RELIV INTERNATIONAL INC - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
____________
FORM
10-K
ANNUAL
REPORT PURSUANT TO
SECTION
13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the Fiscal Year Ended December 31, 2007
(Mark
One)
| x |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2007
OR
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from _________to_________
Commission
File Number
1-11768
RELIV'
INTERNATIONAL, INC.
(Exact
name of Registrant as specified in its charter)
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Delaware
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371172197
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(State
or other jurisdiction of
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(I.R.S.
Employer Identification Number)
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incorporation
or organization)
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136
Chesterfield Industrial Boulevard
Chesterfield,
Missouri
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63005
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(Address
of principal executive offices)
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(Zip
Code)
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(636)
537-9715
Registrant's
telephone number, including area code
Securities
registered pursuant to Sections 12(b) of the Act:
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Title
of Each Class
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Name
of Each Exchange on Which Registered
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Common
Stock, par value $0.001
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NASDAQ
Global Select Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes þ No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer o
Indicate
by check mark whether registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
Based
upon the closing price of $10.50 per share of the registrant’s common stock as
reported on the NASDAQ Global Select Market on June 29, 2007, the aggregate
market value of the common stock held by non-affiliates of the registrant was
approximately $115.5 million. (The determination of stock ownership by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the registrant is not bound by this determination for any other
purpose.)
The
number of shares outstanding of the registrant’s common stock as of March 1,
2008 was 15,873,754 (excluding treasury shares).
DOCUMENTS
INCORPORATED BY REFERENCE
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Document
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Part
of Form 10-K into Which
Document
Is Incorporated
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Sections
of the registrant’s definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 22, 2008, which is expected to be
filed no
later than 120 days after December 31, 2007
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Part
III
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INDEX
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Part
I
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Item
No. 1
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Business
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1
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Item
No. 1A
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Risk
Factors
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16
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Item
No. 1B
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Unresolved
Staff Comments
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25
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Item
No. 2
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Properties
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25
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Item
No. 3
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Legal
Proceedings
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25
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Item
No. 4
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Submission
of Matters to a Vote of Security Holders
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25
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Part
II
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Item
No. 5
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Market
for Registrant’s Common Equity, Related Stockholder
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Matters
and Issuer Purchases of Equity Securities
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26
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Item
No. 6
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Selected
Financial Data
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28
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Item
No. 7
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Management’s
Discussion and Analysis of
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Financial
Condition and Results of Operations
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29
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Item
No. 7A
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Quantitative
and Qualitative Disclosures Regarding Market Risk
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41
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Item
No. 8
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Financial
Statements and Supplementary Data
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42
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Item
No. 9
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Changes
in and Disagreements with Accountants
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on
Accounting and Financial Disclosure
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42
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Item
No. 9A
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Controls
and Procedures
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42
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Item
No. 9B
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Other
Information
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42
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Part
III
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Item
No. 10
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Directors
and Executive Officers of the Registrant
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43
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Item
No. 11
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Executive
Compensation
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43
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Item
No. 12
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Security
Ownership of Certain Beneficial Owners
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and
Management and Related Stockholder Matters
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43
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Item
No. 13
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Certain
Relationships and Related Transactions
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43
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Item
No. 14
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Principal
Accounting Fees and Services
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43
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Part
IV
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Item
No. 15
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Exhibits
and Financial Statement Schedules
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43
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FORWARD-LOOKING
STATEMENTS
This
annual report includes both historical and “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
We have based these forward-looking statements on our current expectations
and
projections about future results. Words such as “may,” “should,” “could,”
“would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “continue,” or similar words are intended to identify
forward-looking statements, although not all forward-looking statements contain
these words. Although we believe that our opinions and expectations reflected
in
the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements, and our actual results
may differ substantially from the views and expectations set forth in this
annual report. We disclaim any intent or obligation to update any
forward-looking statements after the date of this annual report to conform
such
statements to actual results or to changes in our opinions or expectations.
These forward-looking statements are affected by risks, uncertainties and
assumptions that we make, including, among other things, the factors that are
described in “Item No. 1A - Risk Factors.”
PART
I
Item
No. 1 - Business
Overview
We
are a
developer, manufacturer and marketer of a proprietary line of nutritional
supplements addressing basic nutrition, specific wellness needs, weight
management and sports nutrition. All but one of our science-based supplements
are packaged in powdered form and are not only simple to use but also, when
mixed with water, juice or other liquid and consumed, provide an effective
means
of delivering nutrients to the body. We also offer one encapsulated product
and
a line of skin care products. We sell our products through an international
network marketing system using independent distributors. We have sold products
in the United States since 1988 and in selected international markets since
1991.
We
currently offer 15 nutritional supplements and a line of seven skin care
products. We have selectively evolved our product offering over our history.
Our
core line of nutritional supplements, which represented 64.5% of net product
sales for the year ended December 31, 2007, includes the following four
products:
| • |
Reliv
Classic and Reliv NOW — two basic nutritional supplements containing
a full and balanced blend of vitamins, minerals, proteins and herbs
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| • |
Innergize! —
an isotonic sports supplement in three flavors
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| • |
FibRestore —
a high-fiber and antioxidant supplement
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These
are
our most successful supplements based on fiscal year 2007 net sales. We have
11
other nutritional supplements that complement these four core products. We
periodically refine our products and introduce related new products and product
categories. Our internal research and development team has developed most of
our
products, and we hold U.S. patents on five of these products —
Innergize!, FibRestore, Arthaffect, ReversAge and Cellebrate. In addition,
we
have applied for U.S. patents on ProVantage and CardioSentials.
We
believe that our network marketing model is the best method for the marketing
and sale of our products because it utilizes ongoing personal contact among
our
distributors and their retail customers. This enables our distributors to
communicate directly regarding the products, the business opportunity we offer
and their personal experiences with both. We provide our distributors with
a
financially rewarding and entrepreneurial opportunity, affording them the
ability to earn compensation both from the direct sale of products and from
sales volume generated by distributors they sponsor. We actively support our
distributors by providing marketing materials, a dependable product fulfillment
system and frequent educational, training and motivational programs.
The
majority of our sales traditionally has been, and is expected to continue to
be,
made through our distributors in the United States. We also currently
generate sales through distributor networks in Australia, Austria, Canada,
Germany, Ireland, Malaysia, Mexico, the Netherlands, New Zealand, the
Philippines, Singapore and the United Kingdom. In each country in which we
conduct business, our distributors operate under a uniform business and
compensation model that maintains consistent marketing, sales, fulfillment
and
compliance procedures. As of December 31, 2007, our network consisted of
approximately 69,970 distributors — 56,920 in the United States and
13,050 across our international markets.
1
We
manufacture all of our powdered nutritional supplements at our facility in
Chesterfield, Missouri. We believe our ability to formulate and manufacture
all
but one of our own products enables us to produce our products efficiently
while
maintaining our high standards of quality assurance and proprietary product
composition.
Industry
Overview
Nutritional
Supplement Market
We
operate primarily in the $22.5 billion U.S. nutritional supplement
market, which is part of the broader $85 billion U.S. nutrition industry
according to 2007 data published by the Nutrition
Business Journal,
or NBJ,
and $228.0 billion global nutrition industry, also according to the NBJ.
A
combination of demographic, healthcare and lifestyle trends are expected to
drive continued growth in the nutritional supplement market. These trends
include:
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•
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Aging
Population: The
U.S. Census Bureau projects that, by 2010, approximately 39.2% of the
U.S. population will be 45 years of age or older, up from 34.5%
in 2000. This growing population is expected to live longer, as
the
average life expectancy reached an all-time high of 75.2 years for
men and 80.4 years for women in 2004 according to the Centers for
Disease Control, or CDC. We believe this growing population will
continue to focus on their nutritional needs as
they age.
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•
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Rising
Healthcare Costs and Use of Preventive Measures: The
cost of the U.S. healthcare system has increased rapidly, reaching
approximately $2.3 trillion in 2007 and is expected to reach
$4.2 trillion by 2016, according to the National Coalition on Health
Care. Since 2000, insurance premiums for family coverage have increased
by
73% compared with inflation growth of 14% according to the 2005
Employer
Health Benefits Survey by the Kaiser Family Foundation and Health
Research
and Educational Trust. In order to maintain quality of life as
well as
reduce medical costs, many consumers take preventative measures
to improve
their general health, including the use of nutritional
supplements.
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•
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Increasing
Focus on Weight Management: A
study from the CDC completed in 2004 estimated that 66% of the
U.S. adult
population is overweight and 32% is obese. Since being overweight
can lead
to more serious health concerns such as diabetes, heart disease
and other
chronic illnesses, we believe that the rise in obesity will result
in an
increased need not only for weight loss products but wellness products
as
well.
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•
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Increasing
Focus on Fitness: In
its 2005 annual report, the International Health, Racquet &
Sportsclub Association, or IHRSA, estimated that there are approximately
85 million health club members worldwide, up from approximately
60 million five years ago, representing a compound annual growth rate
of 7%. In the United States, there were approximately
41 million health club members, representing 14% of the population,
according to the IHRSA report. We believe that fitness-oriented
consumers
are interested in taking sports nutrition products to increase
energy,
endurance and strength during exercise.
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Direct
Selling Market
Health
and nutrition products are distributed through various market participants,
including retailers such as supermarkets, drugstores, mass merchants and
specialty retailers; direct marketers such as mail order companies and Internet
retailers; and direct sellers such as network marketers and healthcare
practitioners. We distribute our products through the direct selling channel
via
our network marketers.
Direct
selling involves the marketing of products and services directly to consumers
in
a person-to-person manner. Direct selling is a significant global industry
largely utilized for the sale of a wide range of consumer products from
companies such as Avon Products Inc., Alticor Inc. (Amway Corp.) and Tupperware
Brands Corporation. According to the World Federation of Direct Selling
Associations, or WFDSA, the 2004 global direct selling market (for all product
categories) was estimated to be $99.4 billion. The WFDSA estimates that the
number of individuals engaged in direct selling grew by a 12.6% compound annual
growth rate from 1993 to 2003 to include over 13.6 million direct
salespeople in the United States and 54 million salespeople worldwide.
2
While
the
United States is currently the largest direct selling market with
$29.9 billion in annual sales in 2004, international markets account for
70% of the entire industry, according to the WFDSA. Fourteen countries
(including the United States) have annual direct sales revenue of at least
$1 billion and 33 countries have annual direct sales revenue of at least
$100 million, according to the WFDSA.
For
the
nutrition industry, the direct selling channel accounted for approximately
34.0%
of the total U.S. nutritional supplements sold in 2004, or approximately
$6.9 billion, according to the NBJ. The direct selling channel experienced
more growth than retail channels in the United States for nutritional
supplement sales in 2004, according to the NBJ.
We
believe that we are well positioned to capitalize on the domestic and
international growth trends in direct sales, as both a developer and
manufacturer of proprietary nutritional products, utilizing our network
marketing distribution system.
Our
Competitive Strengths
We
believe that we possess a number of competitive strengths that have historically
supported our growth and enabled us to achieve sustained profitability.
Complete,
Simple Nutrition. We
focus
on the completeness, balance and simplicity of our basic nutritional
supplements — Reliv Classic and Reliv NOW — as captured by our slogan,
“Nutrition Made Simple. Life Made Rich.” Because these two basic nutritional
supplements each contain a full and balanced blend of vitamins, minerals,
proteins and herbs, supplementation is made simple for the consumer, who does
not have to select and purchase several supplements for his or her basic
nutritional needs. For more specific individual needs, we provide 13 additional
supplements. We believe that our two basic nutritional supplements, together
with our additional supplements and skin care products, enhance the ability
of
our distributors to build their businesses by providing a comprehensive, simple
product offering.
Powder-Based
Nutritional Supplements. We
believe that our powder-based nutritional supplements provide a competitive
advantage over other supplements such as vitamins, minerals and herbs in pill
or
tablet form. Our nutritional products are consumed with water, milk or juice
and
provide an effective means of delivering nutrients to the body. We believe
nutrients taken orally in liquid form lead to better absorption at the cellular
level, or “bioavailability.”
In-House
Development and Production. We
have
developed substantially all of our products utilizing nutrition science as
the
basis for product formulation. We maintain an ongoing research and development
effort led by Dr. Carl W. Hastings, Ph.D. and consult regularly with
other industry professionals and with the physicians on our Medical Advisory
Board with respect to developments in nutritional science, product enhancements
and new products. Since 1993, we have manufactured substantially all of our
nutritional products at our facility in Chesterfield, Missouri. Currently,
we
outsource only one product, our Slimplicity accelerator capsules. We believe
our
ability to formulate and manufacture all but one of our own products enables
us
to maintain our high standards of quality assurance and proprietary product
composition.
Growing
and Experienced Ambassador Team. Our
Ambassador corps consists of distributors who have achieved the level of Master
Director, have earned royalty payments of at least $4,000 in consecutive months
and meet our leadership and character criteria necessary to garner our
invitation to be an Ambassador. Our Ambassadors generally are our most
productive distributors and are essential in recruiting, motivating and training
our entire distributor network. We, and our Ambassadors, lead hundreds of annual
events throughout all of our markets to motivate and train distributors,
including regular recruiting meetings, trainings, conference calls, training
schools for Master Affiliates and higher levels and regional, national and
international distributor conferences. On December 31, 2007, we had a total
of 374 Ambassadors. The top 10 distributors at the Ambassador level have been
with us for an average of 15 years, which provides consistency in training
new distributors and contributes to increased sales.
3
Uniform
Distributor Business Model. Our
distributor compensation system is uniform throughout our domestic and
international markets. The compensation plan is “seamless” in that distributors
in each market all receive discounts and commissions on the same terms. We
also
provide consistent distributor documentation, training and methods throughout
our system and in all of our markets. We believe this uniform model is effective
in motivating and training distributors to build their businesses and enter
new
markets.
Experienced
and Incentivized Management Team. Our
management team is led by our founder, Robert L. Montgomery, who has been our
Chief Executive Officer since the inception of our company in 1985. Our
executive officers have been employed by our company for an average of
13 years and are experienced in their areas of focus, which include
manufacturing, sales, finance, marketing and operations. As of March 1, 2008,
our directors and executive officers beneficially own approximately 30.7% of
our
common stock.
Our
Business Strategy
Our
basic
objective is to increase our net sales by increasing the number and productivity
of our distributors and by periodically improving our existing products and
introducing new products. We also intend to invest in our infrastructure to
improve our operating efficiencies, provide better service to our distributors
and leverage our current operating facilities to improve our profitability.
We
seek to accomplish these objectives by employing the following strategic
initiatives:
Leverage
and Expand our Existing Distributor Base Throughout the United States.
The
United States has been and will continue to be our largest market. Our growth
strategy in the United States involves multiple initiatives, such as increased
investment in company-sponsored events and training and better utilization
of
our upper-level distributors across different geographical areas. In addition,
we expect to introduce a new autoship program intended to increase customer
and
distributor retention. We will continue to implement these initiatives while
focusing on untapped markets in the United States.
Expand
in Existing and New International Markets. We
believe there is a significant opportunity to increase our net sales in
international markets. We have a uniform business model across all of our
markets and encourage our distributors to pursue their business in multiple
markets. In selected markets, we have begun investing in additional marketing
support for our distributors that is consistent with our successful activities
in the United States, including third party advertising materials and
company-sponsored distributor meetings. We believe this uniform business model
and additional marketing expense will encourage expansion of our distributors
in
our existing international markets and will provide a framework that facilitates
our entry into new international markets. To that end, we continue to monitor
business conditions in potential new markets and will selectively expand as
timing and conditions are appropriate.
Invest
in Improved and New Products. As
a
developer of nutritional supplements, it is vital to continue to invest in
the
research and development of new and innovative products. Additionally, we will
continue to improve and validate the efficacy of our existing product line.
For
example, in February 2007 we launched our Slimplicity Weight Loss System that
includes a meal replacement product and accelerator capsules to aid in weight
loss. These types of investments should facilitate customer and distributor
retention, as well as the recruitment of new distributors.
Expand
and Improve our Manufacturing and Distribution Capabilities. We
currently manufacture all of our powdered nutritional supplements at our
facility in Chesterfield, Missouri. This allows us to precisely control product
composition and quality assurance. Periodically, we make appropriate investments
that enhance our manufacturing capabilities and capacity to further leverage
our
existing facilities and trained production staff. We expect to continue to
make
appropriate investments in our manufacturing and fulfillment
facilities.
4
Our
Products
Product
Overview
Our
product line includes nutritional supplements that address basic nutrition,
specific wellness needs, weight management and sports nutrition. We combine
ingredients from science and nature in targeted, well-balanced, easy-to-use
formulas that are specifically designed to enhance wellness and increase
performance and energy in specific applications. All but one of our supplements
are in powdered form that the consumer mixes with water, juice or other liquid.
We also have one encapsulated product and a line of skin care products.
We
currently offer 15 nutritional and seven skin care products. Our basic
nutritional supplements are formulated to provide a balanced and complete level
of supplementation for the consumer. For more specific needs, we provide other
focused product formulations. We have purposely been selective in the number
and
types of products that we offer. By providing a line of targeted products,
we
make it simple for our distributors and consumers to choose products appropriate
for their objectives. We consider four of our oldest and best selling
products — Reliv Classic, Reliv NOW, Innergize! and FibRestore — to be
our primary or “core” products.
The
following table summarizes our product categories. The net sales figures are
for
the year ended December 31, 2007:
|
Product
Category
|
Product
Name
|
%
of 2007
Net
Sales(1)
|
Year
Introduced
|
|||||||
|
Basic
Nutrition
|
Reliv
Classic
|
21.3
|
1988
|
|||||||
|
|
Reliv
NOW
|
14.7
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1988
|
|||||||
|
|
NOW
for Kids
|
3.9
|
2000
|
|||||||
|
|
Reliv
Delight
|
0.1
|
2001
|
|||||||
|
|
|
|
||||||||
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Specific
Wellness
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FibRestore
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14.9
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1993
|
|||||||
|
|
Arthaffect
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7.2
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1996
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|||||||
|
|
ReversAge
|
4.4
|
2000
|
|||||||
|
|
SoySentials
|
2.2
|
1998
|
|||||||
|
|
CardioSentials
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2.4
|
2005
|
|||||||
|
|
|
|||||||||
|
Weight
Management(2)
|
Slimplicity
Meal Replacement
|
6.2
|
2007
|
|||||||
|
|
Slimplicity
Accelerator Capsule
|
3.1
|
2007
|
|||||||
|
|
Reliv
Ultrim Plus
|
1.0
|
1988
|
|||||||
|
|
Cellebrate
|
0.8
|
1995
|
|||||||
|
|
|
|
||||||||
|
Sports
Nutrition
|
Innergize!
|
13.6
|
1991
|
|||||||
|
|
ProVantage
|
3.1
|
1997
|
|||||||
|
|
|
|
||||||||
|
Skin
Care
|
ReversAge
Skin Care
|
1.1
|
2001
|
|||||||
______________________
| (1) |
This
table does not include net sales for the year ended December 31, 2007
related to freight and handling and sales of marketing materials,
which
represented approximately 11.8% of net sales for the year ended
December 31, 2007.
|
| (2) |
In
February 2007, we introduced our Slimplicity Meal Replacement formula
and
Slimplicity Accelerator Capsules in the United States and in January
2008,
we introduced Slimplicity in each of our European markets. Upon
introduction of our Slimplicity products in a particular market,
our Reliv
Ultrim-Plus line was discontinued in that market.
|
5
Basic
Nutrition Supplements
Our
four
basic nutrition supplements provide consumers with a broad spectrum of essential
nutrients. Every formulation is specifically designed to optimize and enhance
the benefits of the nutrients it contains.
|
•
|
Reliv
Classic is a nutritional supplement containing a variety of vitamins
and
minerals, soy and other protein sources and various herbs. It is
a
vegetarian product that contains no animal compounds, artificial
preservatives, artificial flavors or added simple sugars. Reliv
Classic is
available in the United States, Australia, New Zealand, Canada,
Germany,
Austria, the Netherlands, the United Kingdom, Ireland, Malaysia,
Singapore
and the Philippines.
|
|
•
|
Reliv
NOW is a nutritional supplement containing a variety of vitamins
and
minerals, soy and other protein sources and various herbs. Reliv
NOW is
available in every country where we
operate.
|
|
•
|
NOW
for Kids is a product designed to provide a balanced nutritional
supplement for a child’s diet and contains a variety of vitamins and
minerals. NOW for Kids is available in Australia, New Zealand,
United
States, the United Kingdom, Ireland and the
Philippines.
|
|
•
|
Reliv
Delight is a powdered nutritional supplement sold as a milk replacement.
Reliv Delight is available in Mexico and the United
States.
|
Specific
Wellness Supplements
Our
line
of five specific wellness supplements contains specific compounds that target
certain conditions and promote health. Each product is intended to work in
conjunction with our basic nutritional supplement formulas to provide an
effective, balanced and natural method for sustaining health and well-being.
|
•
|
ReversAge
is a patented youth-promoting nutritional supplement designed to
slow down
the effects of the aging process. Three proprietary complexes form
the
foundation of the supplement: longevity complex, antioxidant complex
and
herbal complex. The longevity complex is restorative and designed
to
replenish key hormones while creating balance within the body’s major
systems; the antioxidant complex is designed to slow aging at the
cellular
level and the herbal complex delivers a variety of herbs, including
Ginkgo
Biloba and Maca. ReversAge is available in every country where
we operate
except Germany, the United Kingdom, Ireland and Singapore. In Canada,
the
product is marketed as Nutriversal.
|
|
•
|
SoySentials
is a nutritional supplement containing soy as well as other vitamins,
minerals and herbs designed for use by women. SoySentials provides
a woman
with key nutrients targeted to promote women’s health and ease the
symptoms of menopause and PMS. SoySentials is available in the
United
States, Canada, the United Kingdom, Ireland and
Mexico.
|
|
•
|
CardioSentials
is a berry-flavored nutritional supplement introduced in February
2005
that promotes heart health. The product contains 1,500 mg of
phytosterols per serving, policosanol and several powerful antioxidants.
In a clinical study of this product, participants experienced meaningful
reductions in cholesterol as well as improvement in their high-density
lipoprotein, or HDL, and low-density lipoprotein, or LDL, ratios.
We have
applied for a U.S. patent on CardioSentials. CardioSentials is
available only in the United
States.
|
|
•
|
Arthaffect
is a patented nutritional supplement containing Arthred, a patented
form
of hydrolyzed collagen protein, which is clinically reported to
support
healthy joint function. The product is available in the United
States,
Australia, New Zealand, Mexico, the Philippines and Canada. The
product is
marketed as A-Affect in Australia, New Zealand and Canada due to
local
product regulations.
|
|
•
|
FibRestore
is a patented nutritional supplement containing fiber, vitamins,
minerals
and herbs. A modified version of the FibRestore formula is marketed
in
Canada under the name Herbal Harmony to comply with Canada’s nutritional
regulations. FibRestore is available in all of the countries in
which we
operate.
|
6
Our
four
weight management supplements combine advanced weight loss promoting complexes
with scientifically balanced nutrition and health enhancing soy protein. Our
ingredients are designed to work together, along with proper diet and exercise,
to turn unwanted fat into energy without sacrificing muscle.
|
•
|
Our
Slimplicity Weight Loss System was introduced in the United States
in
February 2007 and includes our two newest products: (1) Slimplicity
meal
replacement and (2) Slimplicity accelerator capsules. Our Slimplicity
Weight Loss System incorporates these new products into an overall
program
that includes proper diet and exercise and is focused on facilitating
weight loss and developing healthier lifestyle choices. Slimplicity
is
currently available in the United States, Germany, Austria, the
Netherlands, Ireland and the United Kingdom. In our European markets,
we
offer chewable tablets instead of capsules in light of local preferences
and formula modifications required to comply with product
regulations.
|
|
•
|
Reliv
Ultrim-Plus is designed as a meal replacement (for a maximum of
two meals
per day) for use in a weight loss program. Reliv Ultrim-Plus is
sold in
Australia, New Zealand, Canada, Malaysia, Mexico, Philippines and
Singapore. Reliv Ultrim-Plus is no longer available in the United
States,
Germany, the Netherlands, Austria, Ireland and the United Kingdom
due to
the introduction of our Slimplicity meal replacement product. We
expect
Slimplicity to eventually replace Reliv Ultrim-Plus in all of our
markets
as we introduce our Slimplicity Weight Loss System in each
market.
|
|
•
|
Cellebrate
is a patented weight loss aid designed to suppress appetite, curb
the
storage of body fat, and facilitate the body’s fat burning process.
Cellebrate is available in the United States and Canada.
|
Sports
Nutrition Supplements
Our
two
sports nutrition supplements contain a balance of nutrients scientifically
designed to improve athletic performance and endurance, as well as muscle
recovery and repair.
|
•
|
Innergize!
is a patented sports supplement, containing vitamins and minerals
designed
for performance enhancement. Innergize! is available in every country
where we operate. In Canada, the product is marketed as Optain
due to
local product regulations.
|
|
•
|
ProVantage
is a nutritional supplement containing soy designed to enhance
athletic
performance with a balance of nutrients needed to improve endurance,
muscle recovery and repair. ProVantage is designed to increase
muscle
recovery, muscle mass and function, reduce fatigue and burn excess
body
fat for extra energy. The product also benefits dieters and others
seeking
to increase their soy intake. We have applied for a U.S. patent on
ProVantage. ProVantage is available in the United States and Canada.
|
Skin
Care Products
Our
ReversAge skin care product line combines advancements in youth-promoting
nutrients with a delivery system designed to enhance the way those nutrients
are
absorbed and utilized by the skin. Our seven ReversAge products are designed
to
reduce the visible signs of aging and work within the skin to repair the damage
done by the sun and environmental pollutants. Each skin care product is enriched
with the Dermalongevity Complex containing (1) vitamins and antioxidants to
protect the skin from ultraviolet rays, toxins and pollutants,
(2) botanicals to nourish the skin with essential micronutrients that
enhance the body’s healing process, and (3) moisturizing factors to
replenish the skin. Our ReversAge skin care line includes:
|
•
|
Balanced
Cleansing Gel
|
|
•
|
Total
Body Renewal Lotion
|
|
•
|
Smooth
and Lift Serum
|
|
•
|
Daily
Skin Defense
|
|
•
|
Eye
Renewal Cream
|
|
•
|
Nightly
Skin Restore
|
|
•
|
Rich
Cleansing Bar
|
7
Our
Daily
Skin Defense and Total Body Renewal Lotion contain the ReversAge Read and Need
technology that adjusts to different skin types and delivers the necessary
moisture and nutrients to repair and replenish skin. The Nutri-Dynamic Delivery
System, used in our Daily Skin Defense, Total Body Renewal Lotion and Nightly
Skin Restore, holds active ingredients in place on the surface of the skin
for
up to 12 hours, allowing continuous delivery of youth-promoting nutrients
to the skin. ReversAge skin care is available in the United States, Australia,
New Zealand and Canada.
Research
and Development
We
maintain an ongoing research and development effort led by Dr. Carl W.
Hastings, Ph.D. and consult with other industry professionals and with the
physicians and professionals on our Medical Advisory Board with respect to
developments in nutritional science, product enhancements and new products.
Since 2000, we have introduced seven of our current products, including
ReversAge, NOW for Kids, Reliv Delight, CardioSentials, Slimplicity meal
replacement, Slimplicity accelerator capsules and ReversAge Performing Enhancing
Skin Care. From time to time, we have also reformulated and enhanced our
products. We currently are in the later development stages of a new product
that
we expect to introduce when market conditions are favorable. In addition, we
are
in the conceptual stages with respect to certain potential products that would
complement our existing product line. Our research and development team
consistently evaluates product advancements in the marketplace and advancements
in raw materials and ingredients for new product ideas and
developments.
For
the
years ended December 31, 2007, 2006 and 2005, our research and development
expenses were $453,000, $437,000 and $558,000, respectively.
Network
Marketing Program
General
Overview
We
market
and sell our products through a network marketing system of independent
distributors, who purchase our products from us, or from other distributors,
and
who then sell our products directly to consumers. In addition to selling our
products, our distributors also recruit others to distribute our products.
Distributors receive compensation from both the sale of the products they have
purchased at wholesale and, in the case of Master Affiliates and above,
commissions on the volume of products sold by those Master Affiliates and above
that they have sponsored. We believe network marketing is an effective way
to
distribute our products because it allows and relies on personal contact,
education and endorsement of products which is not as readily available through
other distribution channels.
We
recognize that our sales growth is based on the continued development and growth
of our independent distributor force and we strive to maintain an active and
motivated distributor network through a combination of quality products,
discounts, commissions and bonus payments, sales conventions, training, personal
recognition and a variety of publications and promotional materials.
Program
Structure
Individuals
who desire to market and sell our products may become distributors by being
sponsored into the program by an existing distributor, and becoming part of
that
distributor’s “downline.” We offer a tiered discount and commission, or royalty,
format that consists of four principal levels and several sub-levels, which
are
designed to compensate and motivate distributors to increase their networks
and
sales volumes.
Our
distributors consist principally of individuals, although we also permit
entities such as corporations, partnerships, limited liability companies and
trusts to become distributors. A new distributor is required to complete a
distributor application and, in most areas, to purchase a package of distributor
materials (for $39.95 plus shipping in the United States) consisting of a
Distributor Guide and CD, business forms and promotional materials. The
Distributor Agreement, when accepted by us, becomes the contract between us
and
the distributor and obligates the distributor to the terms of the agreement,
which includes our Policies and Procedures for conduct of their business. All
distributors are independent contractors and are not our employees.
8
In
each
country in which we conduct business, distributors operate under a uniform
compensation system in which distributors generally are compensated based on
their sales volumes. On the basis of sales volume or commission volume,
distributors may achieve the following successive levels of achievement and
compensation:
|
Designation
|
Discount | |
|
Retail
Distributor
|
20%
|
|
|
Affiliate
|
25%
|
|
|
Key
Affiliate
|
30%
|
|
|
Senior
Affiliate
|
35%
|
|
|
Master
Affiliate
|
40%
(1)
|
|
|
Director
|
40%
(1)
|
|
|
Key
Director
|
40%
(1)
|
|
|
Senior
Director
|
40%
(1)
|
|
|
Master
Director
|
40%
(1)
|
|
|
Presidential
Director
|
40%
(1)
|
|
_____________________
| (1) |
In
addition to discounts, these levels also receive commissions based
on
downline sales by Master Affiliates and above that they sponsor.
|
Distributors
purchase products from us at a discount from the suggested retail price for
the
products and then may sell the product at retail to customers, sell the product
to other distributors at wholesale or consume the product. The amount of the
discount varies depending on the distributor’s level of achievement, as
indicated above.
Distributors
generate income equal to the difference between the price at which they sell
the
product to customers and the discounted price they pay for the product.
Distributors also earn wholesale commissions on products purchased by downline
distributors in the distributor’s sponsored group equal to the difference
between the price at which the distributor is entitled to purchase product
and
the price at which downline distributors purchase product. We calculate payments
and issue a check directly to the qualified distributor once a month. For
example, assume A is a 40% discount Master Affiliate who signs up B, a 30%
discount Key Affiliate, who signs up C, a 20% discount Retail Distributor.
If C
purchases directly from us, a 10% wholesale profit check will be sent to both
A
and B.
Upon
achieving the level of Master Affiliate, distributors begin to receive
additional compensation — “generation royalty” — payments of 8%, 6%,
4%, 3% and 2% of the retail volume of product purchased from us by Master
Affiliates and above (and their personal groups) whom they have sponsored,
and
for each of five levels of sponsorship. To qualify for these additional
compensation payments, Master Affiliates and above are required to maintain
certain monthly sales volumes and to document specified levels of retail sales.
Master
Affiliates who sponsor other distributors that achieve the level of Master
Affiliate are entitled to become part of the Director Program. Advancement
at
the Director level is based upon achieving increasing levels of royalties based
on sales generated by other distributors in the Director’s downline
organization. Distributors achieving each level receive recognition for their
achievements at our company-sponsored events and in our publications. We also
have a Star Director Program under which distributors achieving the level of
Director and above receive additional compensation based on the number of Master
Affiliates they have sponsored into the program. Directors receive an additional
1% to 3% royalty on the retail sales volume of Master Affiliates in their
downline organization for an unlimited number of levels of sponsorship, until
reaching a level that includes a Master Affiliate who also has achieved Star
Director status.
Master
Directors and Presidential Directors may also be invited to participate in
the
Ambassador Program. As of December 31, 2007, we had 374 Ambassadors.
Qualifications to be invited by us to participate in the Ambassador Program
include demonstrated competence and leadership qualities. Ambassadors receive
recognition and awards for achieving Ambassador status and can then achieve
additional levels of accomplishment. We utilize our Ambassadors to lead meetings
and conferences, and to provide training and education to our distributors.
Ambassadors achieving the level of Silver and higher also participate in the
“Reliv Inner Circle,” which may entitle them to receive additional compensation,
paid participation in our sponsored events, health insurance and car allowances.
9
In
addition to the levels of compensation described, we also provide a variety
of
incentives, bonuses, awards and trips to distributors who achieve high sales
volumes and who advance in the distributor ranks.
Distributor
Training, Motivation and Management
Our
marketing efforts are focused on the development, training, motivation and
support of our independent distributors. We support an active training program
for our distributors in which our representatives and experienced distributors,
usually Ambassadors, lead group training sessions. We provide distributors
with
manuals, brochures and other promotional, training and informational
publications. We encourage distributors to hold regular Tuesday evening
recruiting meetings and Saturday training sessions. We sponsor weekly training
conference calls in which a significant number of distributors participate.
Our
sponsorship generally includes the following:
|
•
|
During
2007, we sponsored approximately 45 training schools on a quarterly
basis
across all of our markets for new Master Affiliates;
|
|
•
|
In
the United States, we annually sponsor regional distributor
conferences.
|
|
•
|
For
each market in which we operate, we sponsor an annual conference
for
distributors; and
|
|
•
|
In
the United States, we sponsor an annual International Conference
for all
distributors.
|
During
2007, we invested approximately $5.3 million in training, conferences and
promotional events for our distributors worldwide.
Distributor
Compliance
Our
distributor organization and business model are designed and intended to promote
the sale of our products to consumers by distributors. Sales training and
promotional efforts emphasize that intention. To that end, and to comply with
applicable governmental regulations of network marketing organizations, we
have
established specific programs and requirements for distributors, including
(1) monitoring by us of purchases by distributors to identify potentially
excessive individual purchases, (2) requiring that distributors certify to
a minimum number of retail sales, and (3) requiring that distributors
certify the sale of at least 70% of previous purchases of a particular product
prior to the purchase of additional amounts of such product. Distributors are
not required at any time to purchase product, although Master Affiliates and
above are required to maintain certain minimum sales levels in their personal
groups to continue receiving generation royalty compensation payments.
Distributors
may create their own advertising provided that it is within our advertising
rules. Unless a distributor is using our designed and approved advertisements,
the distributor must submit for approval in writing all advertising (e.g.
brochures, flyers, audio tapes, classified or display ads, radio scripts) to
our
Compliance Department before placing it or arranging for placement.
Pursuant
to our Policies and Procedures, which are incorporated by reference into our
Distributor Agreement, distributors are permitted to make only those claims
about our products that have been approved by us and/or provided in sales and
training materials. Distributors acknowledge that our products are not
represented as drugs and they are not authorized to make any diagnosis of any
medical condition, make drug-type claims for, or prescribe our products to
treat
or cure, any disease or condition. We do not authorize or permit our
distributors to make any express or implied references with regard to our
products that they cure, prevent or relieve disease, replace or augment
medication, provide therapy, promote healing, alleviate illnesses or symptoms
of
illnesses, or make any other medical claims for specific ailments.
In
order
to comply with regulations that apply to both us and our distributors, we
conduct considerable research into the applicable regulatory framework prior
to
entering any new market to identify all necessary licenses and approvals and
applicable limitations on operations in that market. We devote substantial
resources to obtaining the necessary licenses and approvals and maintaining
operations that are in compliance with the applicable limitations. We also
research laws applicable to distributor operations and revise or alter
distributor materials and products and similar matters, as required by
applicable regulations in each market.
10
Regulations
in existing and new markets often are ambiguous and subject to considerable
interpretive and enforcement discretion by the responsible regulators. In
addition, regulations affecting our business often change and are subject to
varying interpretation and application. We make every effort to monitor and
comply with changes in laws and regulations as they occur.
We
have a
Compliance Department that receives and reviews allegations of distributor
misconduct. If we determine that a distributor has violated our Policies and
Procedures, we may take a number of disciplinary actions. For example, we may
impose sanctions such as warnings or suspensions until specific conditions
are
satisfied, or take other appropriate actions at our discretion, including
termination of the distributor’s agreement.
Geographic
Presence
Markets
We
currently sell our products throughout the United States and in 12 other
countries around the world. We have sold products in the United States since
1988 and sold our first product outside of the United States in 1991 when we
entered Australia. In 2007, approximately 11.5% of our net sales were generated
outside of the United States.
The
table
below shows the countries in which we operate and the year we commenced selling
products:
|
Country
|
Year
Entered
|
|
United
States
|
1988
|
|
Australia
|
1991
|
|
New
Zealand
|
1992
|
|
Canada
|
1992
|
|
Mexico
|
1993
|
|
United
Kingdom(1)
|
1995
|
|
Philippines
|
2000
|
|
Malaysia
|
2003
|
|
Ireland
|
2003
|
|
Singapore
|
2004
|
|
Germany
|
2005
|
|
Austria
|
2006
|
|
Netherlands
|
2006
|
______________________
| (1) |
Includes
Great Britain, Scotland, Wales and Northern Ireland.
|
Within
the United States, we sell our products to distributors in all 50 states.
We derived 25.5% of our net sales in 2007 in California, Kansas, Illinois and
Arizona, with each state contributing at least 5% of net sales. We believe
that
there is the opportunity to increase the number of our distributors in all
markets where we sell our products, particularly in California and the Southeast
as our existing distributor bases grow and expand. Additionally, we intend
to
develop and strengthen distributor groups in other markets, which may include
the Mid-Atlantic states and Texas.
We
organize all of our international operations under our wholly owned subsidiary,
Reliv’ World. As of December 31, 2007, Reliv’ World consisted of the
following market-specific entities: Reliv’ Australia, Reliv’ New Zealand, Reliv’
Canada, Reliv’ Mexico, Reliv’ UK (including Ireland), Reliv’ Philippines, Reliv’
Malaysia, Reliv’ Singapore, and Reliv’ Germany (including Austria and the
Netherlands). We have utilized this method of separate corporations in most
of
our markets, as local business licensing and product approvals require a local
entity.
11
We
believe that there is a significant opportunity to increase sales in all of
our
current international markets. We have established a uniform business model
and
compensation plan across all of our markets, and we have recently begun to
support our international markets with additional marketing support. We continue
to encourage, and in certain circumstances provide limited financial support
to,
certain top distributors in an effort to expand their distributor networks
internationally.
In
addition to increasing sales in current international markets, our expansion
strategy targets selected new foreign markets. Our presence in Malaysia,
Singapore and the Philippines provides us with familiarity from which to expand
into other areas of Asia. Accordingly, we expect to open for business in
Indonesia in 2008 following our receipt of certain licensing and product
approvals. Similar to Asia, our recent entry into Germany, Austria and the
Netherlands and our 12 years of experience in the UK offer us the
opportunity to expand into additional European markets.
New
Market Entry Process
We
constantly evaluate new markets for our products. In order to do so, we perform
an analysis of synergies between new and existing countries and distributor
presence or interest in new markets, market conditions, regulatory conditions,
product approval procedures and competition before selecting markets to enter.
Once we decide to enter a new market, we first hire local legal counsel and/or
a
consultant with appropriate expertise to:
|
•
|
help
ensure that our network marketing system and products comply with
all
applicable regulations;
|
|
•
|
help
establish favorable public relations in the new market by acting
as an
intermediary between us and local regulatory authorities, public
officials
and business people; and
|
|
•
|
explain
our products and product ingredients to appropriate regulators
and, when
necessary, to arrange for local technicians to conduct required
ingredient
analysis tests of the products.
|
Where
regulatory approval in a foreign market is required, local counsel and/or
consultants work with regulatory agencies to confirm that all of the ingredients
in our products are permissible within the new market. Where reformulation
of
one or more of our products is required, we attempt to obtain substitute or
replacement ingredients. During the regulatory compliance process, we may alter
the formulation, packaging, branding or labeling of our products to conform
to
applicable regulations as well as local variations in customs and consumer
habits, and we may modify some aspects of our network marketing system as
necessary to comply with applicable regulations.
Following
completion of the regulatory compliance phase, we undertake the steps necessary
to meet the operations requirements of the new market. In the majority of our
new markets, we establish a sales center in a major city and provide for product
purchases by telephone and/or pick up. Product is shipped to the purchaser
from
a warehouse located in the general geographic market or the distributor may
walk
in to the local office and purchase products, if a pick up center is available.
In addition, we initiate plans to satisfy inventory, personnel and
transportation requirements of the new market, and we modify our distributor
materials, cassette recordings, video cassettes and other training materials
as
necessary to be suitable for the new market.
In
some
countries, regulations applicable to the activities of our distributors also
may
affect our business because in some countries we are, or regulators may assert
that we are, responsible for our distributors’ conduct. In these countries,
regulators may request or require that we take steps to ensure that our
distributors comply with local regulations.
Manufacturing
We
established a manufacturing line at our facility in Chesterfield, Missouri
and
began to manufacture all of our nutritional supplements in early 1993. We
expanded our Chesterfield facility in 1997 to now include 126,000 square
feet of space. At our Chesterfield facility, we manufacture all of our powdered
nutritional supplements for distribution both domestically and internationally.
Our Slimplicity accelerator capsules are manufactured by a third party and
our
skin care line is manufactured by a third party that is both owner and licensee
of certain proprietary technology used in our skin care products.
12
Our
ability to manufacture our powdered nutritional supplements is a competitive
advantage with respect to competitors not engaged in manufacturing and
contributes to our ability to provide high-quality products. Our product
manufacturing includes identifying suppliers of raw materials, acquiring the
finest quality raw materials, blending exact amounts of raw materials into
batches, and canning and labeling the finished products. Since we carefully
select our ingredient suppliers, we are able to control the quality of raw
materials and our finished products. We have not experienced any significant
difficulty in obtaining supplies of raw materials for our nutritional
supplements or finished product of our Slimplicity accelerator capsules. By
monitoring and testing products at all stages of the manufacturing process,
we
can precisely control product composition. In addition, we believe we can
control costs by manufacturing our own powdered nutritional supplements.
In
1996,
we received approval from the Australian Therapeutic Goods Administration,
or
TGA, to manufacture products sold in Australia at our Chesterfield plant. The
certification of our Chesterfield site by the Australian TGA also satisfied
Canadian requirements. In 2007, our Chesterfield plant was audited and
re-certified by the Australian TGA.
Fulfillment
Distributors
order product in case lots of individual quantities and pay for the goods prior
to shipment. We offer our Direct Select Program for distributors and their
retail customers to order product in less than case lots directly from us by
phone. Auto-Ship, an automatic monthly reorder program available for
distributors and customers, provides a simple and convenient ordering process
for consumers as well as distributors wanting to satisfy maintenance
requirements. Product is shipped directly to the distributor or customer and
upline distributors earn wholesale profits or, if applicable, a commission
on
all Direct Select Program and Auto-Ship sales.
In
the
United States, our products are warehoused and shipped by common carrier to
distributors. Our facility in Chesterfield, Missouri serves all parts of the
country. Our products are also warehoused in, and shipped to local distributors
from: Sydney, Australia; Auckland, New Zealand; Oakville, Canada; Birmingham,
England; Petaling Jaya, Malaysia; Singapore; and Frankfurt, Germany. Our
Philippines subsidiary currently has approximately 24 product pick-up
centers located throughout the country which are operated by local business
contractors and a company-owned and operated business center located in Makati.
In Mexico, product is warehoused and shipped in and from approximately
7 distribution centers located throughout the country. With the exception
of our Canada, New Zealand and Singapore subsidiaries, each of our subsidiaries
maintains an office and personnel to receive, record, and fill orders from
distributors. Distributors in Ireland order and receive product from our UK
subsidiary. Distributors in Austria and the Netherlands order and receive
product from our Germany subsidiary.
We
maintain a policy that unused product may be returned by a customer to the
selling distributor for a full refund or exchange within 30 days after
purchase. We also maintain a policy that any distributor who terminates his
or
her distributorship may return saleable product which was purchased from us
within twelve months of the termination for a refund of 90% of the purchase
price less any compensation received relating to the purchase of the products.
We believe this buyback policy addresses and satisfies a number of regulatory
compliance issues pertaining to network marketing systems.
Historically,
product returns and buy backs have not been significant. Product returns and
buy
backs have been approximately 1.72%, 1.17%, and 1.20% of net sales in 2007,
2006
and 2005, respectively.
Information
Technology Systems
In
order
to facilitate our continued growth and support distributor activities, we
continually upgrade our management information and telecommunication systems,
along with increasing our internet-based capabilities. These systems include:
(1) a centralized host computer in our Chesterfield headquarters, which is
linked to our international offices via secure frame relay connections that
provide real-time order entry and information to respond to distributor
inquiries, as well as financial and inventory management systems; (2) local
area networks of personal computers within our markets, serving our local
administrative staffs; (3) an international e-mail system through which our
employees communicate; (4) an Avaya telecommunication system that services
the U.S. market; and (5) internet capabilities that provide a variety
of online services to distributors, including product ordering, product
information, event information and other related announcements, and tools to
assist distributor leaders in managing their downline distributor group. We
continue to pursue initiatives underway to increase the percentage of
distributor orders placed via the internet. To accomplish this goal, we have
rolled out an enhanced shopping cart platform, and have announced periodic
short-term incentives to encourage distributors to place their orders via the
internet.
13
These
systems are designed to provide financial and operating data for management,
timely and accurate product ordering, royalty override payment calculation
and
processing, inventory management, and detailed distributor records. We intend
to
continue to invest in our systems in order to help meet our business strategies.
Intellectual
Property
We
have
obtained U.S. patents on five products: Innergize!, FibRestore, Cellebrate,
Arthaffect and ReversAge (specific wellness supplement). The principal
ingredient delivery system of ReversAge (skin care) is licensed exclusively
under issued U.S. patents. Our formulas are protected as trade secrets and,
to the extent necessary, by confidentiality agreements.
Currently,
we have twenty trademarks registered with the U.S. Patent and Trademark
Office, or USPTO, including Reliv and the names of twelve of our fifteen
products. NOW for Kids is not registered with the USPTO. Trademark registrations
for selected marks have been issued or applied for in Australia,
New Zealand, Canada, Mexico, the United Kingdom, Ireland, the
Philippines, Malaysia, Singapore, Germany and several other foreign countries
that offer network marketing opportunities. We consider our trademarks to be
an
important asset of our business.
Regulation
Product
Regulation
The
formulation, manufacturing, labeling and advertising or promotion of our
products are subject to regulation by the Food and Drug Administration, or
FDA,
which regulates our products under the federal Food, Drug and Cosmetic Act,
or
FDCA, the Federal Trade Commission, or FTC, and various agencies of the states
or countries into which our products are shipped or sold. FDA regulations
include requirements and limitations with respect to the labeling of our food
and cosmetic products and also with respect to the formulation of those
products. FDA regulations also limit and control the extent to which health
or
other claims can be made with respect to the efficacy of any food and cosmetic.
The FDCA has been amended several times with respect to dietary supplements,
most recently by the Nutrition Labeling and Education Act of 1990, or NLEA,
and
the Dietary Supplement Health and Education Act of 1994, or DSHEA, and related
regulations. Such legislation governs the formulation, manufacturing, marketing
and sale of nutritional supplements, including the content and presentation
of
health-related information included on the labels or labeling of nutritional
supplements.
The
majority of the products we market are classified as dietary supplements under
the FDCA. Dietary supplements such as those we manufacture and sell, for which
no “drug” claim is made, are not subject to FDA approval prior to their sale.
However, DSHEA established a pre-market notification process for dietary
supplements that contain a “new dietary ingredient,” or NDI, a term that is
defined as “a dietary ingredient that was not marketed in the United States
before October 15, 1994,” the date on which DSHEA was signed into law.
Certain NDIs that have been “present in the food supply” are exempt from the
notification requirement. For those NDIs that are not exempt, DSHEA requires
the
manufacturer or distributor of a dietary supplement containing an NDI to submit
to the FDA, at least 75 days prior to marketing, a notification containing
the basis for concluding that the dietary supplement containing the NDI will
“reasonably be expected to be safe.” Dietary supplement products can be removed
from the market if shown to be unsafe, or if the FDA determines, based on the
labeling of products, that the intended use of the product is for the diagnosis,
cure, mitigation, treatment or prevention of disease. The FDA can regulate
those
products as “drugs” and require premarket approval of a “new drug application.”
Manufacturers of dietary supplements that make any claims for dietary
supplements, including product performance and health benefit claims, must
have
substantiation that the statements are truthful and not misleading.
14
In
January 2000, the FDA published a final rule that defines the types of
statements that can be made concerning the effect of a dietary supplement on
the
structure or function of the body pursuant to the DSHEA. Under the DSHEA,
dietary supplement labeling may bear “structure/function” claims, which are
claims that the products affect the structure or function of the body, without
prior FDA approval. They may not, without prior FDA approval, bear a claim
that
they can prevent, treat, cure, mitigate or diagnose disease, otherwise known
as
a “drug claim.” The final rule describes how the FDA will distinguish drug
claims from structure/function claims. Dietary supplements, like conventional
foods, are also permitted to make “health claims,” which are claims that are
exempt from regulation as “drug” claims pursuant to the amendments to the FDCA
established by the NLEA in 1990. A “health claim” is a claim, ordinarily
approved by FDA regulation, on a food or dietary supplement product’s labeling
that “characterizes the relationship of any substance to a disease or
health-related condition.” To help assure that foods, dietary supplements and
cosmetics comply with the provisions of the FDCA and FDA’s regulations, the FDA
has numerous enforcement tools, including the ability to issue warning letters,
initiate product seizures and injunctions and pursue criminal penalties.
The
manufacture of dietary supplements is subject to existing FDA current good
manufacturing practice, or cGMP, regulations for food. On June 22, 2007, the
FDA
issued new regulations relating to more detailed cGMP specifically for dietary
supplements. Under the new regulations, we qualify as a small business and
have
until June 2009 before the regulations apply to us. Currently, we are evaluating
our systems and facilities in light of the regulations and expect to be in
full
compliance by June 2009.
Advertisements
for our products are subject to regulation by the FTC. The FTC prohibits unfair
methods of competition and unfair or deceptive acts or practices in or affecting
commerce and provides that the dissemination of any false advertisement
pertaining to drugs, cosmetics or foods, including dietary supplements, is
an
unfair or deceptive practice. Under the FTC’s substantiation doctrine, an
advertiser must have a “reasonable basis” for all claims made about a product.
The failure to be able to adequately substantiate claims may be considered
either deceptive or unfair practices. In order to avoid a violation of the
FTC
standards, we endeavor to assure that we have adequate substantiation for all
advertising claims made for our products. In addition, the FTC has increased
its
scrutiny of the use of distributor testimonials. Although it is impossible
for
us to monitor all the product claims made by our independent distributors,
we
make efforts to monitor distributor testimonials and restrict inappropriate
distributor claims. The FTC has been more aggressive in pursuing enforcement
against dietary supplement products since the passage of DSHEA in 1994, and
has
brought numerous actions against dietary supplement companies, some resulting
in
several million dollar civil penalties and/or restitution as well as
court-ordered injunctions.
We
are
aware that, in some of our international markets, there has been recent adverse
publicity concerning products that contain substances generally referred to
as
“genetically modified organisms,” or GMOs. In some markets, the possibility of
health risks thought to be associated with GMOs has prompted proposed or actual
governmental regulation. When necessary, we have responded to government
regulations that forbid products containing GMOs by changing certain
unacceptable ingredients to non-GMO. Some of our products in certain markets
still contain substances that would be or might be classified as GMOs. We cannot
anticipate the extent to which regulations in these markets will restrict the
use of GMOs in our products or the impact of any regulations on our business
in
those markets. In response to any applicable future regulations, we intend
to
reformulate our products to satisfy the regulations. Compliance with regulatory
requirements in this area should not have a material adverse effect on our
business.
Sales
Program Regulation
Our
distribution and sales program is subject to regulation by the FTC and other
federal and state regulation as well as regulations in several countries in
which we engage in business. Various state agencies regulate multi-level
distribution services. We are required to register with, and submit information
to, certain of such agencies and we believe we have complied fully with such
requirements. We actively strive to comply with all applicable state and federal
laws and regulations affecting our products and our sales and distribution
programs. The Attorneys General of several states have taken an active role
in
investigating and prosecuting companies whose compensation plans they claim
violate local anti-pyramid and/or consumer protection statutes. We are unable
to
predict the effect such increased activity will have on our business in the
future nor are we able to predict the probability of future laws, regulations
or
interpretations which may be passed by state or federal regulatory authorities.
Federal
and state laws directed at network marketing programs have been adopted
throughout the years to prevent the use of fraudulent practices often
characterized as “pyramid schemes.” Illegal pyramid schemes compensate
participants primarily for the introduction or enrollment of additional
participants into the program. Often these schemes are characterized by large
up-front entry or sign-up fees, over-priced products of low value, little or
no
emphasis on the sale or use of products, high-pressure recruiting tactics and
claims of huge and quick financial rewards with little or no effort. Generally,
these laws are directed at ensuring that product sales ultimately are made
to
consumers and that advancement within such sales organizations is based on
sales
of products. We have obtained approval of our marketing program as required
in
all of the markets where we operate and do so for each country we enter.
15
We
believe that our network marketing system satisfies the standards and case
law
defining a legal marketing system. It is an ongoing part of our business to
monitor and respond to regulatory and legal developments, including those that
may affect our network marketing system. However, the regulatory and legal
requirements concerning network marketing systems do not include “bright line”
rules and are inherently fact-based.
Competition
The
business of developing and distributing nutritional and skin care products
such
as those we offer is highly competitive. Numerous manufacturers, distributors
and retailers compete for consumers and, in the case of other network marketing
companies, for distributors. Our competitors include both network marketing
companies such as Alticor Inc. (Amway Corp.), Avon Products Inc., Herbalife
Ltd., Mary Kay Inc., Melaleuca, Inc., Nature’s Sunshine Products Inc.,
NuSkin Enterprises Inc. and USANA Health Sciences Inc., as well as specialty
and
mass retail establishments. Our ability to remain competitive depends on the
underlying science and high quality of our products and our success in
recruiting and retaining distributors. The pool of individuals interested in
network marketing tends to be limited in each market and may be reduced to
the
extent other network marketing companies successfully recruit these individuals
into their businesses. We believe that we offer a rewarding compensation plan
with attractive financial benefits to compete for the time, attention and
commitment of distributors. Our compensation plan is seamless, permitting
international expansion.
Reliv
NOW
and Reliv Classic compete with numerous supplements that offer multi-vitamin
benefits. The Reliv Ultrim-Plus, Slimplicity and Cellebrate products compete
with other products in the weight loss market, including nationally advertised
products such as SlimFast. Many companies have entered, or have plans to enter,
the sports drink market in which Innergize! and ProVantage compete, a market
led
by Gatorade. With Arthaffect, FibRestore, ReversAge, CardioSentials, SoySentials
and the Reliv ReversAge Performance Enhancing Skin Care, we are in the specific
wellness needs product and anti-aging markets, which are extremely competitive
and led by the major food and skin care companies.
Employees
As
of
December 31, 2007, we and all of our subsidiaries had approximately
253 full-time employees compared with 246 such employees at the end of
2006.
Additional
Available Information
We
make
available, free of charge, copies of our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to these
reports as soon as reasonably practicable after such material is electronically
filed with, or furnished to the SEC pursuant to Section 13(a) or 15(d) of the
Exchange Act. This information is available on our corporate web site at
www.reliv.com
under
the “Investor Relations” section. This information may also be obtained from the
SEC’s on-line database located at www.sec.gov.
Item
No. 1A - Risk Factors
Risks
Related to Our Business
As
a company that distributes products through a network marketing system, we
experience constant turnover among our distributors. Our failure to establish
and maintain distributor relationships for any reason could negatively impact
sales of our products and harm our financial condition and operating results.
We
distribute our products exclusively through approximately 69,970 independent
distributors as of December 31, 2007, and we depend upon them directly for
substantially all of our sales. Our network marketing organization is headed
by
a relatively small number of key distributors. To increase our revenue, we
must
increase the number, or the productivity, of our distributors. Accordingly,
our
success depends in significant part upon our ability to attract, retain and
motivate a large base of distributors. The loss of a significant number of
distributors, including any key distributors, together with their downline
sales
organizations, could materially and adversely affect sales of our products
and
could impair our ability to attract new distributors.
16
In
2007,
approximately 65% of our distributors from 2006 renewed their Distributor
Agreements with us. Distributors who purchase our products for personal
consumption or for short-term income goals may stay with us for several months
to one year. Distributors who have committed time and effort to build a sales
organization, particularly our Master Affiliates and above, will generally
stay
for longer periods. Distributors have highly variable levels of training, skills
and capabilities. The turnover rate of our distributors, and our operating
results, can be adversely impacted if we and our upper-level distributor
leadership do not provide the necessary mentoring, training and business support
tools for new distributors to become successful salespeople in a short period
of
time.
Due
to the high level of competition in our industry, we might fail to increase
our
distributor base, which could negatively impact sales of our products.
In
our
efforts to attract and retain distributors, we compete with other network
marketing organizations, including those in the dietary and nutritional
supplement, weight management product and personal care and cosmetic product
industries. Our competitors include both network marketing companies such as
Alticor Inc. (Amway Corp.), Avon Products Inc., Herbalife Ltd., Mary Kay
Inc., Melaleuca, Inc., Nature’s Sunshine Products Inc., NuSkin Enterprises Inc.
and USANA Health Sciences Inc., as well as specialty and mass retail
establishments. Because the industry in which we operate is not particularly
capital-intensive or otherwise subject to high barriers to entry, it is
relatively easy for new competitors to emerge who will compete with us for
our
distributors and customers. In addition, the fact that our distributors may
easily enter and exit our network marketing program contributes to the level
of
competition that we face. For example, a distributor can enter or exit our
network marketing system with relative ease at any time without facing a
significant investment or loss of capital because (1) we have a low upfront
financial cost (generally $39.95) to become a distributor, (2) we do
not require any specific amount of time to work as a distributor, (3) we do
not insist on any special training to be a distributor and (4) we do not
prohibit a new distributor from working with another company. Our ability to
remain competitive, therefore, depends, in significant part, on our success
in
recruiting and retaining distributors through an attractive compensation plan,
the maintenance of an attractive product portfolio and other incentives. We
cannot ensure that our programs for recruitment and retention of distributors
will be successful, and if they are not, our financial condition and operating
results would be harmed.
Since
we cannot exert the same level of influence or control over our independent
distributors as we could were they our own employees, our distributors could
fail to comply with our distributor Policies and Procedures, which could result
in claims against us that could harm our financial condition and operating
results.
Our
distributors are independent contractors and, accordingly, we are not in a
position to directly provide the same direction, motivation and oversight as
we
would if our distributors were our own employees. As a result, there can be
no
assurance that our distributors will participate in our marketing strategies
or
plans, accept our introduction of new products or comply with our distributor
Policies and Procedures.
Our
Policies and Procedures for our independent distributors differ according to
the
various legal requirements of each country in which we do business. While our
Policies and Procedures are designed to govern distributor conduct and to
protect the goodwill associated with our trademarks, they can be difficult
to
enforce because of the large number of distributors and their independent
status. Violations by our distributors of applicable law or of our Policies
and
Procedures in dealing with customers could reflect negatively on our products
and operations, and harm our business reputation. In addition, it is possible
that a court could hold us civilly or criminally accountable based on vicarious
liability because of the actions of our independent distributors. If any of
these events occur, the value of an investment in our common shares could be
impaired.
17
If
we fail to further penetrate and expand our business in existing markets, then
the growth in sales of our products, along with our operating results, could
be
negatively impacted.
The
success of our business is to a large extent contingent on our ability to
continue to grow by further penetrating existing markets, both domestically
and
internationally. Our ability to further penetrate existing markets in which
we
compete is subject to numerous factors, many of which are out of our control.
For example, government regulations in both our domestic and international
markets can delay or prevent the introduction, or require the reformulation
or
withdrawal, of some of our products, which could negatively impact our business,
financial condition and results of operations. Also, our ability to increase
market penetration in certain countries may be limited by the finite number
of
persons in a given country inclined to pursue a network marketing business
opportunity. Moreover, our growth will depend upon improved training and other
activities that enhance distributor retention in our markets. As we continue
to
focus on expanding our existing international operations, these and other risks
associated with international operations may increase, which could harm our
financial condition and operating results.
Failure
to expand into, or to succeed in, new international markets will limit our
ability to grow sales of our products.
We
believe that our ability to achieve future growth is dependent in part on our
ability to continue our international expansion efforts. However, there can
be
no assurance that we would be able to enter new international markets on a
timely basis, or that new markets would be profitable. We must overcome
significant regulatory and legal barriers before we can begin marketing in
any
foreign market. Our operations in some markets also may be adversely affected
by
political, economic and social instability in foreign countries.
We
may be
required to reformulate certain of our products before commencing sales in
a
given country. Once we have entered a market, we must adhere to the regulatory
and legal requirements of that market. No assurance can be given that we would
be able to successfully reformulate our products in any of our potential
international markets to meet local regulatory requirements or attract local
customers. The failure to do so could result in increased costs of producing
products and adversely affect our financial condition. There can be no assurance
that we would be able to obtain and retain necessary permits and approvals.
Also,
it
is difficult to assess the extent to which our products and sales techniques
would be accepted or successful in any given country. In addition to significant
regulatory barriers, we may also encounter problems conducting operations in
new
markets with different cultures and legal systems from those encountered
elsewhere.
Additionally,
in many markets, other network marketing companies already have significant
market penetration, the effect of which could be to desensitize the local
distributor population to a new opportunity, or to make it more difficult for
us
to recruit qualified distributors. There can be no assurance that, even if
we
are able to commence operations in new foreign countries, there would be a
sufficiently large population of potential distributors inclined to participate
in a network marketing system offered by us. We believe our future success
could
depend in part on our ability to seamlessly integrate our business methods,
including our distributor compensation plan, across all markets in which our
products are sold. There can be no assurance that we would be able to further
develop and maintain a seamless compensation program.
We
rely on a limited number of products for the majority of our sales and any
reduction in the demand for or availability of these products would have an
adverse effect on our sales.
Reliv
Classic accounted for 21.3%, 20.7% and 23.9% of our net product sales in for
the
years ended December 31, 2007, 2006 and 2005, respectively, and, combined
with Reliv NOW, Innergize! and FibRestore, these four products accounted
for 64.5%, 71.3% and 69.5% of our net product sales for the years ended
December 31, 2007, 2006 and 2005. If demand for any of these products
decreases significantly, government regulation restricts the sale of these
products, we are unable to adequately source or deliver these products or we
cease offering any of these products for any reason without a suitable
replacement, our business, financial condition and results of operations would
be materially and adversely affected.
18
The
failure to introduce or to gain distributor and market acceptance of new
products could have a negative effect on our business.
The
development and introduction of new products may be a factor in maintaining
and
developing our distributor network and customers. If we fail to introduce new
products on a timely basis, our distributor productivity could be harmed. In
addition, if any new products fail to gain market acceptance, are restricted
by
regulatory requirements, or have quality problems, this would harm our results
of operations. Factors that could affect our ability to continue to introduce
new products include, among others, limited capital resources, government
regulations, the inability to attract and retain qualified research and
development staff, proprietary protections of competitors that may limit our
ability to offer comparable products and any failure to anticipate changes
in
consumer tastes and buying preferences. Additionally, our operating results
could be harmed if our existing and new products do not generate sufficient
interest to retain existing distributors and attract new distributors.
The
business of marketing nutritional products is sensitive to the introduction
of
new products or nutritional technologies, including various prescription drugs,
which may rapidly capture a significant share of the market. Our present or
future competitors may be able to develop products that are comparable or
superior to those we offer, adapt more quickly than we do to new technologies,
evolving industry trends and standards or customer requirements or devote
greater resources to the development, promotion and sale of their products
than
we do.
Since
we conduct all of our manufacturing operations at one facility, any interruption
in our ability to operate could have a material adverse effect on our financial
condition and operating results.
We
conduct our manufacturing operations at our Chesterfield, Missouri facility
and
store a substantial amount of raw materials and finished goods on site. An
event
such as a fire, flood or natural disaster could prevent us from operating for
a
period of time and could adversely affect our financial condition and operating
results.
We
may incur material product liability claims, which could increase our costs
and
harm our financial condition and operating results.
Our
products consist of herbs, vitamins, minerals and other ingredients that are
classified as foods or dietary supplements and are not subject to pre-market
regulatory approval in the United States. Our products could contain
contaminated substances, and some of our products contain innovative ingredients
that do not have long histories of human consumption. As a marketer of dietary
and nutritional supplements and other products that are ingested by consumers
or
applied to their bodies, we have been, and may again be, subjected to various
product liability claims, including that the products contain contaminants,
the
products include inadequate instructions as to their uses, or the products
include inadequate warnings concerning side effects and interactions with other
substances. It is possible that product liability claims could increase our
costs, and adversely affect our revenues and operating income. Moreover,
liability claims arising from a serious adverse event may increase our costs
through higher insurance premiums and deductibles, and may make it more
difficult to secure adequate insurance coverage in the future. In addition,
our
product liability insurance may fail to cover future product liability claims,
thereby requiring us to pay substantial monetary damages and adversely affecting
our business.
We
rely on independent third parties for the ingredients used in our products.
If
these third parties fail to reliably supply ingredients to us at required
levels, then our financial condition and operating results could be harmed.
In
the
event any of our third party suppliers were to become unable or unwilling to
continue to provide us with ingredients in required volumes and at suitable
quality levels, we would be required to identify and obtain acceptable
replacement sources. There is no assurance that we would be able to obtain
alternative supply sources on a timely basis. An extended interruption in the
supply of ingredients would result in the loss of sales. In addition, any actual
or perceived degradation of product quality as a result of reliance on third
party suppliers may have an adverse effect on our sales or result in increased
product returns and buybacks. We obtain the key component of Arthaffect through
a non-exclusive licensing agreement. In the event that we were unable to obtain
that ingredient from our supplier, we could have difficulty obtaining an
acceptable alternative.
19
We
depend on the integrity and reliability of our information technology
infrastructure, and any related inadequacies may result in substantial
interruptions to our business.
Our
ability to timely provide products to our distributors and their customers,
and
services to our distributors, depends on the integrity of our information
technology system. The most important aspect of our information technology
infrastructure is the system through which we record and track distributor
sales, volume points, royalty overrides, bonuses and other incentives. Our
primary data sets are archived and stored at a third party secure site. We
have
encountered, and may encounter in the future, errors in our software or our
enterprise network, or inadequacies in the software and services supplied by
our
vendors. Any such errors or inadequacies that we may encounter in the future
may
result in substantial interruptions to our services and may damage our
relationships with, or cause us to lose, our distributors if the errors or
inadequacies impair our ability to track sales and pay royalty overrides,
bonuses and other incentives, which would harm our financial condition and
operating results. Such errors may be expensive or difficult to correct in
a
timely manner, and we may have little or no control over whether any
inadequacies in software or services supplied to us by third parties are
corrected, if at all. Despite any precautions, the occurrence of a natural
disaster or other unanticipated problems could result in interruptions in
services and reduce our revenue and profits.
If
we fail to protect our trademarks, then our ability to compete could be
negatively affected, which would harm our financial condition and operating
results.
The
market for our products depends to a significant extent upon the goodwill
associated with our trademarks. We own, or have licenses to use, the material
trademark rights used in connection with the packaging, marketing and
distribution of our products in the markets where those products are sold.
Therefore, trademark protection is important to our business. Although most
of
our trademarks are registered in the United States and in certain foreign
countries in which we operate, we may not be successful in asserting trademark
protection. In addition, the laws of certain foreign countries may not protect
our intellectual property rights to the same extent as the laws of the United
States. The loss or infringement of our trademarks could impair the goodwill
associated with our brands and harm our reputation, which would harm our
financial condition and operating results.
If
our intellectual property is not adequate to provide us with a competitive
advantage or to prevent competitors from replicating our products, or if we
infringe the intellectual property rights of others, then our financial
condition and operating results would be harmed.
Our
future success and ability to compete depend, in part, upon our ability to
timely produce innovative products and product enhancements that motivate our
distributors and customers, which we attempt to protect under a combination
of
patents, copyrights, trademark and trade secret laws, confidentiality procedures
and contractual provisions. However, not all of our products are patented
domestically or abroad, and the legal protections afforded by our common law
and
contractual proprietary rights in our products provide only limited protection
and may be time-consuming and expensive to enforce and/or maintain. Further,
despite our efforts, we may be unable to prevent third parties from infringing
upon or misappropriating our proprietary rights or from independently developing
non-infringing products that are competitive with, equivalent to and/or superior
to our products. Additionally, third parties may claim that products we have
independently developed infringe upon their intellectual property rights.
Monitoring
infringement and/or misappropriation of intellectual property can be difficult
and expensive, and we may not be able to detect any infringement or
misappropriation of our proprietary rights. Even if we detect infringement
or
misappropriation of our proprietary rights, litigation to enforce these rights
could cause us to divert financial and other resources away from our business
operations. Further, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the United States.
If
we lose the services of members of our senior management team or fail to attract
and retain qualified scientific or production personnel, then our financial
condition and operating results would be harmed.
We
depend
on the continued services of our Chief Executive Officer and founder, Robert
L.
Montgomery, and our current senior management team and the relationships that
they have developed with our upper-level distributor leadership. Although we
have entered into employment agreements with many members of our senior
management team, and do not believe that any of them are planning to leave
or
retire in the near term, we cannot assure you that our senior managers will
remain with us. The loss or departure of any member of our senior management
team, in particular Mr. Montgomery, could negatively impact our distributor
relations and operating results. Mr. Montgomery’s employment agreement
currently allows him at any time either to (1) reduce his level of service
to us by approximately one-half with a corresponding decrease in position and
base compensation and a 25% decrease in incentive compensation or
(2) terminate his employment agreement and continue in a consulting
capacity for 15 years at 30% of his average annual compensation over the
previous five years as a consulting fee. The loss of such key personnel could
negatively impact our ability to implement our business strategy, and our
continued success will also be dependent upon our ability to retain existing,
and attract additional, qualified personnel to meet our needs.
20
Recruiting
and retaining qualified scientific and production personnel to perform research
and development work and product manufacturing are also critical to our success.
Because the industry in which we compete is very competitive, we face
significant challenges in attracting and retaining this qualified personnel
base. We generally do not enter into employment agreements requiring these
employees to continue in our employment for any period of time.
We
may be held responsible for certain taxes relating to our distributors, which
could harm our financial condition and operating results.
Under
current law, our distributors in the United States and the other countries
in
which we operate are treated for income tax purposes as independent contractors
and compensation paid to them is not subject to withholding by us. The
definition of independent contractor has been challenged in the past and any
changes could possibly jeopardize the exempt status enjoyed by direct sellers
and negatively impact our recruiting efforts. The network marketing industry
has
strongly opposed such bills as they relate to direct sellers. States have become
increasingly active in this area as well. To date, the status of direct sellers
as independent contractors has not been affected. However, there is no assurance
that future legislation at the federal or state level, or in countries other
than the United States, affecting direct sellers will not be enacted.
Risks
Related to Our Industry
The
nutritional products industry is highly competitive.
The
business of marketing nutritional products is highly competitive. The
nutritional products industry includes numerous manufacturers, distributors,
marketers, retailers and physicians that actively compete for the business
of
consumers both in the United States and abroad. Additionally, companies in
other
industries, such as the pharmaceutical industry, could compete in the
nutritional products industry. Some of these competitors have longer operating
histories, significantly greater financial, technical, product development,
marketing and sales resources, greater name recognition, larger established
customer bases and better-developed distribution channels than we do.
Adverse
publicity associated with our products, ingredients or network marketing
program, or those of similar companies, could harm our financial condition
and
operating results.
The
size
of our distribution network and the results of our operations may be
significantly affected by the public’s perception of us and similar companies.
This perception is dependent upon opinions concerning:
|
•
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the
safety and quality of our products and ingredients;
|
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•
|
the
safety and quality of similar products and ingredients distributed
by
other companies;
|
|
•
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regulatory
investigations of us, our competitors and our respective products;
|
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•
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the
actions of our current or former distributors;
|
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•
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our
network marketing program; and
|
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•
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the
network marketing business generally.
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Adverse
publicity concerning any actual or purported failure by us or our distributors
to comply with applicable laws and regulations regarding product claims and
advertising, good manufacturing practices, the regulation of our network
marketing program, the licensing of our products for sale in our target markets
or other aspects of our business, whether or not resulting in enforcement
actions or the imposition of penalties, could have an adverse effect on the
reputation of our company and could negatively affect our ability to attract,
motivate and retain distributors, which would negatively impact our ability
to
generate revenue. We cannot ensure that all distributors will comply with
applicable legal requirements relating to the advertising, labeling, licensing
or distribution of our products.
In
addition, our distributors’ and consumers’ perception of the safety and quality
of our products and ingredients, as well as similar products and ingredients
distributed by other companies, can be significantly influenced by national
media attention, publicized scientific research or findings, widespread product
liability claims and other publicity concerning our products or ingredients
or
similar products and ingredients distributed by other companies. Adverse
publicity, whether or not accurate or resulting from consumers’ use or misuse of
our products, that associates consumption of our products or ingredients or
any
similar products or ingredients with illness or other adverse effects, or that
questions the benefits of our or similar products or claims that any such
products are ineffective, inappropriately labeled or have inaccurate
instructions as to their use, could negatively impact our reputation or the
market demand for our products.
21
We
are affected by extensive laws, governmental regulations, administrative
determinations, court decisions and similar constraints, both domestically
and
abroad, and our or our distributors’ failure to comply with these restraints
could lead to the imposition of significant penalties or claims, which could
harm our financial condition and operating results.
In
both
domestic and foreign markets, the formulation, manufacturing, packaging,
labeling, distribution, importation, exportation, licensing, sale and storage
of
our products are affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar constraints. There
can be no assurance that we or our distributors are in compliance with all
of
these regulations. Our or our distributors’ failure to comply with these
regulations or new regulations could lead to the imposition of significant
penalties or claims and could negatively impact our business. In addition,
the
adoption of new regulations or changes in the interpretations of existing
regulations may result in significant compliance costs or discontinuation of
product sales and may negatively impact the marketing of our products, resulting
in significant loss of sales.
On
April 12, 2006, the Federal Trade Commission issued its Notice of Proposed
Rulemaking in respect of The Business Opportunity Rule, R511993. The proposed
rule, if enacted in its current form, would likely cause us, as well as most
other direct sellers, to be regulated as a seller of business opportunities
in
the United States. Under the current Business Opportunity Rule, we do not
qualify as a seller of a business opportunity because we offer U.S. distributors
the opportunity to join our business for $40, well below the $500 threshold
required for a company to be subject to the current rule. The proposed rule
would eliminate that threshold. In addition, the proposed rule would require
all
sellers of business opportunities to deliver
written disclosure of certain information to a prospective purchaser seven
days
prior to the time the prospective purchaser could sign any agreement or make
any
payment
in
connection with the business opportunity. The information that a seller of
a
business opportunity would have to provide all prospective purchasers would
include: (1) the seller’s and distributor’s identification information, (2)
whether an earnings claim is made and, if so, provide a detailed earnings claim
statement with substantiating information and certain representations relating
to the earnings of other business opportunity purchasers, (3) legal actions
involving deceptive practices or other matters filed against the seller, its
affiliates and other related parties and/or the presenting distributor in the
last 10 years, (4) whether a cancellation or refund policy is available and,
if
so, a statement describing the policy, (5) the number of business opportunity
purchasers that have canceled within the past two years, and (6) a reference
list of the 10 nearest current or past business opportunity purchasers to the
prospect, with personal information available to allow the prospect to contact
a
listed purchaser. We, along with the Direct Selling Association, other direct
selling companies, and other interested parties have filed comments with the
FTC
opposing adoption of the proposed rule in its current form and suggesting
alternative means to regulate fraudulent business activities without imposing
undue burdens on legitimate companies in the direct selling industry. According
to information we have received from the Direct Selling Association, we expect
that the adoption of a final rule will not likely occur until after public
hearings and discussions are held between members of the direct selling industry
and the staff of the Federal Trade Commission, which may delay adoption of
the
final rule a number of years and result in a final rule that is substantially
different from the proposed rule. Notwithstanding the foregoing, if the business
opportunity rule is adopted as proposed, it could negatively impact our business
and result in a decrease in our ability to attract new distributors in the
United States.
On
June
22, 2007, the FDA announced a final rule establishing current good manufacturing
practices, or cGMPs, affecting the manufacture, packing and holding of dietary
supplements. The new rule creates standards to ensure that dietary supplements
and dietary ingredients are not adulterated with contaminants or impurities
and
are labeled to accurately reflect the active ingredients and other ingredients
in the products. It also includes requirements for designing and constructing
physical plants, establishing quality control procedures, and testing
manufactured dietary ingredients and dietary supplements, as well as
requirements for maintaining records. Under the new rule, we are considered
a
small business and, accordingly, have until June 2009 to comply with the final
rule. Currently, we are evaluating the impact of the final rule on our
manufacturing facilities and procedures. If we are required to significantly
alter our manufacturing facilities and/or procedures or make a material
investment in order to comply with the final rule, it could have a material
adverse impact on our financial condition and operating results.
22
Our
network marketing program could be found not to be in compliance with current
or
newly adopted laws or regulations in one or more markets, which could prevent
us
from conducting our business in these markets and harm our financial condition
and operating results.
Our
network marketing program is subject to a number of federal and state
regulations administered by the Federal Trade Commission and various state
agencies in the United States as well as regulations on network marketing in
foreign markets administered by foreign agencies. We are subject to the risk
that, in one or more markets, our network marketing program could be found
not
to be in compliance with applicable law or regulations. Regulations applicable
to network marketing organizations generally are directed at preventing
fraudulent or deceptive schemes, often referred to as “pyramid” or “chain sales”
schemes, by ensuring that product sales ultimately are made to consumers and
that advancement within an organization is based on sales of the organization’s
products rather than investments in the organization or other non-retail
sales-related criteria. The regulatory requirements concerning network marketing
programs do not include “bright line” rules and are inherently fact-based. Thus,
even in jurisdictions where we believe that our network marketing program is
in
full compliance with applicable laws or regulations governing network marketing
systems, we are subject to the risk that these laws or regulations or the
enforcement or interpretation of these laws and regulations by governmental
agencies or courts could change. The failure of our network marketing program
to
comply with current or newly adopted regulations could negatively impact our
business in a particular market or in general. An adverse determination could
(1) require us to make modifications to our network marketing system,
(2) result in negative publicity or (3) have a negative impact on
distributor morale. In addition, adverse rulings by courts in any proceedings
challenging the legality of multi-level marketing systems, even in those not
involving us directly, could have a material adverse effect on our operations.
We
also
are subject to the risk of private party challenges to the legality of our
network marketing program. The multi-level marketing programs of other companies
have been successfully challenged in the past. An adverse judicial determination
with respect to our network marketing program, or in proceedings not involving
us directly but which challenge the legality of multi-level marketing systems
in
any market in which we operate, could negatively impact our business.
Changes
in consumer preferences and discretionary spending could negatively impact
our
operating results.
Our
business is subject to changing consumer trends and preferences. Our continued
success depends in part on our ability to anticipate and respond to these
changes, and we may not respond in a timely or commercially appropriate manner
to such changes. Furthermore, the nutritional supplement industry is
characterized by rapid and frequent changes in demand for products and new
product introductions and enhancements. Our failure to accurately predict these
trends could negatively impact consumer opinion of our products, which in turn
could harm our customer and distributor relationships and cause the loss of
sales. The success of our new product offerings and enhancements depends upon
a
number of factors, including our ability to:
|
•
|
accurately
anticipate customer needs;
|
|
•
|
innovate
and develop new products or product enhancements that meet these
needs;
|
|
•
|
successfully
commercialize new products or product enhancements in a timely
manner;
|
|
•
|
price
our products competitively;
|
|
•
|
manufacture
and deliver our products in sufficient volumes and in a timely
manner; and
|
|
•
|
differentiate
our product offerings from those of our competitors.
|
If
we do
not introduce new products or make enhancements to meet the changing needs
of
our customers in a timely manner, some of our products could be rendered
obsolete, which could negatively impact our revenues, financial condition and
operating results.
Additionally,
the success of our business and our operating results is dependent on
discretionary spending by consumers. A decline in discretionary spending could
adversely affect our business, financial condition, operating results and cash
flows. Our business could also be adversely affected by general economic
conditions, demographic trends, consumer confidence in the economy and changes
in disposable consumer income.
23
Risks
Related to Ownership of Our Common Stock
The
trading price of our common shares is likely to be volatile.
The
trading price of our common shares has been and is likely to be subject to
fluctuations. Factors affecting the trading price of our common shares may
include:
|
•
|
fluctuations
in our quarterly operating and earnings per share results;
|
|
•
|
material
developments with respect to future acquisitions;
|
|
•
|
loss
of key personnel and key distributors;
|
|
•
|
announcements
of technological innovations or new products by us or our competitors;
|
|
•
|
delays
in the development and introduction of new products;
|
|
•
|
our
failure to timely address changing customer or distributor preferences;
|
|
•
|
legislative
or regulatory changes;
|
|
•
|
general
trends in the industry;
|
|
•
|
recommendations
and/or changes in estimates by equity and market research analysts;
|
|
•
|
biological
or medical discoveries;
|
|
•
|
disputes
and/or developments concerning intellectual property, including
patents
and litigation matters;
|
|
•
|
sales
of common stock by our existing holders, in particular sales by
management;
|
|
•
|
securities
class action or other litigation;
|
|
•
|
developments
in our relationships with current or future distributors, customers
or
suppliers; and
|
|
•
|
general
economic conditions, both in the United States and abroad.
|
In
addition, if the market for health and nutrition or network marketing stocks,
or
the stock market in general, experiences a loss of investor confidence, the
trading price of our common shares could decline for reasons unrelated to our
business or financial results. The trading price of our common shares might
also
decline in reaction to events that affect other companies in our industry even
if these events do not directly affect us.
Our
Chief Executive Officer, together with his family members and affiliates,
controls a substantial portion of our combined stockholder voting power, and
his
interests may be different from yours.
Our
Chief
Executive Officer, Robert L. Montgomery, together with his family (including
his
sons R. Scott Montgomery and Ryan A. Montgomery) and affiliates, has the
ability to influence the election and removal of the members of our board of
directors and, as a result, to influence the future direction and operations
of
our company. As of March 1, 2008, Robert L. Montgomery, his family and
affiliates beneficially owned approximately 21.8% of our common stock.
Accordingly, they may significantly influence decisions concerning business
opportunities, declaring dividends, issuing additional shares of common stock
or
other securities and the approval of any merger, consolidation or sale of all
or
substantially all of our assets. They may make decisions that are adverse to
your interests.
Limited
daily trading volume of our common stock may contribute to its price volatility.
Our
common stock trades on the NASDAQ Global Select Market. During 2007, the average
daily trading volume for our common stock as reported by the NASDAQ Global
Select Market was approximately 45,000 shares. As a result, relatively small
trades may have a significant impact on the price of our common stock.
Future
sales of shares by existing stockholders, including management stockholders,
could cause our stock price to decline.
If
our
existing stockholders sell, or indicate an intention to sell, substantial
amounts of our common shares in the public market, the trading price of our
common shares could decline. The sale of substantial amounts of Mr. Robert
L. Montgomery’s or management’s stock in the public market, or the perception
that these sales may occur, could reduce the market price of our stock.
24
We
may issue preferred stock in the future, with rights senior to our common stock.
We
have
authorized in our certificate of incorporation the issuance of up to three
million shares of preferred stock. We may issue shares of preferred stock in
one
or more new series. Our board of directors may determine the terms of the
preferred stock without further action by our stockholders. These terms may
include voting rights, preferences as to dividends and liquidation, conversion
and redemption rights, and sinking fund provisions. Although we have no present
plans to issue shares of preferred stock or to create new series of preferred
stock, if we do issue preferred stock, it could affect the rights, or even
reduce the value, of our common stock.
Item
No. 1B - Unresolved Staff Comments
As
of the
filing of this Annual Report on Form 10-K, we had no unresolved comments from
the staff of the Securities and Exchange Commission that were received not
less
than 180 days before the end of our 2007 fiscal year.
Item
No. 2 - Properties
We
own
approximately six acres of land and a building containing approximately
126,000 square feet of office, manufacturing and warehouse space located in
Chesterfield, Missouri, where we maintain our corporate headquarters and sole
manufacturing facility. We believe that our worldwide facilities are suitable
and adequate in relation to our present and immediate future needs.
The
following table summarizes information related to our worldwide facilities
as of
December 31, 2007:
|
Location
|
Nature
of Use
|
Square
Feet
|
Owned/Leased
|
|||||||
|
Chesterfield,
MO, USA
|
corporate
headquarters/call center/manufacturing/warehouse
|
126,000
|
Owned
|
|||||||
|
Seven
Hills (Sydney), Australia
|
central
office/ warehouse/distribution
|
8,900
|
Leased
|
|||||||
|
Oakville,
Ontario, Canada
|
warehouse/distribution
|
2,100
|
Leased
|
|||||||
|
Mexico
City, Mexico
|
central
office/ warehouse/distribution
|
28,000
|
Leased
|
|||||||
|
Makati
City (Manila), Philippines
|
central
office/ warehouse/distribution
|
8,100
|
Leased
|
|||||||
|
Birmingham,
England, UK
|
central
office/ warehouse/distribution
|
2,200
|
Leased
|
|||||||
|
Petaling
Jaya, Malaysia
|
central
office/call center
|
6,500
|
Leased
|
|||||||
|
Dietzenbach
(Frankfurt), Germany
|
central
office/ warehouse/distribution
|
8,300
|
Leased
|
|||||||
Item
No. 3 - Legal Proceedings
From
time
to time, we are involved in litigation incidental to the conduct of our
business. We do not believe that any current proceedings will have a material
adverse effect on our business, financial condition, results of operations
or
cash flows.
Item
No. 4 - Submission of Matters to a Vote of Security
Holders
No
matters were submitted to a vote of security holders during the fourth quarter
of 2007.
25
PART
II
Item
No. 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
Our
common stock is listed on the NASDAQ Global Select Market under the symbol:
RELV. The following table sets forth the high and low sales prices of our common
stock and the quarterly dividends per share paid on our common stock during
the
years ended December 31, 2007 and 2006.
|
High
|
Low
|
Dividend
|
||||||||
|
Year
Ending December 31, 2007
|
||||||||||
|
Fourth
Quarter
|
$
|
10.07
|
$
|
7.50
|
$
|
0.05
|
||||
|
Third
Quarter
|
11.60
|
8.94
|
-
|
|||||||
|
Second
Quarter
|
11.56
|
9.53
|
0.05
|
|||||||
|
First
Quarter
|
11.49
|
8.57
|
-
|
|||||||
|
Year
Ending December 31, 2006
|
||||||||||
|
Fourth
Quarter
|
10.25
|
8.10
|
0.05
|
|||||||
|
Third
Quarter
|
10.37
|
6.46
|
-
|
|||||||
|
Second
Quarter
|
12.86
|
9.14
|
0.05
|
|||||||
|
First
Quarter
|
18.69
|
11.00
|
-
|
|||||||
As
of
March 1, 2008, there were approximately 2,180 holders of record of our common
stock and an additional 4,990 beneficial owners, including shares of common
stock held in street name. During the fourth quarter of 2007, we did not
repurchase any shares of our common stock under our share repurchase plan
authorized by our Board of Directors in May 2007 that provides for share
repurchases of up to $15 million through April 2010.
26
Stock
Performance Graph
The
following graph compares, for the period January 1, 2003 to December 31, 2007,
the cumulative total return (assuming reinvestment of dividends) on our common
stock with (i) NASDAQ Composite Index (U.S.) and (ii) a peer group including
the
following companies: Mannatech, Inc., Nature’s Sunshine Products, Inc., and
USANA Health Sciences, Inc. The peer group consists of other companies marketing
nutritional products through direct sales. The graph assumes an investment
of
$100 on January 1, 2003, in our common stock and each of the other investment
categories.
The
historical stock prices of our common stock shown on the graph below are not
necessarily indicative of future price performance. Per share value as of
December 31, 2003, 2004, 2005, 2006 and 2007 is based on the common stock’s
closing price as of such date. All prices reflect a 5-for-4 stock split issued
to holders of record on November 14, 2003.
The
information provided under the heading “Performance Graph” shall not be
considered “filed” for purposes of Section 18 of the Securities Exchange Act of
1934 or incorporated by reference in any filing under the Securities Act of
1933
or the Securities Exchange Act of 1934.
|
Base
Period
|
|||||||
|
|
|
12/02
|
12/03
|
12/04
|
12/05
|
12/06
|
12/07
|
|
Reliv'
International, Inc.
|
100.00
|
137.34
|
241.48
|
358.84
|
238.65
|
227.72
|
|
|
NASDAQ
Composite
|
100.00
|
149.75
|
164.64
|
168.60
|
187.83
|
205.22
|
|
|
Peer
Group
|
100.00
|
319.51
|
468.30
|
441.49
|
501.29
|
331.01
|
27
Item
No. 6 - Selected Financial Data
The
following selected financial data are derived from our audited consolidated
financial statements. The data should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in this Annual Report on Form 10-K and our audited consolidated
financial statements, related notes and other financial information included
in
this Annual Report on Form 10-K. Our historical results are not necessarily
indicative of our results of operations for future periods.
|
Year
Ended
December
31,
|
||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||
|
Statements
of Operations Data:
|
||||||||||||||||
|
Product
sales
|
$
|
99,465,246
|
$
|
105,497,420
|
$
|
102,045,383
|
$
|
87,565,109
|
$
|
69,679,404
|
||||||
|
Handling
and freight income
|
11,592,258
|
11,969,737
|
11,519,781
|
9,417,324
|
7,280,319
|
|||||||||||
|
Net
sales
|
111,057,504
|
117,467,157
|
113,565,164
|
96,982,433
|
76,959,723
|
|||||||||||
|
Costs
and expenses:
|
||||||||||||||||
|
Cost
of products sold
|
19,100,527
|
19,519,904
|
19,264,347
|
16,662,935
|
13,228,050
|
|||||||||||
|
Distributor
royalties and commissions
|
44,298,744
|
47,127,026
|
45,479,062
|
38,622,537
|
29,916,744
|
|||||||||||
|
Selling,
general, and administrative
|
40,363,322
|
38,716,529
|
36,348,526
|
32,710,657
|
26,438,447
|
|||||||||||
|
Total
costs and expenses
|
103,762,593
|
105,363,459
|
101,091,935
|
87,996,129
|
69,583,241
|
|||||||||||
|
Income
from operations
|
7,294,911
|
12,103,698
|
12,473,229
|
8,986,304
|
7,376,482
|
|||||||||||
|
Other
income (expense):
|
||||||||||||||||
|
Interest
income
|
634,446
|
692,595
|
238,473
|
118,467
|
91,038
|
|||||||||||
|
Interest
expense
|
(1,373
|
)
|
(50,156
|
)
|
(313,329
|
)
|
(243,118
|
)
|
(234,956
|
)
|
||||||
|
Other
income
|
314,131
|
256,966
|
101,043
|
146,036
|
66,876
|
|||||||||||
|
Total
other income (expense)
|
947,204
|
899,405
|
26,187
|
21,385
|
(77,042
|
)
|
||||||||||
|
Income
before income taxes
|
8,242,115
|
13,003,103
|
12,499,416
|
9,007,689
|
7,299,440
|
|||||||||||
|
Provision
for income taxes
|
3,201,000
|
5,105,000
|
4,978,000
|
3,621,000
|
2,902,000
|
|||||||||||
|
Net
income
|
5,041,115
|
7,898,103
|
7,521,416
|
5,386,689
|
4,397,440
|
|||||||||||
|
Preferred
dividends accrued and paid
|
—
|
—
|
—
|
12,292
|
56,762
|
|||||||||||
|
Net
income available to common shareholders
|
$
|
5,041,115
|
$
|
7,898,103
|
$
|
7,521,416
|
$
|
5,374,397
|
$
|
4,340,678
|
||||||
|
Earnings
per common share - Basic
|
$
|
0.31
|
$
|
0.48
|
$
|
0.47
|
$
|
0.34
|
$
|
0.29
|
||||||
|
Weighted
average shares
|
16,094,000
|
16,465,000
|
15,885,000
|
15,662,000
|
14,969,000
|
|||||||||||
|
Earnings
per common share - Diluted
|
$
|
0.31
|
$
|
0.47
|
$
|
0.46
|
$
|
0.31
|
$
|
0.26
|
||||||
|
Weighted
average shares
|
16,303,000
|
16,727,000
|
16,388,000
|
17,137,000
|
16,706,000
|
|||||||||||
|
Cash
dividends declared per common share
|
$
|
0.100
|
$
|
0.100
|
$
|
0.075
|
$
|
0.065
|
$
|
—
|
||||||
|
As
of December 31,
|
||||||||||||||||
|
Balance
Sheet Data:
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
Cash
and cash equivalents
|
$
|
11,694,699
|
$
|
9,332,810
|
$
|
5,653,594
|
$
|
10,151,503
|
$
|
7,902,508
|
||||||
|
Working
capital
|
12,513,543
|
16,229,922
|
3,963,741
|
11,466,647
|
7,256,295
|
|||||||||||
|
Total
assets
|
33,606,771
|
37,282,220
|
25,981,423
|
30,996,667
|
24,680,916
|
|||||||||||
|
Long-term
debt, less current maturities
|
—
|
—
|
2,211,065
|
3,357,691
|
3,700,138
|
|||||||||||
|
Total
stockholders’ equity
|
23,805,201
|
27,733,851
|
12,564,828
|
18,190,753
|
13,072,378
|
|||||||||||
28
Item
No. 7 - Management’s Discussion and Analysis of
Financial Condition
and Results of Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with “Item No. 6 - Selected Financial
Data” and our financial statements and related notes included elsewhere in this
Annual Report on Form 10-K. The following discussion and analysis discusses
the
financial condition and results of our operations on a consolidated basis,
unless otherwise indicated.
Overview
We
are a
developer, manufacturer and marketer of a proprietary line of nutritional
supplements addressing basic nutrition, specific wellness needs, weight
management and sports nutrition. We also offer a line of skin care products.
We
sell our products through an international network marketing system using
independent distributors. Sales in the United States represented approximately
88.5% of worldwide net sales for the year ended December 31, 2007 compared
to
approximately 90.0% for the year ended December 31, 2006. Our international
operations currently generate sales through distributor networks in Australia,
Canada, Germany, Ireland, Malaysia, Mexico, New Zealand, the Philippines,
Singapore and the United Kingdom. We also operate on a limited basis in
Austria and the Netherlands from our German office.
We
derive
our revenues principally through product sales made by our global independent
distributor base, which, as of December 31, 2007, consisted of approximately
69,970 distributors. Our sales can be affected by several factors, including
our
ability to attract new distributors and retain our existing distributor base,
our ability to properly train and motivate our distributor base and our ability
to develop new products and successfully maintain our current product line.
All
of
our sales to distributors outside the United States are made in the
respective local currency; therefore, our earnings and cash flows are subject
to
fluctuations due to changes in foreign currency rates as compared to the
U.S. dollar. As a result, exchange rate fluctuations may have an effect on
sales and gross margins. Accounting practices require that our results from
operations be converted to U.S. dollars for reporting purposes.
Consequently, our reported earnings may be significantly affected by
fluctuations in currency exchange rates, generally increasing with a weaker
U.S. dollar and decreasing with a strengthening U.S. dollar. Products
manufactured by us for sale to our foreign subsidiaries are transacted in
U.S. dollars. From time to time, we enter into foreign exchange forward
contracts to mitigate our foreign currency exchange risk.
Components
of Net Sales and Expense
Product
sales represent the actual product purchase price typically paid by our
distributors, after giving effect to distributor allowances, which can range
between 20% to 40% of suggested retail price, depending on the rank of a
particular distributor. Handling and freight income represents the amounts
billed to distributors for shipping costs. We record net sales and the related
commission expense when the merchandise is shipped.
Our
primary expenses include cost of products sold, distributor royalties and
commissions and selling, general and administrative expenses.
Cost
of
products sold primarily consists of expenses related to raw materials, labor,
quality control and overhead directly associated with production of our products
and sales materials, as well as shipping costs relating to the shipment of
products to distributors, and duties and taxes associated with product exports.
Cost of products sold is impacted by the cost of the ingredients used in our
products, the cost of shipping the distributors’ orders, along with our
efficiency in managing the production of our products.
Distributor
royalties and commissions are monthly payments made to Master Affiliates and
above, based on products sold by Master Affiliates and above sponsored by such
Master Affiliates or higher-level distributors. Based on our distributor
agreements, these expenses typically approximate 23% of sales at suggested
retail. Also, we include other sales leadership bonuses, such as Ambassador
bonuses, in this line item. We generally expect total distributor royalties
and
commissions to approximate 40% of our net sales. Distributor royalties and
commissions are directly related to the level of our sales and, absent any
changes in our distributor compensation plan, should continue at comparable
levels as a percentage of net sales as in recent periods.
29
Selling,
general and administrative expenses include the compensation and benefits paid
to our employees, all other selling expenses, marketing, promotional expenses,
travel and other corporate administrative expenses. These other corporate
administrative expenses include professional fees, depreciation and
amortization, occupancy costs, communication costs and other similar operating
expenses. Selling, general and administrative expenses can be affected by a
number of factors, including staffing levels and the cost of providing
competitive salaries and benefits; the amount we decide to invest in distributor
training and motivational initiatives; the cost of regulatory compliance, such
as the costs incurred to comply with the various provisions of the
Sarbanes-Oxley Act of 2002; and other administrative costs.
Results
of Operations
The
following table sets forth selected results of our operations expressed as
a
percentage of net sales for the years ended December 31, 2007, 2006 and 2005.
Our results of operations for the periods described below are not necessarily
indicative of results of operations for future periods.
|
Year
ended December 31,
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Net
sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||
|
Costs
and expenses:
|
||||||||||
|
Cost
of products sold
|
17.2
|
16.6
|
17.0
|
|||||||
|
Distributor
royalties and commissions
|
39.9
|
40.1
|
40.0
|
|||||||
|
Selling,
general and administrative
|
36.3
|
33.0
|
32.7
|
|||||||
|
Income
from operations
|
6.6
|
10.3
|
11.0
|
|||||||
|
Interest
income
|
0.5
|
0.6
|
0.2
|
|||||||
|
Interest
expense
|
(0.0
|
)
|
(0.0
|
)
|
(0.3
|
)
|
||||
|
Other
income
|
0.3
|
0.2
|
0.1
|
|||||||
|
Income
before income taxes
|
7.4
|
11.1
|
11.0
|
|||||||
|
Provision
for income taxes
|
2.9
|
4.4
|
4.4
|
|||||||
|
Net
income
|
4.5
|
%
|
6.7
|
%
|
6.6
|
%
|
||||
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
Net
Sales. Overall,
sales decreased by 5.5% worldwide, as sales in the United States decreased
by
7.0% in the year ended December 31, 2007 compared to 2006. During 2007, our
international sales increased by 8.8% over the prior year, primarily the result
of the weakening U.S. dollar. However, we did experience sales growth of 20%
in
our Philippine market, when measured in local currency.
30
The
following table summarizes net sales by geographic market ranked by the date
we
began operations in each market for the years ended December 31, 2007 and
2006.
|
Year
Ended December 31,
|
|||||||||||||||||||||||
|
2007
|
2006
|
Change
from prior year
|
|||||||||||||||||||||
|
Amount
|
%
of Net Sales
|
Amount
|
%
of Net Sales
|
Amount
|
%
|
||||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||
|
United
States
|
$
|
98,348
|
|
|
88.5
|
%
|
$
|
105,784
|
|
|
90.0
|
%
|
$
|
(7,436
|
)
|
|
(7.0
|
)%
|
|||||
|
Australia/New
Zealand
|
|
2,944
|
|
|
2.7
|
|
2,550
|
|
|
2.2
|
|
394
|
|
|
15.5
|
|
|||||||
|
Canada
|
|
1,634
|
|
|
1.5
|
|
1,638
|
|
|
1.4
|
|
(4
|
)
|
|
(0.2
|
)
|
|||||||
|
Mexico
|
|
1,526
|
|
|
1.4
|
|
1,433
|
|
|
1.2
|
|
93
|
|
|
6.5
|
||||||||
|
United
Kingdom/Ireland
|
|
1,062
|
|
|
1.0
|
|
1,235
|
|
|
1.1
|
|
(173
|
)
|
|
(14.0
|
)
|
|||||||
|
Philippines
|
|
2,942
|
|
|
2.6
|
|
2,198
|
|
|
1.9
|
|
744
|
|
|
33.8
|
||||||||
|
Malaysia/Singapore
|
|
1,765
|
|
|
1.5
|
|
1,805
|
|
|
1.5
|
|
(40
|
)
|
|
(2.2
|
)
|
|||||||
|
Germany
|
|
837
|
|
|
0.8
|
|
824
|
|
|
0.7
|
|
13
|
|
|
1.6
|
|
|||||||
|
Consolidated
total
|
$
|
111,058
|
|
|
100.0
|
%
|
$
|
117,467
|
|
|
100.0
|
%
|
$
|
(6,409
|
)
|
|
(5.5
|
)%
|
|||||
The
following table sets forth, as of December 31, 2007 and 2006, the number of
our
active distributors and Master Affiliates and above. The total number of active
distributors includes Master Affiliates and above. We define an active
distributor as one that enrolls as a distributor or renews its distributorship
during the prior twelve months. Master Affiliates and above are distributors
that have attained the highest level of discount and are eligible for royalties
generated by Master Affiliates and above in their downline organization. Growth
in the number of active distributors and Master Affiliates and above is a key
factor in continuing the growth of our business.
|
December
31, 2007
|
December
31, 2006
|
%
Change
|
|||||||||||||||||||||
|
Active
Distributors
|
Master
Affiliates and Above
|
Active
Distributors
|
Master
Affiliates and Above
|
Active
Distributors
|
Master
Affiliates and Above
|
||||||||||||||||||
|
United
States
|
56,920
|
|
|
13,890
|
|
52,880
|
|
|
16,580
|
|
7.6
|
%
|
|
(16.2
|
)%
|
||||||||
|
Australia/New
Zealand
|
|
2,450
|
|
|
280
|
|
2,460
|
|
|
300
|
|
(0.4
|
)
|
|
(6.7
|
)
|
|||||||
|
Canada
|
|
1,140
|
|
|
180
|
|
1,170
|
|
|
180
|
|
(2.6
|
)
|
|
0.0
|
||||||||
|
Mexico
|
|
1,430
|
|
|
220
|
|
1,130
|
|
|
240
|
|
26.5
|
|
|
(8.3
|
)
|
|||||||
|
United
Kingdom/Ireland
|
|
780
|
|
|
120
|
|
910
|
|
|
160
|
|
(14.3
|
) |
|
(25.0
|
)
|
|||||||
|
Philippines
|
|
4,530
|
|
|
400
|
|
3,430
|
|
|
370
|
|
32.1
|
|
|
8.1
|
||||||||
|
Malaysia/Singapore
|
|
2,170
|
|
|
350
|
|
2,560
|
|
|
410
|
|
(15.2
|
)
|
|
(14.6
|
)
|
|||||||
|
Germany
|
|
550
|
|
|
150
|
|
420
|
|
|
130
|
|
31.0
|
|
15.4
|
|||||||||
|
Consolidated
total
|
69,970
|
|
|
15,590
|
|
64,960
|
|
|
18,370
|
|
7.7
|
%
|
|
(15.1
|
)%
|
||||||||
In
the
United States, the sales decline was the result of fewer distributors
qualifying for the level of Master Affiliate during 2007, compared to 2006.
This
decrease in the number of new Master Affiliates led to a reduction in the size
of the average order. In 2007, approximately 5,150 distributors qualified as
new
Master Affiliates and 47.6% of the Master Affiliates and above as of December
31, 2006 requalified as Master Affiliates and above during 2007. This compares
to approximately 7,600 new Master Affiliates and a requalification rate of
56.7%
in 2006. In 2007, approximately 21,930 new distributors were enrolled in the
United States, as compared to approximately 20,390 in 2006. Distributor
retention in the United States improved slightly to approximately 65.2% for
2007 compared to a rate of 62.4% for 2006.
In
the
United States during 2007, we processed approximately 336,060 orders for
products at an average order of $386 at suggested retail. In 2006, we processed
approximately 332,725 product orders at an average order of $421 at suggested
retail. Over the past year, we have emphasized the importance of bringing in
new
distributors at all levels, not just directly into the Master Affiliate level.
We intend to continue our distributor growth strategy of bringing in new
distributors at all levels. However, we will continue to focus on efforts to
teach our newest distributors to build their business to the Master Affiliate
level through training and other programs. Included in these order and average
order totals are orders placed through our Direct Select program. This program
is available for distributors and their retail customers to order products
in
less than case lots directly from us. In the United States during 2007, we
processed a total of approximately 61,360 orders under this program at a
suggested retail sales value of $7.2 million, compared to 75,870 orders, at
a suggested retail value of $8.8 million during 2006. The average order size
at
a suggested retail value was $118 in 2007 compared to $116 during
2006.
31
We
also
continue to focus on initiatives to improve our new distributor enrollment
rates, which we believe will lead to improved sales, and continue to emphasize
the importance of new distributor enrollments in our distributor training.
We
contracted to once again be featured in the February 2008 issue of Success
from Home
magazine, a publication targeted towards people who are considering starting
their own business in the network marketing industry. We continue to encourage
our distributors to use this magazine as a tool to help them build their sales
organizations, as industry data shows it to be an effective tool. A new bonus
program was announced in August 2007. This bonus program involves monthly and
periodic cash awards, along with the opportunity to earn a trip to the Lake
of
the Ozarks, Missouri in September 2008. We believe this will be a more effective
bonus program than the “Mega Bonus” program, as it will award bonuses throughout
the year, and therefore will potentially impact a greater number of
distributors. This allows new distributors to have an equal opportunity to
earn
awards, regardless of when they become a distributor during the contest period.
In
February 2007, we launched our new weight control product line, Slimplicity®.
Slimplicity currently replaces the Ultrim-Plus meal replacement product line
in
the United States, Germany, and the United Kingdom and we expect it to replace
Ultrim-Plus in other markets. In 2007, sales of the Slimplicity product line
represented approximately 9% of net sales in the United States. In comparison,
sales of the previous weight control product line historically represented
approximately 2% of net sales in the United States annually.
During
the year ended December 31, 2007, net sales in our international operations
increased in aggregate by 8.8% to $12.7 million compared to
$11.7 million for the year ended December 31, 2006. The increase in
international sales occurred primarily in the Philippines, Australia/New
Zealand, and Mexico. When net sales are converted using the 2006 exchange rate
for both 2007 and 2006, international net sales increased 0.6% for 2007 compared
to the prior year, as the U.S. dollar weakened against all of the
currencies in which we conduct operations, except for the Mexican
peso.
Net
sales
in the Australia/New Zealand market increased by 15.5% in 2007 compared to
2006. New distributor enrollments were 900 in 2007 compared to 893 in 2006.
When
net sales are converted using the 2006 exchange rate for both 2007 and 2006,
net
sales in this market increased by 3.8%. In 2006, we started a sales development
in that region by supporting leading U.S. distributors as part of a sustained
plan to develop more activity in this and other foreign markets. In 2007, that
plan continued, but at a slightly reduced level. In total, we invested
approximately $433,000 in sales development expenses across our foreign markets
during 2007. The majority of this investment took place in this market. The
sales development efforts continue to have a positive impact on net sales,
which
in turn, has improved the operating results of this market. The combined net
loss for the Australia/New Zealand market was $43,000 in 2007, compared to
a net
loss of $224,000 in 2006.
Net
sales
in Canada decreased by 0.2% in 2007 compared to 2006. Just as in the United
States, the decline in new qualifying Master Affiliates played a role in the
decline in net sales. In 2007, 65 distributors qualified as Master Affiliates,
compared to 88 in the prior year. New distributor enrollments were 381 in 2007
compared to 441 in 2006. When measured in local currency, Canadian net sales
decreased by 5.8% in 2007 compared to 2006. Net income in Canada was $62,000
for
2007, compared to a net loss of $2,000 in 2006. In November 2007, we adjusted
the pricing of our products in Canada to reflect the value of the stronger
Canadian dollar.
32
Net
sales
in Mexico increased 6.5% in 2007 compared to 2006. New distributor enrollments
were 976 in 2007 compared to 682 in 2006. When measured in local currency,
2007
net sales increased by 6.8%, as the Mexican peso weakened slightly on average
for 2007 when compared to the U.S. dollar. Mexico is beginning to show signs
of
improvement in sales from the price increase and change in distributor
qualification requirements that were made in March 2005 to make the Mexican
business model consistent with the rest of our markets. These improved sales
results are also due in part to the efforts of the national sales manager we
named for our Reliv Mexico operations in August 2006. The net loss in Mexico
for
2007 was $332,000, compared to a net loss of $285,000 in 2006. The increase
in
the net loss is due to higher expenses for local distributor conferences and
other marketing support.
Net
sales
in the United Kingdom decreased by 14.0% for 2007 compared to 2006, as we
struggled to make inroads in developing local distributor leaders in this
market. When measured in local currency, net sales in the UK decreased by 20.8%
in 2007 compared to the prior year. New distributor enrollments were 415 in
2007
compared to 624 in 2006. The net loss incurred in the United Kingdom was
$564,000 in 2007, compared to a net loss of $507,000 in 2006. The weakening
U.S.
dollar was the primary cause of the increased loss, as the net loss when
measured in British pounds sterling was £282,000 in 2007 and £274,000 in 2006.
Net
sales
in the Philippines increased by 33.8% in 2007 compared to the prior year. New
distributor enrollments were 3,390 in 2007 compared to 2,254 in 2006.
When
measured in local currency, 2007 net sales increased by 20.0%.
Sales
growth in the Philippines has been the result of stable and effective local
sales leadership, along with the continuing development of local distributor
leaders. Along with the increase in new distributor enrollments, the active
distributor count in the Philippines grew by 32.1% as of the end of 2007
compared to the end of 2006, and the number of distributors at the Master
Affiliate or higher level grew by 8.1%. The net loss in the Philippines for
2007
was $210,000, compared to a net loss of $127,000 in 2006, due to higher expenses
in corporate-sponsored distributor meetings.
Net
sales
in the Malaysia/Singapore market decreased by 2.2% in 2007 compared to the
prior
year. New distributor enrollments were 1,361 in 2007 compared to 1,743 in 2006.
When measured in local currency, 2007 net sales declined by 8.3%. The combined
net loss for Malaysia/Singapore for 2007 was $312,000, compared to a net loss
of
$258,000 in 2006. We appointed a new sales manager for this market in May 2007.
We view this market, coupled with the Philippines, as part of a larger Asian
regional market. We are gradually designing our products, product labeling,
and
sales materials to work across the entire region. As part of this regional
consolidation, we have begun to use a public bonded warehouse in Singapore
to
consolidate inventories across the region. This will allow us to eventually
eliminate local warehousing needs in each country which should reduce our
carrying costs.
Net
sales
in Germany increased by 1.6% in 2007 compared to the prior year. New distributor
enrollments were 368 in 2007, compared to 359 in 2006. When measured in local
currency, 2007 net sales declined by 7.1%. The net loss in Germany for 2007
was
$688,000, compared to a net loss of $473,000 in 2006. The increase in the net
loss is the result of additional corporate spending in sales staffing and
support.
Cost
of Products Sold. Cost
of
products sold as a percentage of net sales increased to 17.2% for the year
ended
December 31, 2007 compared to 16.6% for the year ended December 31, 2006. Gross
margins declined in 2007 compared to 2006 primarily due to lower production
levels corresponding with the decrease in sales. Additionally, raw material
price increases and higher outbound freight costs are negatively impacting
gross
margins.
Distributor
Royalties and Commissions. Distributor
royalties and commissions as a percentage of net sales decreased slightly to
39.9% for the year ended December 31, 2007 compared to 40.1% for the same period
in 2006. Due to the structure of our distributor compensation plan, we do not
expect to experience significant fluctuations in distributor royalties and
commissions as a percentage of net sales.
Selling,
General and Administrative Expenses. For
2007,
selling, general and administrative, or SGA, expenses increased by
$1.6 million compared to 2006. Additionally, SGA expenses as a percentage
of net sales increased to 36.3% in 2007 compared to 33.0% in 2006.
Sales
and
marketing expenses represented approximately $1.4 million of the increase in
2007. Components of the change included an increase in salaries, fringes, and
contract labor expenses of $871,000, an increase of $294,000 for our
international and regional leadership conferences, an increase of $209,000
in
promotional bonuses and trips related to sales volume. At our international
distributor conference in St. Louis in late July 2006, we announced a special
bonus program, called “Mega Bonus.” Under the new “Mega Bonus” program, we
awarded more than $700,000 in bonuses at our international conference in August
2007. The bonuses were awarded to the top 50 distributors in group sales volume
between August 1, 2006 and July 31, 2007, with the first-place winner receiving
$100,000. The promotional trip expenses related to an incentive trip to Germany
earned by our top 50 distributorships upon reaching $15 million in worldwide
retail sales in two consecutive months during the first quarter of 2007.
Additional year over year increases in expenditures were incurred for
distributor newsletter costs, and costs incurred for corporate-sponsored
business opportunity meetings.
33
Distribution
and warehouse expenses increased by $247,000 due to higher wages, contract
labor
expenses, and shipping supply expenses. General and administrative expenses
decreased by approximately $10,000 in 2007 compared to 2006. Significant
increases were in salaries and benefits of $636,000, accounting fees of
$170,000, legal fees of $178,000, and directors’ fees of $117,000. These were
offset by decreases in incentive compensation expense of $871,000, business
insurance expenses of $216,000, and shareholder communication expenses of
$164,000.
Interest
Income/Expense. Interest
income decreased to $634,000 for the year ended December 31, 2007, compared
to
$693,000 for the same period in 2006. The decrease in interest income is the
result of a decrease in short-term investments over the second half of 2007.
Interest expense decreased to $1,000 for 2007 compared to $50,000 for 2006.
Income
Taxes. We
recorded income tax expense of $3.2 million for 2007, an effective rate of
38.8%. In 2006, we recorded income tax expense of $5.1 million, an
effective rate of 39.3%. The lower effective rate in 2007 is the result of
the
increased benefit of the Domestic Manufacturing Deduction, a reduction in
international losses for which there is no tax benefit, and lower marginal
income tax rate, as our income before taxes was lower than the prior
year.
Net
Income. Our
net
income decreased to $5.0 million ($0.31 per share basic and diluted)
for the year ended December 31, 2007 compared to $7.9 million
($0.48 per share basic and $0.47 per share diluted) for 2006.
Profitability decreased commensurate with the decrease in net sales in the
United States, as discussed above, and as a result of the increase in the net
loss from international operations. Net income in the United States was $7.1
million in 2007, compared to $9.8 million in 2006. The net loss from
international operations was $2.1 million in 2007, compared a net loss of $1.9
million in 2006.
Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005
Net
Sales. Sales
in
the United States grew by 3.2% in the year ended December 31, 2006 compared
to
2005. During 2006, our international sales increased by 6.1% over the prior
year, primarily the result of continued growth in our UK market due to the
efforts of the local management, and growth in our Australia/New Zealand market
as the result of certain focused sales development efforts.
The
following table summarizes net sales by geographic market for the years ended
December 31, 2006 and 2005:
|
Year
Ended December 31,
|
|||||||||||||||||||||||
|
2006
|
2005
|
Change
from prior year
|
|||||||||||||||||||||
|
Amount
|
%
of Net Sales
|
Amount
|
%
of Net Sales
|
Amount
|
%
|
||||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||||
|
United
States
|
$
|
105,784
|
|
|
90.0
|
%
|
$
|
102,549
|
|
|
90.3
|
%
|
$
|
3,235
|
|
3.2
|
%
|
||||||
|
Australia/New
Zealand
|
|
2,550
|
|
|
2.2
|
|
2,215
|
|
|
2.0
|
|
335
|
|
|
15.1
|
|
|||||||
|
Canada
|
|
1,638
|
|
|
1.4
|
|
1,668
|
|
|
1.5
|
|
(30
|
)
|
|
(1.8
|
)
|
|||||||
|
Mexico
|
|
1,433
|
|
|
1.2
|
|
1,608
|
|
|
1.4
|
|
(175
|
)
|
|
(10.9
|
)
|
|||||||
|
United
Kingdom/Ireland
|
|
1,235
|
|
|
1.1
|
|
846
|
|
|
0.7
|
|
389
|
|
46.0
|
|||||||||
|
Philippines
|
|
2,198
|
|
|
1.9
|
|
2,328
|
|
|
2.0
|
|
(130
|
)
|
|
(5.6
|
)
|
|||||||
|
Malaysia/Singapore
|
|
1,805
|
|
|
1.5
|
|
2,031
|
|
|
1.8
|
|
(226
|
)
|
|
(11.1
|
)
|
|||||||
|
Germany
|
|
824
|
|
|
0.7
|
|
320
|
|
|
0.3
|
|
504
|
|
|
157.5
|
|
|||||||
|
Consolidated
total
|
$
|
117,467
|
|
|
100.0
|
%
|
$
|
113,565
|
|
|
100.0
|
%
|
$
|
3,902
|
|
|
3.4
|
%
|
|||||
34
The
following table sets forth the number of our active distributors and Master
Affiliates and above, as of December 31, 2006 and 2005:
|
December
31, 2006
|
December
31, 2005
|
%
Change
|
|||||||||||||||||||||
|
Active
Distributors
|
Master
Affiliates and Above
|
Active
Distributors
|
Master
Affiliates and Above
|
Active
Distributors
|
Master
Affiliates and Above
|
||||||||||||||||||
|
United
States
|
52,880
|
|
|
16,580
|
|
52,040
|
|
|
15,840
|
|
1.6
|
%
|
|
4.7
|
%
|
||||||||
|
Australia/New
Zealand
|
|
2,460
|
|
|
300
|
|
2,410
|
|
|
250
|
|
2.1
|
|
|
20.0
|
||||||||
|
Canada
|
|
1,170
|
|
|
180
|
|
1,210
|
|
|
210
|
|
(3.3
|
)
|
|
(14.3
|
)
|
|||||||
|
Mexico
|
|
1,130
|
|
|
240
|
|
1,630
|
|
|
310
|
|
(30.7
|
)
|
|
(22.6
|
)
|
|||||||
|
United
Kingdom/Ireland
|
|
910
|
|
|
160
|
|
750
|
|
|
100
|
|
21.3
|
|
60.0
|
|||||||||
|
Philippines
|
|
3,430
|
|
|
370
|
|
4,070
|
|
|
490
|
|
(15.7
|
)
|
|
(24.5
|
)
|
|||||||
|
Malaysia/Singapore
|
|
2,560
|
|
|
410
|
|
3,250
|
|
|
590
|
|
(21.2
|
)
|
|
(30.5
|
)
|
|||||||
|
Germany
|
|
420
|
|
|
130
|
|
120
|
|
|
50
|
|
250.0
|
|
160.0
|
|||||||||
|
Consolidated
total
|
64,960
|
|
|
18,370
|
|
65,480
|
|
|
17,840
|
|
(0.8
|
)%
|
|
3.0
|
%
|
||||||||
In
the
United States, the rate of sales growth was impacted by declining new
distributor enrollments over the course of 2006. In 2006, approximately 20,390
new distributors were enrolled in the United States, as compared to
approximately 23,030 in 2005. Distributor retention in the United States
remained consistent at approximately 62.4% for 2006 compared to a rate of 62.9%
for 2005. The number of distributors reaching Master Affiliate and above in
the
United States was similarly impacted in 2006. In 2006, approximately 7,600
distributors qualified as new Master Affiliates and 56.7% of the Master
Affiliates and above as of December 31, 2005 requalified as Master Affiliates
and above during 2006. This compares to approximately 8,120 new Master
Affiliates and a requalification rate of 61.6% in 2005.
During
the year ended December 31, 2006, net sales in our international operations
increased in aggregate by 6.1% to $11.7 million compared to
$11.0 million for the year ended December 31, 2005. The increase in
international sales occurred primarily in United Kingdom/Ireland, Australia/New
Zealand, and Germany. In 2006, Germany had its first full year of business,
with
net sales of $824,000, compared to $320,000 from July through December, 2005.
When net sales are converted using the 2005 exchange rate for both 2006 and
2005, international net sales increased 3.4% for 2006 compared to the prior
year, as the U.S. dollar strengthened against the Australian and New
Zealand dollars and the Mexican peso. All other currencies in which we conduct
operations strengthened against the U.S. dollar, in particular the Philippine
peso and Canadian dollar.
Net
sales
in the Australia/New Zealand market increased by 15.1% in 2006 compared to
2005. New distributor enrollments were 893 in 2006 compared to 725 in 2005.
When
net sales are converted using the 2005 exchange rate for both 2006 and 2005,
net
sales in this market increased by 16.8%. In 2006, we invested in sales
development in that region by supporting leading U.S. distributors as part
of a
sustained plan to develop more activity in this and other foreign markets.
In
total, we invested approximately $500,000 in these additional sales development
expenses across our foreign markets during 2006. The sales development efforts
were successful in that they had a positive impact on net sales; however, the
combined net loss for the Australia/New Zealand market was $224,000 in 2006,
compared to a net loss of $115,000 in 2005.
Net
sales
in Canada decreased by 1.8% in 2006 compared to 2005. Just as in the United
States, the decline in new distributor enrollments played a role in the decline
in net sales. New distributor enrollments were 441 in 2006 compared to 489
in
2005. When measured in local currency, Canadian net sales decreased by 7.9%
in
2006 compared to 2005. The net loss in Canada was $2,000 for 2006, compared
to
net income of $77,000 in 2005. In mid-2006, we hired a sales manager to focus
on
the Canadian market.
Net
sales
in Mexico decreased 10.9% in 2006 compared to 2005. New distributor enrollments
were 682 in 2006 compared to 1,048 in 2005. When measured in local currency,
2006 net sales declined by 10.7%. For most of 2006, net sales continued to
be
impacted by the price increase and change in distributor qualification
requirements, effective March 1, 2005, to make the Mexican business model
consistent with the rest of our markets. The net loss in Mexico for 2006 was
$285,000, compared to a net loss of $446,000 in 2005.
35
Net
sales
in the United Kingdom increased by 46.0% for 2006 compared to 2005, as the
efforts of our general manager hired in 2005 in the United Kingdom continued
to
show positive results, coupled with added U.S. distributor leader support.
When
measured in local currency, net sales in the United Kingdom increased by 43.9%
in 2006, compared to the prior year. New distributor enrollments were 624 in
2006 compared to 447 in 2005. However, the added staffing and sales development
expenses continue to impact the profitability of this market. The net loss
incurred in the United Kingdom was $507,000 in 2006, compared to a net loss
of
$421,000 in 2005.
Net
sales
in the Philippines declined by 5.6% in 2006 compared to the prior year. New
distributor enrollments were 2,254 in 2006 compared to 2,993 in 2005. When
measured in local currency, 2006 net sales declined by 11.9%. As in Mexico,
net
sales continue to be impacted by the changes to our distributor qualification
requirements and increased prices in the Philippines effective February 2005.
The net loss in the Philippines for 2006 was $127,000, compared to a net loss
of
$104,000 in 2005, as we increased our expense in corporate-sponsored business
opportunity meetings and other forms of distributor communications.
Net
sales
in the Malaysia/Singapore market decreased by approximately 11.1% in 2006
compared to the prior year. New distributor enrollments were 1,743 in 2006
compared to 2,546 in 2005. When measured in local currency, 2006 net sales
declined by 14.1%. Net sales decreased in Malaysia/Singapore because our new
distributor enrollments declined by nearly 31.5% during 2006 compared to 2005,
and our active distributor count decreased by 21.2%. The combined net loss
for
Malaysia/Singapore for 2006 was $258,000, compared to a net loss of $392,000
in
2005. We have taken steps to reduce administrative expenses in this market
by
moving our offices into a smaller, less-costly facility and have reduced our
presence in Singapore by consolidating our operations into the Malaysian office,
with distribution via a public warehouse.
Net
sales
in Germany increased by 157% from $320,000 in 2005 to $824,000 in 2006, our
first full year of operations. New distributor enrollments were 359 in 2006,
compared to 120 during the portion of 2005 that we were open for business.
We
began operations in Germany in July 2005. The net loss in Germany for 2006
was
$473,000.
Our
Direct Select program is available for distributors and their retail customers
to order products in less than case lots directly from us. In the United States
during 2006, we processed a total of approximately 75,870 orders under this
program at a suggested retail sales value of $8.8 million, compared to
76,000 orders, at a suggested retail value of $8.4 million during 2005. The
average order size at a suggested retail value increased in 2006 to $116
compared to $111 during 2005.
Cost
of Products Sold. Cost
of
products sold as a percentage of net sales decreased slightly to 16.6% for
the
year ended December 31, 2006 compared to 17.0% for the year ended December
31,
2005. Gross margins improved primarily due to margin improvements on our new
formulation of Reliv Classic, which was introduced in mid-February 2006, along
with improved production efficiencies. Partially offsetting these improvements
were higher distribution costs on distributors’ orders due to fuel surcharges
and other increased shipping charges.
Distributor
Royalties and Commissions. Distributor
royalties and commissions as a percentage of net sales increased slightly to
40.1% for the year ended December 31, 2006 compared to 40.0% for the same period
in 2005.
Selling,
General and Administrative Expenses. For
2006,
selling, general and administrative, or SGA, expenses increased by
$2.4 million compared to 2005. Additionally, SGA expenses as a percentage
of net sales increased from 32.0% in 2005 to 33.0% in 2006.
Sales
and
marketing expenses represented approximately $1.8 million of the 2006 increase,
including the increased international sales development expenses of $508,000,
and increased promotional bonuses, such as the “Mega Bonus”, of $482,000 and
promotional trip expenses of $289,000 related to sales volume. Expenses for
distributor conferences, such as our International Conference and regional
conferences, increased by $200,000. Distribution and warehouse expenses
increased by $202,000 due to higher wages and fringe benefit expenses. General
and administrative expenses increased by approximately $383,000. Major
components of the increase were an increase in salaries, bonuses, and fringe
benefit expenses of $637,000 and an increase in business insurance expense
of
$215,000. Offsetting the increases were decreases in professional and consulting
fees, legal, and accounting fees of $459,000.
36
Interest
Income/Expense. Interest
income increased to $693,000 for the year ended December 31, 2006, compared
to
$238,000 for the same period in 2005. Interest expense decreased to $50,000
for
2006 compared to $313,000 for 2005. The decrease is the result of a lower
outstanding debt level during the year ended December 31, 2006, compared to
2005. In April 2006, we completed a public offering of our common stock, which
yielded $11.9 million in net proceeds to us. A portion of the proceeds was
used
to pay off the remaining balance of $2.2 million on a note we entered into
in
March 2005 to purchase the shares of our common stock owned by a former
officer/director and his wife. The increase in interest income is the result
of
the earnings on the remaining proceeds and higher interest rates compared to
the
prior year.
Income
Taxes. We
recorded income tax expense of $5.1 million for 2006, an effective rate of
39.3%. In 2005, we recorded income tax expense of $5.0 million, an
effective rate of 39.8%. The lower effective rate in 2006 is the result of
the
benefit of tax-exempt interest income, coupled with the Federal excise tax
credit available on telecommunications services.
Net
Income. Our
net
income improved to $7.9 million ($0.48 per share basic and
$0.47 per share diluted) for the year ended December 31, 2006 compared to
$7.5 million ($0.47 per share basic and $0.46 per share diluted)
for 2005. Profitability increased slightly commensurate with the increase in
net
sales in the United States, as discussed above, and the increase in interest
income. Net income in the United States was $9.8 million in 2006, compared
to
$9.2 million in 2005. The net loss from international operations was $1.9
million in 2006, compared a net loss of $1.7 million in 2005.
Financial
Condition, Liquidity and Capital Resources
We
generated $4.8 million of net cash during 2007 from operating activities,
$6.6 million was generated in investing activities, and we used
$9.2 million in financing activities. This compares to $9.0 million of
net cash provided by operating activities, $9.3 million used in investing
activities, and $3.8 million generated in financing activities in 2006.
Cash and cash equivalents increased by $2.4 million to $11.7 million
as of December 31, 2007 compared to December 31, 2006. We also have
$399,000 in short-term investments as of December 31, 2007, compared to $7.9
million as of December 31, 2006.
Significant
changes in working capital items consisted of an increase in inventories of
$1.3
million, a decrease in prepaid expenses and other current assets of $268,000,
and an increase in other assets of $431,000 in 2007. Lower than forecasted
sales
volumes in recent months have resulted in higher than planned finished goods
and
raw material inventories. Sales aids and promotional materials have increased
primarily due the purchase of a new edition of Success
from Home
magazine. This magazine is being sold in bulk packs as a recruiting tool. The
decrease in prepaid expenses/other current assets is due to the reduction in
deposits with certain key vendors. Other assets increased as the result of
additional insurance premiums paid and an increase in the value of assets held
in a supplemental executive retirement plan.
Our
net
investing activities included $836,000, $477,000, and $1.6 million for capital
expenditures in the years ended December 31, 2007, 2006 and 2005,
respectively. Investing activities for 2007 also included net proceeds of $7.5
million in short-term investments. The remaining balance of short-term
investments at December 31, 2007 is comprised of certificates of deposit.
We continue to hold a long-term investment valued at $1.1 million as of December
31, 2007 as a limited partner in a private equity fund.
Financing
activities in 2007 included $7.7 million in purchases of our stock into treasury
and $1.6 million in common stock dividends paid. Financing activities in 2006
included $11.9 million in net proceeds from the common stock offering that
closed in April 2006, $1.7 million in common stock dividends paid, $3.6 million
in our purchases of our stock into treasury, $317,000 in proceeds from options
and warrants exercised and excess tax benefits from stock-based compensation,
and $3.1 million of principal payments made on long-term borrowings. These
payments paid off the balance of a promissory note for the purchase of common
stock from a former officer/director and his wife that occurred in March 2005.
The most significant financing activity in 2005 was $13.8 million in
purchases of treasury stock. Of the $13.8 million in stock purchases,
$9.7 million was paid in cash and notes were issued for the remaining
$4.1 million. As of December 31, 2005, $3.1 million of the notes
was outstanding. The majority of this treasury stock was purchased from a former
officer, a former officer/director and his wife, and three of our current
officers and/or directors. In March 2005, we announced that our board of
directors had approved a stock repurchase plan of our common stock of up to
$15 million over the next three years. Approximately $4.3 million of
stock was purchased in the open market during 2005. In June 2005, we also paid
the remaining balance of the long-term debt on our headquarters facility
totaling approximately $3.5 million. In 2005, we also paid $1.2 million in
common stock dividends and received $274,000 in proceeds from the exercise
of
options and warrants.
37
Stockholders’
equity decreased to $23.8 million at December 31, 2007 compared with
$27.7 million at December 31, 2006. The components of the change in
equity are our net income during 2007 of $5.0 million, less the treasury stock
purchases and common stock dividends paid.
Our
working capital balance was $12.5 million at December 31, 2007
compared to $16.2 million at December 31, 2006. The current ratio at
December 31, 2007 was 2.5 compared to 2.9 at previous
year-end.
On
February 21, 2006, we filed a registration statement on Form S-3 with the
Securities and Exchange Commission relating to an underwritten public offering
of 2,000,000 shares of our common stock. On April 5, 2006, we commenced the
public offering at a price of $11.25 per share. The public offering was
completed on April 11, 2006 and consisted of 1,200,000 shares of common stock
offered and sold by us and 800,000 shares of common stock offered and sold
by
selling stockholders. The selling stockholders were four of our directors and/or
officers. The underwriters had a 30-day option to purchase up to 300,000
additional shares from certain of the selling stockholders to cover
over-allotments, if any. This option was exercised for the full 300,000 shares
and closed on May 9, 2006. We did not receive any proceeds from the sale of
common stock by the selling stockholders. Net proceeds to us from the offering,
after reduction for the underwriters’ fee and other offering expenses, were
$11.9 million.
We
also
have a $5 million secured revolving credit facility with our primary lender
that we entered into in June 2006. This facility expires in April 2008, and
any
advances accrue interest at a variable interest rate based on LIBOR. The credit
facility is secured by all of our assets. The facility includes covenants to
maintain total stockholders’ equity of not less than $10.5 million, and
that the ratio of borrowings under the facility to EBITDA shall not exceed
3.5
to 1.0. At December 31, 2007, we had not utilized any of the revolving line
of credit facility and were in compliance with the minimum stockholders’ equity
covenant.
Management
believes that our internally generated funds and the borrowing capacity under
the new revolving line of credit facility will be sufficient to meet working
capital requirements for the remainder of 2008.
Contractual
Obligations
The
table
below presents our contractual obligations and commercial commitments as of
December 31, 2007. This consists of our operating leases. For the operating
leases, the amounts shown represent the future minimum payments under
noncancelable leases with initial or remaining terms in excess of one year
as of
December 31, 2007.
|
(In
Thousand $’s)
|
Less
Than 1 year
|
1-3
years
|
3
- 5 years
|
More
than 5 years
|
Total
|
|||||||||
|
Operating
leases
|
93
|
235
|
40
|
—
|
368
|
|||||||||
|
Total
Obligations
|
$
|
93
|
$
|
235
|
$
|
40
|
$
|
—
|
$
|
368
|
||||
Critical
Accounting Policies
Our
financial statements are based on the selection and application of significant
accounting policies, which require management to make significant estimates
and
assumptions. We believe that the following are some of the more critical
judgment areas in the application of our accounting policies that currently
affect our financial condition and results of operations.
38
Revenue
We
receive payment by credit card, personal check, or guaranteed funds for orders
from independent distributors and makes related commission payments in the
following month. Net sales reflect product sales at suggested retail price
less
the distributor discount of 20% to 40%. Sales revenue and commission expenses
are recorded when the merchandise is shipped, as this is the point title and
risk of loss pass. In accordance with EITF 01-09, we present distributor royalty
and commission expense as an operating expense, rather than a reduction to
net
sales, as these payments are not made to the purchasing
distributor.
Actual
and estimated returns are classified as a reduction of net sales. We estimate
and accrue a reserve for product returns based on our return policy and
historical experience. Total returns have been approximately 1.72%, 1.17%,
and
1.20% of net sales in 2007, 2006 and 2005, respectively. We record handling
and
freight income as a component of net sales and record handling and freight
costs
as a component of cost of products sold. Total revenues do not include sales
tax
as we consider ourselves a pass-through conduit for collecting and remitting
applicable sales taxes.
Inventories
Inventories
are valued at the lower of cost or market. Product cost includes raw material,
labor and overhead costs and is accounted for using the first-in, first-out
basis. On a periodic basis, we review our inventory levels in each country
for
estimated obsolescence or unmarketable items, as compared to future demand
requirements and the shelf life of the various products. Based on this review,
we record inventory write-downs when costs exceed expected net realizable value.
Historically, our estimates of our obsolete or unmarketable items have been
materially accurate.
In
2006,
we adopted SFAS No. 151, “Inventory Costs,” (“SFAS 151”) which clarifies that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as period charges, rather than as
an
inventory value. This standard also requires the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. Our pre-existing accounting policy for inventory valuation was
generally consistent with this guidance, and therefore, the adoption of SFAS
151
did not have a significant impact on our 2006 financial results.
Foreign
Currency Translation
All
balance sheet accounts are translated using the exchange rates in effect at
the
balance sheet date. Statements of operations amounts are translated using the
average exchange rate for the year-to-date periods. The gains and losses
resulting from the changes in exchange rates during this interim period have
been reported in other comprehensive loss. Foreign currency translation
adjustments exclude income tax expense (benefit) given that our investments
in
non-U.S. subsidiaries are deemed to be reinvested for an indefinite period
of time.
Legal
Proceedings
In
the
ordinary course of business, we are subject to various legal proceedings,
including lawsuits and other claims related to labor, product and other matters.
We are required to assess the likelihood of adverse judgments and outcomes
to
these matters as well as the range of potential loss. Such assessments are
required to determine whether a loss contingency reserve is required under
the
provisions of SFAS No. 5, “Accounting for Contingencies,” and to
determine the amount of required reserves, if any. These assessments are
subjective in nature. Management makes these assessments for each individual
matter based on consultation with outside counsel and based on prior experience
with similar claims. To the extent additional information becomes available
or
our strategies or assessments change, our estimates of potential liability
for a
given matter may change. Changes to estimates of liability would result in
a
corresponding additional charge or benefit recognized in the statement of
operations in the period in which such changes become known. We recognize the
costs associated with legal defense in the periods incurred. Accordingly, the
future costs of defending claims are not included in our estimated liability.
Stock-Based
Compensation
On
January 1, 2006, we adopted Statement of Financial Accounting Standards No.
123(R), “Share-Based Payments” (“SFAS No. 123(R)”). Prior to the adoption of
SFAS No. 123(R), we had adopted the disclosure-only provisions of SFAS No.
123
and accounted for employee stock-based compensation under the intrinsic value
method, and no expense related to stock options was recognized. We adopted
the
provisions of SFAS 123(R) using the modified prospective transition method.
Under this method, our consolidated financial statements as of and for the
years
ended December 31, 2007 and 2006 reflect the impact of SFAS 123(R), while the
consolidated financial statements for prior periods have not been restated
to
reflect, and do not include, the impact of SFAS 123(R).
39
We
used
the Black-Scholes option pricing model to determine the fair value of stock
options which requires us to estimate certain key assumptions. As a result
of
adopting SFAS 123(R), we incurred employee stock-based compensation cost of
$75,000 ($51,000 net of tax) and $63,000 (also $63,000 net of tax), for the
years ended December 31, 2007 and 2006, respectively. At December 31, 2007,
we
had $782,000 ($531,000 net of tax) of unrecognized compensation cost relating
to
stock options.
Income
Tax Matters
We
face
challenges from domestic and foreign tax authorities regarding the amount of
taxes due. These challenges include questions regarding the timing and amount
of
deductions and the allocation of income among various taxing jurisdictions.
In
evaluating the exposure associated with our various filing positions, we
estimate reserves for probable exposures. To the extent we were to prevail
in
matters for which accruals have been established or be required to pay amounts
in excess of our reserves, our effective tax rate in a given financial statement
period may be materially impacted.
At
December 31, 2007, we had deferred tax assets related to net operating loss
carryforwards and other income tax credits with a tax value of
$3.33 million. These net operating loss carryforwards have various
expiration dates, depending on the country in which they occurred. A valuation
allowance of $3.28 million has been established for a portion of these
deferred tax assets based on projected future taxable income and the expiration
dates of these carryforwards.
The
calculations of our tax liabilities involve dealing with uncertainties in the
application of complex tax regulations. On January 1, 2007, we adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes - an interpretation of SFAS No. 109” (FIN No. 48),
and related guidance (see Note 11: Income Taxes” in Part II, Item 8 of this Form
10-K). As a result of the implementation of FIN No. 48, we recognize liabilities
for uncertain tax positions based on the two-step process prescribed in FIN
No.
48. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely
than not that the position will be sustained on audit, including resolution
of
related appeals or litigation processes, if any. The second step requires us
to
estimate and measure the tax benefit as the largest amount that is more than
50%
likely to be realized upon ultimate settlement. It is inherently difficult
and
subjective to estimate such amounts, as we have to determine the probability
of
various possible outcomes. We reevaluate these uncertain tax positions on a
quarterly basis. This evaluation is based on factors including, but not limited
to, changes in facts or circumstances, changes in tax law, effectively settled
issues under audit, or new audit activity. Such a change in recognition or
measurement would result in the recognition of a tax benefit or an additional
charge to the tax provision.
Accounting
Pronouncements Not Yet Implemented
Fair
Value Positions
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (SFAS No. 157) which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. In February 2008, the FASB issued FASB Staff Position
(FSP) 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13” (FSP 157-1)
and FSP 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-1
amends SFAS No. 157 to remove certain leasing transactions from its scope.
FSP
157-2 delays the effective date of SFAS No. 157 for all non-financial assets
and
non-financial liabilities, except for items that are recognized or disclosed
at
fair value in the financial statements on a recurring basis (at least annually),
until the beginning of the first quarter of fiscal 2009. The measurement and
disclosure requirements related to financial and non-financial assets and
liabilities are not anticipated to have a significant impact on our consolidated
financial statements.
40
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and other items
at
fair value. The standard requires that unrealized gains and losses are reported
in earnings for items measured using the fair value option. SFAS No. 159 is
effective for us on January 1, 2008. The adoption of SFAS No. 159 is not
expected to have a significant impact on our consolidated financial
statements.
Item
No. 7A - Quantitative And Qualitative Disclosures Regarding Market Risk
Foreign
Currency Risk
Our
earnings and cash flows are subject to fluctuations due to changes in foreign
currency rates as we have several foreign subsidiaries. As a result, exchange
rate fluctuations may have an effect on sales and gross margins. Accounting
practices require that our results from operations be converted to
U.S. dollars for reporting purposes. Consequently, our reported earnings in
future periods may be significantly affected by fluctuations in currency
exchange rates, generally increasing with a weaker U.S. dollar and
decreasing with a strengthening U.S. dollar. Products manufactured by us
for sale to our foreign subsidiaries are transacted in U.S. dollars.
Net
sales
outside of the United States represented 11.5%, 10.0%, and 9.7% of total net
sales in 2007, 2006, and 2005, respectively. Our primary exposures to adverse
currency fluctuations would result in an increase in the cost of goods sold,
relative to foreign net sales, as the vast majority of the products sold are
purchased from the parent company in the United States, with prices denominated
in U.S. dollars. As of December 31, 2007, we had a net investment in our foreign
subsidiaries of $3.0 million (in U.S. dollars).
We
have
performed a sensitivity analysis as of December 31, 2007 that measures the
change in the results of our foreign operations arising from a hypothetical
10%
adverse movement in the exchange rate of all of the currencies in which we
conduct business. Using the results of operations for 2007 for our foreign
operations as a basis for comparison, an adverse movement of 10% would create
a
potential reduction in our net income of approximately $50,000 and reduce the
value of the net investment in the foreign subsidiaries by
$299,000.
From
time
to time, we enter into foreign exchange forward contracts with a financial
institution to sell Canadian dollars in order to protect against currency
exchange risk associated with expected future cash flows. We have accounted
for
these contracts as freestanding derivatives, such that gains or losses on the
fair market value of these forward exchange contracts are recorded as other
income and expense in the consolidated statements of operations. We began 2007
holding no Canadian forward exchange contracts. During 2007, we elected to
enter
into forward exchange contracts for a portion of our Canadian cash flows, as
the
Canadian dollar continued to strengthen against the U.S. dollar. As of December
31, 2007, we were holding Canadian forward exchange contracts totaling $588,000
with maturities through December 31, 2008, and a related mark-to-market loss
of
$14,000. As of December 31, 2007, we had no hedging instruments in place to
offset exposure to any foreign currencies for any of the other countries in
which we do business.
Interest
Rate Risk
Our
interest income is subject to interest rate risk. At December 31, 2007, we
hold
worldwide balances of cash, cash equivalents, and short-term investments
totaling approximately $12.1 million; a substantial portion of which is invested
in U.S. based financial instruments. A significant portion of our U.S. held
cash
and cash equivalents balances earn overnight interest income at either the
daily
prevailing market rate or other short-term (30 days) variable rates. Our
short-term investments consist of fixed-rate certificates of deposit with
original maturities greater than 90 days but less than one year at date of
purchase. We no longer hold auction rate securities or similar debt securities.
Our primary objective of our interest income strategy is to preserve principal
while maximizing yields, without significantly increasing risk. Utilizing an
average fiscal year 2007 quarter-end balance comprised of U.S. held cash, cash
equivalents, and short term investments, a hypothetical 1% change in interest
rates could result in a change in our interest income of approximately
$123,000.
41
As
noted
above, our cash, cash equivalents, and short-term investments are generally
invested in short-term financial instruments which the interest rate
approximates current market rates. Therefore, we believe our market risk to
unrealized gains or losses on the carrying value of these investments is not
significant.
We
also
are exposed to market risk in changes in commodity prices in some of the raw
materials we purchase for our manufacturing needs. However, this presents a
risk
that would not have a material effect on our results of operations or financial
condition.
Item
No. 8 - Financial Statements and Supplementary Data
Reference
is made to the Consolidated Financial Statements contained in Part IV
hereof.
Item
No. 9 - Changes in and Disagreements with Accountants on Accounting and
Financial
Disclosure
None
Item
No. 9A - Controls and Procedures
Effectiveness
of Controls and Procedures
Our
management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, has reviewed and evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2007. Based on such review and evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that the
disclosure controls and procedures were effective as of December 31, 2007,
to
ensure that the information required to be disclosed by us in the reports that
we file or submit under the Securities Exchange Act of 1934, as amended, (a)
is
recorded, processed, summarized and reported within the time period specified
in
the SEC’s rules and forms and (b) is accumulated and communicated to our
management, including the officers, as appropriate to allow timely decisions
regarding required disclosure. There were no material changes in our internal
control over financial reporting during the fourth quarter of 2007 that have
materially affected or are reasonably likely to materially affect our internal
controls over financial reporting.
Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Our management conducted an evaluation of the effectiveness
of our internal control over financial reporting based on the framework in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation included review of
the
documentation of controls, evaluation of the design effectiveness of controls,
testing of the operation effectiveness of controls and a conclusion on this
evaluation. Although there are inherent limitations in the effectiveness of
any
system of internal control over financial reporting, based on our evaluation,
management has concluded our internal controls over financial reporting were
effective as of December 31, 2007.
The
effectiveness of our internal control over financial reporting as of
December 31, 2007 has been audited by Ernst & Young LLP, our
independent registered public accounting firm. Their report, which expresses
an
unqualified opinion on the effectiveness of our internal control over financial
reporting as of December 31, 2007, is included herein.
Item
No. 9B - Other Information
None
42
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 2008 Annual Meeting of Shareholders to be held on May
22, 2008, which is expected to be filed with the Commission within 120 days
after December 31, 2007.
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 2007 Annual Meeting of Shareholders to be held on May
22, 2008, which is expected to be filed with the Commission within 120 days
after December 31, 2007.
Item
No. 12 - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information
called for by Item 12 of Part III is incorporated by reference to the definitive
Proxy Statement for the 2008 Annual Meeting of Shareholders to be held on May
22, 2008, which is expected to be filed with the Commission within 120 days
after December 31, 2007.
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 2008 Annual Meeting of Shareholders to be held on May
22, 2008, which is expected to be filed with the Commission within 120 days
after December 31, 2007.
Item
No. 14 - Principal Accountant Fees and Services
Information
called for by Item 14 of Part III is incorporated by reference to the definitive
Proxy Statement for the 2007 Annual Meeting of Shareholders to be held on May
22, 2008, which is expected to be filed with the Commission within 120 days
after December 31, 2007.
PART
IV
Item
No. 15 - Exhibits and Financial Statement Schedules
|
(a)
|
1.
|
The
Consolidated Financial Statements filed as part of this report on
Form
10-K are listed on the accompanying Index to Consolidated Financial
Statements and Consolidated Financial Statement
Schedules.
|
|
2.
|
Financial
schedules required to be filed by Item 8 of this form, and by Item
15(d)
below:
|
|
Schedule
II
|
Valuation
and qualifying accounts
|
All
other
financial schedules are not required under the related instructions or are
inapplicable and therefore have been omitted.
43
|
3.
|
Exhibits:
|
|
Exhibit
Number
|
Document
|
| 3.1 |
Second
Amended and Restated Certificate of Incorporation (incorporated by
reference to Appendix B of Schedule 14A of the Registrant filed on
April
17, 2003).
|
|
3.2
|
By-Laws
(incorporated by reference to the Registration Statement on Form
S-3 of
the Registrant filed on February 21,
2006).
|
|
3.3
|
Amendment
to By-Laws dated March 22, 2001 (incorporated by reference to the
Registration Statement on Form S-3 of the Registrant filed on February
21,
2006).
|
|
3.4
|
Certificate
of Designation to Create a Class of Series A Preferred Stock for
Reliv'
International, Inc. (incorporated by reference to Exhibit 3.1 to
the Form
10-Q of the Registrant for quarter ended March 31,
2003).
|
|
4.1
|
Form
of Reliv International, Inc. common stock certificate (incorporated
by
reference to the Registration Statement on Form S-3 of the Registrant
filed on February 21, 2006).
|
|
10.1
|
Amended
Exclusive License Agreement with Theodore P. Kalogris dated December
1,
1991 (incorporated by reference to Exhibit 10.1 to the Form 10-K
of the
Registrant for the year ended December 31,
1992).
|
|
10.2*
|
Robert
L. Montgomery Employment Agreement dated June 19, 2007 (incorporated
by
reference to Exhibit 10.1 to the Form 8-K of the Registrant filed
June 25,
2007).
|
|
10.3*
|
Carl
W. Hastings Employment Agreement dated July 26, 2007 (incorporated
by
reference to Exhibit 10.1 to the Form 8-K of the Registrant filed
July 27,
2007).
|
|
10.4
|
Letter
Agreement with Southwest Bank of St. Louis dated June 28, 2006
(incorporated by reference to Exhibit 10.1 to the Form 10-Q of the
Registrant for the quarter ended June 30,
2006).
|
| 10.5 |
Promissory
Note with Southwest Bank of St. Louis dated June 28, 2006 (incorporated
by
reference
to Exhibit 10.2 to the Form 10-Q of the Registrant for the quarter
ended
June 30, 2006).
|
|
10.6*
|
Reliv’
International, Inc. Supplemental Executive Retirement Plan dated
June 1,
1998 (incorporated by reference to Exhibit 10.19 to the Form10-K
of the
Registrant for year ended December 31,
1998).
|
| 10.7* |
Reliv
International, Inc. Employee Stock Ownership Plan and Trust dated
August
24, 2006 (incorporated by reference to Exhibit 10.1 to the Form 8-K
of the
Registrant filed August 30, 2006).
|
| 10.8 |
Agreement
with Hydron Technologies, Inc. dated March 1, 2001 (incorporated
by
reference to Exhibit
10.16 to the Form 10-K of the Registrant for year ended December
31,
2001).
|
|
10.9*
|
Amended
and Restated Distributor Stock Purchase Plan (incorporated by reference
to
Form S-8 Registration Statement the Registrant filed May 9,
2002).
|
|
10.10*
|
2003
Stock Option Plan (incorporated by reference to Form S-8 Registration
Statement the Registrant filed August 13,
2003).
|
|
10.11*
|
Reliv
International, Inc. Incentive Compensation Plan effective January
1, 2007
(incorporated by reference to Exhibit 10.1 to the Form 8-K of the
Registrant filed May 31, 2007).
|
44
|
10.12*
|
Stock
Redemption Agreement with David G. Kreher and Pamela S. Kreher dated
March
14, 2005 (incorporated by reference to Exhibit 10.18 to the Form
10-K of
the Registrant for the year ended December 31,
2004).
|
|
10.13*
|
Kreher
Employment Agreement dated March 14, 2005 (incorporated by reference
to
Exhibit 10.19 to the Form 10-K of the Registrant for the year ended
December 31, 2004).
|
|
10.14*
|
R.
Scott Montgomery Employment Agreement dated January 2, 2008 (incorporated
by reference to Exhibit 10.1 to the Form 8-K of the Registrant filed
January 4, 2008).
|
|
10.15*
|
Ryan
A. Montgomery Employment Agreement dated January 2, 2008 (incorporated
by
reference to Exhibit 10.2 to the Form 8-K of the Registrant filed
January
4, 2008).
|
|
10.16*
|
Steven
G. Hastings Employment Agreement dated January 2, 2008 (incorporated
by
reference to Exhibit 10.3 to the Form 8-K of the Registrant filed
January
4, 2008).
|
|
10.17*
|
Steven
D. Albright Employment Agreement dated January 2, 2008 (incorporated
by
reference to Exhibit 10.4 to the Form 8-K of the Registrant filed
January
4, 2008).
|
|
10.18*
|
Brett
M. Hastings Employment Agreement dated January 2, 2008 (incorporated
by
reference to Exhibit 10.5 to the Form 8-K of the Registrant filed
January
4, 2008).
|
| 11 |
Statement
re: computation of per share earnings (incorporated by reference
to Note 8
of the Consolidated Financial Statements contained in Part
IV).
|
|
21
|
Subsidiaries
of the Registrant (filed herewith).
|
|
23
|
Consent
of Ernst & Young LLP, Independent Auditors (filed
herewith).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended (filed
herewith).
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended (filed
herewith).
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002 (filed herewith).
|
45
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
RELIV'
INTERNATIONAL, INC.
| By: |
/s/
Robert L. Montgomery
|
| Robert L. Montgomery, Chairman of the Board of Directors, President and Chief Executive Officer |
Date:
March 14, 2008
Pursuant
to the requirements of the Securities Act of 1934, this report has been signed
by the following persons on behalf of the registrant and in the capacities
and
on the dates indicated.
| By: |
/s/
Robert L. Montgomery
|
| Robert L. Montgomery, Chairman of the Board of Directors, President and Chief Executive Officer |
Date:
March 14, 2008
| By: |
/s/
Steven D. Albright
|
| Steven D. Albright, Chief Financial Officer (and accounting officer) |
Date:
March 14, 2008
| By: |
/s/
Stephen M. Merrick
|
| Stephen M. Merrick, Senior Vice President, Secretary, Director |
Date:
March 14, 2008
| By: |
/s/
Carl W. Hastings
|
| Carl W. Hastings, Vice Chairman, Chief Scientific Officer, Director |
Date:
March 14, 2008
| By: |
/s/
Donald L. McCain
|
| Donald L. McCain, Director |
Date:
March 14, 2008
| By: |
/s/
John B. Akin
|
| John B. Akin, Director |
Date:
March 14, 2008
| By: |
/s/
Robert M. Henry
|
| Robert M. Henry, Director |
Date:
March 14, 2008
| By: |
/s/
Denis St. John
|
| Denis St. John, Director |
Date:
March 14, 2008
| By: |
/s/
Michael D. Smith
|
| Michael D. Smith, Director |
Date:
March 14, 2008
| By: |
/s/Patrick
G. Doherty
|
| Patrick G. Doherty, Director |
Date:
March 14, 2008
46
Exhibit
Index
|
Exhibit
Number
|
Document
|
| 3.1 |
Second
Amended and Restated Certificate of Incorporation (incorporated
by
reference to Appendix B of Schedule 14A of the Registrant filed
on April
17, 2003).
|
|
3.2
|
By-Laws
(incorporated by reference to the Registration Statement on Form
S-3 of
the Registrant filed on February 21,
2006).
|
|
3.3
|
Amendment
to By-Laws dated March 22, 2001 (incorporated by reference to the
Registration Statement on Form S-3 of the Registrant filed on February
21,
2006).
|
|
3.4
|
Certificate
of Designation to Create a Class of Series A Preferred Stock for
Reliv'
International, Inc. (incorporated by reference to Exhibit 3.1 to
the Form
10-Q of the Registrant for quarter ended March 31,
2003).
|
|
4.1
|
Form
of Reliv International, Inc. common stock certificate (incorporated
by
reference to the Registration Statement on Form S-3 of the Registrant
filed on February 21, 2006).
|
|
10.1
|
Amended
Exclusive License Agreement with Theodore P. Kalogris dated December
1,
1991 (incorporated by reference to Exhibit 10.1 to the Form 10-K
of the
Registrant for the year ended December 31,
1992).
|
|
10.2*
|
Robert
L. Montgomery Employment Agreement dated June 19, 2007 (incorporated
by
reference to Exhibit 10.1 to the Form 8-K of the Registrant filed
June 25,
2007).
|
|
10.3*
|
Carl
W. Hastings Employment Agreement dated July 26, 2007 (incorporated
by
reference to Exhibit 10.1 to the Form 8-K of the Registrant filed
July 27,
2007).
|
|
10.4
|
Letter
Agreement with Southwest Bank of St. Louis dated June 28, 2006
(incorporated by reference to Exhibit 10.1 to the Form 10-Q of
the
Registrant for the quarter ended June 30,
2006).
|
| 10.5 |
Promissory
Note with Southwest Bank of St. Louis dated June 28, 2006 (incorporated
by
reference
to Exhibit 10.2 to the Form 10-Q of the Registrant for the quarter
ended
June 30, 2006).
|
|
10.6*
|
Reliv’
International, Inc. Supplemental Executive Retirement Plan dated
June 1,
1998 (incorporated by reference to Exhibit 10.19 to the Form10-K
of the
Registrant for year ended December 31,
1998).
|
| 10.7* |
Reliv
International, Inc. Employee Stock Ownership Plan and Trust dated
August
24, 2006 (incorporated by reference to Exhibit 10.1 to the Form
8-K of the
Registrant filed August 30, 2006).
|
| 10.8 |
Agreement
with Hydron Technologies, Inc. dated March 1, 2001 (incorporated
by
reference to Exhibit
10.16 to the Form 10-K of the Registrant for year ended December
31,
2001).
|
|
10.9*
|
Amended
and Restated Distributor Stock Purchase Plan (incorporated by reference
to
Form S-8 Registration Statement the Registrant filed May 9,
2002).
|
|
10.10*
|
2003
Stock Option Plan (incorporated by reference to Form S-8 Registration
Statement the Registrant filed August 13,
2003).
|
|
10.11*
|
Reliv
International, Inc. Incentive Compensation Plan effective January
1, 2007
(incorporated by reference to Exhibit 10.1 to the Form 8-K of the
Registrant filed May 31, 2007).
|
47
|
10.12*
|
Stock
Redemption Agreement with David G. Kreher and Pamela S. Kreher
dated March
14, 2005 (incorporated by reference to Exhibit 10.18 to the Form
10-K of
the Registrant for the year ended December 31,
2004).
|
|
10.13*
|
Kreher
Employment Agreement dated March 14, 2005 (incorporated by reference
to
Exhibit 10.19 to the Form 10-K of the Registrant for the year ended
December 31, 2004).
|
|
10.14*
|
R.
Scott Montgomery Employment Agreement dated January 2, 2008 (incorporated
by reference to Exhibit 10.1 to the Form 8-K of the Registrant
filed
January 4, 2008).
|
|
10.15*
|
Ryan
A. Montgomery Employment Agreement dated January 2, 2008 (incorporated
by
reference to Exhibit 10.2 to the Form 8-K of the Registrant filed
January
4, 2008).
|
|
10.16*
|
Steven
G. Hastings Employment Agreement dated January 2, 2008 (incorporated
by
reference to Exhibit 10.3 to the Form 8-K of the Registrant filed
January
4, 2008).
|
|
10.17*
|
Steven
D. Albright Employment Agreement dated January 2, 2008 (incorporated
by
reference to Exhibit 10.4 to the Form 8-K of the Registrant filed
January
4, 2008).
|
|
10.18*
|
Brett
M. Hastings Employment Agreement dated January 2, 2008 (incorporated
by
reference to Exhibit 10.5 to the Form 8-K of the Registrant filed
January
4, 2008).
|
| 11 |
Statement
re: computation of per share earnings (incorporated by reference
to Note 8
of the Consolidated Financial Statements contained in Part
IV).
|
|
21
|
Subsidiaries
of the Registrant (filed herewith).
|
|
23
|
Consent
of Ernst & Young LLP, Independent Auditors (filed
herewith).
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a)
of the Securities Exchange Act, as amended (filed
herewith).
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a)
of the Securities Exchange Act, as amended (filed
herewith).
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant
to 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act
of 2002 (filed herewith).
|
48
Reliv’
International, Inc.
and
Subsidiaries
Consolidated
Financial Statements
Years
ended December 31, 2007, 2006, and 2005
Contents
Consolidated
Financial Statements:
|
Reports
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
F-3
|
|
|
Consolidated
Statements of Income for the years ended
December
31, 2007, 2006, and 2005
|
F-5
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended
December
31, 2007, 2006, and 2005
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for the years ended
December
31, 2007, 2006, and 2005
|
F-7
|
|
|
Notes
to Consolidated Financial Statements - December
31, 2007
|
F-9
|
|
|
|
||
|
Financial
Statement Schedule:
|
|
|
|
Schedule
II - Valuation and Qualifying Accounts for the years ended
December
31, 2007, 2006, and 2005
|
F-32
|
All
other
schedules for which provision is made in the applicable accounting regulation
of
the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
Report
of
Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Reliv’
International, Inc.
We
have
audited the accompanying consolidated balance sheets of Reliv’ International,
Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2007. Our audits also
included the financial statement schedule listed in the index at Item 15(a).
These financial statements and schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Reliv’ International,
Inc. and Subsidiaries at December 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the three years
in
the period ended December 31, 2007, in conformity with U.S. 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 respects, the information set forth
therein.
As
discussed in Note 1 to the consolidated financial statements, in 2007 the
Company adopted Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of Financial
Accounting Standard No. 109 and
changed its method of accounting for uncertainty for income taxes.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Reliv’ International, Inc. and Subsidiaries’
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March
12,
2008,
expressed an unqualified opinion thereon.
/s/
Ernst
& Young LLP
St.
Louis, Missouri
March
12,
2008
F-1
Report
of
Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Reliv’
International, Inc.
We
have
audited Reliv’ International Inc. and Subsidiaries (Reliv’ International, Inc.)
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Reliv’ International, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Report on Internal
Control Over Financial Reporting.
Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, Reliv’ International, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on the
COSO
criteria.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Reliv’
International, Inc. as of December 31, 2007 and 2006, and the related
consolidated statements of income, stockholders’ equity, and cash flows for each
of the three years in the period ended December 31, 2007, of Reliv’
International, Inc., and our report dated March 12, 2008, expressed an
unqualified opinion thereon.
/s/
Ernst
& Young LLP
St.
Louis, Missouri
March
12,
2008
F-2
Reliv’
International, Inc. and Subsidiaries
Consolidated
Balance Sheets
|
December
31
|
|||||||
|
2007
|
2006
|
||||||
|
Assets
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
11,694,699
|
$
|
9,332,810
|
|||
|
Short-term
investments
|
398,592
|
7,864,000
|
|||||
|
Accounts
and notes receivable, less allowances of $8,300 in 2007 and $6,200
in
2006
|
811,634
|
669,379
|
|||||
|
Accounts
due from employees and distributors
|
204,705
|
223,246
|
|||||
|
Inventories:
|
|||||||
|
Finished
goods
|
3,290,114
|
2,752,770
|
|||||
|
Raw
materials
|
1,630,976
|
1,337,661
|
|||||
|
Sales
aids and promotional materials
|
1,258,148
|
687,790
|
|||||
|
Total
inventories
|
6,179,238
|
4,778,221
|
|||||
|
Refundable
income taxes
|
362,330
|
279,096
|
|||||
|
Prepaid
expenses and other current assets
|
862,172
|
1,103,996
|
|||||
|
Deferred
income taxes
|
574,430
|
594,430
|
|||||
|
Total
current assets
|
21,087,800
|
24,845,178
|
|||||
|
Other
assets
|
2,999,903
|
2,639,537
|
|||||
|
Accounts
due from employees and distributors
|
319,883
|
362,959
|
|||||
|
Property,
plant, and equipment
|
18,511,944
|
18,555,718
|
|||||
|
Less
accumulated depreciation
|
9,312,759
|
9,121,172
|
|||||
|
9,199,185
|
9,434,546
|
||||||
|
Total
assets
|
$
|
33,606,771
|
$
|
37,282,220
|
|||
F-3
Reliv’
International, Inc. and Subsidiaries
Consolidated
Balance Sheets (continued)
|
December
31
|
|||||||
|
2007
|
2006
|
||||||
|
Liabilities
and stockholders’ equity
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable and accrued expenses
|
$
|
8,464,257
|
$
|
8,615,256
|
|||
|
Income
taxes payable
|
110,000
|
-
|
|||||
|
Total
current liabilities
|
8,574,257
|
8,615,256
|
|||||
|
Noncurrent
liabilities:
|
|||||||
|
Noncurrent
deferred income taxes
|
-
|
42,000
|
|||||
|
Other
noncurrent liabilities
|
1,227,313
|
891,113
|
|||||
|
Total
noncurrent liabilities
|
1,227,313
|
933,113
|
|||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock, par value $0.001 per share;
3,000,000
shares authorized; -0- shares issued and
outstanding
in 2007 and 2006
|
-
|
-
|
|||||
|
Common
stock, par value $0.001 per share;
30,000,000
shares authorized, 15,877,179 shares
issued
and 15,873,754 shares outstanding in 2007;
16,730,465
shares issued and 16,605,523 shares
outstanding
in 2006
|
15,877
|
16,731
|
|||||
|
Additional
paid-in capital
|
33,100,351
|
34,732,421
|
|||||
|
Accumulated
deficit
|
(8,869,332
|
)
|
(5,336,866
|
)
|
|||
|
Accumulated
other comprehensive loss:
|
|||||||
|
Foreign
currency translation adjustment
|
(419,179
|
)
|
(540,653
|
)
|
|||
|
Treasury
stock
|
(22,516
|
)
|
(1,137,782
|
)
|
|||
|
Total
stockholders’ equity
|
23,805,201
|
27,733,851
|
|||||
|
Total
liabilities and stockholders’ equity
|
$
|
33,606,771
|
$
|
37,282,220
|
|||
See
accompanying notes.
F-4
Reliv’ International, Inc. and Subsidiaries
Consolidated
Statements of Income
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Product
sales
|
$
|
99,465,246
|
$
|
105,497,420
|
$
|
102,045,383
|
||||
|
Handling
& freight income
|
11,592,258
|
11,969,737
|
11,519,781
|
|||||||
|
Net
sales
|
111,057,504
|
117,467,157
|
113,565,164
|
|||||||
|
Costs
and expenses:
|
||||||||||
|
Cost
of products sold
|
19,100,527
|
19,519,904
|
19,264,347
|
|||||||
|
Distributor
royalties and commissions
|
44,298,744
|
47,127,026
|
45,479,062
|
|||||||
|
Selling,
general, and administrative
|
40,363,322
|
38,716,529
|
36,348,526
|
|||||||
|
Income
from operations
|
7,294,911
|
12,103,698
|
12,473,229
|
|||||||
|
Other
income (expense):
|
||||||||||
|
Interest
income
|
634,446
|
692,595
|
238,473
|
|||||||
|
Interest
expense
|
(1,373
|
)
|
(50,156
|
)
|
(313,329
|
)
|
||||
|
Other
income
|
314,131
|
256,966
|
101,043
|
|||||||
|
Income
before income taxes
|
8,242,115
|
13,003,103
|
12,499,416
|
|||||||
|
Provision
for income taxes
|
3,201,000
|
5,105,000
|
4,978,000
|
|||||||
|
Net
income available to common
|
||||||||||
|
shareholders
|
$
|
5,041,115
|
$
|
7,898,103
|
$
|
7,521,416
|
||||
|
Earnings
per common share - Basic
|
$
|
0.31
|
$
|
0.48
|
$
|
0.47
|
||||
|
Weighted
average shares
|
16,094,000
|
16,465,000
|
15,885,000
|
|||||||
|
Earnings
per common share - Diluted
|
$
|
0.31
|
$
|
0.47
|
$
|
0.46
|
||||
|
Weighted
average shares
|
16,303,000
|
16,727,000
|
16,388,000
|
|||||||
See
accompanying notes.
F-5
Reliv’
International, Inc. and Subsidiaries
Consolidated
Statements of Stockholders’ Equity
|
|
|
|
|
Accumulated
|
|
|
|
||||||||||||||||||
|
|
|
Additional
|
|
Other
|
|
|
|
||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Accumulated
|
Comprehensive
|
Treasury
Stock
|
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Loss
|
Shares
|
Amount
|
Total
|
||||||||||||||||||
|
Balance
at December 31, 2004
|
|
16,323,668
|
$
|
16,324
|
$
|
22,661,179
|
$
|
(3,719,711
|
)
|
$
|
(758,331
|
)
|
|
2,737
|
$
|
(8,708
|
)
|
$
|
18,190,753
|
||||||
|
Net
income
|
-
|
-
|
7,521,416
|
-
|
-
|
-
|
7,521,416
|
||||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
88,985
|
-
|
-
|
88,985
|
|||||||||||||||||
|
Total
comprehensive income
|
7,610,401
|
||||||||||||||||||||||||
|
Common
stock dividends paid, $0.075 per share
|
-
|
-
|
-
|
(1,188,288
|
)
|
-
|
-
|
-
|
(1,188,288
|
)
|
|||||||||||||||
|
Warrants
granted under DSPP
|
-
|
-
|
66,674
|
-
|
-
|
-
|
-
|
66,674
|
|||||||||||||||||
|
Common
stock purchased for treasury
|
-
|
-
|
-
|
-
|
-
|
1,460,155
|
(13,790,375
|
)
|
(13,790,375
|
)
|
|||||||||||||||
|
Retirement
of treasury stock
|
(1,410,698
|
)
|
(1,411
|
)
|
(1,746,357
|
)
|
(11,539,012
|
)
|
-
|
(1,410,698
|
)
|
13,286,780
|
-
|
||||||||||||
|
Proceeds
from sale of treasury stock
|
-
|
-
|
22,547
|
-
|
-
|
(2,112
|
)
|
10,813
|
33,360
|
||||||||||||||||
|
Options
and warrants exercised
|
700,674
|
701
|
598,420
|
(326,818
|
)
|
-
|
-
|
-
|
272,303
|
||||||||||||||||
|
Tax
benefit from exercise of options and warrants
|
-
|
-
|
1,370,000
|
-
|
-
|
-
|
-
|
1,370,000
|
|||||||||||||||||
|
Balance
at December 31, 2005
|
15,613,644
|
15,614
|
22,972,463
|
(9,252,413
|
)
|
(669,346
|
)
|
50,082
|
(501,490
|
)
|
12,564,828
|
||||||||||||||
|
Net
income
|
-
|
-
|
-
|
7,898,103
|
-
|
-
|
-
|
7,898,103
|
|||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
128,693
|
-
|
-
|
128,693
|
|||||||||||||||||
|
Total
comprehensive income
|
8,026,796
|
||||||||||||||||||||||||
|
Common
stock dividends paid, $0.100 per share
|
-
|
-
|
-
|
(1,675,582
|
)
|
-
|
-
|
-
|
(1,675,582
|
)
|
|||||||||||||||
|
Warrants
granted under DSPP
|
-
|
-
|
102,224
|
-
|
-
|
-
|
-
|
102,224
|
|||||||||||||||||
|
Employee
stock-based compensation
|
-
|
-
|
62,991
|
-
|
-
|
-
|
-
|
62,991
|
|||||||||||||||||
|
Common
stock purchased for treasury
|
-
|
-
|
-
|
-
|
-
|
416,487
|
(3,602,531
|
)
|
(3,602,531
|
)
|
|||||||||||||||
|
Retirement
of treasury stock
|
(341,627
|
)
|
(342
|
)
|
(707,608
|
)
|
(2,258,289
|
)
|
-
|
(341,627
|
)
|
2,966,239
|
-
|
||||||||||||
|
Proceeds
from issuance of common stock, net
|
1,200,000
|
1,200
|
11,917,592
|
-
|
-
|
-
|
-
|
11,918,792
|
|||||||||||||||||
|
Options
and warrants exercised
|
258,448
|
259
|
262,451
|
(48,685
|
)
|
-
|
-
|
-
|
214,025
|
||||||||||||||||
|
Tax
benefit from exercise of options and warrants
|
-
|
-
|
122,308
|
-
|
-
|
-
|
-
|
122,308
|
|||||||||||||||||
|
Balance
at December 31, 2006
|
16,730,465
|
|
16,731
|
|
34,732,421
|
|
(5,336,866
|
)
|
|
(540,653
|
)
|
124,942
|
|
(1,137,782
|
)
|
|
27,733,851
|
||||||||
|
Net
income
|
-
|
-
|
-
|
5,041,115
|
-
|
-
|
-
|
5,041,115
|
|||||||||||||||||
|
Other
comprehensive income:
|
|||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
121,474
|
-
|
-
|
121,474
|
|||||||||||||||||
|
Total
comprehensive income
|
5,162,589
|
||||||||||||||||||||||||
|
Common
stock dividends paid, $0.100 per share
|
-
|
-
|
-
|
(1,600,621
|
)
|
-
|
-
|
-
|
(1,600,621
|
)
|
|||||||||||||||
|
Warrants
granted under DSPP
|
-
|
-
|
80,026
|
-
|
-
|
-
|
-
|
80,026
|
|||||||||||||||||
|
Employee
stock-based compensation
|
-
|
-
|
75,151
|
-
|
-
|
-
|
-
|
75,151
|
|||||||||||||||||
|
Common
stock purchased for treasury
|
-
|
-
|
-
|
-
|
-
|
752,491
|
(7,677,124
|
)
|
(7,677,124
|
)
|
|||||||||||||||
|
Retirement
of treasury stock
|
(874,008
|
)
|
(874
|
)
|
(1,818,556
|
)
|
(6,972,960
|
)
|
-
|
(874,008
|
)
|
8,792,390
|
-
|
||||||||||||
|
Options
and warrants exercised
|
28,722
|
28
|
83,469
|
-
|
-
|
-
|
-
|
83,497
|
|||||||||||||||||
|
Other
|
(8,000
|
)
|
(8
|
)
|
(52,160
|
)
|
-
|
-
|
-
|
-
|
(52,168
|
)
|
|||||||||||||
|
Balance
at December 31, 2007
|
15,877,179
|
$
|
15,877
|
$
|
33,100,351
|
$
|
(8,869,332
|
)
|
$
|
(419,179
|
)
|
3,425
|
$
|
(22,516
|
)
|
$
|
23,805,201
|
||||||||
See accompanying notes.
F-6
Reliv’
International, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
income
|
$
|
5,041,115
|
$
|
7,898,103
|
$
|
7,521,416
|
||||
|
Adjustments
to reconcile net income to net
|
||||||||||
|
cash
provided by operating activities:
|
||||||||||
|
Depreciation
and amortization
|
1,114,974
|
1,243,407
|
1,417,166
|
|||||||
|
Stock-based
compensation
|
155,177
|
165,215
|
66,674
|
|||||||
|
Tax
benefit from exercise of options
|
-
|
-
|
1,370,000
|
|||||||
|
Deferred
income taxes
|
(40,000
|
)
|
(189,000
|
)
|
(366,000
|
)
|
||||
|
Foreign
currency transaction (gain)/loss
|
(118,718
|
)
|
(194,760
|
)
|
268,436
|
|||||
|
(Increase)
decrease in accounts and notes receivable
|
(50,098
|
)
|
52,869
|
(108,587
|
)
|
|||||
|
(Increase)
decrease in inventories
|
(1,286,334
|
)
|
896,792
|
327,447
|
||||||
|
(Increase)
decrease in refundable income taxes
|
(90,923
|
)
|
(260,035
|
)
|
1,288,260
|
|||||
|
(Increase)
decrease in prepaid expenses and other
|
||||||||||
|
current
assets
|
268,442
|
154,428
|
(173,057
|
)
|
||||||
|
Increase
in other assets
|
(430,747
|
)
|
(49,677
|
)
|
(465,991
|
)
|
||||
|
Increase
in accounts payable and accrued expenses
|
90,397
|
63,346
|
538,723
|
|||||||
|
Increase
(decrease) in income taxes payable
|
110,000
|
(821,571
|
)
|
819,344
|
||||||
|
Net
cash provided by operating activities
|
4,763,285
|
8,959,117
|
12,503,831
|
|||||||
|
Investing
activities
|
||||||||||
|
Proceeds
from sale of property, plant, and equipment
|
4,847
|
97,117
|
148,506
|
|||||||
|
Purchase
of property, plant, and equipment
|
(841,193
|
)
|
(572,748
|
)
|
(1,710,523
|
)
|
||||
|
Purchase
of investments
|
(1,398,592
|
)
|
(8,974,000
|
)
|
-
|
|||||
|
Proceeds
from sales or maturities of investments, at cost
|
8,864,000
|
110,000
|
-
|
|||||||
|
Net
cash provided by (used in) investing activities
|
6,629,062
|
(9,339,631
|
)
|
(1,562,017
|
)
|
|||||
|
Financing
activities
|
||||||||||
|
Principal
payments on long-term borrowings and line of
|
||||||||||
|
credit
|
-
|
(3,127,344
|
)
|
(3,655,514
|
)
|
|||||
|
Net
proceeds from issuance of common stock
|
-
|
11,918,792
|
-
|
|||||||
|
Common
stock dividends paid
|
(1,600,621
|
)
|
(1,675,582
|
)
|
(1,188,288
|
)
|
||||
|
Proceeds
from options and warrants exercised
|
83,497
|
214,025
|
273,520
|
|||||||
|
Excess
tax benefits from stock-based compensation
|
-
|
103,182
|
-
|
|||||||
|
Purchase
of stock for treasury
|
(7,677,124
|
)
|
(3,602,531
|
)
|
(10,690,375
|
)
|
||||
|
Proceeds
from sale of treasury stock
|
-
|
-
|
33,360
|
|||||||
|
Net
cash provided by (used in) financing activities
|
(9,194,248
|
)
|
3,830,542
|
(15,227,297
|
)
|
|||||
|
Effect
of exchange rate changes on cash and cash
|
||||||||||
|
equivalents
|
163,790
|
229,188
|
(212,426
|
)
|
||||||
|
Increase
(decrease) in cash and cash equivalents
|
2,361,889
|
3,679,216
|
(4,497,909
|
)
|
||||||
|
Cash
and cash equivalents at beginning of year
|
9,332,810
|
5,653,594
|
10,151,503
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
11,694,699
|
$
|
9,332,810
|
$
|
5,653,594
|
||||
F-7
Reliv’
International, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows (continued)
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Interest
|
$
|
1,373
|
$
|
81,156
|
$
|
300,329
|
||||
|
Income
taxes
|
$
|
3,036,000
|
$
|
6,262,000
|
$
|
1,838,000
|
||||
|
Noncash
investing and financing transactions:
|
||||||||||
|
Issuance
of promissory notes for purchase
|
||||||||||
|
of
stock for treasury
|
$
|
-
|
$
|
-
|
$
|
4,050,000
|
||||
See
accompanying notes.
F-8
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
December
31, 2007
1.
Nature of Business and Significant Accounting Policies
Nature
of Business
Reliv’
International, Inc. (the Company) produces a proprietary line of nutritional
supplements addressing basic nutrition, specific wellness needs, weight
management, and sports nutrition. These products are sold by subsidiaries of
the
Company to a sales force of independent distributors and licensees of the
Company that sell products directly to consumers. The Company and its
subsidiaries sell products to distributors throughout the United States and
in
Australia, Austria, Canada, Germany, Ireland, Malaysia, Mexico, the Netherlands,
New Zealand, the Philippines, Singapore, and the United Kingdom.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
foreign and domestic subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Inventories
Inventories
are valued at the lower of cost or market. Product cost includes raw materials,
labor, and overhead costs and is accounted for using the first-in, first-out
basis. On a periodic basis, the Company reviews its inventory levels, as
compared to future demand requirements and the shelf life of the various
products. Based on this review, the Company records inventory write-downs when
necessary.
In
2006,
the Company adopted SFAS No. 151, “Inventory Costs” which clarifies that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage) should be recognized as period charges, rather than as
an
inventory value. This standard also requires the allocation of fixed production
overheads to inventory based on the normal capacity of the production
facilities. The Company’s pre-existing accounting policy for inventory valuation
was generally consistent with this guidance, and therefore, the adoption of
SFAS
No. 151 did not have a significant impact on 2006 financial
results.
Property,
Plant, and Equipment
Property,
plant, and equipment are stated on the cost basis. Depreciation is computed
using the straight-line or an accelerated method over the useful life of the
related assets. Generally, computer equipment and software are depreciated
over
5 years, office equipment and machinery over 7 years, and real property over
39
years.
F-9
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
1. Nature
of Business and Significant Accounting Policies
(continued)
Foreign
Currency Translation
All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Statements of income amounts have been translated
using the average exchange rate for the year. The gains and losses resulting
from the changes in exchange rates from year to year have been reported in
other
comprehensive income (loss). The foreign currency translation adjustment is
the
only component of accumulated other comprehensive loss. Foreign currency
translation adjustments exclude income tax expense (benefit) given that the
Company’s investments in non-U.S. subsidiaries are deemed to be reinvested for
an indefinite period of time. The transaction (gains) losses were ($118,718), ($194,760),
and $268,436 for 2007, 2006, and 2005, respectively.
Revenue
Recognition
The
Company receives payment by credit card, personal check, or guaranteed funds
for
orders from independent distributors and makes related commission payments
in
the following month. Net sales reflect product sales less the distributor
discount of 20 percent to 40 percent of the suggested retail price. Sales
revenue and commission expenses are recorded when the merchandise is shipped,
as
this is the point title and risk of loss pass. In accordance with EITF 01-09,
the Company presents distributor royalty and commission expense as an operating
expense, rather than a reduction to net sales, as these payments are not made
to
the purchasing distributor.
Actual
and estimated returns are classified as a reduction of net sales. The Company
estimates and accrues a reserve for product returns based on the Company’s
return policy and historical experience. The Company records handling and
freight income as a component of net sales and records handling and freight
costs as a component of cost of products sold. Total revenues do not include
sales tax as the Company considers itself a pass-through conduit for collecting
and remitting applicable sales taxes.
Basic
and Diluted Earnings per Share
Basic
earnings per common share are computed using the weighted average number of
common shares outstanding during the year. Diluted earnings per common share
are
computed using the weighted average number of common shares and potential
dilutive common shares that were outstanding during the period. Potential
dilutive common shares consist of outstanding stock options, outstanding stock
warrants, and convertible preferred stock. See Note 8 for additional information
regarding earnings per share.
F-10
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
1. Nature
of Business and Significant Accounting Policies
(continued)
Stock-Based
Compensation
The
Company has a stock option plan for employees and eligible directors allowing
for incentive and non-qualified stock options, which are described more fully
in
Note 7. On January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123R, “Share-Based Payments” (“SFAS No. 123(R)”) using
the modified prospective transition method. Under this method, the Company’s
consolidated financial statements for prior periods have not been restated
and
do not include the impact of SFAS No. 123(R). Accordingly, no compensation
expense related to stock option awards was recognized in the year ended December
31, 2005 because all stock options granted had an exercise price equal to the
fair market value of the underlying common stock on the date of grant. The
following table shows the effect on net income and earnings per share as if
the
fair-value-based method of accounting had been applied to all outstanding and
unvested stock options prior to adoption of SFAS No. 123(R). For purposes of
this pro forma disclosure, the estimated fair value of the stock option award
is
assumed to be expensed over the award’s vesting periods using the Black-Scholes
model.
|
Year
ended
December
31
|
||||
|
2005
|
||||
|
Basic:
|
||||
|
Net
income available to common
|
||||
|
shareholders,
as reported
|
$
|
7,521,416
|
||
|
Deduct:
total stock-based employee compensation
|
||||
|
expense
determined under fair value-based method
|
||||
|
for
all awards, net of related tax effects
|
1,645,036
|
|||
|
Pro
forma net income available to common
|
||||
|
shareholders
|
$
|
5,876,380
|
||
|
Diluted:
|
||||
|
Net
income available to common shareholders,
|
||||
|
as
reported
|
$
|
7,521,416
|
||
|
Deduct:
total stock-based employee compensation
|
||||
|
expense
determined under fair value-based method
|
||||
|
for
all awards, net of related tax effects
|
1,645,036
|
|||
|
Pro
forma net income available to common
|
||||
|
shareholders
|
$
|
5,876,380
|
||
|
Earnings
per share:
|
||||
|
Basic—as
reported
|
$
|
0.47
|
||
|
Basic—pro
forma
|
$
|
0.37
|
||
|
|
||||
|
Diluted—as
reported
|
$
|
0.46
|
||
|
Diluted—pro
forma
|
$
|
0.36
|
||
F-11
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
1. Nature
of Business and Significant Accounting Policies
(continued)
Stock-Based
Compensation (continued)
The
Company accounts for options granted to non-employees and warrants granted
to
distributors under the fair value approach required by EITF 96-18, “Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods, or Services.”
Income
Taxes
The
provision for income taxes is computed using the liability method. The primary
differences between financial statement and taxable income result from financial
statement accruals and reserves and differences between depreciation for book
and tax purposes.
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No.
48”). FIN No. 48 prescribes a more likely than not threshold for financial
statement presentation and measurement of a tax position taken or expected
to be
taken in a tax return. FIN No. 48 also provides guidance on de-recognition
of
income tax assets and liabilities, accounting for interest and penalties
associated with tax positions, accounting for income taxes in interim periods,
and income tax disclosures. Effective January 1, 2007, the Company adopted
FIN
No. 48. See “Note 11: Income Taxes” for further discussion.
Advertising
Costs
of
sales aids and promotional materials are capitalized as inventories. All other
advertising and promotional costs are expensed when incurred. The Company
recorded $226,000, $296,000, and $52,000 of advertising expense in 2007, 2006,
and 2005, respectively.
Research
and Development Expenses
Research
and development expenses which are charged to selling, general, and
administrative expenses as incurred were $453,000, $437,000, and $558,000 in
2007, 2006, and 2005, respectively.
Cash
Equivalents
The
Company's policy is to consider the following as cash and cash equivalents:
demand deposits, short-term investments with a maturity of three months or
less
when purchased, and highly liquid debt securities with insignificant interest
rate risk and with original maturities from the date of purchase of generally
three months or less.
F-12
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
1. Nature
of Business and Significant Accounting Policies
(continued)
Short-Term
Investments
Short-term
investments, categorized as available-for-sale, are comprised of investment
grade variable rate debt obligations issued by various state and municipal
governments. Accordingly, investments in these securities are recorded at cost,
which approximates fair value due to their variable interest rates, which
typically reset every 35 days or less. Despite the long-term nature of their
stated contractual maturities, the Company has the ability to quickly liquidate
these securities and therefore classifies them as current assets. As a result
of
the resetting variable rates, no cumulative gross unrealized or realized holding
gains or losses are recognized from these investments. In accordance with
management’s objective for their available-for-sale investments, each reset of
the variable interest rate is not considered a sale and subsequent repurchase.
Accordingly, this activity is presented net in the consolidated statements
of
cash flows.
Short-term
investments also include certificates of deposit with original maturities at
acquisition ranging from greater than ninety days and less than one year. Income
generated from all short-term investments is presented as interest income in
the
consolidated statements of income.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and
accompanying notes. Actual results could differ from those
estimates.
Reclassifications
In
years
prior to 2006, in addition to the required disclosure of "net sales," the
Company reported "sales at suggested retail," representing the gross sales
amount reflected on the Company's invoices to distributors before "distributor
allowances." Beginning in 2006, the Company reclassified the presentation of
"net sales" by presenting "product sales" and "handling & freight income."
Handling and freight income represents the amounts billed to distributors for
shipping costs. Product sales represent the actual product purchase price
typically paid by the Company's distributors, after giving effect to distributor
allowances, which range from 20% to 40% of suggested retail prices. Subsequent
to this classification, net sales for all years presented represent product
sales and handling & freight income.
To
conform to the 2007 and 2006 presentation, previously reported 2005 amounts
for
other income have been reclassified to interest income and other income within
the consolidated statements of income.
F-13
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
1. Nature
of Business and Significant Accounting Policies
(continued)
New
Accounting Pronouncements
Fair
Value Positions
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS
No. 157) which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. In February 2008,
the FASB issued FASB Staff Position (FSP) 157-1, “Application of FASB Statement
No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13” (FSP 157-1) and FSP 157-2, “Effective Date of
FASB Statement No. 157” (FSP 157-2). FSP 157-1 amends SFAS No. 157 to remove
certain leasing transactions from its scope. FSP 157-2 delays the effective
date
of SFAS No. 157 for all non-financial assets and non-financial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the beginning of
the
first quarter of fiscal 2009. The measurement and disclosure requirements
related to financial and non-financial assets and liabilities are not
anticipated to have a significant impact on the Company’s consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS No. 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and other items
at
fair value. The standard requires that unrealized gains and losses are reported
in earnings for items measured using the fair value option. SFAS No. 159 is
effective for the Company on January 1, 2008. The adoption of SFAS No. 159
is
not expected to have a significant impact on the Company’s consolidated
financial statements.
F-14
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
2.
Property, Plant, and Equipment
Property,
plant, and equipment at December 31, 2007 and 2006, consist of the
following:
|
2007
|
2006
|
||||||
|
Land
|
$
|
829,222
|
$
|
829,222
|
|||
|
Building
|
9,817,692
|
9,565,221
|
|||||
|
Machinery
and equipment
|
3,673,515
|
4,199,714
|
|||||
|
Office
equipment
|
1,525,905
|
1,520,297
|
|||||
|
Computer
equipment and software
|
2,665,610
|
2,441,264
|
|||||
|
18,511,944
|
18,555,718
|
||||||
|
Less
accumulated depreciation
|
9,312,759
|
9,121,172
|
|||||
|
$
|
9,199,185
|
$
|
9,434,546
|
||||
3.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses at December 31, 2007 and 2006, consist of the
following:
|
2007
|
2006
|
||||||
|
Trade
payables
|
$
|
4,288,481
|
$
|
3,824,951
|
|||
|
Distributors'
commissions
|
3,285,270
|
3,449,687
|
|||||
|
Sales
taxes
|
390,585
|
421,923
|
|||||
|
Payroll
and payroll taxes
|
499,921
|
918,695
|
|||||
|
$
|
8,464,257
|
$
|
8,615,256
|
||||
On
June
28, 2006, the Company entered into a new revolving loan agreement with its
primary lender. The new agreement has an effective date of April 30, 2006 and
replaces the prior revolving loan agreement with the same lender. Under the
new
agreement, the lender agreed to provide a line of credit for the Company in
the
amount of $5 million, reduced from $15 million under the prior agreement.
This
new
revolving line of credit facility expires on April 30, 2008, and any advances
accrue interest at a variable interest rate based on LIBOR. Similar to the
previous facility, the new facility includes covenants to maintain total
stockholders' equity of not less than $10.5 million, and that borrowings under
the facility shall not exceed EBITDA by a ratio of 3.5:1. A commitment fee
in an
amount equal to 0.25% per year is payable quarterly on the average daily-unused
portion of the revolver. At December 31, 2007, the Company had not utilized
any
of the new revolving line of credit facility and was in compliance with the
minimum stockholders' equity covenant.
F-15
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
5.
Investments
Available-for-Sale
Investments
Available-for-sale investments at December 31, 2007 are
as
follows:
|
Unrealized
|
Recorded
|
Cash
and
|
Short-term
|
|||||||||||||
|
Cost
|
gains
/ (losses)
|
basis
|
cash
equivalents
|
investments
|
||||||||||||
|
Cash
|
$
|
7,670,244
|
$
|
-
|
$
|
7,670,244
|
$
|
7,670,244
|
||||||||
|
Certificates
of deposit
|
4,423,047
|
-
|
4,423,047
|
4,024,455
|
398,592
|
|||||||||||
|
$
|
12,093,291
|
$
|
-
|
$
|
12,093,291
|
$
|
11,694,699
|
$
|
398,592
|
|||||||
Available-for-sale
investments at December 31, 2006 are as follows:
|
Unrealized
|
Recorded
|
Cash
and
|
Short-term
|
|||||||||||||
|
Cost
|
gains
/ (losses)
|
basis
|
cash
equivalents
|
investments
|
||||||||||||
|
Cash
|
$
|
7,382,810
|
$
|
-
|
$
|
7,382,810
|
$
|
7,382,810
|
$
|
-
|
||||||
|
Municipal
securities
|
5,000,000
|
-
|
5,000,000
|
-
|
5,000,000
|
|||||||||||
|
Commercial
paper
|
1,950,000
|
-
|
1,950,000
|
1,950,000
|
-
|
|||||||||||
|
Certificates
of deposit
|
1,924,000
|
-
|
1,924,000
|
-
|
1,924,000
|
|||||||||||
|
Industrial
revenue bonds
|
940,000
|
-
|
940,000
|
-
|
940,000
|
|||||||||||
|
$
|
17,196,810
|
$
|
-
|
$
|
17,196,810
|
$
|
9,332,810
|
$
|
7,864,000
|
|||||||
Other
Investment
In
June
2006, the Company contributed $1,000,000 as a limited partner in a private
equity fund. In accordance with EITF Topic D-46, “Accounting for Limited
Partnership Investments,” the Company accounts for its investment under the
equity method. Under this method, the Company’s proportionate share of
partnership income (loss) is recorded to other income (expense) with a
corresponding increase (decrease) in the carrying value of its investment.
For
the years ended December 31, 2007 and 2006, the Company’s partnership income was
$52,000 and $32,000, respectively. The carrying value of this investment is
$1,084,000 and $1,032,000 at December 31, 2007 and 2006, respectively, and
is
included in “Other Assets” in the accompanying consolidated balance
sheets.
Other-Than-Temporary
Impairment
All
of
the Company’s available-for-sale and other investments are subject to a periodic
impairment review. Investments are considered to be impaired when a decline
in
fair value is judged to be other-than-temporary. Once a decline in fair value
is
determined to be other-than-temporary, an impairment charge is recorded in
other
income (expense), and a new cost basis in the investment is established. For
the
years ended December 31, 2007 and 2006, a review of the Company’s investments
has not resulted in any impairment.
F-16
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
6. Fair
Value of Financial Instruments
The
carrying values and fair values of the Company’s financial instruments are
approximately as follows:
|
2007
|
2006
|
||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
||||||||||
|
Amount
|
Value
|
Amount
|
Value
|
||||||||||
|
Cash
and cash equivalents
|
$
|
11,694,699
|
$
|
11,694,699
|
$
|
9,332,810
|
$
|
9,332,810
|
|||||
|
Short-term
investments
|
398,592
|
398,592
|
7,864,000
|
7,864,000
|
|||||||||
The
carrying amount of cash equivalents and short-term investments approximates
fair
value because of the short maturity of those instruments.
7.
Stockholders’ Equity
Stock
Options
On
January 1, 2006, the Company adopted SFAS 123(R). Prior to the adoption of
SFAS
123(R), the Company had adopted the disclosure-only provisions of SFAS 123
and
accounted for employee stock-based compensation under the intrinsic value
method, and no expense related to stock options was recognized. The Company
adopted the provisions of SFAS 123(R) using the modified prospective transition
method. Under this method, the Company's consolidated financial statements
as of
and for the years ended December 31, 2007 and 2006 reflect the impact of SFAS
123(R), while the consolidated financial statements for prior periods have
not
been restated to reflect, and do not include, the impact of SFAS 123(R). SFAS
123(R) amends SFAS No. 95, "Statement of Cash Flows," to require that excess
tax
benefits be reported as a financing cash flow rather than as an operating cash
flow.
The
Company sponsors a stock option plan (the “2003 Plan”) allowing for incentive
stock options and non-qualified stock options to be granted to employees and
eligible directors. The plan has been approved by the stockholders of the
Company. The 2003 Plan provides that 1,000,000 shares may be issued under the
plan at an option price not less than the fair market value of the stock at
the
time the option is granted. The 2003 Plan expires on March 20, 2013. The options
vest pursuant to the schedule set forth for the plan. In 2005, the Company
issued grants of 543,000 shares under the 2003 Plan. The 2005 option grants
were
issued with an exercise price equal to the fair value of the shares at the
time
of grant and were fully vested in the year of grant. Accordingly, no stock-based
compensation expense has been recognized relating to the 2005 option grants.
The
fair
value of the options granted in 2005 were 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 4.02% to 4.31%; dividend
yield ranging from 0.55% to 0.80%; volatility factor of the expected price
of
the Company’s stock ranging from 0.448 to 0.516; and a weighted average expected
life of 7.0 years. The weighted average fair value of the options granted during
2005 was $4.19 per share.
F-17
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
7.
Stockholders’ Equity (continued)
Stock
Options (continued)
In
August
2007, the Company granted options to purchase 216,000 shares of common stock
under the 2003 Plan. The options were issued with an exercise price of $9.74
which is equal to the fair value of the shares at the time of
grant.
The
fair
value of the options granted in 2007 were estimated at the date of grant using
a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.01%; dividend yield of 1.00%;
volatility factor of the expected price of the Company’s stock of 0.472; an
expected life of 4.5 years and a grant date fair value of $4.07 per share.
The
options have a term of five years and vest in increments of 25% beginning August
7, 2009 and ending May 1, 2012. Expense for stock options granted in 2007 is
recognized on a straight-line basis separately for each vesting portion of
the
stock option award.
As
of
December 31, 2007, as adjusted for forfeitures, 269,500 shares remain available
for grant under the 2003 Plan.
Upon
adoption of SFAS No. 123(R) on January 1, 2006, there existed 128,720
unexercised stock options from grants made in 2001 under a prior stock option
plan. The fair value of options granted in 2001 were estimated at the date
of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions: risk-free interest rates ranging from 3.07% to 4.78%;
dividend yield of zero; volatility factor of the expected price of the Company’s
stock of 0.729; and a weighted average expected life of 4.51 years. The weighted
average fair value of options granted during 2001 was $0.42. As of December
31,
2006, all stock options granted in 2001 were vested and have either been
exercised or expired.
Compensation
cost for the stock option plans was approximately $75,000 ($51,000 net of tax)
and $63,000 ($63,000 net of tax) for the years ended December 31, 2007 and
2006,
respectively, and has been recorded in selling, general, and administrative
expense. As of December 31, 2007, the total remaining unrecognized compensation
cost related to non-vested stock options totaled $782,000 ($531,000 net of
tax),
which will be amortized over the weighted remaining requisite service period
of
4.3 years.
F-18
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
7.
Stockholders’ Equity (continued)
Stock
Options (continued)
A
summary
of the Company’s stock option activity and related information for the years
ended December 31 follows:
|
2007
|
|
2006
|
|
2005
|
|||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Avg.
|
Avg.
|
Avg.
|
|||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
|||||||||||||||||
|
Options
|
Price
|
Options
|
Price
|
Options
|
Price
|
||||||||||||||
|
Outstanding
beginning of
|
|||||||||||||||||||
|
the
year
|
542,321
|
$
|
7.70
|
835,395
|
$
|
5.46
|
1,007,435
|
$
|
0.74
|
||||||||||
|
Granted
|
216,000
|
9.74
|
-
|
543,000
|
7.97
|
||||||||||||||
|
Exercised
|
(27,321
|
)
|
2.60
|
(247,457
|
)
|
0.74
|
(710,286
|
)
|
0.72
|
||||||||||
|
Forfeited
|
(5,500
|
)
|
9.74
|
(45,617
|
)
|
4.39
|
(4,754
|
)
|
0.71
|
||||||||||
|
Outstanding
at end of
|
|||||||||||||||||||
|
year
|
725,500
|
$
|
8.48
|
542,321
|
$
|
7.70
|
835,395
|
$
|
5.46
|
||||||||||
|
Exercisable
at end of year
|
515,000
|
$
|
7.96
|
542,321
|
$
|
7.70
|
706,675
|
$
|
6.31
|
||||||||||
|
As
of December 31, 2007
|
|||||||||||||||||||
|
Options
Outstanding
|
Options
Exercisable
|
||||||||||||||||||
|
Range
of
|
Number
|
|
Weighted
Avg.
|
|
Weighted
Avg.
|
|
Number
|
|
Weighted
Avg.
|
|
Weighted
Avg.
|
||||||||
|
Exercise
Prices
|
Outstanding
|
|
Remaining
Life
|
|
Exercise
Price
|
|
Exercisable
|
|
Remaining
Life
|
|
Exercise
Price
|
||||||||
|
$7.92
|
485,000
|
7.00
|
|
$7.92
|
485,000
|
7.00
|
|
$7.92
|
|||||||||||
|
$8.68
|
30,000
|
7.79
|
8.68
|
30,000
|
7.79
|
8.68
|
|||||||||||||
|
$9.74
|
210,500
|
4.58
|
9.74
|
-
|
-
|
-
|
|||||||||||||
|
$7.92
- $9.74
|
725,500
|
6.33
|
|
$8.48
|
515,000
|
7.05
|
|
$7.96
|
|||||||||||
The
aggregate intrinsic value of stock options outstanding and currently exercisable
at December 31, 2007 was $131,000 and $131,000, respectively. Intrinsic value
for stock options is calculated based on the exercise price of the underlying
awards as compared to the quoted price of the Company’s common stock as of the
reporting date.
F-19
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
7.
Stockholders’ Equity (continued)
Stock
Options (continued)
A
summary
of the total intrinsic value, actual tax benefit realized, and cash received
for
stock options exercised for the years ended December 31 follows:
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Stock
Options Exercised:
|
||||||||||
|
Intrinsic
value
|
$
|
223,000
|
$
|
2,262,000
|
$
|
5,557,000
|
||||
|
Actual
tax benefit realized
|
-
|
108,000
|
1,342,000
|
|||||||
|
Cash
received
|
71,000
|
121,000
|
143,000
|
|||||||
Of
the
options exercised in 2006, 81,789 shares were paid with 6,537 mature shares
of
Company stock, owned six months or greater. In 2005, options for 523,344 shares
were paid with 44,960 mature shares. These shares tendered as payment were
valued at the fair market price on the date of exercise.
Distributor
Stock Purchase Plan
In
November 1998, the Company established a Distributor Stock Purchase Plan. The
plan allows distributors who have reached the “Ambassador” status the
opportunity to allocate up to 10% of their monthly compensation into the plan
to
be used to purchase the Company’s common stock at the current market value. The
plan also states that at the end of each year, the Company will grant warrants
to purchase additional shares of the Company’s common stock based on the number
of shares purchased by the distributors under the plan during the year. The
warrant exercise price will equal the market price for the Company’s common
stock at the date of issuance. The warrants issued shall be in the amount of
25%
of the total shares purchased under the plan during the year. This plan
commenced in January 1999, and a total of 25,891, 28,995, and 25,303 warrants
were issued during the years ended December 31, 2007, 2006, and 2005,
respectively. The warrants are fully vested upon grant. The weighted average
fair values of warrants granted during 2007, 2006, and 2005 were $2.25, $2.76,
and $4.04 per share, respectively.
The
Company records expense under the fair value method of SFAS No. 123(R) for
warrants granted to distributors. Total expense recorded for these warrants
was
$80,026, $102,224, and $66,674 in 2007, 2006, and 2005, respectively. The fair
value of the warrants was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions:
F-20
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
7.
Stockholders’ Equity (continued)
Distributor
Stock Purchase Plan (continued)
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Expected
warrant life (years)
|
2.5
|
2.5
|
2.5
|
|||||||
|
Risk-free
weighted average interest rate
|
3.07
|
%
|
4.74
|
%
|
4.37
|
%
|
||||
|
Stock
price volatility
|
0.431
|
0.476
|
0.448
|
|||||||
|
Dividend
yield
|
1.2
|
%
|
1.0
|
%
|
0.6
|
%
|
||||
A
summary
of the Company’s warrant activity and related information for the years ended
December 31 follows:
|
2007
|
2006
|
2005
|
|||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Avg.
|
Avg.
|
Avg.
|
|||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
|||||||||||||||||
|
Warrants
|
Price
|
Warrants
|
Price
|
Warrants
|
Price
|
||||||||||||||
|
Outstanding
beginning of
|
|||||||||||||||||||
|
the
year
|
76,142
|
$
|
10.25
|
66,719
|
$
|
9.47
|
76,852
|
$
|
5.70
|
||||||||||
|
Granted
|
25,891
|
8.19
|
28,995
|
8.68
|
25,303
|
13.18
|
|||||||||||||
|
Exercised
|
(1,401
|
)
|
8.85
|
(17,528
|
)
|
5.28
|
(35,347
|
)
|
3.94
|
||||||||||
|
Expired
and forfeited
|
(20,908
|
)
|
8.94
|
(2,044
|
)
|
5.12
|
(89
|
)
|
3.73
|
||||||||||
|
Outstanding
at end of
|
|||||||||||||||||||
|
year
|
79,724
|
$
|
9.95
|
76,142
|
$
|
10.25
|
66,719
|
$
|
9.47
|
||||||||||
|
Exercisable
at end of year
|
79,724
|
76,142
|
66,719
|
||||||||||||||||
|
As
of December 31, 2007
|
||||||||||||||||
|
Warrants
Outstanding
|
Warrants
Exercisable
|
|||||||||||||||
|
Range
of
|
Number
|
Weighted
Avg.
|
Weighted
Avg.
|
Number
|
Weighted
Avg.
|
|||||||||||
|
Exercise
Prices
|
Outstanding
|
Remaining
Life
|
Exercise
Price
|
Exercisable
|
Exercise
Price
|
|||||||||||
|
$8.19
|
25,891
|
3.00
|
|
$8.19
|
25,891
|
|
$8.19
|
|||||||||
|
$8.68
|
28,530
|
2.00
|
8.68
|
28,530
|
8.68
|
|||||||||||
|
$13.18
|
25,303
|
1.00
|
13.18
|
25,303
|
13.18
|
|||||||||||
|
$8.19
- $13.18
|
79,724
|
2.01
|
|
$9.95
|
79,724
|
|
$9.95
|
|||||||||
F-21
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
7.
Stockholders’ Equity (continued)
Distributor
Stock Purchase Plan (continued)
A
summary
of the total intrinsic value, actual tax benefit realized, and cash received
for
stock warrants exercised for the years ended December 31 follows:
|
Year
ended December 31
|
||||||||||
|
|
2007
|
2006
|
2005
|
|||||||
|
Stock
Warrants Exercised:
|
||||||||||
|
Intrinsic
value
|
$
|
2,000
|
$
|
78,000
|
$
|
212,000
|
||||
|
Actual
tax benefit realized
|
1,000
|
14,000
|
28,000
|
|||||||
|
Cash
received
|
12,000
|
93,000
|
131,000
|
|||||||
The
intrinsic value for stock warrants outstanding at December 31, 2007 was $-0-
with a weighted average remaining life of 2.01 years.
Public
Offering of Common Stock
On
February 21, 2006, the Company filed a registration statement on Form S-3 with
the Securities and Exchange Commission relating to an underwritten public
offering of 2,000,000 shares of its common stock. On April 5, 2006, the Company
commenced the public offering at a price of $11.25 per share. The public
offering was completed on April 11, 2006 and consisted of 1,200,000 shares
of
common stock offered and sold by the Company and 800,000 shares of common stock
offered and sold by selling stockholders. The selling stockholders were four
directors and/or officers of the Company. The underwriters had a 30-day option
to purchase up to 300,000 additional shares from certain of the selling
stockholders to cover over-allotments, if any. This option was exercised for
the
full 300,000 shares and closed on May 9, 2006. The Company did not receive
any
proceeds from the sale of common stock by the selling stockholders.
The
Company used a portion of the net proceeds from the offering for the repayment
of long-term debt and used the remaining net proceeds for general corporate
purposes. Net proceeds to the Company from the offering, after reduction for
the
underwriters' fees and other offering expenses, were $11,919,000.
F-22
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
8.
Earnings per Share
The
following table sets forth the computation of basic and diluted earnings per
share:
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Numerator:
|
||||||||||
|
Net
income
|
$
|
5,041,115
|
$
|
7,898,103
|
$
|
7,521,416
|
||||
|
Denominator:
|
||||||||||
|
Denominator
for basic earnings per share -
|
||||||||||
|
weighted
average shares
|
16,094,000
|
16,465,000
|
15,885,000
|
|||||||
|
Dilutive
effect of employee stock options and
|
||||||||||
|
other
warrants
|
209,000
|
262,000
|
503,000
|
|||||||
|
Denominator
for diluted earnings per share -
|
||||||||||
|
adjusted
weighted average shares
|
16,303,000
|
16,727,000
|
16,388,000
|
|||||||
|
Basic
earnings per share
|
$
|
0.31
|
$
|
0.48
|
$
|
0.47
|
||||
|
Diluted
earnings per share
|
$
|
0.31
|
$
|
0.47
|
$
|
0.46
|
||||
For
the
years ended, December 31, 2007 and 2006, respectively, warrants to purchase
25,303 shares of common stock were not included in the denominator for diluted
earnings per share because their effect would be anti-dilutive.
9.
Leases
The
Company leases certain office facilities, storage, equipment, and automobiles.
These leases have varying terms, and certain leases have renewal and/or purchase
options. Future minimum payments under non-cancelable leases with initial or
remaining terms in excess of one year consist of the following at
December 31, 2007:
|
2008
|
$
|
92,814
|
||
|
2009
|
88,542
|
|||
|
2010
|
77,216
|
|||
|
2011
|
69,126
|
|||
|
2012
|
40,324
|
|||
|
$
|
368,022
|
Rent
expense for all operating leases was $78,856,
$62,392, and
$57,632 for the years ended December 31, 2007, 2006, and 2005,
respectively.
F-23
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
10.
Derivative Financial
Instruments
The
Company has various transactions with its foreign subsidiaries that are
denominated in U.S. dollars and are subject to foreign currency exchange risk
on
these transactions.
The
Company from time to time uses foreign currency exchange contracts to reduce
its
exposure to fluctuations in foreign exchange rates. The Company bases these
contracts on the amount of cash flows that it expects to be remitted to the
United States from its foreign operations and does not use such derivative
financial instruments for trading or speculative purposes. The Company accounts
for these contracts as free standing derivatives, such that gains or losses
on
the fair market value of these forward exchange contracts as of the balance
sheet dates are recorded as other income and expense in the consolidated
statements of income.
At
December 31, 2005, the Company held forward exchange contracts totaling $978,000
with maturities through December 2006. All such contracts were denominated
in
Canadian Dollars. At December 31, 2006, the Company no longer held any forward
exchange contracts. At December 31, 2007, the Company held forward exchange
contracts totaling $588,000 with maturities through December 2008.
The
aggregate accrued loss on these contracts was $14,000 and $-0- as of December
31, 2007 and 2006, respectively. The increase (decrease) in the aggregate
accrued loss on these contracts was $14,000, ($59,000), and ($42,000) for the
years ended December 31, 2007, 2006, and 2005, respectively.
11.
Income Taxes
The
components of income before income taxes are as follows:
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
United
States
|
$
|
11,448,135
|
$
|
15,803,248
|
$
|
15,186,474
|
||||
|
Foreign
|
(3,206,020
|
)
|
(2,800,145
|
)
|
(2,687,058
|
)
|
||||
|
$
|
8,242,115
|
$
|
13,003,103
|
$
|
12,499,416
|
|||||
F-24
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
11.
Income Taxes (continued)
The
components of the provision for income taxes are as follows:
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
2,598,000
|
$
|
4,340,000
|
$
|
4,594,000
|
||||
|
State
|
569,000
|
924,000
|
705,000
|
|||||||
|
Foreign
|
74,000
|
30,000
|
45,000
|
|||||||
|
Total
current
|
3,241,000
|
5,294,000
|
5,344,000
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
(34,000
|
)
|
(168,000
|
)
|
(327,000
|
)
|
||||
|
State
|
(6,000
|
)
|
(21,000
|
)
|
(39,000
|
)
|
||||
|
Foreign
|
-
|
-
|
-
|
|||||||
|
Total
deferred
|
(40,000
|
)
|
(189,000
|
)
|
(366,000
|
)
|
||||
|
$
|
3,201,000
|
$
|
5,105,000
|
$
|
4,978,000
|
|||||
The
provision for income taxes is different from the amounts computed by applying
the United States federal statutory income tax rate of 34%, 35%, and 34% for
2007, 2006, and 2005, respectively. The reasons for these differences are as
follows:
|
Year
ended December 31
|
||||||||||
|
2007
|
2006
|
2005
|
||||||||
|
Income
taxes at U.S. statutory rate
|
$
|
2,802,000
|
$
|
4,524,000
|
$
|
4,250,000
|
||||
|
Impact
of graduated federal taxes
|
-
|
(103,000
|
)
|
-
|
||||||
|
State
income taxes, net of federal benefit
|
434,000
|
727,000
|
666,000
|
|||||||
|
Effect
of foreign losses without an income
|
||||||||||
|
tax
benefit
|
(23,000
|
)
|
-
|
50,000
|
||||||
|
Foreign
corporate income taxes
|
74,000
|
30,000
|
45,000
|
|||||||
|
Executive
life insurance expense
|
(3,000
|
)
|
16,000
|
33,000
|
||||||
|
Meals
and entertainment
|
58,000
|
68,000
|
41,000
|
|||||||
|
Extraterritorial
income exclusion
|
-
|
(27,000
|
)
|
(33,000
|
)
|
|||||
|
Qualified
production activities
|
||||||||||
|
income
- American Jobs Creation Act
|
(117,000
|
)
|
(99,000
|
)
|
(73,000
|
)
|
||||
|
Other
|
(24,000
|
)
|
(31,000
|
)
|
(1,000
|
)
|
||||
|
$
|
3,201,000
|
$
|
5,105,000
|
$
|
4,978,000
|
|||||
F-25
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
11.
Income Taxes (continued)
The
components of the deferred tax assets and liabilities, and the related tax
effects of each temporary difference at December 31, 2007 and 2006, are as
follows:
|
2007
|
2006
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Product
refund reserve
|
$
|
243,000
|
$
|
162,000
|
|||
|
Inventory
obsolescence reserve
|
13,000
|
13,000
|
|||||
|
Vacation
accrual
|
27,000
|
23,000
|
|||||
|
Stock-based
compensation
|
94,000
|
64,000
|
|||||
|
Organization
costs
|
134,000
|
96,000
|
|||||
|
Deferred
compensation
|
361,000
|
393,000
|
|||||
|
Sales
incentives
|
-
|
129,000
|
|||||
|
Miscellaneous
accrued expenses
|
27,430
|
58,430
|
|||||
|
Foreign
net operating loss carryforwards
|
3,328,000
|
2,393,000
|
|||||
|
Valuation
allowance
|
(3,279,000
|
)
|
(2,344,000
|
)
|
|||
|
948,430
|
987,430
|
||||||
|
Deferred
tax liabilities:
|
|||||||
|
Depreciation
|
356,000
|
435,000
|
|||||
|
Net
deferred tax assets (liabilities)
|
$
|
592,430
|
$
|
552,430
|
|||
|
Reported
as:
|
|||||||
|
Current
deferred tax assets
|
$
|
574,430
|
$
|
594,430
|
|||
|
Non-current
deferred tax assets 1
|
18,000
|
-
|
|||||
|
Non-current
deferred tax liabilities
|
-
|
42,000
|
|||||
|
Net
deferred tax assets (liabilities)
|
$
|
592,430
|
$
|
552,430
|
|||
1
Included within other non-current assets on the consolidated balance
sheets.
The
Company has a deferred tax asset of $3,328,000 as of December 31, 2007, and
$2,393,000 as of December 31, 2006, relating to foreign net operating loss
carryforwards. The Company has recorded a valuation allowance to the extent
that
it is more likely than not that this asset will not be realized before it
expires beginning in 2008.
On
October 22, 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed
into law. One provision of the Act provides for a special one-time deduction
of
85% of certain repatriated foreign earnings. The Company did not take advantage
of this special provision. Through December 31, 2007, the Company has not
recorded a provision for income taxes on the earnings of its foreign
subsidiaries because such earnings are intended to be permanently reinvested
outside the U.S. The cumulative amount of unremitted earnings on which the
Company has not recognized United States income tax was $-0- at December 31,
2007.
F-26
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
11.
Income Taxes (continued)
The
Company’s effective tax rate is based on expected income, statutory tax rates
and tax planning opportunities available to the Company in the various
jurisdictions in which the Company operates. Significant judgment is required
in
determining the Company’s effective tax rate and in evaluating its tax
positions. In evaluating the exposure associated with various filing positions,
the Company estimates reserves for probable exposures, which are adjusted
quarterly in light of changing facts and circumstances, such as the progress
of
tax audits, case law and emerging legislation.
Effective
January 1, 2007, the Company adopted the provisions of FIN No. 48. As a result
of the implementation of FIN No. 48, the Company recognized no material
adjustment in its estimated liability for unrecognized tax benefits. The Company
has historically classified unrecognized tax benefits in current income taxes
payable. As a result of the adoption of FIN No. 48, the Company reclassified
its
unrecognized tax benefits to other non-current liabilities. In 2007, the Company
is continuing its practice to recognize interest and / or penalties related
to
income tax matters in income tax expense.
The
aggregate changes in the balance of gross unrecognized tax benefits were as
follows:
|
Beginning
Balance as of January 1, 2007 (date of adoption)
|
$
|
87,700
|
||
|
Settlements
and effective settlements with tax authorities
|
(1,900
|
)
|
||
|
Lapse
of statute of limitations
|
-
|
|||
|
Increases
in balances related to tax positions taken during prior
periods
|
112,700
|
|||
|
Decreases
in balances related to tax positions taken during prior
periods
|
(22,300
|
)
|
||
|
Increases
in balances related to tax positions taken during current
period
|
44,300
|
|||
|
Balance
as of December 31, 2007
|
$
|
220,500
|
The
current portion of the Company’s unrecognized tax benefits is presented in the
balance sheet within income taxes payable and the amount expected to be settled
after one year is recorded in other non-current liabilities.
During
the third quarter of 2007, the U.S. Internal Revenue Service (IRS) commenced
an
examination of the Company’s 2005 U.S. federal income tax return. To date, the
IRS has presented to the Company notices of proposed adjustments principally
in
the area of disallowed professional fees. The Company has estimated the
resolution of these notices in its assessment of its unrecognized tax benefits
balance.
At
December 31, 2007, the Company had a $220,500 balance of unrecognized tax
benefits, all of which would impact the effective income tax rate if
recognized.
F-27
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
11.
Income Taxes (continued)
The
Company, including its domestic and foreign subsidiaries, is subject to U.S.
federal income tax as well as income tax of multiple state and foreign
jurisdictions. The Company has concluded all U.S. federal income tax matters
for
years through 2003 and concluded years through 2005 with its primary state
jurisdiction.
12.
Employee Benefit Plans
The
Company sponsors a 401(k) employee savings plan which covers substantially
all
employees. Employees can contribute up to 15% of their gross income to the
plan,
and the Company matches a percentage of the employee’s contribution at a rate of
50% in 2007 and 2006 and 75% in 2005. Company contributions under the 401(k)
plan totaled $297,000, $283,000, and $384,000 in 2007, 2006, and 2005,
respectively.
On
September 1, 2006, the Company established an employee stock ownership plan
("ESOP") which covers substantially all U.S. employees. Contributions to the
ESOP are funded by the Company on a discretionary basis. Company contributions
under the ESOP plan totaled $250,000 in each of the years ended December 31,
2007 and 2006, respectively.
13.
Incentive Compensation Plans
In
July
2001, the Board of Directors approved an incentive compensation plan effective
for fiscal years beginning with 2001. Under the plan, the Company established
a
bonus pool payable on a semi-annual basis equal to 25% of the net income of
the
Company. Bonuses are payable on all profits, but only if the net income for
each
six-month period exceeds $250,000. The bonus pool is allocated to executives
according to a specified formula, with a portion allocated to a middle
management group determined by the Executive Committee of the Board of
Directors.
In
May
2007, the Board of Directors approved the adoption of a new incentive
compensation plan. This new plan was effective for fiscal year 2007 and replaces
the previous plan. Under the new plan, bonuses are payable quarterly in an
amount not to exceed 18% of the Company’s Income from Operations for any period,
subject to the Company achieving a minimum quarterly Income from Operations
of
at least $500,000. For fiscal year 2007, the Board determined that the aggregate
amount of incentive compensation available under the Plan shall be equal to
16%
of the Company’s Income from Operations. Similar to the previous plan, the bonus
pool is allocated to executives according to a specified formula, with a portion
also allocated to a middle management group.
The
Company expensed a total of $1,242,400, $2,113,400, and $2,141,500 to the
participants of the bonus pool for 2007, 2006, and 2005,
respectively.
F-28
.
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
13.
Incentive Compensation Plans (continued)
The
Company sponsors a Supplemental Executive Retirement Plan (SERP) to allow
certain executives to defer a portion of their annual salary and bonus into
a
grantor trust. A grantor trust was established to hold the assets of the SERP.
The Company funds the grantor trust by paying the amount deferred by the
participant into the trust at the time of deferral. Investment earnings and
losses accrue to the benefit or detriment of the participants. The SERP also
provides for a discretionary matching contribution by the Company not to exceed
100% of the participant’s annual contribution. In 2007, 2006, and 2005, the
Company did not provide a match. The participants fully vest in the deferred
compensation three years from the date they enter the SERP. The participants
are
not eligible to receive distribution under the SERP until retirement, death,
or
disability of the participant. At December 31, 2007 and 2006, SERP assets were
$1,009,000 and $861,000, respectively, and are included in “Other Assets” in the
accompanying consolidated balance sheets. At December 31, 2007 and 2006, SERP
liabilities were $1,037,000 and $891,000, respectively, and are included in
“Other Non-Current Liabilities” in the accompanying consolidated balance
sheets.
14.
Related Party Transactions
In
March
2005 and May 2005, the Company purchased a total of 574,201 shares of the
Company’s common stock from three officer/directors and one former officer. The
total cost of the purchases was $5,435,313, for a weighted average purchase
price of $9.47 per share. The price per share was based on a discount from
the
market price per share at the time of purchase in order to approximate the
dilutive impact of their shares on the open market.
In
March
2005, the Company entered into a stock redemption agreement with an
officer/director and his spouse (collectively “Seller”). Under the stock
redemption agreement, the Company issued promissory notes (“Notes”) totaling
$4,050,000 to the Seller in exchange for 450,000 shares of the Company’s common
stock ($9.00 per share) owned by the Seller. Interest, at 4% per annum, accrued
on the outstanding balance of the Notes and was payable quarterly. In 2006,
the
Company made principal prepayments (without penalty) on the Notes totaling
$3,100,000 resulting in a December 31, 2006 outstanding balance due on the
Notes
of $-0-.
An
officer/director of the Company is of counsel in a law firm which provides
legal
services to the Company. During the years ended December 31, 2007 and 2006,
the
Company incurred legal fees to this firm of approximately $29,000 and $114,000,
respectively. Previously, this officer/director was a principal at another
law
firm. During the year ended December 31, 2005, the Company incurred legal fees
to his firm of approximately $41,000.
An
officer/director of the Company has a minority ownership position in a vendor
that supplies finished goods to the Company. Under this relationship, the
Company provides the vendor a significant portion of the raw materials for
the
vendor’s conversion to finished goods. The vendor reimburses the Company for
Company-supplied raw materials and charges the company a fee for the conversion.
During the year ended December 31, 2007, the Company’s net purchases from this
vendor were $459,000. As of December 31, 2007, the Company has a net materials
reimbursement receivable from this vendor of $170,000.
F-29
Reliv’
International, Inc. and Subsidiaries
Notes
to
Consolidated Financial Statements
15.
Segment Information
Description
of Products and Services by Segment
The
Company operates in one reportable segment, a network marketing segment
consisting of eight operating units that sell nutritional and dietary products
to a sales force of independent distributors that sell the products directly
to
customers. These operating units are based on geographic regions.
Geographic
area data for the years ended December 31, 2007, 2006, and 2005,
follows:
|
2007
|
2006
|
2005
|
||||||||
|
Net
sales to external customers
|
||||||||||
|
United
States
|
$
|
98,347,762
|
$
|
105,783,642
|
$
|
102,549,244
|
||||
|
Australia/New
Zealand
|
2,943,848
|
2,550,086
|
2,215,465
|
|||||||
|
Canada
|
1,633,928
|
1,637,999
|
1,667,555
|
|||||||
|
Mexico
|
1,526,146
|
1,433,462
|
1,607,473
|
|||||||
|
United
Kingdom
|
1,062,088
|
1,234,976
|
846,273
|
|||||||
|
Malaysia/Singapore
|
1,765,124
|
1,804,704
|
2,031,045
|
|||||||
|
Philippines
|
2,942,156
|
2,197,813
|
2,328,178
|
|||||||
|
Germany
|
836,452
|
824,475
|
319,931
|
|||||||
|
Total
net sales
|
$
|
111,057,504
|
$
|
117,467,157
|
$
|
113,565,164
|
||||
|
Assets
by area
|
||||||||||
|
United
States
|
$
|
29,388,767
|
$
|
32,438,453
|
$
|
20,920,384
|
||||
|
Australia/New
Zealand
|
604,852
|
500,916
|
670,787
|
|||||||
|
Canada
|
232,631
|
134,859
|
176,760
|
|||||||
|
Mexico
|
953,937
|
1,250,811
|
1,323,482
|
|||||||
|
United
Kingdom
|
320,767
|
283,884
|
195,399
|
|||||||
|
Malaysia/Singapore
|
1,006,780
|
1,209,616
|
1,414,909
|
|||||||
|
Philippines
|
599,733
|
977,034
|
764,471
|
|||||||
|
Germany
|
499,304
|
486,647
|
515,231
|
|||||||
|
Total
consolidated assets
|
$
|
33,606,771
|
$
|
37,282,220
|
$
|
25,981,423
|
||||
F-30
15.
Segment Information (continued)
The
Company classifies its sales into three categories of sales products plus
handling & freight income. Net sales by product category data for the years
ended December 31, 2007, 2006, and 2005, follow:
|
2007
|
2006
|
2005
|
||||||||
|
Net
sales by product category
|
||||||||||
|
Nutritional
and dietary supplements
|
$
|
96,935,192
|
$
|
102,295,598
|
$
|
99,254,075
|
||||
|
Skin
care products
|
1,091,896
|
1,119,836
|
1,131,012
|
|||||||
|
Sales
aids and other
|
1,438,158
|
2,081,986
|
1,660,296
|
|||||||
|
Handling
& freight income
|
11,592,258
|
11,969,737
|
11,519,781
|
|||||||
|
Total
net sales
|
$
|
111,057,504
|
$
|
117,467,157
|
$
|
113,565,164
|
||||
16.
Quarterly Financial Data (Unaudited)
|
First
|
Second
|
Third
|
Fourth
|
||||||||||
|
(In
thousands, except per share amounts)
|
|||||||||||||
|
2007
|
|||||||||||||
|
Net
sales
|
$
|
34,964
|
$
|
26,325
|
$
|
25,121
|
$
|
24,648
|
|||||
|
Gross
profit
|
$
|
28,902
|
$
|
21,926
|
$
|
20,800
|
$
|
20,329
|
|||||
|
Net
income
|
$
|
2,620
|
$
|
823
|
$
|
901
|
$
|
697
|
|||||
|
Net
income available to
|
|||||||||||||
|
common
shareholders
|
$
|
2,620
|
$
|
823
|
$
|
901
|
$
|
697
|
|||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
|
$
|
0.16
|
$
|
0.05
|
$
|
0.06
|
$
|
0.04
|
|||||
|
Diluted
|
$
|
0.16
|
$
|
0.05
|
$
|
0.06
|
$
|
0.04
|
|||||
|
2006
|
|||||||||||||
|
Net
sales
|
$
|
31,195
|
$
|
27,849
|
$
|
29,779
|
$
|
28,644
|
|||||
|
Gross
profit
|
$
|
26,113
|
$
|
23,126
|
$
|
24,828
|
$
|
23,880
|
|||||
|
Net
income
|
$
|
2,450
|
$
|
1,620
|
$
|
1,804
|
$
|
2,024
|
|||||
|
Net
income available to
|
|||||||||||||
|
common
shareholders
|
$
|
2,450
|
$
|
1,620
|
$
|
1,804
|
$
|
2,024
|
|||||
|
Earnings
per share:
|
|||||||||||||
|
Basic
|
$
|
0.16
|
$
|
0.10
|
$
|
0.11
|
$
|
0.12
|
|||||
|
Diluted
|
$
|
0.15
|
$
|
0.09
|
$
|
0.11
|
$
|
0.12
|
|||||
F-31
Reliv’
International, Inc. and Subsidiaries
Schedule
II - Valuation and Qualifying Accounts
For
the
years ended December 31, 2007, 2006, and 2005
|
Column
A
|
Column
B
|
Column
C
|
Column
E
|
Column
F
|
|||||||||
|
Balance
at
|
|||||||||||||
|
Beginning
of
|
Charged
to Costs
|
Deductions
|
Balance
at End
|
||||||||||
|
Classification
|
Year
|
and
Expenses
|
Describe
|
of
Year
|
|||||||||
|
Year
ended December 31, 2007
|
|||||||||||||
|
Deducted
from asset accounts:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
6,200
|
$
|
19,200
|
$
|
17,100
|
(1)
|
$
|
8,300
|
||||
|
Reserve
for obsolete inventory
|
32,800
|
46,300
|
45,800
|
(2) |
33,300
|
||||||||
|
Liability
accounts:
|
|||||||||||||
|
Reserve
for refunds
|
421,000
|
1,905,900
|
(3) |
1,696,900
|
(3) |
630,000
|
|||||||
|
Year
ended December 31, 2006
|
|||||||||||||
|
Deducted
from asset accounts:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
39,700
|
$
|
19,700
|
$
|
53,200
|
(1)
|
$
|
6,200
|
||||
|
Reserve
for obsolete inventory
|
158,000
|
81,800
|
207,000
|
(2) |
32,800
|
||||||||
|
Liability
accounts:
|
|||||||||||||
|
Reserve
for refunds
|
382,000
|
1,368,700
|
(3) |
1,329,700
|
(3) |
421,000
|
|||||||
|
Year
ended December 31, 2005
|
|||||||||||||
|
Deducted
from asset accounts:
|
|||||||||||||
|
Allowance
for doubtful accounts
|
$
|
11,500
|
$
|
73,700
|
$
|
45,500
|
(1)
|
$
|
39,700
|
||||
|
Reserve
for obsolete inventory
|
12,000
|
150,400
|
4,400
|
(2) |
158,000
|
||||||||
|
Liability
accounts:
|
|||||||||||||
|
Reserve
for refunds
|
257,000
|
1,363,500
|
(3) |
1,238,500
|
(3) |
382,000
|
|||||||
|
(1)
|
Uncollectible
accounts written off, net of
recoveries.
|
|
(2)
|
Disposal
of obsolete inventory.
|
| (3) |
Amounts
refunded, net of salable amounts returned are shown as a reduction
of net
sales
|
F-32