4
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
Exhibit
Document Number
-------- -------
1994 Annual Incentive Compensation Plan
(incorporate by reference Exhibit 10.11 to the
Form 10-K of the Registrant for year ended
December 31, 1995) 10.8
1994 Long-Term Incentive Compensation Plan
(incorporate by reference Exhibit 10.12 to the
Form 10-K of the Registrant for year ended
December 31, 1995) 10.9
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) 10.10
Loan Agreement dated March 20, 1996 with Southwest
Bank of St. Louis (incorporate by reference Exhibit
10.14 to the Form 10-K of the Registrant for year
ended December 31, 1998) 10.11
Deed of Trust Note dated January 2, 1996 in the
amount of $950,000 with Southwest Bank of St. Louis
(incorporate by reference Exhibit 10.15 to the Form
10-K of the Registrant for year ended December 31,
1998) 10.12
Line of Credit Note dated March 20, 1996 in the
amount of $1,000,000 with Southwest Bank of St. Louis
(incorporate by reference Exhibit 10.16 to the Form
10-K of the Registrant for year ended December 31,
1998) 10.13
Line of Credit Note dated January 2, 1996 in the
amount of $500,000 with Southwest Bank of St. Louis
(incorporate by reference Exhibit 10.17 to the Form
10-K of the Registrant for year ended December 31,
1998) 10.14
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) 10.15
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) 10.16
Exhibit
Document Number
-------- -------
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) 10.17
1999 Stock Option Plan (incorporate by reference to
Appendix E of the Form 14A the Registrant
filed April 22, 1999) 10.18
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 Schedules listed in subparagraph (a)(2) of this Item 14 are
attached hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RELIV' INTERNATIONAL, INC.
By: /s/ Robert L. Montgomery
-------------------------------
Robert L. Montgomery, Chairman of the Board of Directors, President and
Chief Executive Officer, Treasurer
Date: March 30, 2001
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
By: /s/ Robert L. Montgomery
-------------------------------
Robert L. Montgomery, Chairman of the Board of Directors, President and
Chief Executive Officer, Treasurer
Date: March 30, 2001
By: /s/ David G. Kreher
-------------------------------
David G. Kreher, Senior Vice President, Assistant Secretary (principal
financial and accounting officer)
Date: March 30, 2001
By: /s/ Carl W. Hastings
-------------------------------
Carl W. Hastings, Executive Vice President, Assistant Secretary,
Director
Date: March 30, 2001
By: /s/ Thomas W. Pinnock
-------------------------------
Thomas W. Pinnock III, Director
Date: March 30, 2001
By: /s/ Stephen M. Merrick
-------------------------------
Stephen M. Merrick, Senior Vice President, Secretary, Director
Date: March 30, 2001
29
By: /s/ Donald L. McCain
-------------------------------
Donald L. McCain, Director
Date: March 30, 2001
By: /s/ John Akin
-------------------------------
John Akin, Director
Date: March 30, 2001
By: /s/ Sandra S. Montgomery
-------------------------------
Sandra S. Montgomery, Director
Date: March 30, 2001
By: /s/ Thomas T. Moody
-------------------------------
Thomas T. Moody, Director
Date: March 30, 2001
By: /s/ Marvin W. Solomonson
-------------------------------
Marvin W. Solomonson, Director
Date: March 30, 2001
Consolidated Financial Statements
Reliv' International, Inc.
and Subsidiaries
Years ended December 31, 2000, 1999, and 1998
with Report of Independent Auditors
Reliv' International, Inc.
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2000, 1999, and 1998
Contents
Consolidated Financial Statements:
Report of Independent Auditors........................................ F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999.......... F-2
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999, and 1998.................................. F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2000, 1999, and 1998.................................. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999, and 1998................................... F-6
Notes to Consolidated Financial Statements - December 31, 2000........ F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2000, 1999, and 1998..................................... 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.
F-1
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, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, 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 6, 2001
F-2
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
2000 1999
-------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 1,198,682 $ 1,531,700
Accounts and notes receivable, less allowances of $5,000 in 2000
and $430,000 in 1999 2,566,982 794,037
Note receivable from officer 59,250 164,250
Inventories:
Finished goods 2,584,895 1,826,748
Raw materials 1,459,960 2,402,006
Sales aids and promotional materials 484,936 476,708
-------------------------------------------
Total inventories 4,529,791 4,705,462
Refundable income taxes 663,735 855,178
Prepaid expenses and other current assets 322,131 304,734
Net deferred income taxes 83,174 141,236
-------------------------------------------
Total current assets 9,423,745 8,496,597
Other assets:
Goodwill, net of accumulated amortization of $65,692 in 1999
- 459,846
Other assets 849,691 1,013,130
-------------------------------------------
Total other assets 849,691 1,472,976
Property, plant, and equipment 15,669,705 15,362,583
Less accumulated depreciation and amortization (5,548,026) (4,560,338)
-------------------------------------------
10,121,679 10,802,245
-------------------------------------------
Total assets $20,395,115 $20,771,818
===========================================
See accompanying notes.
F-3
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
December 31
2000 1999
-------------------------------------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 6,864,415 $ 5,887,615
Income taxes payable - 3,391
Borrowings under line of credit 1,918,080 1,792,986
Current maturities of long-term debt 332,466 468,351
Current maturities of capital leases 176,094 154,622
-------------------------------------------
Total current liabilities 9,291,055 8,306,965
Noncurrent liabilities:
Capital lease obligations, less current maturities 143,900 305,081
Long-term debt, less current maturities 4,901,788 4,990,639
Other noncurrent liabilities 412,610 350,415
-------------------------------------------
Total noncurrent liabilities 5,458,298 5,646,135
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, 9,654,505 shares issued and outstanding in 2000
and 9,551,102 shares issued and outstanding in 1999 9,655 9,551
Additional paid-in capital 9,074,756 9,072,831
Notes receivable - officers and directors (26,650) (38,217)
Accumulated deficit (2,787,725) (1,889,297)
Accumulated other comprehensive loss:
Foreign currency translation adjustment (624,274) (336,150)
-------------------------------------------
Total stockholders' equity 5,645,762 6,818,718
-------------------------------------------
Total liabilities and stockholders' equity $20,395,115 $20,771,818
===========================================
See accompanying notes.
F-4
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Operations
Year ended December 31
2000 1999 1998
----------------------------------------------------------------
Sales at suggested retail $83,496,234 $90,085,780 $77,493,832
Less distributor allowances on
product purchases 22,216,449 20,807,613 24,093,903
----------------------------------------------------------------
Net sales 61,279,785 69,278,167 53,399,929
Costs and expenses:
Cost of products sold 25,023,444 35,861,931 15,792,916
Distributor royalties and commissions 15,929,756 15,316,965 16,664,486
Selling, general, and administrative 20,545,175 19,834,063 18,069,355
Impairment of goodwill (see Note 2) 407,292 - -
----------------------------------------------------------------
61,905,667 71,012,959 50,526,757
----------------------------------------------------------------
Income (loss) from operations (625,882) (1,734,792) 2,873,172
Other income (expense):
Interest expense (639,172) (585,255) (509,492)
Other income 115,626 149,866 134,249
----------------------------------------------------------------
Income (loss) before income taxes (1,149,428) (2,170,181) 2,497,929
Provision (benefit) for income taxes (251,000) (770,000) 941,000
----------------------------------------------------------------
Net income (loss) $ (898,428) $ (1,400,181) $ 1,556,929
================================================================
Earnings (loss) per common share $(.09) $(.15) $.16
Earnings (loss) per common share -
assuming dilution $(.09) $(.15) $.16
See accompanying notes.
F-5
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Notes Accumulated
Common Stock Additional Receivable- Other Treasury Stock
-------------------- Paid-In Officers & Accumulated Comprehensive ----------------
Shares Amount Capital Directors Deficit Income/(Loss) Shares Amount Total
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 9,617,307 $9,617 $9,126,147 $ (4,633) $ (1,673,164) $ (289,902) - $ - $7,168,065
Net income - - - - 1,556,929 - - - 1,556,929
Other comprehensive
income/(loss):
Foreign currency
translation adjustment - - - - - (150,755) - - (150,755)
------------
Total comprehensive income $1,406,174
------------
Options exercised 36,195 36 43,964 (44,000) - - - - -
Repayment of loan by
officers and directors - - - 3,887 - - - 3,887
Dividends paid ($.025
per share) - - - - (237,960) - - - (237,960)
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1998 9,653,502 9,653 9,170,111 (44,746) (354,195) (440,657) - - $8,340,166
-----------------------------------------------------------------------------------------------------
Net loss - - - - (1,400,181) - - - (1,400,181)
Other comprehensive
income/(loss):
Foreign currency
translation adjustment - - - - - 104,507 - - 104,507
------------
Total comprehensive loss $(1,295,674)
------------
Common stock purchased
for treasury - - - - - - 102,400 (135,798) (135,798)
Cancellation of treasury
stock (102,400) (102) (97,280) - (38,416) - (102,400) 135,798 -
Repayment of loan by
officers and directors - - - 6,529 - - - - 6,529
Dividends paid ($.01
per share) - - - - (96,505) - - - (96,505)
-----------------------------------------------------------------------------------------------------
Balance at December 31, 1999 9,551,102 9,551 9,072,831 (38,217) (1,889,297) (336,150) - - 6,818,718
-----------------------------------------------------------------------------------------------------
Net loss - - - - (898,428) - - - (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 - - - - 11,567
Warrants granted under
distributor
stock purchase plan - - 1,140 - - - - - 1,140
Options exercised 102,540 103 (103) - - - - - -
Warrants exercised 863 1 888 - - - - - 889
-----------------------------------------------------------------------------------------------------
Balance at December 31, 2000 9,654,505 $9,655 $9,074,756 $(26,650) $ (2,787,725) $ (624,274) - $ - $5,645,762
=====================================================================================================
See accompanying notes.
F-6
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2000 1999 1998
---------------------------------------------------------------
Operating activities
Net income (loss) $ (898,428) $(1,400,181) $1,556,929
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 1,080,247 1,068,471 793,008
Amortization of goodwill 52,554 52,554 13,138
Impairment charge for goodwill 407,292 - -
Provision for losses on accounts receivable - 431,625 9,915
Provision for deferred income taxes 57,098 (61,225) 9,232
Foreign currency transaction (gain)/loss 21,376 (23,782) 38,756
Increase in accounts and notes receivable (347,245) (561,104) (474,159)
(Increase) decrease in inventories 85,966 (740,168) (1,348,163)
(Increase) decrease in refundable income taxes 188,950 (541,074) (294,589)
(Increase) decrease in prepaid expenses and
other current assets (25,084) 138,244 56,032
(Increase) decrease in other assets 150,903 (313,383) (502,034)
Increase (decrease) in accounts payable and
accrued expenses (360,404) 834,360 2,083,822
Increase (decrease) in income taxes payable (1,370) (55,749) 66,756
Increase (decrease) in unearned income - (102,712) 102,711
---------------------------------------------------------------
Net cash provided by (used in) operating activities 411,855 (1,274,124) 2,111,354
Investing activities
Proceeds from sale of property, plant, and
equipment 23,464 - 8,923
Purchase of property, plant, and equipment (440,224) (1,081,746) (1,756,442)
Repayment of loans by officers and directors 116,567 6,529 3,887
---------------------------------------------------------------
Net cash used in investing activities (300,193) (1,075,217) (1,743,632)
Financing activities
Proceeds from long-term borrowings and line of
credit 365,094 1,779,162 785,307
Principal payments on long-term borrowings and
line of credit (466,829) (419,863) (344,774)
Principal payments under capital lease obligations (137,617) (163,654) (44,336)
Proceeds from warrants exercised 2,029 - -
Dividends paid - (96,505) (237,960)
Purchase of treasury stock - (135,798) -
---------------------------------------------------------------
Net cash (used in) provided by financing activities (237,323) 963,342 158,237
Effect of exchange rate changes on cash and cash
equivalents (207,357) 100,895 (135,581)
---------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (333,018) (1,285,104) 390,378
Cash and cash equivalents at beginning of year 1,531,700 2,816,804 2,426,426
---------------------------------------------------------------
Cash and cash equivalents at end of year $1,198,682 $1,531,700 $2,816,804
===============================================================
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Year ended December 31
2000 1999 1998
----------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 605,565 $ 581,235 $ 556,962
================================================================
Income taxes $ 219,500 $ 55,710 $1,201,896
================================================================
Noncash investing and financing transactions:
Capital lease obligations entered into $ 56,598 $ 104,285 $ 508,830
================================================================
See accompanying notes.
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2000
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, Colombia, 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 is
determined using standard costs, which approximate the first-in, first-out
basis. Other inventory cost is determined using the first-in, first-out basis.
Property, Plant, and Equipment
Property, plant, and equipment are stated on the cost basis. Depreciation 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.
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.
Shipping and Handling Costs
During 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10,
Accounting for Shipping and Handling Fees and Costs. Previously, the Company
recognized shipping and handling costs as a reduction to net sales. Effective
with the adoption of Staff Accounting Bulletin No. 101 on October 1, 2000, the
EITF requires shipping and handling costs to be included in cost of sales. The
effect of adopting EITF 00-10 increased net sales and cost of products sold from
previously reported amounts by $1,305,000 in 1999 and $1,506,000 in 1998.
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. 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.
1. Nature of Business and Significant Accounting Policies (continued)
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. The FASB has issued 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.
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.
Advertising
Costs of sales aids and promotional materials are capitalized as inventories.
All other advertising and promotional costs are expensed when incurred.
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.
1. Nature of Business and Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to
conform to the current presentation.
2. Acquisition of Reliv UK, Ltd.
On October 1, 1998, the Company acquired the common stock of Reliv UK, Ltd.
(Reliv UK) in exchange for 250,000 shares of Reliv Europe, Inc. (Reliv Europe),
the holding company of the acquired entity, and certain other consideration as
described below. Prior to the acquisition, Reliv UK was a licensee of the
Company. The shares issued of Reliv Europe were valued at $12,500. In
conjunction with the acquisition, the previous owner of Reliv UK forgave
approximately $435,000 in advances to Reliv UK, and the Company converted
$420,000 of its advances to Reliv UK into 8,400,000 shares of Reliv Europe,
which represents a 97% ownership interest in Reliv Europe. Also, Reliv Europe is
required to make monthly payments of 1.5% of the retail sales of Reliv UK to the
previous owner of Reliv UK for a period of ten years. These payments are being
expensed as incurred. The operations of Reliv UK are included in the
consolidated statements of operations from the date of acquisition as part of
the network marketing segment. The transaction was accounted for as a purchase,
and the excess cost over fair value of the net assets acquired is being
amortized on a straight-line basis over a ten-year period.
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, has no impact on the
Company's 2000 cash flows or its ability to generate cash flow in the future.
3. Research and Development Expenses
Research and development expenses of $410,000, $393,000, and $319,000 in 2000,
1999 and 1998, respectively, were charged to selling, general, and
administrative expenses as incurred.
4. Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2000 and 1999, consist of the
following:
2000 1999
------------------------------
Land $ 829,222 $ 829,222
Building 8,399,277 8,384,105
Machinery and equipment 3,984,971 3,870,695
Office equipment 494,266 454,729
Computer equipment and software 1,961,969 1,823,832
------------------------------
15,669,705 15,362,583
Less accumulated depreciation and amortization (5,548,026) (4,560,338)
------------------------------
$10,121,679 $10,802,245
==============================
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2000 and 1999, consist of
the following:
2000 1999
-------------------------------
Trade payables $5,264,706 $4,097,103
Distributors commissions 1,199,522 1,421,286
Sales taxes 171,639 204,552
Interest expense 65,478 31,871
Payroll and payroll taxes 148,573 127,800
Other 14,497 5,003
-------------------------------
$6,864,415 $5,887,615
===============================
6. Short-Term Borrowings
In May 2000, the Company renewed its line of credit and extended its maximum
borrowing limit to $3,000,000. 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, which was
9.5% at December 31, 2000 and 8.5% at December 31, 1999. The maturity date of
the line is May 2001. A portion of the Company's inventory and property, plant,
and equipment with a net book value of $5,075,600 as of December 31, 2000 are
pledged as security under the terms of the agreement. As of December 31, 2000,
the Company's outstanding balance was $1,918,080 on the line of credit and
available borrowings were $534,000.
7. Long-Term Debt
Long-term debt at December 31, 2000 and 1999, consists of the following:
2000 1999
------------------------------
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 $2,730,800
at December 31, 2000); balance due on March 1, 2005 $ 405,792 $477,076
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) 58,130 277,164
Term loan payable in monthly installments of $38,802, including interest at
8.5%, with the balance due March 2001; secured by land
and building (net book value of $5,326,900 at December 31, 2000) 4,158,073 4,261,155
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 $188,560 at December 31, 2000) 167,504 238,840
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 240,000 -
------------------------------
5,234,254 5,458,990
Less current maturities (332,466) (468,351)
------------------------------
$4,901,788 $4,990,639
==============================
7. Long-Term Debt (continued)
On March 1, 2001, the Company obtained a modification agreement related to the
term loan with a balance of $4,158,073. The modification agreement effectively
extended the maturity of the note to March 2004, from March 2001, with monthly
installments continuing at $38,802 per month. The interest rate remained the
same rate at 8.5%. Accordingly, the term loan has been excluded from current
maturities.
Principal maturities of long-term debt, as modified, at December 31, 2000 are as
follows:
2001 $ 332,466
2002 299,765
2003 244,619
2004 3,883,017
2005 474,387
--------------------
$ 5,234,254
====================
8. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended December 31
2000 1999 1998
------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings per
share - net income (loss) $(898,428) $(1,400,181) $1,556,929
Denominator:
Denominator for basic earnings per share -
weighted average shares 9,563,000 9,633,000 9,645,000
Effect of dilutive securities:
Employee stock options and other warrants - - 390,000
------------------------------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares 9,563,000 9,633,000 10,035,000
======================================================
Basic earnings (loss) per share $(0.09) $(0.15) $0.16
======================================================
Diluted earnings (loss) per share $(0.09) $(0.15) $0.16
======================================================
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.
9. Stock Options, Warrants, and Distributor Stock Purchase Plan
Stock Options
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 1995, the Company adopted an incentive stock option plan which provides
for the grant of incentive stock options and nonqualified stock options for
employees (including officers) and other consultants and advisors of the
Company. A maximum of 1,100,000 shares can be purchased at an option price not
less than the fair market value of the stock at the time the options are
granted.
In May 1999, the Company adopted another incentive stock option plan similar to
the 1995 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 December 1999, options for 922,000 shares were issued at an exercise
price of between $1.125 and $1.2375 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 $1,140, $0, and $0 in 2000, 1999, and 1998,
respectively.
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 5.11% to 6.87% for 2000, 6.12% to 6.29% for 1999,
and 4.55% for 1998; dividend yield of zero for 2000 and .50% for 1999 and 1998;
volatility factor of the expected price of the Company's stock of .745 for 2000,
.667 for 1999, and .681 for 1998; and a weighted average expected life of 4.42
years. The weighted average fair value of stock options granted during 2000,
1999, and 1998 was $.98, $.58, and $1.23 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:
2000 1999 1998
-------------------------------------------
Pro forma net income (loss) $(1,318,935) $(1,851,570) $1,450,356
Pro forma earnings (loss)
per share:
Basic $(.14) $(.19) $.15
Diluted $(.14) $(.19) $.14
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:
2000 1999 1998
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------------------------------------------
Outstanding beginning of
the year 2,391,600 $1.663 1,474,850 $2.021 1,165,900 $1.954
Granted:
Price = fair value 69,000 1.612 722,000 1.125 275,000 2.125
Price > fair value - 640,000 1.793 75,000 2.3375
Exercised (1) (400,600) 1.262 - (38,300) 1.348
Forfeited (21,000) 1.571 (445,250) 2.165 (2,750) 1.818
-------------- -------------- --------------
Outstanding at end of
year 2,039,000 $1.740 2,391,600 $1.663 1,474,850 $2.021
============== ============== ==============
Exercisable at end of
year 1,693,679 1,711,031 971,914
============== ============== ==============
(1) Shares issued were less than options exercised due to cashless exercise
provisions.
As of December 31, 2000
Options Outstanding Options Exercisable
------------------------------------- ----------------------------------
Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- --------------------- ---------------- -------------------- ------------------- --------------- ------------------
$1.125-$2.00 1,014,500 3.82 $1.212 718,092 $1.216
$2.01-$3.00 933,000 3.05 2.179 884,087 2.164
$3.125 91,500 1.96 3.125 91,500 3.125
---------------- ---------------
$1.125-$3.125 2,039,000 3.38 $1.740 1,693,679 $1.814
================ ===============
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 32,837 and 36,075 warrants were issued
during the years ended December 31, 2000 and 1999, respectively. The weighted
average fair value of warrants granted during 2000 and 1999 were $.60 and $.49
per share, respectively.
A summary of the Company's warrant activity and related information for the
years ended December 31 follows:
2000 1999 1998
-------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
------------------------------------------------------------------------------------
Outstanding beginning of
the year 36,075 $1.031 111,548 $4.360 111,548 $4.360
Granted:
Price = fair value 32,837 1.25 36,075 1.031 - -
Exercised (863) $1.031 - - - -
Forfeited - - (111,548) 4.36 - -
-------------- -------------- --------------
Outstanding at end of
year 68,049 $1.137 36,075 $1.031 111,548 $4.360
============== ============== ==============
Exercisable at end of
year 11,163 - 111,548
============== ============== ==============
As of December 31, 2000
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 68,049 2.48 $1.137 11,163 $1.031
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, 2000:
Capital Operating Leases
Leases
-------------------------------------
2001 $194,788 $289,231
2002 142,839 274,664
2003 11,446 153,525
2004 - 106,615
2005 - 29,045
Thereafter - -
-------------------------------------
Total minimum lease payments 349,073 $853,080
=================
Less amount representing interest 29,079
--------------------
Present value of minimum lease payments
(including current portion of $176,094) $319,994
====================
Machinery, office, and computer equipment at December 31, 2000 and 1999, include
approximately $676,784 and $702,360 of equipment under leases that have been
capitalized. Accumulated depreciation and amortization for such equipment
approximated $324,890 and $272,215 at December 31, 2000 and 1999, respectively.
Rent expense for all operating leases was $319,802, $350,029, and $324,272 for
the years ended December 31, 2000, 1999, and 1998, respectively.
11. Fair Value of Financial Instruments
The carrying values and fair values of the Company's financial instruments are
as follows:
2000 1999
----------------------------------- ----------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------- ----------------------------------
Cash and cash equivalents $ 1,199,000 $ 1,199,000 $ 1,532,000 $ 1,532,000
Long-term debt, including
current maturities 5,234,000 5,239,000 5,459,000 5,403,000
Capital lease obligations,
including current maturities 320,000 318,000 460,000 455,000
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 many of
the Company's products. This agreement provides the Company with the exclusive
worldwide license to manufacture and sell all products created by the licensor
and requires monthly royalty payments of 5% of net sales, with a minimum payment
of $10,000 and a maximum payment of $22,000. The agreement terminates the later
of December 2001 or upon the death of the licensor. The amount of expense under
this agreement was $264,000 for each of the years ended December 31, 2000, 1999,
and 1998.
13. Income Taxes
The components of income (loss) before income taxes are as follows:
Year ended December 31
2000 1999 1998
------------------------------------------------------------
Domestic $ 303,804 $(1,443,941) $2,637,355
Foreign (1,453,232) (726,240) (139,426)
------------------------------------------------------------
$(1,149,428) $(2,170,181) $2,497,929
============================================================
The components of the provision (benefit) for income taxes are as follows:
Year ended December 31
2000 1999 1998
------------------------------------------------------------
Current:
Federal $(310,000) $(642,000) $801,000
Foreign 24,000 (15,000) 69,000
State (23,000) (51,000) 59,000
------------------------------------------------------------
Total current (309,000) (708,000) 929,000
Deferred:
Federal 50,000 (75,000) 3,000
Foreign 8,000 13,000 9,000
------------------------------------------------------------
Total deferred 58,000 (62,000) 12,000
------------------------------------------------------------
$(251,000) $(770,000) $941,000
============================================================
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
2000 1999 1998
------------------------------------------------------------
Income taxes at statutory rate $(391,000) $(738,000) $849,000
Differences between U.S. and foreign tax rates on
foreign income - (6,000) 5,000
State income taxes, net of federal benefit (15,000) (34,000) 39,000
Tax losses in excess of book losses (223,000) - -
Goodwill impairment charge 156,000 - -
Effect of foreign losses without an income tax
benefit 101,000 - -
Executive life insurance expense 53,000 - -
Nondeductible foreign development expenses 31,000 - -
Meals and entertainment 22,000 - -
Tax benefit realized from employee exercise of
stock options (17,000) - -
Other 32,000 8,000 48,000
------------------------------------------------------------
$(251,000) $(770,000) $941,000
============================================================
The components of the deferred tax asset and the related tax effects of each
temporary difference at December 31, 2000 and 1999, are as follows:
2000 1999
---------------------------------------
Deferred tax asset:
Product refund reserve $ 18,000 $ 18,000
Tax over book depreciation (178,000) (95,000)
Deferred compensation 135,000 102,000
Inventory obsolescence reserve 73,000 81,000
Vacation accrual 11,000 -
Charitable contributions 12,000 -
Bad debt reserve 2,000 20,000
Miscellaneous accrued expenses 10,174 15,236
---------------------------------------
$ 83,174 $141,236
=======================================
Federal income taxes have not been provided on the undistributed earnings of the
Company's Australian and New Zealand subsidiaries since the Company has foreign
tax credits available to offset any related federal income taxes.
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 $179,000, $174,000, and
$126,000 in 2000, 1999, and 1998, respectively.
15. Incentive Compensation Plans
Effective January 1, 1994, the Company adopted an annual incentive compensation
plan and a long-term incentive plan. These plans cover three officers/directors
and are effective until termination of their employment. Participants in the
plans are entitled to receive additional compensation based on the attainment of
defined annual and long-term performance measures. Incentive compensation under
each of the plans cannot exceed the participant's base salary rate. The base
salary rates and the performance measures specified by both plans are
established annually by the Board of Directors.
The Company paid $76,824, $0, and $0 in 2000, 1999, and 1998, respectively,
under its incentive compensation plans.
During 1998, the Company established a supplemental executive retirement plan
which allows certain employees to defer a portion of their annual salary/bonus
into a grantor trust. The participants have a choice of certain investment
vehicles, and earnings/losses on the trust assets accrue, to the
benefit/detriment of the participants. The Company may also match the
participant's deferral amount. In 2000 and 1999, the Company did not provide a
match. In 1998, the Company agreed to a 56% match which approximated $65,000.
16. Employment Agreements
In November 1992, the Company entered into a services agreement with a former
officer for a term retroactively commencing in July 1992 and expiring in
December 1999. The Company paid $0 in 2000 and approximately $50,000 in the
years ended December 31, 1999 and 1998.
Effective January 1, 1994, the Company entered into employment agreements with
three officers/directors and, in June 1997, entered into new employment
agreements with two of these officers/directors. The employment agreements
provide for base salary rates established annually by the Board of Directors.
The Company paid base salaries of $1,082,000, $1,166,000, and $1,272,000 in
2000, 1999, and 1998, respectively, under the terms of the agreements.
17. 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, 2000, 1999,
and 1998, the Company incurred fees to the officer/director and his firm of
approximately $269,000, $220,000, and $396,000, respectively.
In the stockholders' equity section of the balance sheet, notes receivable -
officers and directors include amounts due from officers/directors of $26,650
and $38,217 at December 31, 2000 and 1999, 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.
In December 1999, the individual received a loan of $75,000 from the Company.
This loan was repaid, including interest, in March 2000.
18. 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
$51,000, $65,000, and $78,000 in 2000, 1999, and 1998, respectively.
19. Legal Proceedings
In May 1998, the former sales/general manager of the Company's Canadian
subsidiary filed a lawsuit claiming unlawful termination and breach of contract.
The individual had been terminated by the Company in April 1998. In September
2000, this lawsuit was dismissed in favor of the Company.
20. 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.
20. Segment Information (continued)
Segment data for the fiscal years ended December 31, 2000, 1999, and 1998
follows:
2000 1999 1998
--------------------------------------------------------------------
Net sales
Net sales to external customers:
Network marketing $44,535,717 $41,985,765 $47,068,163
Manufacturing and packaging 16,744,068 27,292,402 6,331,766
--------------------------------------------------------------------
Total net sales to external customers 61,279,785 69,278,167 53,399,929
Intersegment net sales:
Manufacturing and packaging 6,501,576 6,145,234 7,387,501
--------------------------------------------------------------------
Total net sales 67,781,361 75,423,401 60,787,430
Reconciling items:
Intersegment net sales (6,501,576) (6,145,234) (7,387,501)
--------------------------------------------------------------------
Total consolidated net sales $61,279,785 $69,278,167 $53,399,929
====================================================================
Depreciation and amortization
Network marketing $ 302,624 $ 528,140 $492,920
Manufacturing and packaging 830,177 592,885 313,226
--------------------------------------------------------------------
Total consolidated depreciation
and amortization expense $1,132,801 $1,121,025 $806,146
====================================================================
Segment profit (loss)
Network marketing $1,099,872 $1,634,492 $5,045,857
Manufacturing and packaging 24,556 (1,897,913) (616,995)
--------------------------------------------------------------------
Total segment profit (loss) 1,124,428 (263,421) 4,428,862
Reconciling items:
Corporate expenses (1,750,309) (1,471,371) (1,555,690)
Nonoperating-net 115,625 149,866 134,249
Interest expense (639,172) (585,255) (509,492)
--------------------------------------------------------------------
Total consolidated income (loss) before
income taxes $(1,149,428) $(2,170,181) $2,497,929
====================================================================
20. Segment Information (continued)
2000 1999 1998
--------------------------------------------------------------------
Segment assets
Network marketing $13,418,288 $13,973,132 $13,271,828
Manufacturing and packaging 5,778,145 5,266,986 4,164,340
--------------------------------------------------------------------
Total segment assets 19,196,433 19,240,118 17,436,168
Reconciling items:
Corporate assets 1,198,682 1,531,700 2,816,804
--------------------------------------------------------------------
Total consolidated assets $20,395,115 $20,771,818 $20,252,972
====================================================================
Capital expenditures
Network marketing $300,017 $ 339,594 $ 433,128
Manufacturing and packaging 140,207 742,152 1,323,314
--------------------------------------------------------------------
Total capital expenditures $440,224 $1,081,746 $1,756,442
====================================================================
Geographic area data
2000 1999 1998
--------------------------------------------------------------------
Net sales to external customers
United States $55,996,610 $64,694,363 $48,862,590
Australia 1,718,929 2,128,156 2,307,044
New Zealand 292,895 416,178 589,752
Canada 913,051 992,509 1,213,609
Mexico 1,768,570 691,160 317,457
United Kingdom 388,488 355,801 109,477
Colombia 82,638 - -
Philippines 118,604 - -
--------------------------------------------------------------------
Total net sales to external customers $61,279,785 $69,278,167 $53,399,929
====================================================================
Assets by area
United States $17,689,638 $17,887,685 $16,730,842
Australia 871,155 1,051,248 1,878,575
New Zealand 341,905 643,405 646,584
Canada 307,071 439,018 677,550
Mexico 653,251 586,088 257,431
United Kingdom 100,247 93,565 61,990
Colombia 144,382 70,809 -
Philippines 287,466 - -
--------------------------------------------------------------------
Total consolidated assets $20,395,115 $20,771,818 $20,252,972
====================================================================
20. Segment Information (continued)
Major Customer
Revenues from sales to one customer of the Company's manufacturing and packaging
segment represented approximately $16.7 million and $21.3 million of
consolidated net sales for 2000 and 1999, respectively.
21. Quarterly Financial Data (Unaudited)
First Second Third Fourth
--------------------------------------------------------------------------------
(In thousands, except per share amounts)
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)
1999
Net sales $ 18,057 $ 19,282 $ 17,248 $ 14,691
Cost of products sold $ 8,437 $ 11,232 $ 9,263 $ 6,930
Net income (loss) $ 67 $ (367) $ (350) $ (750)
Earnings (loss) per share:
Basic $ .01 $ (.04) $ (.04) $ (.08)
Diluted $ .01 $ (.04) $ (.04) $ (.08)
Reliv' International, Inc. and Subsidiaries
Schedule II - Valuation and Qualifying Accounts
For the years ended December 31, 2000, 1999 and 1998
Column A Column B Column C Column D Column E Column F
- ----------------------------------------------------------------------------------------------------------
Additions
-------------------------
Balance at Charged to Charged to Balance at
beginning costs and other Deductions end
Classification of year expenses accounts describe of year
- ----------------------------------------------------------------------------------------------------------
Year ended December 31, 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
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Year ended December 31, 1998
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful
accounts $ 7,600 $ 9,887 $ -- $ 12,487(1) $ 5,000
Reserve for obsolete
inventory 109,000 180,000 -- 113,000(2) 176,000
Supporting liability
accounts:
Reserve for refunds 50,000 377,000 -- 377,000(3) 50,000
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<FN>
(1) Uncollectable accounts written off, net of recoveries.
(2) Disposal of obsolete inventory.
(3) Amounts refunded, net of salable amounts returned.
</FN>