<PAGE>
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, 1996
COMMISSION FILE NUMBER
1-11768
RELIV' INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
Illinois 371172197
-------- ---------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri 63006
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(314) 537-9715
--------------
Registrant's telephone number, including area code
Securities registered pursuant to Sections 12(b) and 12(g) of the Act:
Name of each exchange
Title of Class on which registered:
-------------- ---------------------
Common Stock, without par value NASDAQ National Market tier of The
NASDAQ Stock Market
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of the Form 10-K or any amendment to the Form 10-K. [_]
Based upon the closing price of $7.50 per share of Registrant's Common
Stock as reported on NASDAQ National Market tier of The NASDAQ Stock Market at
March 17, 1997, the aggregate market value of the voting stock held by non-
affiliates of the Registrant was then approximately $44,352,000 (Determination
of stock ownership by non-affiliates was made solely for the purpose of
responding to the requirements of the Form and the Registrant is not bound by
this determination for any other purpose).
The number of shares outstanding of the Registrant's Common Stock as of
March 17, 1997 was 9,646,494 (excluding treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1997 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.
<PAGE>
PART I
ITEM NO. 1 - BUSINESS
- ---------------------
GENERAL
- -------
Reliv' International, Inc. (the "Company") was incorporated in Illinois on
February 11, 1985, under the name American Life Investors, Inc. The name of the
Company was changed to its current name on January 20, 1992. The Company
maintains its principal executive offices at 136 Chesterfield Industrial
Boulevard, Chesterfield, Missouri 63006.
The Company produces a line of food products including nutritional
supplements, diet management products, functional foods, a line of granola bars
and a sports drink mix. Functional foods are products designed to influence
specific functions of the body. The Company also distributes a line of premium
skin care products. These products are sold by subsidiaries and licensees of the
Company to a sales force of independent distributors who sell products directly
to consumers. The Company and its subsidiaries and licensees sell products to
distributors throughout the United States and in Australia, Canada, New Zealand,
Mexico and the United Kingdom.
The Company has two wholly-owned subsidiaries, Reliv', Inc. ("Reliv'") and
Reliv' World Corporation ("Reliv' World"). Reliv' World has four subsidiaries -
Reliv' Australia, Reliv' Canada, Reliv' New Zealand and Reliv' Mexico.
Reliv' was organized as an Illinois corporation on May 24, 1988, as a
wholly-owned subsidiary of the Company, and began selling nutritional supplement
products in October, 1988, in the United States.
In Australia, Canada, New Zealand and Mexico, 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
2
<PAGE>
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.
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.
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.
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.
On July 1, 1995, 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. Reliv' UK is an
independent entity, operated by an individual who was instrumental in developing
the Company's Australian market. Reliv' UK was granted the right to use the
Reliv' family of trademarks in connection with its operation of the Reliv'
business in the United Kingdom. Pursuant to the terms of the arrangement, Reliv'
UK purchases all of its requirements for products from the Company and is to pay
Reliv' World a royalty of 2% of products sold in 1995 (defined as the designated
retail selling price of all products on which commissions are payable to
distributors), 3% in 1996, 4% in 1997, and 5% thereafter.
PRINCIPAL PRODUCTS
- ------------------
Through its subsidiaries, the Company markets and sells a line of related
products including nutritional supplements, weight control products, functional
foods, granola bars, sports drink mixes and a premium skin care line.
The 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. The products are in powdered form to be mixed
with juice or other beverages. The Reliv' Classic formula has a U.S.
3
<PAGE>
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.
Reliv' Ultrim-Plus(R) is designed as a meal replacement (for a maximum of
two meals per day) in a weight loss program. The product incorporates the core
formulation of Reliv' NOW, including vitamins, minerals, proteins and herbs, as
well as additional protein and nutrient sources. Reliv' Ultrim-Plus is available
in three flavors - vanilla, chocolate and strawberry. It is also available in
aspartame-free vanilla. The product is in powdered form for mixture with water
or milk.
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 is in powdered form and is recommended to be used
alone or with Reliv' Ultrim Plus meal replacement.
Reliv' Celleboost(R) is also a weight loss aid designed to suppress
appetite and reduce body fat. Reliv' Celleboost is in capsule form and is
recommended to supplement Reliv' Cellebrate, Reliv' Ultrim-Plus or to be used
alone. Reliv' Celleboost was introduced in January, 1996.
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.
Reliv' Innergize!(R) is a patented powdered sports drink containing a
mixture of vitamins and minerals. Reliv' Innergize is available in lemon and
orange flavors.
Reliv' Fibrestore(R) is a patented nutritional supplement containing
fiber, vitamins, minerals and herbs. The product is in powdered form for
mixture with water or juice. A modified version of the Reliv' Fibrestore
formula is marketed in Canada under the name Herbal Harmony in compliance with
that country's nutritional regulations.
Reliv' Arthaffect(TM) is a nutritional supplement and functional food
containing Arthred(TM), a patented form of hydrolyzed collagen protein, which is
clinically reported to nutritionally support healthy joint function. The
product is in powdered form for mixture with water, milk or juice. Reliv'
Arthaffect was introduced in October, 1996.
On January 10, 1996, the Company introduced the Getabetterbody(TM) Weight
Loss System. Each weight loss system kit contains the Reliv' Ultrim Plus, Reliv'
Cellebrate and Reliv' Celleboost products together with product information and
other tools to be used in a weight loss program.
The Company also markets a line of skin care products which is based on
compounds found only in the avocado. The products are designed to be used
individually or in combination with each other. The product line includes:
(i) Reliv' Face and Body Bar, a mild face and body soap; (ii) Reliv' Pathway(R),
a skin cleanser and primer which contains a variety of avocado based
ingredients; (iii)
4
<PAGE>
Reliv' Reavo(R), a skin care cream designed to reduce the appearance of aging
in the skin caused by natural and environmental causes; and (iv) Reliv' R.P.
1.5(R), a skin care cream having the active ingredient retinyl palmitate is
designed to reduce the appearance of aging caused by environmental causes such
as exposure to the sun.
The Company conducts ongoing research and development on its product line
and intends to introduce additional product items. See "Research and
Development."
PATENTS AND TRADEMARKS
- ----------------------
The Company has obtained U.S. patents on the formulations of Reliv'
Innergize!, Reliv' Fibrestore and Reliv' Cellebrate.
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 Reliv' Ultrim-Plus and 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.
The principal ingredient of Reliv' Arthaffect is the subject of an issued
U.S. patent. 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.
The principal ingredient of Reliv' Reavo is the subject of an issued U.S.
patent. On July 1, 1995, Avogen, Inc. ("Avogen") granted to the Company a
license under such patent and other proprietary rights relating to the skin care
line of products to purchase such products from or through Avogen and to sell
and distribute the products (the "Avogen Agreement"). The Avogen Agreement is
worldwide in scope and continues through the later of the last to expire of the
patents subject to the Avogen Agreement or December 31, 2014. The Agreement may
also be terminated by Reliv' upon 180 days prior written notice to Avogen.
Pursuant to the Avogen Agreement, the Company is obligated to pay Avogen
royalties which vary depending on the product sold. The patent rights for the
formula which forms the basis of the Reavo product were assigned to the law firm
of Conkle
5
<PAGE>
& Olesten, through a levy of execution, as a result of the legal fees owing to
that firm by Avogen incurred in pursuing the patent protection. In connection
with the execution of the Avogen Agreement, the Company, Avogen and Conkle &
Olesten entered into an agreement (the "Conkle Agreement") whereby Conkle &
Olesten granted a license of such patent rights to Avogen to allow it to enter
into the Avogen Agreement. A dispute arose concerning the Avogen Agreement and
Conkle Agreement which resulted in litigation. The litigation was settled
through mediation and the parties are negotiating a final agreement which the
Company believes will not have a significant affect on the Company's financial
condition. (See 1995 Form 10-K, Item No. 3 - Legal Proceedings)
Trademark registrations for "Reliv'" and for the 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 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 sells its products to a network of independent contractors,
designated as "distributors", who in turn sell the products directly to
consumers. The Company's products are marketed and sold to distributors in the
United States, Australia, Canada, New Zealand and Mexico through a subsidiary in
each country and in the U.K. through a licensee. The marketing efforts of the
Company and these subsidiaries and licensees are focused on the development,
training and support of this network of independent distributors. The Company,
through these subsidiaries and licensees, supports an active training program
for distributors in which Company representatives and experienced distributors
lead group training sessions. The Company and these subsidiaries and licensees
also create and provide distributors with manuals, brochures and other
promotional, training and informational publications. Periodically, each
subsidiary and licensee sponsors distributor meetings at which Company
representatives provide training and information concerning the Company's
products. Company subsidiaries and licensees also sponsor group telephone
conference calls for training and promotional activities.
Distributors consist principally of individuals, although a limited number
of distributors are corporations or partnerships. New distributors are
sponsored by existing distributors. A new distributor is required to complete a
distributor application and, in most areas, to purchase a package of distributor
materials (for $39.95 in the United States) consisting of a distributor manual,
business forms and promotional materials. Distributors purchase products from
Company subsidiaries and licensees 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 a
Retail Distributor and is entitled to purchase products from a Company
subsidiary or other distributors at a discount of 25 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
6
<PAGE>
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 45 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 45 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 2 percent to 5 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 below
their sponsored Master Affiliates. To qualify for these additional compensation
payments, Master Affiliates are required to maintain certain monthly sales
volumes and 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. In mid-1996, the Company
introduced the Star Director Program, which allows Directors to receive
increased additional compensation payments.
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
7
<PAGE>
participation in Company sponsored events, paid hotel rooms at conventions,
health insurance and car allowances. Once a month, 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 Select(sm) 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 and licensees also provide a variety of additional
incentives or bonuses to the most productive distributors.
As of March 17, 1997, 36,465 persons or entities were registered as
distributors of Company subsidiaries and licensee of which 3,325 were Master
Affiliates. This is an increase from March, 1996 totals of 34,320 distributors
of which 2,280 were Master Affiliates. The number of registered distributors
and Master Affiliates in each country in which Company subsidiaries and
licensees operate is as follows:
<TABLE>
<CAPTION>
Distributors Master Affiliates
------------ -----------------
<S> <C> <C>
United States 26,482 2,487
Australia 4,340 295
New Zealand 1,752 116
Canada 1,349 274
Mexico 1,445 48
United Kingdom 1,097 105
</TABLE>
Not all persons registered as distributors of Company subsidiaries or
licensees 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 1996.
The Company recognizes that its sales growth is based upon the continued
development of its independent distributor force and 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.
8
<PAGE>
The Company recognizes that businesses in the network marketing industry
risk the possibility that a portion of sales made to distributors may not be
consumed or sold to consumers and instead, may remain as inventory in the
distributors' possession. 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 percentage compensation payments.
Each subsidiary and licensee maintains a policy that unused product may be
returned by customers to the selling distributor or the subsidiary or licensee
for a full refund within 30 days after purchase. Each subsidiary and licensee
also maintains a policy that any distributor who terminates his distributorship
may return resalable product 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.
Company subsidiaries and licensees presently market and sell the Company's
products in the United States, Australia, New Zealand, Canada, Mexico and the
United Kingdom. In 1996, sales in the United States represented 84 percent of
total sales, Australia 9 percent, New Zealand 3 percent, Canada 3 percent,
Mexico 1 percent and United Kingdom less than 1 percent. The Company is
investigating and planning for the introduction of the Company's products into
other countries.
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; Toronto, Canada;
Mexico City, Mexico; and London, England. Each subsidiary and licensee of the
Company maintains an office and personnel to receive, record and fill orders
from distributors. Distributors order product from Company subsidiaries and
licensees in case lots and pay for the goods prior to shipment. In general,
state or local governmental sales taxes are collected by Company subsidiaries
and licensees for taxing authorities.
9
<PAGE>
MANUFACTURING AND PRODUCT SOURCES
- ---------------------------------
The Company established a manufacturing line at its facility in
Chesterfield, Missouri and had begun manufacture of its nutritional products in
early 1993. Shortly after manufacturing commenced, the facility was flooded in
July 1993, as a result of a break in a levee on the Missouri River. The Company
initiated the return of manufacturing to its Chesterfield facility in mid-1995
and currently manufactures all of its products (except granola bars and skin
care products) at this facility. See "Item No. 2 - Properties".
During 1996, the Company's nutritional products were manufactured at its
Chesterfield facilities and by contract manufacturers, predominantly located in
the United States, who produced the products (granola bars) 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 effect on the
timely supply of goods. In 1996, the Company received approval from the
Australian Therapeutic Goods Authority ("TGA") to manufacture products sold in
Australia at its Chesterfield plant. The Company is in the process of reducing
its use of contract manufacturers in Australia and intends to manufacture the
majority 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.
During 1996, the Company's line of skin care products was supplied to it
pursuant to the Avogen Agreement and was purchased from Avogen and various
contract manufacturers. Arthred(TM), the principal ingredient of Reliv'
Arthaffect, is supplied to the Company by Traco.
RESEARCH AND DEVELOPMENT
- ------------------------
The Company reestablished its research and development facilities in its
Chesterfield facility in 1995. During the period that the Chesterfield facility
was damaged due to the flood, research was conducted at the Company's temporary
headquarters and at the facilities of the contract manufacturers. The Company
conducts research, product development and formulation, testing and quality
control, all relating to food products. Research and development costs were
$289,000 in 1996, $294,000 in 1995 and $355,000 in 1994.
EMPLOYEES
- ---------
As of December 31, 1996, the Company and all subsidiaries had approximately
202 full-time employees compared with 107 such employees at the end of 1995. The
significant increase in employees resulted primarily from an increase in
manufacturing and warehouse employees, both as a result of the increase in the
Company's product sales and as a result of the expansion of the Company's
contract manufacturing business segment. The Company believes that its
relationship
10
<PAGE>
with its employees is satisfactory. In June of 1996, the Company's
manufacturing and warehouse employees certified representation by the local
Teamsters Union. The Union and the Company are currently negotiating a
collective bargaining agreement.
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. The skin care products sold by the Company are also subject to FDA
regulations with respect to formulation and marketing of cosmetics. FDA
regulations also limit and control the extent to which health or other claims
can be made with respect to the efficacy of any food or cosmetic. The FDCA has
been amended several times with respect to 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"). 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. The Company presently does not anticipate
marketing new products which would require FDA approval. However, these
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.
The Company's advertising of its nutritional supplement products is also
subject to regulation by the FTC under the Federal Trade Commission Act, which
prohibits unfair or deceptive trade practices, including false or misleading
advertising. The FTC in recent years has brought a number of actions
challenging claims by companies (other than the Company) for weight loss and
"fat burning" dietary supplement products and plans.
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 affects
on sales.
11
<PAGE>
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.
SALES PROGRAM REGULATION
- ------------------------
The Company's distribution and sales program is subject to regulation by
the FTC and other federal and state regulation. 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.
Under current law, the Company's distributors are treated for federal
income tax purposes as independent contractors and compensation paid to them is
not subject to withholding by the Company. Several bills have been introduced
in Congress which would restrict the definition of independent contractor and
possibly jeopardize the exempt status enjoyed by direct sellers. Such a change
would negatively impact the Company's recruiting efforts. The direct selling
industry is strongly opposing such bills as they relate to direct sellers. The
Company is unable to assess the likelihood of these or similar bills being
enacted. In several states, legislation has been introduced which would narrow
the definition of independent contractor for purposes of income tax withholding
as well as unemployment compensation, worker's compensation and other employee
benefits. To date, the status of direct sellers as independent contractors has
not been affected. States are becoming increasingly active in this area,
however, and there is no assurance that future legislation at the state level
affecting direct sellers will not be enacted.
COMPETITION
- -----------
The Company's products are sold in highly competitive markets against
companies 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 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 Reliv' Ultrim-Plus, Cellebrate and Celleboost 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! competes, a
market long dominated by Gatorade(tm). Reliv' NOW, Reliv' Classic and Reliv'
Fibrestore compete with
12
<PAGE>
numerous mineral and vitamin supplement products. The Company's skin care line
competes with products sold by numerous, well-established cosmetic companies,
including several direct selling companies such as Mary Kay and Avon. With
Arthaffect, the Company has entered the relatively new "functional foods"
market, which is expected to be extremely competitive and led by the major food
companies.
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. Revenues from UK
operations were minimal in 1996.
Each foreign subsidiary and licensee 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.
Reference is made to Note 16 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on geographical segments.
CONTRACT MANUFACTURING
- ----------------------
In the last quarter of 1995, the Company commenced providing contract
processing 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. At
present, the Company is providing these services for two customers on an as-
ordered basis. Revenues from these services during 1995 were $279,000, and
increased to $3,310,000 in 1996.
Reference is made to Note 15 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on business segments.
ITEM NO. 2 - PROPERTIES
- -----------------------
The Company owns approximately three acres of land and a building
containing approximately 46,300 square feet of office, manufacturing and
warehouse space located at 136 Chesterfield Industrial Boulevard, Chesterfield,
Missouri, 63006, where it currently maintains its corporate headquarters. The
main facility and surrounding land was severely damaged by a flood in July,
1993, and the Company immediately relocated to offices at 1809 Clarkson,
Chesterfield, Missouri, where it maintained its temporary corporate
headquarters. The Company began repairs and improvements
13
<PAGE>
to its main facility, and finalized relocation of its corporate offices to the
facility in February, 1995. The Company's decision to return to the facility was
based on its ability to obtain adequate flood insurance to offset future losses
if incurred and the government's direction toward upgrading the levee that
protects the facility.
The 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, 1996, are $649,000 and $205,000, respectively. The promissory
note is secured by a deed of trust on the premises. The Company intends to fund
its 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 main
facility for $400,000 to be used for expansion of its facilities. The Company
has recently formulated plans for a major expansion of its headquarters and
manufacturing facilities adjacent to its current building. The proposed
construction project would add approximately 90,000 square feet to its current
site. The additional space would be utilized for manufacturing and packaging,
warehousing for raw materials and finished goods, and administrative offices.
During 1996, the Company leased approximately 20,800 square feet of
warehouse space at a separate site in Chesterfield, Missouri, for shipping and
finished goods storage. The lease runs through October 17, 1997, at a rental
rate of $8,700 per month, but can be terminated by the Company upon 120 days
prior notice.
The Company leases office space in Parramatta, Australia, Mississauga,
Ontario, Canada and in Mexico City, Mexico to support its operations in those
areas, and has a contract warehouse arrangement in Auckland, New Zealand.
ITEM NO. 3 - LEGAL PROCEEDINGS
- ------------------------------
N/A
ITEM NO. 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ----------------------------------------------------------------
N/A
14
<PAGE>
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.
1996 and 1995 Quarterly Stock Price Data
----------------------------------------
<TABLE>
<CAPTION>
HI LO
------ -----
<S> <C> <C>
1996
----
First Quarter 2.273 1.477
Second Quarter 3.864 1.818
Third Quarter 7.727 2.727
Fourth Quarter 11.136 5.227
1995
----
First Quarter 3.523 2.273
Second Quarter 2.727 1.875
Third Quarter 2.273 1.818
Fourth Quarter 2.159 1.080
</TABLE>
All stock price data has been retroactively adjusted for the Company's 10%
stock dividend issued in February 1997.
As of March 17, 1997, there were approximately 1,530 holders of record of
the Company's Common Stock.
On February 15, 1995, a dividend of $.005 per share was paid to
shareholders of record. On October 15, 1995, a dividend of $.005 per share was
paid to shareholders of record. On May 15, 1996, a dividend of $.005 per share
was paid to shareholders of record. On December 6, 1996, a dividend of $.015
per share was paid to shareholders of record. On February 28, 1997, a 10% stock
dividend and a cash dividend of $.01 per share was paid to shareholders of
record. The cash dividend on such date was paid on all shares after giving
effect to the stock dividend. 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
15
<PAGE>
also allows participants to make additional voluntary purchases of common stock
on a quarterly basis at the market price.
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.
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994 1993 1992
-----------------------------------------------------------------
(1)
<S> <C> <C> <C> <C> <C>
Net Sales $40,729,993 $28,913,873 $32,190,444 $43,553,022 $32,274,085
Income from continuing operations, before
extraordinary loss $ 1,507,014 $ 569,823 $ 893,766 $ 3,062,398 $ 3,302,776
Net Income $ 1,507,014 $ 569,823 $ 893,766 $ 1,649,398 $ 3,302,776
Earnings (loss) per common and common
equivalent share/(2)/:
Primary:
Income before extraordinary loss .15 .06 .09 .29 .31
Extraordinary loss -- --- --- (.14) ---
-----------------------------------------------------------------
Net Income .15 .06 .09 .15 .31
Fully Diluted:
Income before extraordinary loss .14 .06 .09 .29 .31
Extraordinary loss --- --- --- (.14) ---
----------------------------------------------------------------
Net Income .14 .06 .09 .15 .31
Cash Dividends per share of Common Stock .02 .01 $ .015 -- --
Total Assets $11,401,665 $10,276,234 $ 9,660,013 $10,525,380 $ 9,416,710
Long-term debt and capital lease obligations,
less current maturities $ 1,478,079 $ 1,416,764 $ 1,000,024 $ 1,072,070 $ 1,117,576
</TABLE>
/(1)/ In July, 1993, during the Midwestern floods, a levee broke and flooded
300 area businesses, including the Company's headquarters and
manufacturing facility. The effects of this event have been accounted
for as an extraordinary loss.
/(2)/ 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.
16
<PAGE>
ITEM NO. 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ----------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
RESULTS OF OPERATIONS
- ---------------------
Net Income
1996 vs. 1995
The Company's 1996 net income was $1,507,000 or $.15 per share ($.14 per
share fully diluted). This compares with net income of $570,000, or $.06 per
share in 1995. Net income in the United States was $1,686,000 in 1996, compared
to $430,000 in 1995. Net income from international operations was a loss of
$179,000 in 1996, compared with gain of $140,000 in 1995.
The increase in net income as compared to 1995 is a result of a 41 percent
increase in net sales in 1996 to $40.7 million, as compared to $28.9 million in
1995. Net sales in the United States increased to $34.4 million from $22.2
million in 1995, while net sales in the foreign operations declined slightly to
$6.3 million in 1996 from $6.7 million in 1995. Net sales in the United States
in 1996 were comprised of $31.1 million in network marketing sales and $3.3
million in contract packaging services. Net sales in the United States in 1995
consisted of $21.9 million in network marketing sales and $279,000 in contract
packaging sales.
Net sales for the fourth quarter of 1996 were $12.0 million, $10.9 million
from network marketing sales and $1.1 million from contract packaging services.
This is an increase from fourth quarter 1995 net sales of $6.9 million, of which
$6.7 million were network marketing sales and $200,000 was from contract
packaging services. Increases in network marketing sales during the fourth
quarter of 1996 were realized in each of the Company's operations as net sales
in the United States increased to $9.1 million, from $5.3 million in 1995, and
net sales in the foreign operations increased to $1.8 million, from $1.4 million
in 1995.
In the fourth quarter of 1995, the Company began providing contract
packaging services, including blending, processing and packaging food products
in accordance with specifications provided by its customers. Net sales in 1996
were $3.3 million compared to $279,000 in 1995. Direct costs of contract
packaging services were 93 percent of revenue. The Company experienced high
levels of start up expenses and inefficiencies caused by the rapid increase in
contract packaging services which reduced net profit. Direct costs as a percent
of revenue improved throughout the year from 108 percent in the first quarter,
to 99 percent in the second, to 88 percent in the third quarter to 84 percent in
the fourth quarter. The improvement was due to improved controls in the
manufacturing process and a new pricing agreement with a major customer that was
put into effect September 1, 1996.
In 1995, the Company strengthened its sales and marketing departments by
adding additional personnel to provide support and strategic planning in all
subsidiary marketing and business building programs. One element of the
strategy developed was the Road to Presidential, designed to encourage
distributors to reach the highest level of earnings potential by building their
downline organizations. This program was initially introduced in the United
States in 1995 and then in the
17
<PAGE>
foreign subsidiaries throughout 1996. The Company believes the results of this
program have been very successful in the United States and that it will support
the efforts to increase sales in the other subsidiaries. To strengthen the
strategy of the Road to Presidential the Company introduced the Star Director
Program in June 1996. This program compensates distributors who reach certain
levels of sales organization growth with bonuses based on the retail sales of
their distributor network.
In 1996 network marketing sales activity in the United States resulted in a
larger and more productive number of independent distributors. During 1996,
16,622 new distributors enrolled and 10,305 distributors renewed their
distributorships, compared to 14,653 new distributors and 5,470 renewals in
1995. The average wholesale order size in the U.S. (at retail) increased in
1996 to $733 compared to $670 in 1995.
In March 1994, the Company introduced the Direct Select Program in the
United States to make products available to consumers by ordering directly
through the Company. In 1996, the program produced sales at retail value of
$4.3 million, compared to retail sales of $2.6 million in 1995 and $779,000 in
1994. The Company plans to begin implementing the Direct Select Program in its
foreign subsidiaries in 1997.
The United States 1996 net sales were affected by the introductions of
Reliv' Celleboost, a weight loss product, and the Getabetterbody weight loss
system, in January 1996, Cool Punch Innergize, an isotonic drink targeted
towards children, in June 1996 and Arthaffect, a product designed to
nutritionally support bone and joint conditions, in October 1996. For the month
of December, 1996 these products represented 16 percent of total product sales.
Also, 1996 network marketing sales strengthened in the top ten states with
an increase of 26 percent when compared to 1995 sales. Illinois, Michigan and
Texas were the Company's primary markets in 1996 contributing 35.1 percent of
total sales, a decrease of 2.3 percent when compared to the top three markets in
1995, indicating a more diverse base of sales growth.
In Australia and New Zealand net sales declined to $4,723,000 in 1996 from
$5,760,000 in 1995. Fourth quarter 1996 sales increased to $1,260,000 from
$1,165,000 in 1995. Fourth quarter sales, traditionally the weakest sales
quarter, also exceeded the third quarter 1996 sales of $1,141,000. In October
1996, the Company employed a new sales manager in these markets who is
experienced in network marketing sales. Sales in Australia and New Zealand have
been affected by continued delays in the introduction of several new products
due to regulatory policies, plus increased levels of competition. The Company
expects to introduce several new products in 1997 for these markets. New
distributor enrollments declined in Australia and New Zealand to 3,108 from
4,373 in 1995. Distributor renewals in Australia were 41% and in New Zealand
36% in 1996 as compared to 38% and 29% in 1995, respectively.
Net sales in Canada increased in 1996 to $1,247,000 from $494,000 in 1995.
New distributor enrollments increased to 1,165 from 376 in 1995. The 1996 net
sales in Canada were positively affected by the introductions of Reliv Optain,
an isotonic drink similar to the Innergize sold in the United States, and
Celleboost, a weight loss product, in January 1996. These products represented
14 percent of total product sales for 1996.
18
<PAGE>
In Mexico net sales continued to decline as the economy contributed to
Reliv Mexico's inability to increase net sales and reach profitability. Net
sales in Mexico in 1996 were $352,000, compared to $436,000 in 1995 and
$1,008,000 in 1994. As of the end of 1996, the value of the peso to U.S. dollars
declined by 61 percent compared to the value at the beginning of 1994. To offset
the devaluation of the peso, the Company has substantially increased the retail
price of its products. This had a significant negative effect on the ability to
sell the product and therefore contributed to the reduction in sales. As a
result, new distributor enrollment declined in 1995 to 487 compared to 1,001 in
1995.
The Company believes that its computer hardware and software will meet its
administrative needs in the United States and in its foreign subsidiaries in the
foreseeable future.
1995 vs. 1994
The Company's 1995 net income was $570,000 or $.06 per share. This
compares with net income $894,000 or $.09 per share in 1994. Income in the
United States was $430,000 in 1995, compared to $431,000 in 1994. Income after
taxes from international operations was $140,000 in 1995, compared with $463,000
in 1994.
The reduction in net profit as compared to 1994 is a result of a decrease
in net sales in 1995 to $28.9 million, as compared to $32.2 million in 1994.
Net sales declined in the foreign operations from $11.4 million in 1994 to $6.7
million in 1995, while net sales in the United States increased to $22.2 million
from $20.8 million in 1994.
The Company believes the increase in 1995 net sales in the United States is
due to a strengthening in its primary markets, comprising ten states, which
increased by 12.9 percent when compared to 1994, and an increase in the sales
placed through the Company's Direct Select Program described above.
The Company believes the decline in sales in the foreign operations in 1995
is a result of several factors which had a negative effect on sales momentum.
In Australia and New Zealand net sales were affected by the delay in introducing
several new products due to regulatory policies, increased competition, and
several key distributors who either reduced or terminated their daily
involvement leaving a short-term lack of distributor leadership. The Company
believes that these events may have affected both 1995 sales, as well as the
recruitment of new distributors, which can have a more long-term affect on
sales.
In Canada and Mexico the operation's net sales were affected by the absence
of sales managers since fourth quarter 1994 through mid-1995. The Company
employed a sales manager in Mexico in May 1995 and in Canada in August 1995.
Both individuals are experienced in network marketing and are citizens of their
respective country.
In Mexico the decline in the economy contributed to Reliv Mexico's
inability to increase net sales and reach profitability. During 1995, the value
of the peso to U.S. dollars declined approximately 36 percent compared to the
1994 value. To offset the devaluation of the peso, on
19
<PAGE>
February 1, 1995, the Company substantially increased the retail price of its
products. This had a negative effect on the ability to sell the product and
therefore contributed to the reduction in sales.
Cost of Sales:
During 1996, cost of network marketing products sold improved to 19 percent
of net sales compared with 21 percent in 1995, and 23 percent in 1994. The
principal cause for the improvement in gross profit margins is the return to the
Company's manufacturing facility in June 1995, which resulted in improved
manufacturing controls and the ability to increase the utilization of the
manufacturing facility by providing contract packaging services. Also, the
Company received approval from the Australian and Canadian health departments to
manufacture products at its facility in St. Louis and export to those countries.
Prior to this approval, the Company utilized contract manufacturers in each of
these countries to provide products. The result of this approval is lower cost
of goods and higher quality products.
Cost of network marketing products sold decreased to 18 percent in the
fourth quarter of 1996 from 19 percent for the same period in 1995.
Distributor Royalties and Discounts:
Distributor royalties and discounts as a percentage of network marketing
sales decreased to 36 percent in 1996 from 37 percent in 1995. Fourth quarter
1996 distributor royalties and discounts decreased to 36 percent from 40 percent
in 1995. The reduced level as a percent of revenues is attributable to an
increase in non-commissionable revenues generated through the sale of
distributor kits, sales materials and shipping and handling charges.
Distributor royalties and commissions increased to 37 percent in 1995 from
33 percent in 1994. This is due to an increase in net sales from the Company's
Direct Select program from 1994 levels. In this program, customers purchase
directly from the Company at full retail price and the Company distributes to
the distributor force 45 percent of the purchase price as a commission earned.
This is higher than the average commission paid by the Company to distributors
on direct sales to customers. In addition, in 1995, the Company paid royalties
of $366,000 through the Ambassador Program, which rewards distributors who
promote growth and provide sales leadership, an increase of 93 percent over
1994.
Distributor royalties and commissions are governed by the distributor
agreements and are directly related to the level of sales. The Company pays as
a percentage of retail sales up to 18 percent in royalties and as much as 45
percent in commissions.
Selling, General and Administrative
Selling, general and administrative expenses as a percentage of net sales
decreased to 36 percent for 1996, from 39 percent in 1995 and from 41 percent in
1994. The decrease in 1996 is primarily a result of the increase in net sales
and the Company's ability to operate with limited increases in operational
expenses. The decrease in 1995 compared to 1994 was due to efficiencies
associated with the Company's returns to its corporate offices in first quarter
1995. Selling, general
20
<PAGE>
and administrative expenses were affected during 1996 as the Company increased
sales production incentives compared to 1995 by $620,000, or 1.5 percent of
revenues, and added in June 1996, the Star Director Program, which rewards
distributors who reached certain growth levels with an additional bonus based on
the retail sales of their distributor network. The Company paid $420,000, or 1.0
percent of revenues, in 1996 in Star Director Bonuses.
Selling, general and administrative expenses as a percentage of net sales
were lower in the fourth quarter 1996 as expenses were 35 percent of net sales
compared to 40 percent during the fourth quarter 1995. The increase in net
revenues from $6,898,000 in the fourth quarter 1995 to $12,044,000 in 1996 is
the primary reason.
Interest Expense:
Interest expense increased in 1996 to $213,000 from $146,000 in 1995 and
from $81,000 in 1994. The increase in 1996 is due to a loan package secured to
finance the rehabilitation of the Company's office and manufacturing facility,
plus the purchase of additional manufacturing equipment required to provide
contract packaging services. Short-term debt, capital lease obligations and
long-term debt increased to $1,761,000 from $1,627,000 in 1995.
Other Income/Expense:
Other income decreased to $147,000 in 1996 from $226,000 in 1995 and from
$134,000 in 1994. This is due to a decrease in interest earned from cash
investments made by the Company in interest-bearing accounts or financial
instruments and foreign exchange gains in 1995.
Income Taxes:
The provision for income taxes increased to $950,000, or 2.3 percent of net
sales in 1996, from .6 percent of net sales or $187,000 in 1995, and .6 percent
of net sales, or $183,000 in 1994. The effective tax rate for 1996 was 39
percent. Effective tax rates for 1995 and 1994 were 25 percent and 17 percent,
respectively. The effective rates for 1995 and 1994 were lower than the United
States statutory rate as a result of the conversions of Reliv' Canada to an
unlimited liability company in 1995 and Reliv' Mexico to a limited liability
company in 1994. The 1996 effective rate was more in line with the United
States statutory rate of 34 percent, plus applicable state income tax rates, as
compared to prior years.
FINANCIAL CONDITION
- -------------------
The Company generated cash flow of $2,122,000 from operating activities
during 1996 and $364,000 through long-term financing. This compares to $803,000
generated from operating activities and $662,000 through long-term financing in
1995. Cash and cash equivalents increased $602,000 to $2,109,000 by year-end
1996. The Company utilized the funds generated through operations to acquire
$765,000 of property, plant and equipment, to repurchase 309,189 shares of
common stock at a cost of $872,000 and to pay dividends of $179,000.
21
<PAGE>
Current assets increased to $6,553,000 at December 31, 1996 from $5,499,000
as of December 31, 1995, primarily due to the increase in cash and cash
equivalents as described above. Accounts receivable increased by $398,000 to
$1,056,000 from the December 31, 1995 balance of $659,000 as a result of the
increase in contract packaging services, which are generally paid on 30 day
terms. Inventories remained relatively constant at $2,762,000 as the inventory
turnover ratio improved to its current rate of 3.9 from 2.4 in 1995.
Property, plant and equipment, after dispositions, increased $721,000 to
$6,996,000 at December 31, 1996, as a result of the acquisition of manufacturing
equipment, primarily high speed pouching equipment, which provides versatility
to the manufacturing process and expanded the Company's capability to meet the
needs of its contract packaging customers.
Current liabilities increased to $3,866,000 at December 31, 1996 from
$3,352,000 at December 31, 1995. The increase in current liabilities is mainly
in distributor commissions payable and sales taxes payable, which increased by
$284,000 and $72,000 respectively, as a result of increased net sales as
compared to December 31, 1995. Accrued payroll and payroll taxes increased to
$391,000 at December 31, 1996 from $156,000 for the prior year end, primarily
due to $240,000 in accrued incentive compensation due to officers.
Long-term debt increased slightly to $1,478,000 from $1,417,000 as of
December 31, 1995. The Company entered into a loan agreement in January 1996 to
provide additional financing and to retire a loan the Company entered into in
the fourth quarter 1994 with its previous bank. The agreement includes a
$950,000 term loan, the proceeds of which were used to retire $423,000 of
outstanding debt on a $500,000 term loan and $163,000 outstanding on a line of
credit, and $364,000 to finance the acquisition of additional manufacturing
equipment. The agreement also includes operating lines of credit of $1,500,000
that replaced a $500,000 line of credit. At December 31, 1996, the Company was
not utilizing the lines of credit.
Stockholders' equity increased to $6.1 million compared with $5.5 million
in 1995. The improvement is due to the net income of the Company. During 1996,
the Company invested $872,000 to repurchase 309,189 shares of common stock and
paid cash dividends of $179,000.
The Company's working capital balance has improved by $540,000 since
December 31, 1995. The current ratio at December 31, 1996 was 1.7. Management
believes that the Company's internally generated funds together with the loan
agreement will be sufficient to meet working capital requirements in 1997.
On January 31, 1997, the Company declared a 10% stock dividend and a cash
dividend of $0.01 per share paid on February 28, 1997 to recordholders as of
February 14, 1997. The stock dividend resulted in a transfer from retained
earnings to the common stock account in the amount of $5,848,000, which was
based on the closing price of $6.50 per share of Common Stock on the declaration
date. Average shares outstanding and all per share amounts included in the
accompanying consolidated financial statements and notes reflect the increased
number of shares as a result of the stock dividend.
22
<PAGE>
Forward-looking statements made in this filing involve material risks and
uncertainties that could cause actual results and events to differ materially
from those set forth, or implied, including 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. 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 1997 Annual Meeting of Shareholders to be
held on May 28, 1997, 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 1997 Annual Meeting of Shareholders to be
held on May 28, 1997, 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 1997 Annual Meeting of Shareholders to be
held on May 28, 1997, 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 1997 Annual Meeting of Shareholders to be
held on May 28, 1996, to be filed with the Commission within 120 days of the end
of the Company's last fiscal year.
23
<PAGE>
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
Voting Trust Agreement
(incorporate by reference Exhibit
9 to the Form 10-K of the Registrant
for year ended December 31, 1987) 9
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
24
<PAGE>
Exhibit
Document Number
-------- -------
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
Tobin Stock Purchase Agreement
(incorporate by reference Exhibit 10.6
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.4
Tobin Consulting Agreement
(incorporate by reference Exhibit 10.7
to the Form 10-K of the Registrant
for year ended December 31, 1992) 10.5
1995 Stock Option Plan
(incorporate by reference Exhibit 10.7 to
the Form 10-K of the Registrant for year
ended December 31, 1995) 10.6
Montgomery Employment Agreement
dated April 13, 1994 (incorporate by
reference Exhibit 10.12 to the Form 10-Q
of the Registrant for quarter ended June 30, 1994). 10.7
Hastings Employment Agreement
dated April 13, 1994 (incorporate by
reference Exhibit 10.13 to the Registrant's
Form 10-Q for quarter ended June 30, 1994). 10.8
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). 10.9
25
<PAGE>
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) 10.10
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) 10.11
Agreement with Avogen, Inc. dated July 1, 1995
(incorporate by reference Exhibit 10.13 to the
Form 10-K of the Registrant for year ended
December 31, 1995) 10.12
Agreement with Conkle & Olesten and Avogen, Inc.
dated July 1, 1995 (incorporate by reference Exhibit
10.14 to the Form 10-K of the Registrant for year
ended December 31, 1995) 10.13
Agreement with Traco Labs, Inc. 10.14
Statement re: computation of per
share earnings 11
Subsidiaries of the Registrant
(incorporate by reference the
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) N/A
(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.
26
<PAGE>
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 28, 1997
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 28, 1997
By: /s/ David G. Kreher
-------------------------------------------------------------------------
David G. Kreher, Senior Vice President, Chief Operating Officer,
Assistant Secretary (principal financial and accounting officer)
Date: March 28, 1997
By: /s/ Carl W. Hastings
-------------------------------------------------------------------------
Carl W. Hastings, Executive Vice President, Assistant Secretary, Director
Date: March 28, 1997
By: /s/ Stephen M. Merrick
-------------------------------------------------------------------------
Stephen M. Merrick, Secretary, Director
Date: March 28, 1997
By: /s/ Donald L. McCain
-------------------------------------------------------------------------
Donald L. McCain, Director
Date: March 28, 1997
By: /s/ Sandra S. Montgomery
-------------------------------------------------------------------------
Sandra S. Montgomery, Director
Date: March 28, 1997
<PAGE>
Item No. 14(a)
Index to Consolidated Financial Statements
and Financial Statement Schedule
Contents
<TABLE>
<CAPTION>
<S> <C>
Consolidated Financial Statements:
Report of Independent Auditors....................................... F-1
Consolidated Balance Sheets as of December 31, 1996 and 1995......... F-2
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994.................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994.................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.................................... F-6
Notes to Consolidated Financial Statements December 31, 1996........ F-8
Financial Statement Schedule:
Schedule II Valuation and Qualifying Accounts for the years
ended December 31, 1996, 1995 and 1994............................... F-28
</TABLE>
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.
<PAGE>
[LETTERHEAD OF ERNST & YOUNG LLP]
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. 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
[Letterhead of Ernst & Young LLP]
March 10, 1997
F-1
<PAGE>
Reliv' International, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1996 1995
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,108,770 $ 1,507,176
Accounts and notes receivable, less
allowances of $13,000 in 1996 and
$7,000 in 1995 1,056,360 658,607
Inventories:
Finished goods 1,219,295 1,012,987
Raw materials 1,136,897 1,014,385
Sales aids and promotional materials 405,768 485,795
----------- -----------
2,761,960 2,513,167
Refundable income taxes 48,949 229,438
Prepaid expenses and other current
assets 512,031 529,364
Deferred income taxes 65,000 61,000
----------- -----------
Total current assets 6,553,070 5,498,752
Deferred costs 79,223 158,734
Property, plant and equipment:
Land 790,677 780,346
Building 2,863,457 2,851,407
Machinery and equipment 1,693,849 1,181,260
Office equipment 328,780 280,978
Computer equipment and software 1,245,137 1,145,944
Construction in progress 74,423 35,500
----------- -----------
6,996,323 6,275,435
Less accumulated depreciation and
amortization (2,226,951) (1,656,687)
----------- -----------
4,769,372 4,618,748
----------- -----------
$11,401,665 $10,276,234
=========== ===========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
---------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 3,496,058 $ 2,988,496
Income taxes payable 65,102 138,336
Current maturities of long-term debt and
capital lease obligations 282,502 210,256
Unearned income 22,602 14,766
---------------------------
Total current liabilities 3,866,264 3,351,854
Capital lease obligations, less current maturities 13,211 75,573
Long-term debt, less current maturities 1,464,868 1,341,191
Stockholders' equity:
Common stock, no par value; 20,000,000 shares
authorized, 9,900,529 shares issued in 1996 and
1996 and 9,311,301 shares issued in 1995 9,211,826 3,412,986
Notes receivable-officers and directors (4,633) (4,633)
Retained earnings (deficit) (2,516,181) 2,714,723
Foreign currency translation adjustment 10,970 (79,634)
Less cost of treasury stock-250,580
shares in 1996 and 214,366 shares in 1995 (644,660) (535,826)
---------------------------
6,057,322 5,507,616
---------------------------
$11,401,665 $10,276,234
===========================
</TABLE>
F-3
See accompanying notes.
<PAGE>
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Sales at suggested retail $60,840,620 $46,466,287 $52,679,333
Less distributor allowances on
product purchases 20,110,627 17,552,414 20,488,889
-----------------------------------------
Net sales 40,729,993 28,913,873 32,190,444
Costs and expenses:
Cost of products sold 10,193,418 6,386,806 7,452,791
Distributor royalties and commissions 13,429,386 10,678,500 10,666,789
Selling, general and administrative 14,585,127 11,171,344 13,047,001
-----------------------------------------
38,207,931 28,236,650 31,166,581
-----------------------------------------
Income from operations 2,522,062 677,223 1,023,863
Other income (expense):
Interest expense (212,819) (146,476) (80,665)
Other income 147,771 226,076 133,568
-----------------------------------------
Income before income taxes 2,457,014 756,823 1,076,766
Provision for income taxes 950,000 187,000 183,000
-----------------------------------------
Net income $ 1,507,014 $ 569,823 $ 893,766
=========================================
Earnings per common and common
equivalent share (1) $.15 $.06 $.09
</TABLE>
(1) Per share data reflects the pro forma effect of the Company's 10 percent
stock dividend declared on January 31, 1997 and distributed on February 28,
1997.
See accompanying notes.
F-4
<PAGE>
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
Notes Foreign Under Repurchase
Common Stock Receivable- Currency Treasury Stock Agreements
--------------------- Officers and Retained Translation --------------------------------------
Shares Amount Directors Earnings Adjustment Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 9,653,044 $3,473,335 $(53,190) $ 2,350,885 $ (5,136) 196,642 $(493,336) 65,217 $(132,165)
Issuance of common stock
in lieu of payment for
consulting services 10,000 25,000 -- -- -- -- -- -- --
Common stock purchased for
treasury -- -- -- -- -- 166,697 (325,528) -- --
Common stock purchased for
treasury from directors -- -- -- -- -- 27,827 (86,383) -- --
Repayment of loans by
officers and directors -- -- 42,667 -- -- -- -- -- --
Reduction of reserve for
common stock redemption
under repurchase agreement -- -- -- -- -- -- -- -- 13,754
Acquisition of treasury
stock under agreements -- -- -- -- -- 65,217 (118,411) (65,217) 118,411
Foreign currency translation
adjustment -- -- -- -- 65,338 -- -- -- --
Cancellation of treasury stock (190,131) (38,027) -- (362,251) -- (190,131) 400,278 -- --
Dividends paid ($.01 per share) -- -- -- (142,978) -- -- -- -- --
Net income -- -- -- 893,766 -- -- -- -- --
------------------------------------------------------------------------------------------------
Balance at December 31, 1994 9,472,913 3,460,308 (10,523) 2,739,422 60,202 266,252 (623,380) -- --
Common stock purchased for
treasury -- -- -- -- -- 109,726 (365,544) -- --
Repayment of loans by
officers and directors -- -- 5,890 -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- (139,836) -- -- -- --
Cancellation of treasury stock (161,612) (47,322) -- (500,776) -- (161,612) 453,098 -- --
Dividends paid ($.01 per share) -- -- -- (93,746) -- -- -- -- --
Net income -- -- -- 569,823 -- -- -- -- --
------------------------------------------------------------------------------------------------
Balance at December 31, 1995 9,311,301 3,412,986 (4,633) 2,714,723 (79,634) 214,366 (535,826) -- --
Common stock purchased for
treasury -- -- -- -- -- 309,189 (823,808) -- --
Options exercised 8,113 10,266 -- -- -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- 90,604 -- -- -- --
Cancellation of treasury stock (295,755) (59,154) -- (710,820) -- (295,755) 714,974 -- --
Dividends paid ($.02 per share) -- -- -- (179,370) -- -- -- -- --
Stock dividend declared
January 31, 1997 876,870 5,847,728 -- (5,847,728) -- 22,780 -- -- --
Net income -- -- -- 1,507,014 -- -- -- -- --
------------------------------------------------------------------------------------------------
Balance at December 31, 1996 9,900,529 $9,211,826 $ (4,633) $(2,516,181) $ 10,970 250,580 $(644,660) -- $ --
================================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $1,507,014 $ 569,823 $ 893,766
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 629,157 452,141 491,414
Provision for losses on accounts receivable 78,699 - 1,132
Provision for deferred income taxes (1,974) 13,017 (8,246)
Loss on sale of property, plant and equipment - - 19,371
Foreign currency translation loss 3,169 27,315 35,738
Common stock issuance in lieu of
compensation - - 25,000
Increase in accounts and notes receivable (480,365) (470,654) (75,710)
(Increase) decrease in inventories (216,431) 262,765 737,960
(Increase) decrease in refundable income taxes 183,454 41,199 (138,751)
(Increase) decrease in prepaid expenses and
other current assets (61,861) (187,073) 44,880
(Increase) decrease in deferred costs 69,753 (122,689) 5,056
Increase (decrease) in accounts payable and
accrued expenses 480,944 324,388 (843,365)
Decrease in income taxes payable (77,890) (102,824) (451,401)
Increase (decrease) in unearned income 7,839 (4,264) 886
----------------------------------------
Net cash provided by operating activities 2,121,508 803,144 737,730
Investing activities
Proceeds from the sale of property, plant and
equipment 837 - 11,067
Purchase of property, plant and equipment (765,386) (1,330,083) (392,110)
Proceeds from the sale of investments 81,969 - -
Repayment of loans to officers and directors - 5,890 28,228
----------------------------------------
Net cash used in investing activities (682,580) (1,324,193) (352,815)
Financing activities
Proceeds from long-term borrowings and line of
credit 363,887 662,297 -
Principal payments on long-term borrowings and
line of credit (171,097) (112,236) (45,296)
Principal payments under capital lease obligations (59,230) (61,774) (52,717)
Proceeds from stock warrants exercised 10,266 - -
Dividends paid (179,370) (93,745) (142,978)
Purchase of treasury stock (878,808) (460,543) (457,745)
----------------------------------------
Net cash used in financing activities (914,352) (66,001) (698,736)
Effect of exchange rate changes on cash and cash
equivalents 77,018 (74,531) 136,056
----------------------------------------
Increase (decrease) in cash and cash equivalents 601,594 (661,581) (177,765)
Cash and cash equivalents at beginning of year 1,507,176 2,168,757 2,346,522
----------------------------------------
Cash and cash equivalents at end of year $2,108,770 $ 1,507,176 $2,168,757
========================================
</TABLE>
F-6
<PAGE>
Reliv' International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $217,698 $138,404 $ 81,155
============================
Income taxes $845,632 $346,931 $775,140
============================
Noncash investing and financing transactions:
Treasury stock received from officer/director
in lieu of repayment on notes and accounts
receivable $ -- $ -- $ 72,577
============================
Capital lease obligations entered into $ -- $ 35,230 $ 19,680
============================
</TABLE>
See accompanying notes.
F-7
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1996
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. The Company also distributes a line of premium skin care
products. These products are sold by subsidiaries of the Company to a sales
force of independent distributors and licensees of the Company who sell products
directly to consumers. The Company and its subsidiaries and licensees sell
products to distributors throughout the United States and in Australia, Canada,
New Zealand, Mexico and the United Kingdom. In addition, in the fourth quarter
of 1995, the Company began providing contract processing and packaging services.
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 and
amortization, which includes the amortization of assets recorded under capital
leases, are computed using the straight-line or accelerated method over the
useful life of the related assets.
Deferred Costs
The costs of brochures, design fees for product labels and organization costs
are capitalized and amortized on a straight-line basis over the respective
assets' useful lives, typically three to five years.
F-8
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 25 percent to 45 percent of such suggested retail price. Sales
revenue and commission expense are recorded when the merchandise is shipped.
Unearned income represents prepaid orders for which the Company has not shipped
the merchandise.
Advertising
Costs of sales aids and promotional materials are capitalized as inventories.
All other advertising and promotional costs are expensed when incurred.
Income Taxes
The provision for income taxes is computed using the liability method. The
primary difference between financial statement and taxable income results from
financial statement accruals and reserves.
Foreign Currency Translation
Each foreign subsidiary's assets and liability accounts, which are originally
recorded in the appropriate local currencies, are translated into United States
dollar amounts at the year-end exchange rates. Revenue and expense accounts are
translated at the average rates for the year. Transaction gains and losses, the
amounts of which are immaterial, are included in selling, general and
administrative expenses. Foreign exchange translation adjustments are
accumulated in a separate component of stockholders' equity.
The foreign exchange translation adjustment for 1995 reflects the consolidated
effect on the Company resulting from the decline in the value of the Mexican
peso relative to the U.S. dollar of approximately 36 percent in 1995. In 1996,
the Mexican peso remained relatively stable, while the Australian and New
Zealand dollars improved from their 1995 levels. The magnitude of the effect on
the foreign exchange translation adjustment is
F-9
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Nature of Business and Significant Accounting Policies (continued)
Foreign Currency Translation (continued)
mitigated by the fact that the U.S. dollar denominated intercompany financing of
the Mexican subsidiary is considered of a long-term investment nature.
Accordingly, the effect of exchange rate fluctuations on the intercompany
financing is accumulated as a separate component of stockholders' equity.
Stock-Based Compensation
The Company accounts for stock options in accordance with 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 Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting and Disclosure of Stock-Based Compensation," effective for
years beginning after December 1995. The Company has elected to disclose the
effects of this pronouncement in a footnote to these financial statements (see
Note 6).
Earnings per Common and Common Equivalent Share
Earnings per common and common equivalent share were computed on net income
using the weighted average number of shares of common stock and common stock
equivalents outstanding during each year. On January 31, 1997, the Company
declared a 10 percent stock dividend on the Company's common stock which was
distributed on February 28, 1997 to shareholders of record on February 14, 1997.
The dividend was transferred from retained earnings to common stock in the
amount of $5,848,000, which was based on the closing price of $6.50 per share on
the declaration date. Average shares outstanding and all per share amounts
included in the accompanying consolidated financial statements and notes are
based on the increased number of shares giving retroactive recognition to the
stock dividend.
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.
F-10
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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.
Long-Lived Assets
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
121 also addresses the accounting for long-lived assets that are expected to be
disposed of. The Company adopted SFAS 121 effective January 1, 1996 and
determined that no impairment losses exist.
Reclassifications
Certain reclassifications have been made to prior years' financial statements to
conform to the current presentation.
2. Research and Development Expenses
Research and development expenses of $289,035, $293,850 and $355,256 in 1996,
1995 and 1994, respectively, were charged to selling, general and administrative
expenses as incurred.
F-11
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 1996 and 1995, consist of
the following:
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Trade payables $1,688,777 $1,801,965
Distributors commissions 1,064,023 780,070
Sales taxes 225,509 153,893
Payroll and payroll taxes 391,905 156,347
Other 125,844 96,221
------------------------
$3,496,058 $2,988,496
========================
</TABLE>
4. Short-Term Borrowings
In 1994, the Company obtained a $500,000 line of credit with a bank. The line of
credit, which originally matured in December 1995, was extended through March
1996. In January 1996, the line of credit was repaid with the proceeds of a new
term loan (see Note 5). In addition to the new term loan, the Company obtained
two separate lines of credit amounting to $500,000 and $1,000,000, respectively.
Borrowings under the $500,000 line of credit are due January 1998 and bear
interest, payable monthly, at the prime rate. Borrowings under the $1,000,000
line of credit are due February 2001 and bear interest, payable monthly, at the
prime rate. A portion of the Company's inventory and property, plant and
equipment with a net book value of $3,491,000 are pledged as security under the
terms of the agreements. The agreements include restrictive covenants, including
a requirement that the Company maintain a current ratio of 1.5 to 1.0 and a
minimum net worth of $5,500,000. As of December 31, 1996, the Company had no
borrowings against these lines of credit.
F-12
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt
Long-term debt at December 31, 1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
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 $2,881,000 at December 31,
1996); balance due on March 1, 2005 $ 649,476 $ 695,770
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
Credit facility (including line of credit and
term loan) -- 591,620
Term loan payable in monthly installments of
$19,550, including interest at 8.5% through
April 2001; secured by land, equipment and
inventory (net book value of $3,491,000 at
December 31, 1996) 830,705 --
-----------------------
1,684,936 1,492,145
Less current maturities (220,068) (150,954)
-----------------------
$1,464,868 $1,341,191
=======================
</TABLE>
F-13
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Long-Term Debt (continued)
Principal maturities of long-term debt at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 220,068
1998 240,838
1999 263,594
2000 288,529
2001 141,373
Thereafter 530,534
----------
$1,684,936
==========
</TABLE>
6. Stock Options, Warrants, Treasury Stock and Repurchase Agreements
Stock Options
The Company had an incentive stock option plan for key employees which expired
in January 1995. Accordingly, no additional options can be granted under this
plan as of that date. At December 31, 1995, options for 172,000 shares and
228,000 shares were outstanding at an option price of $2.25 and $2.475 per
share, respectively. The options are exercisable at various dates through
December 1999.
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 to the
Company. A maximum of 1,000,000 shares can be purchased at an option price not
less than the fair market value of the stock at the time the options are
granted.
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB 25) and related interpretations in accounting for its
employee and nonemployee director stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 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 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.
F-14
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued)
Stock Options (continued)
Pro forma information regarding net income and earnings per share is required by
SFAS 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 5.15 percent to 5.30 percent for 1995 and 5.15
percent to 6.10 percent for 1996; dividend yield of .50 percent; volatility
factor of the expected price of the Company's stock of .658 for both years; and
a weighted average expected life of the options of 3.72 years.
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 options' vesting period. The
effects of applying the pro forma disclosure provisions of SFAS 123 are not
likely to be representative of the effects on reported net income for future
years. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
--------------------
<S> <C> <C>
Pro forma net income $1,385,941 $537,842
Pro forma earnings per share $ .13 $ .05
</TABLE>
F-15
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued)
Stock Options (continued)
A summary of the Company's stock option activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Options Price Options Price Options Price
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of
the year 803,500 $1.884 400,000 $2.378 -- $ --
Granted:
Price = fair value 187,500 2.59 350,500 1.375 174,000 2.25
Price (greater than) fair
value -- -- 53,000 1.513 226,000 2.475
Exercised (9,500) 1.375 -- -- -- --
Forfeited (2,500) 1.375 -- -- -- --
------- ------- -------
Outstanding end of year 979,000 $2.024 803,500 $1.884 400,000 $2.375
======= ======= =======
Exercisable at end of year 451,662 -- 246,831 -- 66,666 --
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996
Options Outstanding Options Exercisable
------------------------------------------- -----------------------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.375 - $2.00 449,000 3.95 $1.462 221,664 $1.473
$2.25 - $2.875 530,000 3.31 2.50 229,998 2.443
------- -------
$1.375 - $2.875 979,000 3.61 $2.024 451,662 $1.967
======= =======
</TABLE>
Warrants
In 1995, the Company, as part of a consulting agreement, issued warrants to
purchase 3,058 shares of common stock. The exercise prices of these warrants
range from $.05 per share to $2.125 per share and have a term of two years. In
1996, as part of this same agreement, the Company issued warrants to purchase
34,578 shares with the same range of exercise prices and terms of the warrants
issued in the previous year.
F-16
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued)
Warrants (continued)
In July 1996, as part of another consulting agreement, the Company issued a
warrant to purchase 92,680 shares of common stock at an exercise price of $4.60
per share. This warrant has a term of three years.
The Company records expense when warrants are issued at an exercise price less
than the fair value per share at the date of grant.
A summary of the Company's warrant activity and related information for the
years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Avg. Avg. Avg.
Exercise Exercise Exercise
Warrants Price Warrants Price Warrants Price
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of
the year 3,058 $1.646 -- $ -- -- $ --
Granted:
Price less than fair value 6,354 0.05 706 0.05 -- --
Price = fair value 28,224 2.125 2,352 2.125 -- --
Price greater than fair value 92,680 4.60 -- -- -- --
Exercised -- -- -- -- -- --
Forfeited -- -- -- -- -- --
------- ------ ----
Outstanding end of year 130,316 $3.773 3,058 $1.646 -- $ --
======= ====== ====
Exercisable at end of year 130,316 -- 3,058 -- --
======= ===== ====== ==== --
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1996
Warrants Outstanding Warrants Exercisable
-------------------------------- ----------------------------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.05 7,060 1.29 $ 0.05 7,060 $ 0.05
$2.125 30,576 1.41 2.125 30,576 2.125
$4.60 92,680 2.5 4.60 92,680 4.60
------- -------
$0.05-$4.60 130,316 2.18 $3.773 130,316 $3.773
======= =======
F-17
</TABLE>
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued)
Treasury Stock and Repurchase Agreements
In October 1992, the Company entered into a stock repurchase agreement with a
former officer/director of the Company. Under the agreement, which was
retroactive to July 1992, the Company was obligated to purchase 259,686 of the
individual's shares of Company common stock. The mandatory purchase occurred in
six quarterly installments of 43,281 shares beginning in July 1992 and
concluding in December 1993. As of December 31, 1993, the Company had redeemed
all 259,686 shares required by the agreement for $657,683.
Under the same agreement, the Company also had the option to purchase an
additional 432,814 of the individual's shares on the basis of 43,281 shares each
quarter beginning in January 1995 and concluding in April 1996. Through December
31, 1996, the Company had exercised all options under the agreement and redeemed
an additional 432,814 shares for $870,218.
7. 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, 1996:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ---------
<S> <C> <C>
1997 $70,450 $277,463
1998 14,915 132,392
1999 -- 110,625
2000 -- 38,190
Thereafter -- --
------- --------
Total minimum lease payments 85,365 $558,670
Less amount representing interest 9,720
-------
Present value of minimum lease
payments (including current portion of $62,434) $75,645
=======
</TABLE>
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Leases (continued)
Machinery, office and computer equipment at December 31, 1996 and 1995, include
approximately $410,662 and $470,356 of equipment under leases that have been
capitalized. Accumulated depreciation and amortization for such equipment
approximated $344,539 and $328,458 at December 31, 1996 and 1995, respectively.
Rent expense for all operating leases was $289,979, $167,985 and $86,304 for the
years ended December 31, 1996, 1995 and 1994, respectively.
8. 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 percent of net sales, with a minimum
payment of $10,000 and a maximum payment of $22,000. The agreement terminates
the earlier of December 2001 or on the death of licensor. The amount of expense
under this agreement was $264,000 for each of the years ended December 31, 1996,
1995 and 1994, respectively.
9. Income Taxes
The components of income before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
---------- -------- ----------
<S> <C> <C> <C>
Domestic $2,710,323 $646,978 $ 565,502
Foreign (253,309) 109,845 511,264
---------- -------- ----------
$2,457,014 $756,823 $1,076,766
========== ======== ==========
</TABLE>
F-19
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Current:
Federal $758,000 $ 31,000 $(46,000)
Foreign 88,000 124,000 247,000
State 108,000 18,000 (5,000)
----------------------------------
Total current 954,000 173,000 196,000
Deferred:
Federal (3,000) (1,000) 1,000
Foreign (1,000) 15,000 (14,000)
State - - -
----------------------------------
Total deferred (4,000) 14,000 (13,000)
----------------------------------
$950,000 $187,000 $183,000
==================================
</TABLE>
The provision for income taxes is different from the amounts computed by
applying the United States federal statutory income tax rate of 34 percent. The
reasons for these differences are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
---------------------------------
<S> <C> <C> <C>
Income taxes at statutory rate $835,000 $ 257,000 $ 366,000
Difference between financial statement
and federal income tax recognition of
foreign losses - (101,000) (183,000)
Differences between U.S. and foreign
tax rates on foreign income 12,000 - (5,000)
State income taxes, net of federal 71,000 12,000 (4,000)
benefit
Other 32,000 19,000 9,000
-------------------------------
$950,000 $ 187,000 $ 183,000
===============================
</TABLE>
Effective December 31, 1995, the Company hybridized its Canadian subsidiary for
federal income tax purposes. During 1995, the Company recognized an income tax
F-20
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Income Taxes (continued)
benefit in excess of the foreign loss recognized for financial statement
purposes as a result of this hybridization. The Company hybridized its Mexican
subsidiary in 1994, which resulted in the recognition of a similar income tax
benefit.
The components of the deferred tax asset and the related tax effects of each
temporary difference at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------
<S> <C> <C>
Deferred tax asset:
Product refund reserve $29,000 $29,000
Bad debt reserve 6,000 3,000
Miscellaneous accrued expenses 30,000 29,000
-----------------
$65,000 $61,000
=================
</TABLE>
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.
The Internal Revenue Service (IRS) examinations of the Company's U.S. federal
income tax returns for fiscal years 1992 through 1994 resulted in a proposed
assessment against the Company. The Company has filed a protest letter seeking
abatement of the assessment. The Company intends to vigorously defend its
position, and in management's opinion, resolution of this matter will not have a
material adverse effect on the Company's financial position or results of
operations.
10. Employee Benefit Plans
The Company sponsors a noncontributory profit sharing plan which covers
substantially all employees. The plan may be amended or terminated at any time
by resolution of the Company's Board of Directors, and contributions are made at
the discretion of the Board. Company contributions totaled $0, $35,000 and $0 in
1996, 1995 and 1994, respectively.
In 1995, the Company established a 401(k) employee savings plan which covers
substantially all employees. Employees may contribute up to 5 percent of their
gross income to the plan, and the Company matches 50 percent of the employee's
contribution. Company contributions totaled $23,000 and $11,000 in 1996 and
1995, respectively.
F-21
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Incentive Compensation Plans
Effective January 1, 1994, the Company adopted an annual incentive compensation
plan and a long-term incentive plan. These plans include three officers/
directors and are effective until termination of their employment. Participants
in the plan 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 approximately $525,000, $0 and $163,000 in 1996, 1995 and 1994,
respectively, under its incentive compensation plans.
12. Employment Agreements
In November 1992, the Company entered into a services agreement with an officer
for a term retroactively commencing in July 1992 and expiring in December 1999.
The agreement provides for a minimum monthly salary and incentive compensation
based upon the profits (defined as "income before income taxes and incentive
compensation expense") of the foreign subsidiaries.
Under the terms of the agreement, the officer's annual incentive compensation
will equal (1) $280,000, $340,000 and $425,000 for 1997 through 1999,
respectively, plus $10,000 for each $100,000 of profits in excess of designated
profits for the respective year, or (2) a percentage of profits if the profits
are less than designated profits.
The Company may terminate this agreement prior to the expiration of its term
after June 1994. Subject to termination provisions defined in the agreement,
amounts shall be payable to the officer for a period of three years from the
date of termination of this agreement (equal to 100 percent of the aggregate
compensation paid for the year immediately preceding the year in which the
termination occurred, 75 percent in the second year and 50 percent in the third
year) or renewal at the expiration of this term or any renewal term. The Company
paid approximately $60,000, $120,000 and $159,000 in 1996, 1995 and 1994,
respectively, under the terms of the agreement.
Effective January 1, 1994, the Company entered into employment agreements with
three officers/directors. The employment agreements provide for base salary
rates established annually by the Board of Directors. The Company paid base
salaries of $960,000, $768,750 and $700,000 in 1996, 1995 and 1994,
respectively, under the terms of the agreements.
F-22
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. 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, 1996, 1995
and 1994, the Company incurred fees to the officer/director and his firm of
approximately $231,000, $305,000 and $293,000, respectively.
Accounts and notes receivable include accounts receivable from officers/
directors of $4,633 and $219,082 at December 31, 1996 and 1995, respectively.
During 1996, the Company paid $121,000 for goods and services to a company
wholly owned by three officers/directors and one director of the company in
connection with promotional activities.
14. Consulting Agreements
In October 1992, the Company entered into a consulting agreement with a former
officer/director of the Company. Under the agreement, which retroactively
commenced in July 1992 and expires in June 1996, (1) the officer/director's
employment agreement was terminated, (2) the individual shall provide consulting
services and advice to the Company for the term of the agreement and (3) the
individual shall not compete with the Company anywhere within the United States
from July 1992 through December 1995. The individual's compensation for
providing consulting services and not competing was approximately $134,000 at
the time the agreement was executed, plus $4,500 per month from July 1992
through December 1992 and 1 percent of the suggested retail value of the
Company's United States sales from July 1992 through June 1996. Total expense
under this agreement approximated $203,000, $342,000 and $336,000 in 1996, 1995
and 1994, respectively.
In conjunction with an acquisition, the Company entered into a consulting
agreement with a partnership consisting of the three former stockholders. Under
the agreement, which commenced in March 1992 and expires in February 2002, the
Company will pay annual consulting fees to the partnership equal to 2 percent of
the new company's retail sales (defined as "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 percent of retail
sales that exceed those figures. Total expense under this agreement approximated
$133,000, $185,000 and $340,000 in 1996, 1995 and 1994, respectively.
F-23
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Segment Information
In 1994 and 1995, substantially all of the Company's assets, sales and operating
results were employed in or derived from the manufacture and direct sale of
nutritional, diet and skin care products to a sales force of independent
distributors who sell products directly to customers (network marketing). In
late 1995, the Company began performing contract processing and packaging
services for unrelated customers.
All segment data provided is for the 1996 fiscal year only, as the Company began
contract manufacturing in late 1995 and the results for 1995 were not material.
<TABLE>
<CAPTION>
1996
-----------
<S> <C>
Net sales
Network marketing $37,419,875
Contract manufacturing 3,310,118
-----------
$40,729,993
===========
Operating income
Network marketing $ 4,055,671
Contract manufacturing (200,532)
Corporate expenses (1,333,077)
-----------
Operating income 2,522,062
Nonoperating income (net) 147,771
Interest expense (212,819)
Income tax expense (950,000)
-----------
Net income $ 1,507,014
===========
Identifiable assets
Network marketing $ 7,772,109
Contract manufacturing 1,420,786
Corporate 2,208,770
-----------
$11,401,665
===========
Depreciation and amortization
Network marketing $ 452,483
Contract manufacturing 176,674
-----------
$ 629,157
===========
Capital expenditures
Network marketing $ 384,818
Contract manufacturing 380,568
-----------
$ 765,386
===========
</TABLE>
F-24
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Segment Information (continued)
Operating profit is total revenue less operating expenses, excluding interest,
corporate expenses and income tax expense. Identifiable assets by business
segment include both assets directly identified with those operations and an
allocable share of jointly used assets. Corporate assets consist primarily of
cash and nonoperating accounts receivable.
16. Geographic Segment Data
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
United New
States Australia Zealand Canada (1) Mexico (2) Eliminations Consolidated
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1996
Net sales:
Unaffiliated customers $34,408,349 $3,550,213 $1,172,743 $1,246,624 $ 352,063 $ - $40,729,992
Inter-area transfers 910,402 83,307 - - - (993,709) -
------------------------------------------------------------------------------------------------
Total $35,318,751 $3,633,520 $1,172,743 $1,246,624 $ 352,063 $(993,709) $40,729,992
================================================================================================
Net income (loss) $ 1,685,771 $ 115,033 $ 19,717 $ (164,066) $(149,441) $ - $ 1,507,014
================================================================================================
Identifiable assets $ 8,340,211 $1,472,565 $ 668,501 $ 692,905 $ 227,483 $ - $11,401,665
================================================================================================
</TABLE>
(1) The Canadian subsidiary's loss from operations of $249,066 is offset by a
United Stated federal tax benefit of approximately $85,000 related to the
Canadian subsidiary's losses.
(2) The Mexican subsidiary's loss from operations of $226,441 is offset by a
United States federal tax benefit of approximately $77,000 related to the
Mexican subsidiary's losses.
F-25
<PAGE>
Reliv' International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Geographic Segment Data (continued)
<TABLE>
<CAPTION>
United New
States Australia Zealand Canada (3) Mexico (4) Eliminations Consolidated
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1995
Net sales:
Unaffiliated customers $22,223,817 $4,311,351 $1,448,785 $494,167 $ 435,753 $ - $28,913,873
Inter-area transfers 92,976 197,620 - - - (290,596) -
------------------------------------------------------------------------------------------------
Total $22,316,793 $4,508,971 $1,448,785 $494,167 $ 435,753 $(290,596) $28,913,873
================================================================================================
Net income (loss) $ 430,262 $ 232,536 $ 38,153 $ (185) $(130,943) $ - $ 569,823
================================================================================================
Identifiable assets $ 7,893,171 $1,473,242 $ 433,683 $342,990 $ 133,148 $ - $10,276,234
================================================================================================
</TABLE>
(3) The Canadian subsidiary's loss from operations of $101,185 is offset by a
United States federal tax benefit of approximately $101,000 related to the
Canadian subsidiary's losses.
(4) The Mexican subsidiary's loss from operations of $198,943 is offset by a
United States federal tax benefit of approximately $68,000 related to the
Mexican subsidiary's losses.
<TABLE>
<CAPTION>
United New
States Australia Zealand Canada Mexico (5) Eliminations Consolidated
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1995
Net sales:
Unaffiliated customers $20,790,296 $7,246,741 $2,106,768 $1,039,051 $1,007,588 $ - $32,190,444
Inter-area transfers 6,877,644 145,407 - - - (7,023,051) -
------------------------------------------------------------------------------------------------
Total $27,667,940 $7,392,148 $2,106,768 $1,039,051 $1,007,588 $(7,023,051) $32,190,444
================================================================================================
Net income (loss) $ 430,993 $ 384,153 $ 81,398 $ (6,198) $ 3,420 $ - $ 893,766
================================================================================================
Identifiable assets $ 6,207,554 $2,204,728 $ 593,632 $ 473,200 $ 180,899 $ - $ 9,660,013
================================================================================================
</TABLE>
(5) The Mexican subsidiary's loss from operations of $181,580 is offset by a
United States federal tax benefit of approximately $185,000 related to the
Mexican subsidiary's losses.
United States inter-area transfers represent shipments of nutritional, diet and
skin care products to the foreign subsidiaries.
F-26
<PAGE>
Reliv's International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
17. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
----------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
1996
Net sales $9,304 $9,448 $9,934 $12,044
Cost of products sold $2,568 $2,415 $2,348 $ 2,862
Net income $ 278 $ 302 $ 338 $ 589
Earnings per share /1/:
Primary $ .03 $ .03 $ .03 $ .06
Fully diluted $ .03 $ .03 $ .02 $ .06
1995
Net sales $8,512 $6,663 $6,841 $ 6,898
Cost of products sold $1,939 $1,513 $1,436 $ 1,499
Net income (loss) $ 511 $ (109) $ 94 $ 74
Earnings (loss) per share /1/ $ .05 $ (.01) $ .01 $ .01
</TABLE>
(1) Per share data reflects the pro forma effect of the Company's 10 percent
stock dividend declared on January 31, 1997 and distributed on February 28,
1997.
F-27
<PAGE>
Reliv' International, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Additions
--------------------------------
Balance at Charged to Charged to Balance at
beginning of costs and other Deductions end
Classification year expenses accounts describe of year
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts $ 7,000 $ 78,700 $ - $ 72,700 /(1)/ $ 13,000
Reserve for obsolete inventory - 125,000 - - 125,000
Supporting liability accounts:
Reserve for refunds 78,800 92,000 - 92,000 /(2)/ 78,800
----------------------------------------------------------------------------------------
Year ended December 31, 1995
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts 29,000 - - 22,000 /(1)/ 7,000
Supporting liability accounts:
Reserve for refunds 54,800 195,000 - (171,000)/(2)/ 78,800
----------------------------------------------------------------------------------------
Year ended December 31, 1994
- ----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts 28,000 9,000 - (8,000) /(1)/ 29,000
Supporting liability accounts:
Reserve for refunds 30,800 314,000 - (290,000) /(2)/ 54,800
----------------------------------------------------------------------------------------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Amounts refunded, net of salable amounts returned.
F-28
<PAGE>
EXHIBIT 10.14
AGREEMENT
---------
THIS AGREEMENT is made as of November 6, 1996, by and among Traco Labs,
Inc., an ____________ corporation having its principals offices at 3102 Clark
Road, Champaign, Illinois 61821 ("Traco") and Reliv' International, Inc. an
Illinois corporation having its principal offices at 136 Chesterfield Industrial
Boulevard, Chesterfield, Missouri 63005 ("Reliv").
WHEREAS, Reliv is engaged in the business of developing, manufacturing,
marketing and selling nutritional products;
WHEREAS, Traco has the exclusive license to market and sell a hydrolyzed
collagen product protected by U.S. Patent No. 4,804,745, and sold by Traco under
the registered tradename "Arthred";
NOW, THEREFORE, in consideration of the premises and of the terms,
covenants and conditions hereinafter contained, the parties hereto agree as
follows:
1. DEFINITIONS. When used in this Agreement, each of the following terms
shall have the meaning set forth in this paragraph:
1.1 "PRODUCT" shall mean a composition incorporating the Technology
developed for consumer sales provided by Traco for Reliv in accordance with
the terms of this Agreement.
1.2 "PATENTS" shall mean and include U.S. Patent No. 4,804,745 and
any and all domestic or foreign patents or patent applications, and any
division or continuation in part, now existing or hereafter prepared,
filed, issued or obtained which, in whole or part, covers, concerns,
incorporates, deal with or relates to any part of the Technology.
1.3 "TECHNOLOGY" shall mean and include (i) the technology which is
the subject of Patent No. 4,804,745 dealing with hydrolyzed collagen or
(ii) any and all applications of any claim of any of the Patents and shall
include, without limitation (i) the composition, formula, components or
ingredients of any Product and (ii) the method of production or manufacture
thereof.
1.4 "CONFIDENTIAL INFORMATION" shall mean and include any and all
information, whether contained or set forth in any document, letter,
memorandum, drawing, schematic, material specification, or in any oral
communication, transmitted by Traco to Reliv or by Reliv to Traco,
respectively from any employee, officer, agent or representative of one to
any employee, officer, agent or representative of the other, and designated
herein or in the information transmitted as confidential information. An
oral communication shall be designated as "confidential" by written
statement given by the party providing the confidential information to the
other party within 30 days after the date of such communication, specifying
the confidential information provided in such communication to be
designated as confidential. In general, confidential information is
intended to include, but not necessarily be limited to, information
concerning or relating to (i) the Technology, (ii) sources of supply for
ingredients, materials, or products, (iii) financial information concerning
Traco or Reliv or (iv) methods of selling or marketing. "Confidential
Information" shall also include, without the requirement of communication
thereof by one party to another or the designation thereof hereunder, any
and all information concerning or relating to (i) the ingredients,
composition, or formula or the Product, (ii) methods of production or
manufacture of any of the Product, (iii) any other nonpublic information
concerning the Technology or the Product, (iv) the identity, addresses or
telephone numbers of customers or distributors for Reliv. "Confidential
Information" shall not include:
<PAGE>
(i) Information which, at the time of disclosure to a party, had
been previously published or had become generally known;
(ii) Information which is published or which becomes general
knowledge after a disclosure to a party hereunder unless such
publication or knowledge occurs as a result of a violation of this
Agreement or a non-disclosure agreement signed by an employee of a
party hereto;
(iii) Information disclosed by one party to another which, prior
to disclosure thereof to such party hereunder, was already in the
possession of such party as evidenced by written records of such party
which are communicated to the party disclosing the information within
30 days after the date of the disclosure; or,
(iv) Information disclosed by one party to another which,
subsequent to the disclosure, is obtained by the party to whom the
disclosure was made from a third person who is lawfully in possession
of such information and not in violation of any contractual, legal or
fiduciary obligation with respect to such information.
1.5 "DIRECT SALES" shall mean and include any organization,
structure, marketing or sales method or technique or procedure by which
products are sold to consumers directly by the manufacturer or principal
distributor of the product through a network of independent distributors
known as multilevel marketing systems. "Direct Sales" shall not include
sales through retail stores, or marketing programs principally intended for
sales through retail stores but also incorporating catalogue sales or
direct sales through media campaigns utilizing television, radio or print
advertising.
1.6 "TERRITORY" shall mean all areas in which Reliv or its affiliates
or licensees sells its products, now and at any time during the term of
this Agreement. Reliv's current sales area is the United States and its
territories, Canada, the United Kingdom, Mexico, Australia and New Zealand.
Reliv shall give Traco notice of any expansion in its sales area.
2. EXCLUSIVE LICENSE. Subject to and on the terms and conditions hereof,
Traco grants and transfers to Reliv, and its subsidiaries, an exclusive license
to market and sell the Product in the Territory for Direct Sales.
2.1 The rights granted to Reliv herein are exclusive during the term
hereof in the Territory for Direct Sales and Traco shall not retain any
right or authority to use, sell, license or transfer any right, interest or
license the Product in the Territory for Direct Sales for itself or to any
other person. The parties acknowledge that Traco may sell Product to a
wholesaler who in turn resells the Product to an entity engaged in Direct
Sales.
2.2 The rights and license granted herein shall be irrevocable for
the term hereof and may not be terminated prior to the expiration of the
term hereof except as expressly provided in paragraph 10 hereof.
2.3 Notwithstanding the other provisions of this paragraph in the
event that Reliv shall fail to purchase 50 metric tons of Product within
two years of the date of this Agreement, and purchase 50 metric tons each
year thereafter, the license granted to Reliv hereunder shall be non-
exclusive and Traco shall be entitled to make, use and sell, and grant
licenses to make and sell the Product to any person without restriction,
provided only that no license or right shall be granted which would limit
or restrict the non-exclusive license granted to Reliv hereunder.
2
<PAGE>
3. PURCHASE OF PRODUCT.
3.1 Traco agrees that it shall sell and Reliv agrees to purchase
Product pursuant to specific purchase orders submitted from time to time by
Reliv at least 30 days before the requested delivery date. No purchase
order is binding on Reliv unless and until it is in writing and signed by
Reliv's designated representative. Each purchase order shall be deemed to
be submitted pursuant to this Agreement and subject to the terms and
conditions herein.
3.2 Reliv agrees that, during the term of this Agreement, or until
this Agreement is terminated prior to the expiration of its term, Reliv
shall purchase its entire requirements for the Product from Traco. Traco
shall procure, ship and deliver Product in a timely manner in accordance
with the purchase orders. Traco guarantees that all Producs purchased will
meet Reliv's approved specifications or will be rejected at Traco's
expense. Reliv may at any time, without advance notice, cease placing
further purchase orders for Product, suspend placing such orders for a
period of time, or reduce the frequency of such orders or the quantities of
Product ordered. Such decisions by Reliv to cease, suspend or reduce its
purchases of Product are within the Reliv's sole and absolute discretion.
Reliv shall give Traco notice, however, of any material anticipated changes
in order volume or frequency, of which it is aware. Any expenditures Traco
may make based on projected future sales to Reliv (including any forecasts
by Traco or Reliv) are Traco's responsibility and at Traco's own risk.
3.3 Traco shall be responsible for insuring that its plant and
equipment have the capacity and are fit for the provision of Product
contemplated hereunder and that the Product will be manufactured, packaged
and supplied in accordance with Good Manufacturing Practice (GMP) and
customary quality assurance (QA). Traco shall, at all times and at its sole
cost, comply with all local, state and Federal laws, ordinances and
regulations governing the procurement and and delivery of Product.
3.4 Traco shall deliver written and detailed notice to Reliv
immediately in the event of the occurrence of any condition, circumstance
or event that could impact the supply of Product or the ability of Traco to
fulfill its obligations under this Agreement, including component supply or
labor shortages, or events which involve health, safety, building code, FDA
or other regulatory issues or violations.
4. PRICING; PAYMENT
4.1 Pricing shall be in accordance with Exhibit "A". Traco shall extend
to Reliv 1% - 10-day terms or net 30 days. All shipments of Product shall be
F.O.B. Traco's facility in Champaign, Illinois. Traco agrees not to charge
Reliv its standard marketing charge, which is currently $4.00.
4.2 The prices set forth on Exhibit "A" shall remain constant during the
first 2 years of the term of this Agreement, subject however to adjustment to
reflect increases or decreases in costs due to cost increases to Traco or to
Product modifications or improvements. Traco will provide sixty (60) days prior
notice of any such price change. Every two years during the term of this
Agreement the parties shall renegotiate the price of the Product provided,
however, that the price shall not increase by more than 10% of the price charged
to Reliv immediately prior to such price increase.
5. TRADEMARK LICENSING.
5.1 The use of Arthred(tm) is protected by U.S. Patent No. 4,804,745.
Traco believes that it is in the best interest of all parties to preserve
and protect the identity and integrity of this valuable supplement in the
marketplace. Therefore, Traco requests that with respect to any product or
formula
3
<PAGE>
to which Arthred(tm) is incorporated, Reliv agrees to use "Arthred" as the
sole source of hydrolyzed collagen.
5.2 Reliv agree that it shall not feature, display or relate in any
manner, either directly or indirectly, the Arthred(tm) tradename, research
data or any other product claims proprietary to Arthred(tm), to any of its
own products, or any of the products it manufactures or supplies to others,
that are not a part of an Arthred(tm) Trademark-Licensing Agreement.
5.3 Reliv agrees that it shall not resell or supply Arthred(tm) in
bulk raw material form to any other entity or individual ("person"), except
as part of a finished product, finished dose (e.g., tablet, capsule,
powder, granule, or liquids), or vitamin/mineral premix, unless such person
first executes and delivers an agreement to Traco in this form.
5.4 This Agreement applies to all products containing Arthred(tm),
whether manufactured under a captive label or for others. If Reliv is
manufacturing or supplying Arthred(tm)-containing products to others,
whether directly or indirectly, who own or control the finished product
label, it shall inform these customers of the provisions of this Agreement
and shall not manufacture or supply Arthred(tm)-containing products to
customers that do not conform to the provisions of this Agreement.
5.5 Traco grants Reliv a license to use the Arthred(tm) trademark in
connection with the marketing and sale of the Product for the term of this
Agreement. Reliv may, however, market and sell the Arthred(tm) Product
under other trademarks or tradenames, subject to Traco's approval, which
shall not be unreasonably withheld.
6. CONFIDENTIAL INFORMATION. Each of the parties hereto agrees that,
with respect to Confidential Information in its possession as to which no
communication thereof is required for the application hereof, or Confidential
Information transmitted to it by the other party, such party will not use any
such Confidential Information for any purpose other than as expressly authorized
herein and shall not disclose, or permit its employees or agents to disclose,
such Confidential Information to any person, or to use the same. Confidential
Information of the other party may be used by a party hereto solely as follows:
(i) for the performance of such party's obligations under this Agreement, (ii)
in connection with the manufacture, production, sale or distribution of Product
pursuant to the terms of this Agreement or (iii) for such other purposes as the
other party may authorize in writing. Confidential Information of the other
party may be disclosed by a party solely to those employees of the party who
have a need to know the information for the purposes provided herein and who
have executed an agreement for the benefit of both of the parties, in form
satisfactory to both and consistent with the provisions hereof, prohibiting the
use or further disclosure of such Confidential Information.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS OF TRACO. Traco represents
and warrants to Reliv, as of the date hereof, that the following are true and
correct:
7.1 Traco has the full right, power and authority to grant the
license provided herein and the execution and performance of this Agreement
by Traco does not, and will not, with or without the giving of notice or
the passage of time, violate or constitute a default under any contract,
agreement, commitment or license to which Traco is a party or by which it,
any of the Patents or any of the rights licensed hereunder, are bound.
7.2 To the best of the knowledge of Traco , the delivery, sale or use
of the Product will not infringe upon or violate any patent, trade secret
or other proprietary right of any person.
4
<PAGE>
8. REPRESENTATIONS AND WARRANTIES OF RELIV. Reliv represents and
warrants to Traco that it has the full right and authority to enter into this
Agreement with Traco, that it has the full right, power and authority to enter
into this Agreement and that the execution and performance of this Agreement by
Reliv will not with or without the giving of notice or the passage of time,
violate or constitute a default under any contract, agreement, or commitment to
which Reliv is a party or by which it is bound.
9. INDEMNIFICATION.
9.1 Traco warrants that the Product manufactured by Traco will be
free from any defect or contamination and the materials used will be of the
highest quality and suitable for manufacture of the Product. Traco agrees
to inspect each lot of the Product before shipment from its plant in
accordance with reasonable inspection standards.
9.2 Traco agrees to indemnify, defend and hold harmless Reliv from
and with respect to any and all actions, claims, liabilities, losses,
damages, costs and expenses (including reasonable attorneys' fees incurred
by Reliv in enforcing this indemnification) relating to the Product or
Traco's production of Product, including any manufacturing defect in the
Product caused by Traco.
9.3 So long as Traco agrees to sell or sells any Product to Reliv,
Traco will maintain products liability insurance with a major insurance
carrier in an amount of at least $2,000,000 and provide Certificates of
Insurance at all times naming Reliv as an "Additional Insured" and
protecting Traco and Reliv from the liability set forth in the indemnity
paragraph above.
9.4 Reliv agrees that it will protect, defend, hold harmless and
indemnify Traco, its officers, directors, employees and advisors from and
against any and all claims actions, liabilities, losses, costs, and
expenses (including attorneys' fees) arising out of, caused by or resulting
from any breach of the representations and warranties of Reliv herein, and
any breach of this Agreement.
10. TERM AND TERMINATION.
10.1 This Agreement shall be for a term commencing on the execution
of this Agreement and expiring on the later of (i) the date of expiration
of Traco's right to market and sell the Product or (ii) December 31, 2014.
10.2 This Agreement may be terminated by Reliv by giving written
notice that the Agreement shall terminate on a specific date that is more
than 60 days in the future.
10.3 An "Event of Default" shall mean and include any violation by
Traco or Reliv, of their respective obligations or warranties herein. Reliv
and Traco shall each have thirty (30) days after notice specifying the
violation to cure the violation.
10.3.1 This Agreement may be terminated by Traco prior to the
expiration of the term, by written notice to Reliv, of an uncured Event of
Default by Reliv.
10.3.2 This Agreement may be terminated by Reliv prior to the
expiration of its term, by written notice to Traco, of an uncured Event of
Default by Traco.
11. SALE OF PRODUCT AFTER EXPIRATION OR TERMINATION. From and after the
date of expiration or termination of this Agreement for any reason, Reliv shall
be entitled to sell or otherwise dispose of any Product
5
<PAGE>
which shall be in Reliv's inventory or on order on the date of such termination
or expiration, provided that Reliv shall have paid any and all amounts due to
Traco with respect to such products.
12. EQUITABLE REMEDIES. Each of the parties hereto acknowledges and
agrees that the disclosure or use by a party, or such party's employees or
agents, of any information which is confidential or the violation by Traco and
Reliv of their respective covenants would cause irreparable harm to the other
party which could not adequately be compensated for in damages. Notwithstanding
the provisions of this Agreement relating to arbitration, in the event of such
violations by a party, or of a related agreement by an employee or agent of a
party, the other party shall be entitled to injunctive relief to enjoin such
violation or to compel compliance with the provisions of this Agreement, in
addition to any and all other remedies available at law or in equity with
respect to such violation, in any court of competent jurisdiction and, further,
shall be entitled to recover such party's reasonable attorneys' fees of such
action from the losing party it prevails against.
13. NOTICES. All notices or other communications, including service of
process, required or permitted to be given hereunder shall be in writing and
shall be delivered personally or mailed, certified mail, return receipt
requested, postage prepaid, to the parties at their addresses as set forth on
the first page of this Agreement, Any notice mailed in accordance with the
terms hereof shall be deemed received on the third day following the day of
mailing. Either party may change the address to which such notices to such
party may be given hereunder by serving proper notice of such change of address
to the other party.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes all prior written or oral negotiations, representations, agreements,
commitments or contracts with respect to the subject matter hereof.
15. BENEFITS; ASSIGNMENT. This Agreement shall be binding upon and shall
insure to the benefit of the parties hereto and their respective successors in
interest. Neither party shall be entitled to assign any right or obligation
under this Agreement without the express written consent of the other party and
any attempted assignment of any such right or obligation shall be void, provided
that either party hereto may assign all of its rights and obligations hereunder:
(i) to any person who shall acquire substantially all of the business and
assets, and shall assume substantially all of the liabilities of, such party or
(ii) a corporation into which or with which the parties shall merge or
consolidate, if in such transaction the acquiring person or succeeding
corporation shall expressly assume all of the obligations of such party.
16. SEVERABILITY. Whenever possible, each paragraph of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law. If any paragraph of this Agreement shall be unenforceable or
invalid under applicable law, such paragraph shall be ineffective only to the
extent and duration of such unenforceability or invalidity and the remaining
substance of such paragraph and the remaining paragraphs of this Agreement shall
in such event continue to be binding and in full force and effect.
17. WAIVERS. No failure by any party to exercise any of such party's
rights hereunder or to insist upon strict compliance with respect to any
obligation hereunder, and no custom or practice of the parties at variance with
the terms hereof, shall constitute a waiver by any party to demand exact
compliance with the terms hereof. Waiver by any party of any particular default
by any other party shall not affect or impair such party's rights in respect to
any subsequent default of the same or of a different nature, nor shall any delay
or omission of any party to exercise any right arising from any default by any
other party affect or impair such party's rights as to such default or any
subsequent default.
18. ARBITRATION. All disputes between the parties whether arising from
this agreement or not must be decided finally by binding arbitration before a
panel of two (2) arbitrators. The arbitrators shall be retired judges. There
must be a mediation before a third retired judge within thirty (30) days of
submission of the dispute
6
<PAGE>
to arbitration. No party may present a claim or defense in the arbitration that
was not presented by it in the mediation. Arbitrations and mediations shall be
held in Chicago, Illinois. Each party consents to jurisdiction of the courts of
Illinois and Missouri for the purpose of compelling arbitration.
19. GOVERNING LAW. This Agreement shall be governed by, and shall be
interpreted and enforced in all respects in accordance with, the laws of the
State of Missouri.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
RELIV' INTERNATIONAL, INC.
By: /s/ Carl W. Hastings
-----------------------------------
Carl W. Hastings, Executive Vice President
Attest:
/s/ Stephen M. Merrick
- ---------------------------
Secretary
TRACO LABS, INC.
By: /s/ Sid Tracy
------------------------------------------
Sid Tracy, President
Attest:
/s/ Sid Tracy
- ---------------------------
Secretary
7
<PAGE>
Exhibit XI
Reliv' International, Inc. and Subsidiaries
Statement Re: Computation of Per Share Earnings
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Year ended December 31
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
(In thousands, except per share data)
Primary:
Average shares outstanding 9,854 10,280 10,460
Net effect of warrants and options 530 26 8
-------------------------------------
10,384 10,306 10,468
=====================================
Net income $ 1,507 $ 570 $ 894
=====================================
Per share amount $ .15 $ .06 $ .09
=====================================
Fully diluted:
Average shares outstanding 9,854 10,280 10,460
Net effect of warrants and options 663 26 8
-------------------------------------
10,517 10,306 10,468
=====================================
Net income $ 1,507 $ 570 $ 894
=====================================
Per share amount $ .14 $ .06 $ .09
=====================================
</TABLE>
NOTE: Per share data reflects the pro forma effect of the Company's 10 percent
stock dividend declared on January 31, 1997 and distributed on February
28, 1997.
<PAGE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 33-81025) pertaining to the Reliv' International, Inc. 1995 Stock
Option Plan of our report dated March 10, 1997, with respect to the consolidated
financial statements and schedule of Reliv' International, Inc. included in the
Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
St. Louis, Missouri
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
balance sheet as of December 31, 1996 and the statement of operations for the
year ended December 31, 1996 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,108,770
<SECURITIES> 0
<RECEIVABLES> 1,069,360
<ALLOWANCES> 13,000
<INVENTORY> 2,761,960
<CURRENT-ASSETS> 6,353,070
<PP&E> 6,996,323
<DEPRECIATION> 2,226,951
<TOTAL-ASSETS> 11,401,665
<CURRENT-LIABILITIES> 3,866,264
<BONDS> 1,478,079
0
0
<COMMON> 9,211,826
<OTHER-SE> (1,865,184)
<TOTAL-LIABILITY-AND-EQUITY> 11,401,665
<SALES> 40,729,993
<TOTAL-REVENUES> 40,729,993
<CGS> 10,193,418
<TOTAL-COSTS> 10,193,418
<OTHER-EXPENSES> 28,014,513
<LOSS-PROVISION> 69,289
<INTEREST-EXPENSE> 212,819
<INCOME-PRETAX> 2,457,014
<INCOME-TAX> 950,000
<INCOME-CONTINUING> 1,507,014
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,507,014
<EPS-PRIMARY> .15
<EPS-DILUTED> .14
</TABLE>
