e424b4
Filed Pursuant to Rule 424(b)(4)
Registration
No. 333-131974
2,000,000 shares
RELIV INTERNATIONAL, INC.
Common Stock
We are offering 1,200,000 shares of common stock and the
selling stockholders identified in this prospectus are offering
800,000 shares of common stock. We will not receive any
proceeds from the sale of shares by the selling stockholders.
Our common stock is traded on the Nasdaq National Market under
the symbol RELV. On April 5, 2006, the last
reported sale price of our common stock on the Nasdaq National
Market was $11.65 per share.
Investing in our common stock involves a high degree of risk.
Please see the section entitled Risk Factors
starting on page 7 of this prospectus to read about risks
you should consider carefully before buying shares of our common
stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
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Per Share | |
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Total | |
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Public offering price
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$ |
11.25 |
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$ |
22,500,000 |
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Underwriting discount
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$ |
0.675 |
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$ |
1,350,000 |
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Proceeds, before expenses to Reliv International,
Inc.
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$ |
10.575 |
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$ |
12,690,000 |
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Proceeds, before expenses to the Selling Stockholders
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$ |
10.575 |
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$ |
8,460,000 |
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Some of the selling stockholders have granted the underwriters a
30-day option to
purchase up to an additional 300,000 shares of our common
stock at the public offering price, less the underwriting
discount, to cover any over-allotments.
The underwriters expect to deliver the shares on or about
April 11, 2006.
Canaccord Adams
Incorporated
The date of this prospectus is April 5, 2006
Relìv... nutrition made simple, life made rich. |
TABLE OF CONTENTS
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Certain Relationships and Related Transactions
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Index to Financial Statements
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F-1 |
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You should rely only on the information contained in this
prospectus. Neither we, the selling stockholders, nor the
underwriters have authorized anyone to provide you with
information different from that contained in this prospectus.
We, the selling stockholders and the underwriters are offering
to sell shares of common stock and seeking offers to buy shares
of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of
the time of delivery of this prospectus or of any sale of common
stock.
In this prospectus we rely on and refer to information and
statistics regarding our industry. We obtained this market data
from independent industry publications or other publicly
available information. Some data is also based on our good faith
estimates, which are derived from our review of internal surveys
and studies, as well as independent industry publications.
Although we believe that these outside sources are reliable, we
have not independently verified, and do not guarantee, the
accuracy and completeness of this information.
Reliv
Classic®,
Reliv
NOW®,
Innergize!®,
Arthaffect®,
Cellebrate®,
FibRestore®,
ReversAge®,
Reliv
Delight®,
Reliv
Ultrim-Plus®,
ProVantage®,
CardioSentials®,
SoySentials®
and NOW for
Kidstm
are trademarks of Reliv International, Inc. All other
brand names, trademarks or service marks referred to in this
prospectus are the property of their owners.
i
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and
should be read in conjunction with the more detailed information
and consolidated financial statements and notes thereto
incorporated by reference in this prospectus. Before you decide
to invest in our common stock, you should read the entire
prospectus carefully, including the risk factors included in
this prospectus, as well as the consolidated financial
statements and related notes included elsewhere in this
prospectus. In this prospectus, unless the context requires
otherwise, we, us, our or
Reliv refer to Reliv
International, Inc. and its subsidiaries.
Our Business
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.
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 a line of
skin care products. We sell our products through an
international network marketing system using independent
distributors. As of December 31, 2005, our network
consisted of approximately 65,480 distributors
52,040 in the United States and 13,440 across our international
markets. We have sold products in the United States since 1988
and in selected international markets since 1991.
For the year ended December 31, 2005, we generated net
sales of $113.6 million, operating income of
$12.5 million and net income of $7.5 million, an
increase of 17.1% in net sales, 38.8% in operating income and
39.6% in net income, over the same period in 2004.
We currently offer 13 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 approximately 61.4% of net sales
for the year ended December 31, 2005, includes the
following four products:
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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 |
These are our most successful supplements based on net sales. We
have nine 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 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.
1
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, Canada, Germany, Ireland,
Malaysia, Mexico, 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.
We manufacture all of our nutritional supplements at our
facility in Chesterfield, Missouri. We believe our ability to
formulate and manufacture 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 $20.3 billion U.S. nutritional
supplement market, which is part of the broader
$68.6 billion U.S. nutrition industry according to
2004 data published by the Nutrition Business Journal, or
NBJ, and the $182.0 billion global nutrition industry,
also according to the NBJ.
We believe that a combination of demographic, healthcare and
lifestyle trends are expected to drive continued growth in the
nutritional supplement market. These trends include: an aging
population; rising healthcare costs and use of preventative
measures; and an increasing focus on weight management and
fitness.
Direct Selling Market
Direct selling involves the marketing of products and services
directly to consumers in a
person-to-person
manner. 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. While the United States is currently
the largest direct selling market with $29.9 billion in
annual sales in 2004, international markets account for 70.0% of
the entire industry, according to the WFDSA.
For the nutrition industry, the direct marketing channel, which
includes direct sellers, accounted for approximately 34.0% of
the total U.S. nutritional supplements sold in 2004, or
approximately $6.9 billion, according to the NBJ. This
channel experienced more growth than retail channels in the
United States for nutritional supplement sales in 2004,
according to the NBJ.
Competitive Strengths
We believe that we possess a number of competitive strengths
that have enabled us to achieve sustained growth and
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. 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.
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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 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. Additionally, we
manufacture substantially all of our nutritional products at our
facility in Chesterfield, Missouri, which enables us to maintain
our high standards of quality assurance and proprietary product
composition.
Growing Upper-Level Distributor Team. On
December 31, 2005, we had approximately 65,480 active
distributors in all of our markets, of which approximately
17,840 were Master Affiliates or above, generally our most
productive distributors. The number of distributors at the
Master Affiliate level or above has increased from approximately
12,020 at December 31, 2003 to approximately 15,110 at
December 31, 2004 to approximately 17,840 at
December 31, 2005.
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 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. Assuming successful completion of the offering,
our directors and executive officers will continue to
beneficially own approximately 33.7% of our common stock.
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 domestic net sales have
increased from $65.8 million for the year ended
December 31, 2003 to $102.5 million for the year ended
December 31, 2005. We have achieved this growth through
multiple initiatives, such as increased investment in
company-sponsored events and training and better utilization of
our upper-level distributors. We will continue 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 established a uniform
business model and recently have begun to support our
international markets with the assistance and experience of our
proven upper-level distributors. In selected international
markets, we also have begun investing in additional marketing
support for our distributors. We believe this uniform business
model and additional marketing expense will encourage our
distributors to expand in our existing international markets and
will provide a framework that facilitates our entry into new
international markets.
Invest in Improved and New Products. As a developer of
nutritional supplements, it is important to continue to invest
in the research and development of new and innovative products.
Additionally, we will
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continue to improve and validate the efficacy of our existing
product line. These types of investments will aid in 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
nutritional supplements at our facility in Chesterfield,
Missouri. This allows us to precisely control product
composition and quality assurance. We will continue to make
appropriate investments that enhance our manufacturing
capabilities and capacity to further leverage our existing
facilities and trained production staff.
Corporate Information
We are incorporated under the laws of the State of Delaware and
commenced our present business in October 1988. Our principal
executive offices and production facility are at 136
Chesterfield Industrial Boulevard, Chesterfield, Missouri 63005,
and our telephone number is (636) 537-9715. We also
maintain a website at www.reliv.com, but the information on the
website is not part of this prospectus.
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The Offering
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Common stock to be offered by Reliv International,
Inc. |
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1,200,000 shares |
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Common stock to be offered by the selling stockholders |
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800,000 shares |
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Common stock to be outstanding after this offering |
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16,813,052 shares |
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Use of Proceeds |
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We intend to use the net proceeds to us from this offering for
the repayment of debt and for general corporate purposes,
including working capital, continued domestic and international
growth, and for possible product acquisitions. We will not
receive any proceeds from the sale of common stock by the
selling stockholders. |
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Nasdaq National Market symbol |
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RELV |
The number of shares of common stock to be offered assumes that
the underwriters over-allotment option is not exercised.
Except as otherwise indicated, the number of shares of our
common stock that will be outstanding after this offering is
based on 15,613,052 shares outstanding as of
January 31, 2006 and excludes:
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806,829 shares of common stock issuable upon the exercise
of outstanding stock options with a weighted-average exercise
price of $5.79 per share; |
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65,568 shares of common stock issuable upon exercise of
outstanding warrants with a weighted- average exercise price of
$9.51 per share; |
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1,163,856 shares of common stock available for future grant
or issuance under our 2003 Stock Option Plan; and |
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shares of common stock available for future issuance upon
exercise of warrants that can be granted under our Distributor
Stock Purchase Plan. We issue warrants in the amount of 25% of
the total shares purchased by distributors under the plan, which
purchases are limited to 10% of the distributors monthly
compensation. |
Unless otherwise stated, all information in this prospectus
assumes no exercise of the over-allotment option granted by the
selling stockholders to the underwriters.
5
Summary Consolidated Financial Data
The summary consolidated financial data for the years ended
December 31, 2005, 2004 and 2003 set forth below are
derived from our audited consolidated financial statements
included elsewhere in this prospectus. Our historical results
are not necessarily indicative of our results of operations for
future periods. This summary consolidated financial data should
be read in conjunction with Selected Consolidated
Financial Data and Managements Discussion and
Analysis of Financial Condition and Results of Operations
included in this prospectus and our audited consolidated
financial statements and notes thereto included elsewhere in
this prospectus.
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Year Ended December 31, | |
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2005 | |
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2004 | |
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2003 | |
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Statements of Operations Data:
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Sales at suggested retail
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$ |
163,968,979 |
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$ |
139,442,752 |
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$ |
110,569,576 |
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Less distributor allowances on product purchases
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50,403,815 |
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42,460,319 |
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33,609,853 |
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Net sales
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113,565,164 |
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96,982,433 |
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76,959,723 |
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Income from operations
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12,473,229 |
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8,986,304 |
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7,376,482 |
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Net income
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7,521,416 |
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5,386,689 |
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4,397,440 |
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Preferred dividends accrued and paid
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12,292 |
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56,762 |
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Net income available to common shareholders
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$ |
7,521,416 |
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$ |
5,374,397 |
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$ |
4,340,678 |
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Earnings per common share Basic
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$ |
0.47 |
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$ |
0.34 |
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$ |
0.29 |
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Weighted-average shares
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15,885,000 |
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15,662,000 |
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14,969,000 |
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Earnings per common share Diluted
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$ |
0.46 |
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$ |
0.31 |
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$ |
0.26 |
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Weighted-average shares
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16,388,000 |
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17,137,000 |
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16,706,000 |
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Cash dividends declared per common share
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$ |
0.075 |
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$ |
0.065 |
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$ |
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Other Financial Data:
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Depreciation and amortization
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$ |
1,417,166 |
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$ |
1,209,577 |
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$ |
935,292 |
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Purchase of property, plant and equipment
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1,710,523 |
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1,870,632 |
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983,269 |
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Purchase of stock for treasury
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$ |
10,690,375 |
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$ |
1,293,980 |
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$ |
1,199,913 |
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Distributors & Master
Affiliates(1):
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United States Active Distributors
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52,040 |
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47,190 |
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41,000 |
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United States Master Affiliates and above
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15,840 |
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12,460 |
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9,150 |
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International Active Distributors
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13,440 |
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26,010 |
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20,560 |
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International Master Affiliates and above
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2,000 |
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2,650 |
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2,870 |
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December 31, 2005 | |
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Actual | |
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As Adjusted(2) | |
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Balance Sheet Data:
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Cash and cash equivalents
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$ |
5,653,594 |
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$ |
14,543,594 |
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Working capital
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3,963,741 |
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13,753,741 |
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Total assets
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25,981,423 |
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34,871,423 |
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Long-term debt, less current maturities
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2,211,065 |
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11,065 |
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Total stockholders equity
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12,564,828 |
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24,554,828 |
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(1) |
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 active
distributors that have attained the highest level of discount on
purchases of our products and are eligible for royalties from
sales volume generated by Master Affiliates and above that they
sponsor. The total number of active distributors includes the
number of Master Affiliates and above. |
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(2) |
Gives effect to the offering of 1,200,000 shares of our
common stock by us at an offering price of $11.25 per
share, less the underwriting discount and estimated offering
expenses payable by us, and the application of the net proceeds
as described under Use of Proceeds as if they had
occurred on December 31, 2005. |
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6
RISK FACTORS
An investment in our common stock involves a high degree of
risk. You should consider carefully the following information
about these risks, together with the other information contained
or incorporated by reference in this prospectus, including our
consolidated financial statements and related notes, before you
decide to buy our common stock. If any of the following risks
actually occur, our business, financial condition or results of
operations could suffer. In that case, the market price of our
common stock could decline, and you may lose all or part of your
investment.
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
65,480 independent distributors as of December 31, 2005,
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.
In 2005, approximately 62.9% of our distributors from 2004
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., Natures 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
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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.
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
8
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 23.9%, 23.7% and 22.0% of our net
sales for the years ended December 31, 2005, 2004 and 2003,
respectively, and, combined with Reliv NOW, Innergize! and
FibRestore, these four products accounted for 61.4%, 61.1% and
58.1% of our net sales for the years ended December 31,
2005, 2004 and 2003, respectively. 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.
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. For
example, we recently changed the formulations of Reliv Classic
and Reliv NOW and our net sales could decrease if our customers
do not accept the new formulations. 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
9
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.
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
10
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. Montgomerys employment agreement currently allows
him at any time either to (i) reduce his level of service
to us by approximately one-half with a corresponding decrease in
position and compensation or (ii) terminate his employment
agreement and
11
continue in a consulting capacity for 10 years at 20% of
his annual compensation 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.
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 publics
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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the actions of our current or former distributors; |
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our network marketing program; and |
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the network marketing business generally. |
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
12
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.
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 March 7, 2003, the FDA proposed a new regulation to
require current good manufacturing practices, or cGMPs,
affecting the manufacture, packing and holding of dietary
supplements. The proposed regulation would establish 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 proposed
requirements for designing and constructing physical plants,
establishing quality control procedures, and testing
manufactured dietary ingredients and dietary supplements, as
well as proposed requirements for maintaining records and for
handling consumer complaints related to current good
manufacturing practices. The final rule resulting from this
rulemaking process is currently undergoing review by the Office
of Management and Budget. Publication of the final rule is
expected in the next several weeks. Because of the long delay in
issuing the final rule, there is considerable uncertainty as to
the provisions of the final rule, and as to how large an impact
the rule will have on the dietary supplement industry.
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
13
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 organizations
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:
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accurately anticipate customer needs; |
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innovate and develop new products or product enhancements that
meet these needs; |
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successfully commercialize new products or product enhancements
in a timely manner; |
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price our products competitively; |
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manufacture and deliver our products in sufficient volumes and
in a timely manner; and |
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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
14
economic conditions, demographic trends, consumer confidence in
the economy and changes in disposable consumer income.
Risks Related to this Offering and Ownership of Our Common
Stock
The trading price of our common shares is likely to be
volatile, and you might not be able to sell your shares at or
above the offering price.
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:
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fluctuations in our quarterly operating and earnings per share
results; |
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material developments with respect to future acquisitions; |
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loss of key personnel and key distributors; |
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announcements of technological innovations or new products by us
or our competitors; |
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delays in the development and introduction of new products; |
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our failure to timely address changing customer or distributor
preferences; |
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legislative or regulatory changes; |
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general trends in the industry; |
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recommendations and/or changes in estimates by equity and market
research analysts; |
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biological or medical discoveries; |
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disputes and/or developments concerning intellectual property,
including patents and litigation matters; |
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sales of common stock by our existing holders, in particular
sales by management; |
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securities class action or other litigation; |
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developments in our relationships with current or future
distributors, customers or suppliers; and |
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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. After this offering, Robert L.
Montgomery, his family and affiliates will beneficially own
approximately 22.3% 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 National Market. During
2005, the average daily trading volume for our common stock as
reported by the Nasdaq National Market was approximately
35,000 shares.
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Even if we achieve a wider dissemination as to the shares
offered by us and the selling stockholders pursuant to this
prospectus, we are uncertain as to whether a more active trading
market in our common stock will develop. As a result, relatively
small trades may have a significant impact on the price of our
common stock.
Our management has broad discretion over the use of
proceeds from this offering.
The net proceeds to us from this offering are expected to be
approximately $12.0 million after deducting the
underwriting discount and estimated offering expenses payable by
us. Management will retain broad discretion as to the use and
allocation of a substantial portion of these net proceeds. Our
investors will not have the opportunity to evaluate the
economic, financial and other relevant information that we may
consider in the application of the net proceeds.
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 after the 90-day
contractual lock-up of
our directors and executive officers, which is subject to
adjustment, the trading price of our common shares could decline
below the offering price. Canaccord Adams Inc., on behalf of the
underwriters, may, in its sole discretion, permit those who have
entered into lock-up
agreements with the underwriters to sell shares prior to the
expiration of the
lock-up agreements. The
sale of substantial amounts of Mr. Robert L.
Montgomerys or managements stock in the public
market, or the perception that these sales may occur, could
reduce the market price of our stock.
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.
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FORWARD-LOOKING STATEMENTS
This prospectus includes both historical and
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended,
and 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 prospectus. We disclaim any
intent or obligation to update any forward-looking statements
after the date of this prospectus 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
Risk Factors.
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USE OF PROCEEDS
We expect to receive net proceeds of approximately
$12.0 million from the sale of 1,200,000 shares of our
common stock in this offering, based on an offering price to the
public of $11.25 per share, and after deducting the
underwriting discount and estimated offering expenses payable by
us. We will not receive any proceeds from the sale of the common
stock being offered by the selling stockholders.
We expect to use a portion of the net proceeds from this
offering to repay a promissory note issued to a former director
and executive officer and his wife in connection with the
repurchase of shares of our common stock. The outstanding
principal amount was $3.1 million at December 31,
2005. The note requires principal payments through
January 15, 2008 and accrues interest at a rate of
4.0% per year. We expect to use the remainder of the net
proceeds to us, together with our available cash, for general
corporate purposes including working capital, our continued
domestic and international growth and for possible product
acquisitions.
DIVIDEND POLICY
In 2004, our board of directors adopted a dividend program to
make regular distributions to our stockholders. Since that time,
we have declared and paid the following dividends:
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May 17, 2004
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0.030 |
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November 15, 2004
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0.035 |
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May 18, 2005
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0.035 |
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November 14, 2005
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0.040 |
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The declaration and payment of dividends in the future will be
determined by our board of directors in light of conditions then
existing, including our earnings, financial condition, capital
requirements and other factors.
18
CAPITALIZATION
The following table summarizes our cash and cash equivalents and
our total capitalization as of December 31, 2005 on an
actual basis and as adjusted to give effect to the sale of
1,200,000 shares of our common stock by us in this offering
at a public offering price of $11.25 per share, after
deducting the underwriting discount and estimated offering
expenses payable by us. We will not receive any proceeds from
the sale of shares of common stock in this offering by the
selling stockholders. The information in the table below should
be read in conjunction with Selected Consolidated
Financial Data, Use of Proceeds and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in this
prospectus and our consolidated financial statements and related
notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 | |
|
|
| |
|
|
Actual | |
|
As Adjusted | |
|
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
5,653,594 |
|
|
$ |
14,543,594 |
|
|
|
|
|
|
|
|
Debt (including current maturities):
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
|
$ |
916,244 |
|
|
$ |
16,244 |
|
|
Long-term debt, less current maturities:
|
|
|
|
|
|
|
|
|
|
|
Promissory note
|
|
|
2,200,000 |
|
|
|
|
|
|
|
Other
|
|
|
11,065 |
|
|
|
11,065 |
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt, less current maturities
|
|
|
2,211,065 |
|
|
|
11,065 |
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
3,127,309 |
|
|
|
27,309 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $.001 per share;
3,000,000 shares authorized; no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, par value $.001 per share; 30,000,000
authorized; 15,613,644 shares issued and
15,563,562 shares outstanding actual;
16,813,644 shares issued and 16,763,562 shares
outstanding, as
adjusted(1)
|
|
|
15,614 |
|
|
|
16,814 |
|
|
Additional paid-in capital
|
|
|
22,972,463 |
|
|
|
34,961,263 |
|
|
Accumulated deficit
|
|
|
(9,252,413 |
) |
|
|
(9,252,413 |
) |
|
Foreign currency translation adjustment
|
|
|
(669,346 |
) |
|
|
(669,346 |
) |
|
Treasury stock
|
|
|
(501,490 |
) |
|
|
(501,490 |
) |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
12,564,828 |
|
|
|
24,554,828 |
|
|
|
|
|
|
|
|
Total capitalization
|
|
$ |
15,692,137 |
|
|
$ |
24,582,137 |
|
|
|
|
|
|
|
|
|
|
(1) |
Does not include options to purchase 806,829 shares of
our common stock issuable upon exercise at a weighted-average
exercise price of $5.79 per share or warrants to
purchase 65,568 shares of our common stock issuable
upon exercise at a weighted-average exercise price of
$9.51 per share. The total shares available for future
grant under our 2003 Stock Option Plan is 1,163,856. This also
does not include shares of common stock available for future
issuance upon exercise of warrants that can be granted under our
Distributor Stock Purchase Plan. We issue warrants in the amount
of 25% of the total shares purchased by distributors under the
plan, which purchases are limited to 10% of the
distributors monthly compensation. |
19
PRICE RANGE OF OUR COMMON STOCK
Our common stock trades on the Nasdaq National Market under the
symbol RELV. On April 5, 2006, the last
reported sale price of our common stock was $11.65 per
share on the Nasdaq National Market. The following table sets
forth, for the periods indicated, the high and low sale prices
for our common stock as reported on the Nasdaq National Market.
|
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
Year Ending December 31, 2006
|
|
|
|
|
|
|
|
|
|
Second Quarter (through April 5, 2006)
|
|
$ |
12.86 |
|
|
$ |
11.37 |
|
|
First Quarter
|
|
|
18.69 |
|
|
|
11.00 |
|
Year Ending December 31, 2005
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
15.59 |
|
|
|
8.50 |
|
|
Third Quarter
|
|
|
10.85 |
|
|
|
8.10 |
|
|
Second Quarter
|
|
|
11.35 |
|
|
|
8.78 |
|
|
First Quarter
|
|
|
10.50 |
|
|
|
7.66 |
|
Year Ending December 31, 2004
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
9.27 |
|
|
|
6.50 |
|
|
Third Quarter
|
|
|
9.87 |
|
|
|
5.70 |
|
|
Second Quarter
|
|
|
12.24 |
|
|
|
8.32 |
|
|
First Quarter
|
|
|
9.97 |
|
|
|
5.10 |
|
20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of December 31,
2005 and 2004 and for the years ended December 31, 2005,
2004 and 2003 set forth below are derived from our audited
consolidated financial statements included elsewhere in this
prospectus. The selected consolidated financial data as of
December 31, 2003, 2002 and 2001 and for the years ended
December 31, 2002 and 2001 set forth below are derived from
our audited consolidated financial statements that are not
included in this prospectus. Our historical results are not
necessarily indicative of our results of operations for future
periods. This selected consolidated financial data should be
read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
included in this prospectus and our audited consolidated
financial statements and related notes thereto included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales at suggested retail
|
|
$ |
163,968,979 |
|
|
$ |
139,442,752 |
|
|
$ |
110,569,576 |
|
|
$ |
90,110,444 |
|
|
$ |
74,410,042 |
|
|
|
Less distributor allowances on product purchases
|
|
|
50,403,815 |
|
|
|
42,460,319 |
|
|
|
33,609,853 |
|
|
|
27,183,581 |
|
|
|
21,466,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
113,565,164 |
|
|
|
96,982,433 |
|
|
|
76,959,723 |
|
|
|
62,926,863 |
|
|
|
52,943,047 |
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
19,264,347 |
|
|
|
16,662,935 |
|
|
|
13,228,050 |
|
|
|
11,569,163 |
|
|
|
12,562,385 |
|
|
|
Distributor royalties and commissions
|
|
|
45,479,062 |
|
|
|
38,622,537 |
|
|
|
29,916,744 |
|
|
|
24,205,030 |
|
|
|
18,795,153 |
|
|
|
Selling, general, and administrative
|
|
|
36,348,526 |
|
|
|
32,710,657 |
|
|
|
26,438,447 |
|
|
|
22,898,359 |
|
|
|
20,555,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
101,091,935 |
|
|
|
87,996,129 |
|
|
|
69,583,241 |
|
|
|
58,672,552 |
|
|
|
51,913,187 |
|
|
Income from operations
|
|
|
12,473,229 |
|
|
|
8,986,304 |
|
|
|
7,376,482 |
|
|
|
4,254,311 |
|
|
|
1,029,860 |
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(313,329 |
) |
|
|
(243,118 |
) |
|
|
(234,956 |
) |
|
|
(340,343 |
) |
|
|
(527,208 |
) |
|
|
Other income
|
|
|
339,516 |
|
|
|
264,503 |
|
|
|
157,914 |
|
|
|
120,839 |
|
|
|
24,788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
26,187 |
|
|
|
21,385 |
|
|
|
(77,042 |
) |
|
|
(219,504 |
) |
|
|
(502,420 |
) |
|
Income before income taxes
|
|
|
12,499,416 |
|
|
|
9,007,689 |
|
|
|
7,299,440 |
|
|
|
4,034,807 |
|
|
|
527,440 |
|
|
Provision for income taxes
|
|
|
4,978,000 |
|
|
|
3,621,000 |
|
|
|
2,902,000 |
|
|
|
1,542,000 |
|
|
|
219,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,521,416 |
|
|
|
5,386,689 |
|
|
|
4,397,440 |
|
|
|
2,492,807 |
|
|
|
308,440 |
|
|
Preferred dividends accrued and paid
|
|
|
|
|
|
|
12,292 |
|
|
|
56,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$ |
7,521,416 |
|
|
$ |
5,374,397 |
|
|
$ |
4,340,678 |
|
|
$ |
2,492,807 |
|
|
$ |
308,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share Basic
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
|
$ |
0.29 |
|
|
$ |
0.18 |
|
|
$ |
0.02 |
|
|
|
Weighted-average shares
|
|
|
15,885,000 |
|
|
|
15,662,000 |
|
|
|
14,969,000 |
|
|
|
14,144,000 |
|
|
|
14,349,000 |
|
|
Earnings per common share Diluted
|
|
$ |
0.46 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
$ |
0.15 |
|
|
$ |
0.02 |
|
|
|
Weighted-average shares
|
|
|
16,388,000 |
|
|
|
17,137,000 |
|
|
|
16,706,000 |
|
|
|
16,111,000 |
|
|
|
14,498,000 |
|
|
Cash dividends declared per common share
|
|
$ |
0.075 |
|
|
$ |
0.065 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
Balance Sheet Data: |
|
| |
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
5,653,594 |
|
|
$ |
10,151,503 |
|
|
$ |
7,902,508 |
|
|
$ |
3,437,966 |
|
|
$ |
1,258,821 |
|
Working capital
|
|
|
3,963,741 |
|
|
|
11,466,647 |
|
|
|
7,256,295 |
|
|
|
2,392,927 |
|
|
|
515,291 |
|
Total assets
|
|
|
25,981,423 |
|
|
|
30,996,667 |
|
|
|
24,680,916 |
|
|
|
18,445,986 |
|
|
|
16,986,601 |
|
Long-term debt, less current maturities
|
|
|
2,211,065 |
|
|
|
3,357,691 |
|
|
|
3,700,138 |
|
|
|
4,057,042 |
|
|
|
4,650,246 |
|
Total stockholders equity
|
|
$ |
12,564,828 |
|
|
$ |
18,190,753 |
|
|
$ |
13,072,378 |
|
|
$ |
7,797,646 |
|
|
$ |
5,826,850 |
|
21
MANAGEMENTS DISCUSSION & 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 Selected Historical Financial
Information and our financial statements and related notes
included elsewhere in this prospectus. 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 90.3% of worldwide net sales for the year ended
December 31, 2005 compared to approximately 86.5% for the
year ended December 31, 2004. 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 derive our revenues principally through product sales made by
our global independent distributor base, which, as of
December 31, 2005, consisted of approximately 65,480
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
Sales at suggested retail primarily represents the gross sales
amounts on our invoices to our distributors before distributor
allowances, and also includes freight and handling income and
sales of marketing materials. Distributor allowances on product
purchases represents the discount given to a distributor in
purchasing nutritional supplements or skin care products from
us. The amount of the discount can range between 20% to 40% of
suggested retail price, depending on the rank of a particular
distributor. Net sales reflect the items included in sales at
suggested retail, less the distributor allowances. 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.
22
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.
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, 2005, 2004 and 2003. Our results of
operations for the periods described below are not necessarily
indicative of results of operations for future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
17.0 |
|
|
|
17.2 |
|
|
|
17.2 |
|
|
Distributor royalties and commissions
|
|
|
40.0 |
|
|
|
39.8 |
|
|
|
38.9 |
|
|
Selling, general and administrative
|
|
|
32.0 |
|
|
|
33.7 |
|
|
|
34.4 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
11.0 |
|
|
|
9.3 |
|
|
|
9.5 |
|
|
Interest expense
|
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
|
(0.3 |
) |
|
Other income
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
11.0 |
|
|
|
9.3 |
|
|
|
9.4 |
|
Provision for income taxes
|
|
|
4.4 |
|
|
|
3.7 |
|
|
|
3.8 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6.6 |
% |
|
|
5.6 |
% |
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004
Net Sales. Sales in the United States grew by 22.3% in
the year ended December 31, 2005 compared to 2004. During
2005, our international sales declined by 16.0% over the prior
year, primarily the result of price increases and changes made
to the distributor qualification requirements made in our
Mexican and Philippine markets. Also contributing to the net
sales increase during 2005 were sales from the introduction
23
of our newest product, CardioSentials. Introduced in
February 2005, net sales of this product were
$3.9 million for the year ended December 31, 2005.
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, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2005 | |
|
2004 | |
|
Change From Prior | |
|
|
| |
|
| |
|
Year | |
|
|
|
|
% of Net | |
|
|
|
% of Net | |
|
| |
|
|
Amount | |
|
Sales | |
|
Amount | |
|
Sales | |
|
Amount | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
(dollars in thousands) | |
|
|
|
|
United States
|
|
$ |
102,549 |
|
|
|
90.3 |
% |
|
$ |
83,873 |
|
|
|
86.5 |
% |
|
$ |
18,676 |
|
|
|
22.3 |
% |
Australia/ New Zealand
|
|
|
2,215 |
|
|
|
2.0 |
|
|
|
2,543 |
|
|
|
2.6 |
|
|
|
(328 |
) |
|
|
(12.9 |
) |
Canada
|
|
|
1,668 |
|
|
|
1.5 |
|
|
|
1,751 |
|
|
|
1.8 |
|
|
|
(83 |
) |
|
|
(4.7 |
) |
Mexico
|
|
|
1,608 |
|
|
|
1.4 |
|
|
|
2,634 |
|
|
|
2.7 |
|
|
|
(1,026 |
) |
|
|
(39.0 |
) |
United Kingdom/ Ireland
|
|
|
846 |
|
|
|
0.7 |
|
|
|
545 |
|
|
|
0.6 |
|
|
|
301 |
|
|
|
55.2 |
|
Philippines
|
|
|
2,328 |
|
|
|
2.0 |
|
|
|
2,865 |
|
|
|
3.0 |
|
|
|
(537 |
) |
|
|
(18.7 |
) |
Malaysia/ Singapore
|
|
|
2,031 |
|
|
|
1.8 |
|
|
|
2,771 |
|
|
|
2.9 |
|
|
|
(740 |
) |
|
|
(26.7 |
) |
Germany
|
|
|
320 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$ |
113,565 |
|
|
|
100.0 |
% |
|
$ |
96,982 |
|
|
|
100.0 |
% |
|
$ |
16,583 |
|
|
|
17.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, as of December 31, 2005 and
2004, 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, 2005 | |
|
December 31, 2004 | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
|
|
|
Master | |
|
|
|
Master | |
|
|
|
Master | |
|
|
Active | |
|
Affiliates and | |
|
Active | |
|
Affiliates and | |
|
Active | |
|
Affiliates and | |
|
|
Distributors | |
|
Above | |
|
Distributors | |
|
Above | |
|
Distributors | |
|
Above | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
United States
|
|
|
52,040 |
|
|
|
15,840 |
|
|
|
47,190 |
|
|
|
12,460 |
|
|
|
10.3 |
% |
|
|
27.1 |
% |
Australia/ New Zealand
|
|
|
2,410 |
|
|
|
250 |
|
|
|
3,040 |
|
|
|
290 |
|
|
|
(20.7 |
) |
|
|
(13.8 |
) |
Canada
|
|
|
1,210 |
|
|
|
210 |
|
|
|
1,480 |
|
|
|
210 |
|
|
|
(18.2 |
) |
|
|
0.0 |
|
Mexico
|
|
|
1,630 |
|
|
|
310 |
|
|
|
9,000 |
|
|
|
710 |
|
|
|
(81.9 |
) |
|
|
(56.3 |
) |
United Kingdom/ Ireland
|
|
|
750 |
|
|
|
100 |
|
|
|
450 |
|
|
|
60 |
|
|
|
66.7 |
|
|
|
66.7 |
|
Philippines
|
|
|
4,070 |
|
|
|
490 |
|
|
|
6,760 |
|
|
|
650 |
|
|
|
(39.8 |
) |
|
|
(24.6 |
) |
Malaysia/ Singapore
|
|
|
3,250 |
|
|
|
590 |
|
|
|
5,280 |
|
|
|
730 |
|
|
|
(38.4 |
) |
|
|
(19.2 |
) |
Germany
|
|
|
120 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
65,480 |
|
|
|
17,840 |
|
|
|
73,200 |
|
|
|
15,110 |
|
|
|
(10.5 |
)% |
|
|
18.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the United States, new distributor enrollments, high
retention and continued growth in the number of Master
Affiliates and above continue to be key factors in our sales
growth. In 2005, over 23,030 new distributors were enrolled in
the United States, as compared to approximately 22,980 in 2004.
Distributor retention in the United States was approximately
62.9% for 2005 compared to a rate of 57.7% for 2004. The number
of distributors reaching Master Affiliate and above has also
continued to improve in the United States. In 2005,
approximately 8,120 distributors qualified as new Master
Affiliates and 61.6% of the Master Affiliates and above as of
December 31, 2004 requalified as Master Affiliates and
above during
24
2005. This compares to approximately 6,860 new Master Affiliates
and a requalification rate of 61.2% in 2004. We attribute the
increase in net distributor enrollment and retention in part to
the momentum created by the consistency and reinforcement of our
training programs and business opportunity presentations, in the
form of regional distributor conferences and other
corporate-sponsored meetings. This has resulted in more
distributors reaching the Master Affiliate level and above, who
generally are more experienced and productive distributors.
During the year ended December 31, 2005, net sales in our
international operations declined in aggregate by 16.0% to
$11.0 million compared to $13.1 million for the year
ended December 31, 2004. The decrease in international
sales occurred primarily in Mexico, Malaysia/ Singapore and the
Philippines because of a change in our distributor qualification
requirements, which resulted in a decrease in our number of
distributors in those markets. When net sales are converted
using the 2004 exchange rate for both 2004 and 2005,
international net sales declined 18.1% for 2005 compared to the
prior year, as the U.S. dollar weakened against every currency
in which we conduct operations during 2005.
Net sales in the Australia/ New Zealand market decreased by
12.9% in 2005 compared to 2004. New distributor enrollments were
725 in 2005 compared to 1,419 in 2004. When net sales are
converted using the 2004 exchange rate for both 2004 and 2005,
net sales in this market decreased by 15.6%. As a result of the
decline in sales during the first half of 2005, the contract of
the sales manager for that market was terminated during the
second quarter of 2005, and we named a new sales manager in
September 2005. The combined net loss for the Australia/ New
Zealand market was $115,000 in 2005, compared to a net loss of
$132,000 in 2004.
Net sales in Canada decreased by 4.7% in 2005 compared to 2004.
The decline in net sales is due in part to the decline in new
distributor enrollments. New distributor enrollments were 489 in
2005 compared to 853 in 2004. When measured in local currency,
Canadian net sales decreased by 11.1% in 2005 compared to 2004.
Net income in Canada was $77,000 for 2005, compared to $249,000
in 2004.
Net sales in Mexico decreased 39.0% in 2005 compared to 2004.
New distributor enrollments were 1,048 in 2005 compared to 7,904
in 2004. When measured in local currency, 2005 net sales
declined by 41.3%. Net sales declined subsequent to a 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 2005 was $446,000, compared to a net loss of $113,000 in
2004.
Net sales in the United Kingdom increased by 55.2% for 2005
compared to 2004, as the efforts of our new general manager and
national sales manager in the UK began to show positive results.
When measured in local currency, net sales in the UK increased
by 56.3% in 2005, compared to the prior year. New distributor
enrollments were 447 in 2005 compared to 193 in 2004. However,
the added staffing and sales development expenses more than
offset the gain in sales. The net loss incurred in the UK was
$421,000 in 2005, compared to a net loss of $183,000 in 2004.
As in Mexico, we changed our distributor qualification
requirements and increased prices in the Philippines effective
February 2005. Net sales in the Philippines declined by 18.7% in
2005 compared to the prior year. New distributor enrollments
were 2,993 in 2005 compared to 5,360 in 2004. When measured in
local currency, 2005 net sales declined by 20.2%. The net loss
in the Philippines for 2005 was $104,000, compared to a net loss
of $164,000 in 2004.
Net sales in the Malaysia/ Singapore market decreased by
approximately 26.7% in 2005 compared to the prior year. New
distributor enrollments were 2,546 in 2005 compared to 4,906 in
2004. In comparison to 2004, currency fluctuation in 2005 had a
negligible effect on sales in this market. Net sales decreased
in Malaysia/ Singapore because our new distributor enrollments
declined by nearly 48.1% during 2005 compared to 2004, and our
active distributor count decreased by 38.4%. The decrease in new
distributors in
25
this market resulted from a change in our distributor
qualification requirements. The combined net loss for Malaysia/
Singapore for 2005 was $392,000, compared to a net loss of
$170,000 in 2004.
We began operations in Germany in July 2005. We had net sales of
approximately $320,000 during our first six months.
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 2005, we processed
a total of approximately 76,000 orders under this program at a
suggested retail sales value of $8.4 million compared to
58,800 orders at a suggested retail value of $6.2 million
during 2004. The average order size at suggested retail value
increased in 2005 to $111 compared to $106 during 2004.
Cost of Products Sold. Cost of products sold as a
percentage of net sales decreased slightly to 17.0% for the year
ended December 31, 2005 compared to 17.2% for the year
ended December 31, 2004. Raw material costs remained fairly
stable throughout the year, and operating efficiencies gradually
improved during 2005 subsequent to the installation of new
production equipment during the third and fourth quarters of
2004.
Distributor Royalties and Commissions. Distributor
royalties and commissions as a percentage of net sales increased
slightly to 40.0% for the year ended December 31, 2005
compared to 39.8% for the same period in 2004. The increase is
due to changes made during the first quarter of 2005 to the
distributor compensation plan in the Philippines and Mexico,
resulting in commission payments being made on the full
suggested retail value of the products sold. With these changes,
commission payments are now uniform throughout our domestic and
international markets.
Selling, General and Administrative Expenses. For 2005,
selling, general and administrative, or SGA, expenses increased
by $3.6 million compared to 2004. However, SGA expenses as
a percentage of net sales declined from 33.7% in 2004 to 32.0%
in 2005.
Sales and marketing expenses represented approximately
$1.9 million of the 2005 increase, including increased
credit card fees due to the higher sales volume, and increased
promotional bonuses and promotional trip expenses related to
sales volume. General and administrative expenses increased by
approximately $1.6 million, primarily in salaries and
bonuses, fringe benefit expenses, travel expenses, professional
service fees, and directors fees. These increases were
offset by declines in certain areas. Legal fees decreased by
$163,000, and accounting fees and related expenses decreased by
$669,000 in 2005 compared to the prior year. The decrease in
accounting fees and related expenses is due in part to our
establishment of an internal audit department to supplement
managements efforts related to documenting and assessing
our internal controls. In the prior year, we incurred additional
third party expenses with the adoption of the internal control
documentation requirements of the Sarbanes-Oxley Act.
During 2005, we incurred SGA expenses of approximately $645,000
in our most recent market entry, Germany. We began sales in
Germany on July 18, 2005.
Interest Expense. Interest expense increased to $313,000
for the year ended December 31, 2005 compared to $243,000
for 2004. The increase is the result of higher interest rates on
the term loan on our headquarters facility, coupled with
additional interest expense incurred on a note we entered into
in March 2005 to purchase the shares of our common stock owned
by a former officer and director and his wife. The interest rate
on the term loan on our headquarters facility was a variable
rate loan with interest equal to the prime rate. This loan was
paid in full in June 2005. The note to purchase the stock owned
by the former officer and director was for $3.5 million
with an interest rate of 4.0% per year, of which
$3.1 million was outstanding as of December 31, 2005.
We also issued a note for $593,000 to the wife of the former
officer and director, which was repaid immediately after its
issuance.
26
Income Taxes. We recorded income tax expense of
$5.0 million for 2005, an effective rate of 39.8%. In 2004,
we recorded income tax expense of $3.6 million, an
effective rate of 40.2%. The lower effective rate in 2005 is the
result of the new Domestic Manufacturing Deduction, enacted by
the American Jobs Creation Act of 2004, beginning with the 2005
tax year.
Net Income. Our net income improved to $7.5 million
($0.47 per share basic and $0.46 per share diluted) for the year
ended December 31, 2005 compared to $5.4 million
($0.34 per share basic and $0.31 per share diluted) for 2004.
Profitability continued to increase as net sales improved in the
United States, as discussed above. Net income in the United
States was $9.2 million in 2005 compared to
$5.9 million in 2004. The net loss from international
operations was $1.7 million in 2005 compared to a net loss
of $513,000 in 2004.
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003
Net Sales. Sales in the United States, our largest
market, grew by 27.4% in 2004 compared to 2003. Our
international operations experienced a sales increase of 17.8%
in 2004 compared to 2003, due primarily to the first full year
of operation in Malaysia. We continued to implement our uniform
distributor compensation plan and business model across our
foreign operations. These changes reduced operating margin in
the foreign markets, and, along with other sales development
expenses, reduced net income in the international markets
overall, but are essential to the consistent execution of our
business model and sustainability of our international growth.
During 2004, we did not introduce any new products in the United
States; however, we introduced certain core products into our
foreign markets, including FibRestore and ReversAge in Malaysia.
The following table summarizes the net sales by geographic
market for the years ended December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2004 | |
|
2003 | |
|
Change from | |
|
|
| |
|
| |
|
Prior Year | |
|
|
|
|
% of Net | |
|
|
|
% of Net | |
|
| |
|
|
Amount | |
|
Sales | |
|
Amount | |
|
Sales | |
|
Amount | |
|
% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(dollars in thousands) | |
United States
|
|
$ |
83,873 |
|
|
|
86.5 |
% |
|
$ |
65,832 |
|
|
|
85.5 |
% |
|
$ |
18,041 |
|
|
|
27.4 |
% |
Australia/ New Zealand
|
|
|
2,543 |
|
|
|
2.6 |
|
|
|
2,060 |
|
|
|
2.7 |
|
|
|
483 |
|
|
|
23.4 |
|
Canada
|
|
|
1,751 |
|
|
|
1.8 |
|
|
|
1,256 |
|
|
|
1.6 |
|
|
|
495 |
|
|
|
39.4 |
|
Mexico
|
|
|
2,634 |
|
|
|
2.7 |
|
|
|
3,338 |
|
|
|
4.3 |
|
|
|
(704 |
) |
|
|
(21.1 |
) |
United Kingdom/ Ireland
|
|
|
545 |
|
|
|
0.6 |
|
|
|
475 |
|
|
|
0.6 |
|
|
|
70 |
|
|
|
14.7 |
|
Philippines
|
|
|
2,865 |
|
|
|
3.0 |
|
|
|
3,419 |
|
|
|
4.4 |
|
|
|
(554 |
) |
|
|
(16.2 |
) |
Malaysia/ Singapore
|
|
|
2,771 |
|
|
|
2.9 |
|
|
|
580 |
|
|
|
0.8 |
|
|
|
2,191 |
|
|
|
377.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
$ |
96,982 |
|
|
|
100.0 |
% |
|
$ |
76,960 |
|
|
|
100.0 |
% |
|
$ |
20,022 |
|
|
|
26.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
The following table sets forth the number of our active
distributors and Master Affiliates and above as of
December 31, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 | |
|
December 31, 2003 | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
|
|
|
Master | |
|
|
|
Master | |
|
|
|
Master | |
|
|
Active | |
|
Affiliates and | |
|
Active | |
|
Affiliates and | |
|
Active | |
|
Affiliates and | |
|
|
Distributors | |
|
Above | |
|
Distributors | |
|
Above | |
|
Distributors | |
|
Above | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
United States
|
|
|
47,190 |
|
|
|
12,460 |
|
|
|
41,000 |
|
|
|
9,150 |
|
|
|
15.1 |
% |
|
|
36.2 |
% |
Australia/ New Zealand
|
|
|
3,040 |
|
|
|
290 |
|
|
|
2,580 |
|
|
|
240 |
|
|
|
17.8 |
|
|
|
20.8 |
|
Canada
|
|
|
1,480 |
|
|
|
210 |
|
|
|
1,140 |
|
|
|
180 |
|
|
|
29.8 |
|
|
|
16.7 |
|
Mexico
|
|
|
9,000 |
|
|
|
710 |
|
|
|
7,700 |
|
|
|
1,370 |
|
|
|
16.9 |
|
|
|
(48.2 |
) |
United Kingdom/ Ireland
|
|
|
450 |
|
|
|
60 |
|
|
|
410 |
|
|
|
80 |
|
|
|
9.8 |
|
|
|
(25.0 |
) |
Philippines
|
|
|
6,760 |
|
|
|
650 |
|
|
|
7,380 |
|
|
|
810 |
|
|
|
(8.4 |
) |
|
|
(19.8 |
) |
Malaysia/ Singapore
|
|
|
5,280 |
|
|
|
730 |
|
|
|
1,350 |
|
|
|
190 |
|
|
|
291.1 |
|
|
|
284.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated total
|
|
|
73,200 |
|
|
|
15,110 |
|
|
|
61,560 |
|
|
|
12,020 |
|
|
|
18.9 |
% |
|
|
25.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the United States, our largest market, the number of active
distributors increased to 47,190 at December 31, 2004 from
41,000 at December 31, 2003. New distributor enrollments in
the United States increased to 22,975 in 2004 compared to 20,800
in 2003. The retention rate of distributors who renew their
annual agreement was 57.7% in 2004, as compared to a renewal
rate of 53.7% in the prior year. The renewal rate was also
slightly better than the average renewal rate over the last five
years of 55.0%. Master Affiliates and above increased to 12,460
in the United States as of December 31, 2004 from 9,150 as
of December 31, 2003. Nearly 6,900 distributors qualified
as new Master Affiliates in 2004 and 61.2% of the Master
Affiliates and above as of December 31, 2003, requalified
as Master Affiliates and above during 2004. In 2004, we
processed approximately 207,170 wholesale orders in the United
States at an average retail price of $504 compared to
approximately 171,900 orders at an average of $480 in 2003.
The increase in distributor enrollment and retention in the
United States in 2004 was due in part to the momentum created by
the consistency and reinforcement of our training programs and
business opportunity presentations, in the form of regional
distributor conferences and other corporate-sponsored meetings.
Also, we held our annual international distributor conference in
St. Louis, Missouri in August 2004 with approximately 6,000
distributors in attendance. These activities have resulted in
more distributors reaching the Master Affiliate level and above,
who generally are more experienced and productive distributors.
In the Australia/ New Zealand market, net sales increased to
$2.5 million in 2004 from $2.1 million in 2003. New
distributor enrollments during 2004 in the Australia/ New
Zealand market were 1,419, as compared to 905 in 2003.
Distributor renewals in the market were 63.1% in 2004 as
compared to 65.3% in 2003. A portion of the sales increase as
measured in U.S. dollars is the result of the strengthening
of the Australian and New Zealand dollars relative to the
U.S. dollar, but sales in Australia measured in local
currency increased in 2004, as well. On a local currency basis,
sales in Australia increased by 11.1% in 2004 compared to 2003,
whereas local currency sales in New Zealand decreased by 9.3% in
2004 compared to 2003. In September 2003, we changed our
compensation plan to pay royalties based on the full retail
price of products. This change in the compensation plan was part
of our worldwide plan to make the business model seamless from
country to country. As a result of the additional royalty
expense due to the compensation plan change, along with the
added expenses of the new sales manager, the market experienced
a net loss in 2004. The combined net loss for the Australia/ New
Zealand market was $132,000 in 2004 compared to net income of
$2,000 in 2003. Similar changes in the compensation plans were
made in Canada and the United Kingdom earlier in 2003, and
similar changes were made for the Mexican and Philippine markets
in 2005.
28
Net sales in Canada increased in 2004 to $1.8 million from
$1.3 million in 2003. During 2004, the Canadian dollar
continued to strengthen considerably compared to the
U.S. dollar, and this caused a portion of the net sales
improvement, when expressed in U.S. dollars. In Canadian
dollars, net sales improved by 28.9% in 2004 compared to 2003.
New distributor enrollments were 853 in 2004 compared to 594 in
2003, with a distributor renewal rate of 55.0% during 2004. The
Canadian operation showed an increase in net income in 2004 to
$249,000, as compared to a net income of $155,000 in 2003.
Growth in the Canadian market is a by-product of the success
being experienced in the U.S. market, as the same sales
development strategies are used in Canada.
Net sales in Mexico in 2004 were $2.6 million compared to
$3.3 million in 2003. New distributor enrollments increased
in 2004 to 7,904 compared to 5,939 in 2003. Net sales in Mexico
declined due in part to more stringent Master Affiliate
qualification requirements and other changes to the distributor
compensation plan, as the distributor force in Mexico was
adversely affected by these changes. The net loss in this market
decreased to $113,000 in 2004, as compared to a net loss of
$134,000 in 2003.
Net sales in the United Kingdom in 2004 were $545,000 compared
to $475,000 in 2003. The increase in net sales is almost
entirely due to the stronger UK pound compared to the
U.S. dollar. Net sales in UK pounds for 2004 increased by
2.7% compared to 2003. New distributor enrollments were 193 in
2004 compared to 166 in 2003. The net loss incurred in this
market increased to $183,000 in 2004 from $115,000 in 2003. The
increase in sales was offset by higher commission expenses, as
we made a change to the UK compensation plan, similar to the
Australia/ New Zealand market, to pay royalties on the full
retail value of the products.
Net sales in the Philippines in 2004 were $2.9 million
compared to $3.4 million in 2003. New distributor
enrollments were 5,360 in 2004 compared to 6,311 in 2003. As in
Mexico, net sales declined due in part to the changes made in
the business model and distributor compensation plan, which
resulted in fewer distributors in the Philippines. The
Philippines operations had a net loss of $164,000 in 2004
compared to a net loss of $15,000 in 2003. Approximately $65,000
of the net loss was due to a valuation allowance recorded
against deferred tax assets for net operating loss carryforwards
that the likelihood of utilization is uncertain prior to their
expiration in 2005 and 2006. Additionally, the Philippines
operation was subject to a minimum corporate income tax based on
gross profit of approximately $45,000.
Malaysia/ Singapore had net sales of $2.8 million during
2004 compared to net sales of $580,000 during 2003. Malaysia
opened in September 2003, and Singapore opened in March 2004.
Approximately 4,900 new distributors enrolled during 2004 in
this market compared to approximately 1,200 new distributor
enrollments during the last four months of 2003. We had a net
loss of $170,000 in this market in 2004 compared to a net loss
of $237,000 during 2003, Malaysias start-up year.
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 in 2004, the program
processed a total of 58,800 orders for a suggested retail value
of $6.2 million compared to 40,300 orders totaling
$4.3 million in 2003. The average order size at suggested
retail value remained constant at $106 in both 2004 and 2003.
Cost of Products Sold. Cost of products sold as a
percentage of net sales remained steady at 17.2% for 2003 and
2004. Increased volume efficiencies were offset by expenses
incurred in the
start-up of a
manufacturing equipment upgrade installed during the third and
fourth quarters of 2004. Overall ingredient costs in 2004 were
stable, with nominal price increases on some items. Also, the
cost of increased analytical testing procedures required under
Australian regulations increased cost of products sold.
29
Distributor Royalties and Commissions. Distributor
royalties and commissions as a percentage of net sales increased
to 39.8% in 2004 compared to 38.9% in 2003. The continuing
increase in the percentage was the result of royalty payments
being made on the full retail value of the products in most of
our international markets. These expenses are governed by our
Distributor Agreements and are directly related to the level of
sales. Included in the 2004 distributor royalties and
commissions are royalties of $2.0 million earned through
the Ambassador Program as compared to $1.5 million in 2003.
The Ambassador Program compensates distributors at the highest
levels for their leadership and development of sales. As of
December 31, 2004, there were 238 Ambassadors compared to
210 Ambassadors at the end of 2003.
Selling, General and Administrative Expenses. SGA
expenses as a percentage of net sales were 33.7% for 2004 and
34.4% in 2003. The percentage decrease is due to the increase in
our net sales. Total SGA expenses increased from
$26.4 million in 2003 to $32.7 million in 2004.
In 2004, total distribution and warehouse expenses increased to
$1.6 million from $1.5 million in 2003 primarily due
to increased expenses in the United States to support the growth
in sales.
Total sales and marketing expenses in 2004 were
$14.5 million compared to $11.9 million in 2003, an
increase of 21.9% in 2004. Amounts paid in the Star
Director Bonus and other volume-related bonuses paid to
distributors increased by $1.1 million in 2004 as compared
to 2003, as the result of increased sales. The Star Director
Program compensates distributors who reach certain levels of
sales organization growth with bonuses based on the retail sales
of their distributor network. In 2004, $3.6 million was
paid through this program compared to $2.8 million in 2003.
Credit card processing fees also increased by $408,000 in 2004
as compared to 2003, also as the result of increased sales.
Distributor training and other distributor support expenses
increased by $304,000. Sales and marketing expenses, as a
percentage of net sales, were 14.9% in 2004 and 15.4% in 2003.
Total general and administrative expenses in 2004 were
$16.6 million compared to $13.1 million in 2003. The
expenses paid to outside parties in 2004 to supplement
managements documentation and assessment of internal
controls required under Section 404 of the Sarbanes-Oxley
Act were the most significant component of this increase.
Accounting fees increased by $1.3 million from 2003 to
2004. Most of this increase was related to the expenses incurred
to perform the work required under the Sarbanes-Oxley Act.
Because of the increase in our stock price over the first six
months of 2004, we became classified as an accelerated
filer. As a result, the period of time in which we had to
perform this internal control assessment was compressed. Many of
these costs were one-time expenses, as part of the first year
start-up and
documentation under the Sarbanes-Oxley Act.
Total staff compensation and fringe benefits increased by 13.9%,
or $1.3 million, in 2004 compared to 2003. This increase is
due to the increase in incentive compensation bonuses paid
during 2004, the addition of Malaysia and Singapore and various
staffing increases, primarily in the United States. Significant
changes in general and administrative expenses included an
increase in travel expenses by $167,000 in 2004 compared to
2003; business insurance expenses increased by $191,000 in 2004
compared to 2003; and directors fees, investor relations
expenses and other expenses related to being a publicly-traded
company increased by $356,000 in 2004 compared to 2003.
Interest Expense. Interest expense in 2004 was $243,000
compared to $235,000 in 2003. Interest expense increased
slightly in 2004, as the prime rate increased from 4.0% at the
end of 2003 to 5.25% at the end of 2004. The term loan on our
headquarters facility was a variable rate instrument equal to
the prime rate.
30
Income Taxes. Income tax expense was $3.6 million
for 2004 and $2.9 million for 2003. The effective tax rate
for 2004 was 40.2%. State income taxes, along with foreign
losses with no U.S. tax benefit, represent most of the
increase over the U.S. statutory tax rate of 34.0%. Also,
in the Philippines, a minimum corporate income tax and a
valuation allowance recorded against the deferred tax asset had
a slight impact on the effective tax rate in 2004. The effective
tax rate for 2003 was 39.8%.
Net Income. Our 2004 net income available to common
stockholders was $5.4 million or $0.31 per share
diluted. This compares with net income of $4.3 million or
$0.26 per share diluted in 2003. Net income in the United
States, our primary market, was $5.9 million in 2004
compared to net income of $4.7 million in 2003 and led to
our overall improvement in both sales and profitability. Net
loss from international operations was $513,000 in 2004 compared
with a net loss of $344,000 in 2003. Our net income was
adversely impacted by the expenses we incurred related to the
first year of managements documentation and assessment of
internal controls as required by Section 404 of the
Sarbanes-Oxley Act of 2002.
Financial Condition, Liquidity and Capital Resources
We generated $12.5 million of net cash during 2005 from
operating activities, $1.6 million was used in investing
activities, and we used $15.2 million in financing
activities. This compares to $7.4 million of net cash
provided by operating activities, $1.8 million used in
investing activities, and $3.4 million used in financing
activities in 2004. Cash and cash equivalents decreased by
$4.5 million to $5.7 million as of December 31,
2005 compared to December 31, 2004.
Significant changes in working capital items consisted of a
decrease in inventories of $327,000, an increase in accounts
payable and accrued expenses of $538,000, and a decrease in
refundable income taxes payable of $1.3 million in 2005.
The decrease in inventories is a result of better production
efficiencies gained from manufacturing equipment upgrades
installed during the third and fourth quarters of 2004. The
increase in accounts payable and accrued expenses is due to
increased production volume and other expenses related to the
increase in sales volume, coupled with the increase in
distributor commissions payable at December 31, 2005
compared to December 31, 2004. This increase in distributor
commissions payable is the result of higher total sales in
December 2005 compared to December 2004. The decrease in the
refundable income taxes is the result of a refund received from
the Internal Revenue Service on the overpayment of income tax
deposits.
Our net investing activities included $1.7 million,
$1.9 million and $1.0 million for capital expenditures
in the years ended December 31, 2005, 2004 and 2003,
respectively. The most significant financing activity in 2005
was $13.8 million in purchases of treasury stock. Of the
$13.8 million in stock purchases, we paid $9.7 million
in cash and issued notes 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 and director and his
wife, and three of our current officers and 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. We purchased
approximately $4.3 million of stock 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.
In 2004, we paid $975,000 for the redemption of preferred stock,
$12,000 in preferred stock dividends and $1.0 million in
common stock dividends. We also used $1.3 million to
purchase treasury stock and received $292,000 in proceeds from
the exercise of options and warrants. In 2004, all treasury
stock was purchased from related parties. During 2003, we
purchased $1.2 million of treasury stock and received
$142,000 in proceeds from the sale of treasury stock and
$328,000 in proceeds from the exercise of options and warrants.
31
Stockholders equity decreased to $12.6 million at
December 31, 2005 compared with $18.2 million at
December 31, 2004. The decrease is primarily due to a stock
repurchase of approximately $4.1 million of our common
stock from a former officer and director and his wife in the
first quarter of 2005, stock purchases from three of our
officers and directors totaling $5.1 million that took
place in May 2005 and $4.6 million of other 2005 treasury
stock purchases, offset by our net income during 2005.
Stockholders equity also increased by $1.4 million
and $2.6 million as the result of the tax benefit from the
exercise of nonqualified options and warrants during the years
ended December 31, 2005 and 2004, respectively.
Our working capital balance was $4.0 million at
December 31, 2005 compared to $11.5 million at
December 31, 2004. The current ratio at December 31,
2005 was 1.4 compared to 2.4 at previous year-end. In June 2005,
we entered into a new $15 million secured revolving credit
facility with our primary lender. This new facility replaced our
previous operating line of credit that had a maximum borrowing
limit of $1 million. The new facility expires in April
2007, and any advances accrue interest at a variable interest
rate based on LIBOR. The credit facility is secured by all of
our assets. The new 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, 2005, we had not utilized any of the new
revolving line of credit facility and were in compliance with
the minimum stockholders equity covenant.
Management believes that our internally generated funds, along
with the proceeds from this offering, and the borrowing capacity
under the new revolving line of credit facility will be
sufficient to meet working capital requirements for the
remainder of 2006.
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.
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.
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
32
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.
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. Based on
our evaluation of our tax positions, we believe we have
appropriately accrued 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, 2005, we had deferred tax assets related to
net operating loss carryforwards and other income tax credits
with a tax value of $1.9 million. These net operating loss
carryforwards have various expiration dates, depending on the
country in which they occurred. A valuation allowance of
$1.8 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.
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 and continue to explore expansion into other
foreign countries. 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 9.7%, 13.5%,
and 14.5% of total net sales in 2005, 2004, and 2003,
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, 2005, we had a net investment in our
foreign subsidiaries of $3.8 million (in U.S. dollars).
We have performed a sensitivity analysis as of December 31,
2005 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 the countries in
which we presently operate. Using the results of operations for
2005 for our foreign operations as a basis for comparison, an
adverse movement of 10% would create a potential reduction in
our net income of less than $50,000 and reduce the value of the
net investment in the foreign subsidiaries by $380,000.
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
33
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. The net changes in
the fair value of these forward contracts, as of
December 31, 2005 was a cumulative expense of $59,000. As
of December 31, 2005, we had no hedging instruments in
place to offset exposure to the Australian or New Zealand
dollars, Mexican or Philippine pesos, the
Malaysian ringgit, the Singapore dollar, the
EU Euro, or the British pound.
Interest Rate Risk
We have $3.1 million in long-term debt with a
weighted-average effective interest rate of 4.03% at December
31, 2005. Of this amount, all but $27,000 is debt with a fixed
interest rate of 4.0%. Since substantially all of our long-term
debt has a fixed interest rate, we are not subject to any
interest rate risk.
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.
Contractual Obligations
The table below presents our contractual obligations and
commercial commitments as of December 31, 2005. This
consists of our long-term debt and operating leases. For the
long-term debt, the amounts shown represent the principal and
interest amounts by year of anticipated maturity for our debt
obligations and related average interest rates based on the
weighted-average interest rates at the end of the period. 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,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than | |
|
|
|
|
|
More Than |
|
|
|
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
| |
|
|
(dollars in thousands) | |
Promissory
note(1)
|
|
$ |
1,006 |
|
|
$ |
2,285 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,291 |
|
Other debt
|
|
|
17 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
28 |
|
Operating leases
|
|
|
66 |
|
|
|
112 |
|
|
|
8 |
|
|
|
|
|
|
|
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total obligations
|
|
$ |
1,089 |
|
|
$ |
2,408 |
|
|
$ |
8 |
|
|
$ |
|
|
|
$ |
3,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The outstanding principal amount of the promissory note was
$3.1 million at December 31, 2005 and accrues interest
at 4.0% per year. We intend to repay this note in full with
the proceeds from this offering. |
34
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.
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 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 13 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 61.4% of net sales for the year
ended December 31, 2005, includes the following four
products:
|
|
|
|
|
Reliv Classic and Reliv NOW two basic nutritional
supplements containing a full and balanced blend of vitamins,
minerals, proteins and herbs |
|
|
|
Innergize! an isotonic sports supplement in three
flavors |
|
|
|
FibRestore a high-fiber and antioxidant supplement |
These are our most successful supplements based on net sales. We
have nine 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 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, Canada, Germany, Ireland,
Malaysia, Mexico, 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,
2005, our network consisted of approximately 65,480
distributors 52,040 in the United States and
13,440 across our international markets.
We manufacture all of our nutritional supplements at our
facility in Chesterfield, Missouri. We believe our ability to
formulate and manufacture our own products enables us to produce
our products efficiently while maintaining our high standards of
quality assurance and proprietary product composition.
35
Industry Overview
Nutritional Supplement Market
We operate primarily in the $20.3 billion
U.S. nutritional supplement market, which is part of the
broader $68.6 billion U.S. nutrition industry according to
2004 data published by the Nutrition Business Journal, or
NBJ, and $182.0 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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|
|
|
|
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
74.4 years for men and 79.8 years for women in 2001
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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|
|
Rising Healthcare Costs and Use of Preventive Measures:
The cost of the U.S. healthcare system has increased
rapidly, reaching approximately $1.9 trillion in 2004 and
is expected to reach $3.6 trillion by 2014, according to
the Centers for Medicare and Medicaid Services. 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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|
Increasing Focus on Weight Management: A study from the
CDC completed in 2002 estimated that 65% of the U.S. adult
population is overweight and 31% 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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|
|
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. |
Direct Selling Market
Health and nutrition products are distributed through various
market participants, including retailers, such as supermarkets,
drugstores, mass merchants and specialty retailers, and direct
marketers which include direct sellers (such as network
marketers and healthcare practitioners), mail order companies
and Internet retailers. 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 12.5%
compound annual growth rate from 1993 to 2004 to include over
13.6 million direct salespeople in the United States and
54 million salespeople worldwide.
36
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 marketing 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 marketing
channel experienced more growth than retail channels in the
United States for nutritional supplement sales in 2004,
according to the NBJ. Direct sellers were the largest
segment of the direct marketing channel.
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 enabled us to achieve sustained growth and
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 11 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. We believe our ability
to formulate and manufacture our own products enables us to
maintain our high standards of quality assurance and proprietary
product composition.
Growing Upper-Level Distributor Team. Our
upper-level distributor team consists of distributors who have
achieved the level of Master Affiliate or above. Our upper-level
distributors generally are our most productive distributors and
are essential in recruiting, motivating and training our entire
distributor network. We, and our upper-level distributors, lead
thousands 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
37
conferences. On December 31, 2005, we had a total of
approximately 65,480 active distributors in all of our markets,
of which approximately 17,840 were Master Affiliates or above.
The number of distributors at the Master Affiliate level or
above has increased at a compound rate of 21.7% from
December 31, 2003 to December 31, 2005. The top 10
distributors at the Ambassador level have been with us for an
average of 13 years, which provides consistency in training
new distributors and contributes to increased sales.
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. Assuming successful
completion of the offering, our directors and executive officers
will continue to beneficially own approximately 33.7% 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. Over the three years ended
December 31, 2005, our domestic net sales grew by 21.5%
compounded annually. We have achieved this growth through
multiple initiatives, such as increased investment in
company-sponsored events and training and better utilization of
our upper-level distributors across different geographical
areas. 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
and recently have begun to support our international markets
with the assistance and experience of our proven upper-level
distributors. In selected markets, we also have begun investing
in additional marketing support for our distributors that is
consistent with our successful activities in the United States,
including radio and newspaper advertising 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
2006, we introduced new formulations of Reliv Classic and
Reliv NOW in the United States that apply new whole
38
soybean technology. These types of investments will aid in
customer and distributor retention, as well as the recruitment
of new distributors. We may attempt to acquire licenses, as
necessary, for ingredients or formulas, consistent with our past
practice, and we may seek out new nutritional product lines or
key ingredient suppliers that could be acquired to complement
our existing products and product philosophy.
Expand and Improve our Manufacturing and Distribution
Capabilities. We currently manufacture all of our
nutritional supplements at our facility in Chesterfield,
Missouri. This allows us to precisely control product
composition and quality assurance. In 2004, we invested in an
upgrade of our production lines to increase our throughput. We
will continue to make appropriate investments that enhance our
manufacturing capabilities and capacity to further leverage our
existing facilities and trained production staff. We also are
contemplating investment in automated distribution and shipping
capabilities.
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. Our supplements
are in powdered form that the consumer mixes with water, juice
or other liquid. We also have a line of skin care products.
We currently offer 13 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.
39
The following table summarizes our product categories. The net
sales figures are for the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of 2005 | |
|
Year | |
Product Category |
|
Product Name |
|
Net Sales(1) | |
|
Introduced | |
|
|
|
|
| |
|
| |
Basic Nutrition
|
|
Reliv Classic |
|
|
23.9 |
% |
|
|
1988 |
|
|
|
Reliv NOW |
|
|
9.8 |
|
|
|
1988 |
|
|
|
NOW for Kids |
|
|
2.9 |
|
|
|
2000 |
|
|
|
Reliv Delight |
|
|
0.2 |
|
|
|
2001 |
|
|
Specific Wellness
|
|
FibRestore |
|
|
14.6 |
|
|
|
1993 |
|
|
|
Arthaffect |
|
|
6.2 |
|
|
|
1996 |
|
|
|
ReversAge |
|
|
3.9 |
|
|
|
2000 |
|
|
|
CardioSentials |
|
|
3.4 |
|
|
|
2005 |
|
|
|
SoySentials |
|
|
2.5 |
|
|
|
1998 |
|
|
Weight Management
|
|
Reliv Ultrim-Plus |
|
|
2.5 |
|
|
|
1988 |
|
|
|
Cellebrate |
|
|
1.5 |
|
|
|
1995 |
|
|
Sports Nutrition
|
|
Innergize! |
|
|
13.1 |
|
|
|
1991 |
|
|
|
ProVantage |
|
|
2.9 |
|
|
|
1997 |
|
|
Skin Care
|
|
ReversAge Skin Care |
|
|
1.0 |
|
|
|
2001 |
|
|
|
(1) |
This table does not include net sales for the year ended
December 31, 2005 related to freight and handling and sales
of marketing materials, which represented approximately 11.6% of
net sales for the year ended December 31, 2005. |
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, the United
Kingdom, 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 childs diet and contains a
variety of vitamins and minerals. NOW for Kids is available in
the United States, the United Kingdom and the Philippines. |
|
|
|
Reliv Delight is a powdered nutritional supplement sold as a
milk replacement. Reliv Delight is available in the United
States and Mexico. |
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.
40
|
|
|
|
|
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 bodys 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 womens health and ease the symptoms of menopause
and PMS. SoySentials is available in the United States, Canada,
the UK 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 recent
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 Canadas nutritional regulations.
FibRestore is available in all of the countries in which we
operate. |
Weight Management Supplements
Our two weight management supplements combine an advanced
fat-burning complex with scientifically balanced nutrition and
health enhancing soy protein. Our ingredients are designed to
work together to turn unwanted fat into energy without
sacrificing muscle.
|
|
|
|
|
Reliv Ultrim-Plus is designed as a meal replacement (for a
maximum of two meals per day) for use in a weight loss program.
The product formula includes an advanced complex of thermogenic
fat burners, along with an increased level of soy protein. Each
serving of the product provides 35% of the recommended daily
allowance of many essential vitamins and minerals. Reliv
Ultrim-Plus is sold in every country where we operate. |
|
|
|
Cellebrate is a patented weight loss aid designed to suppress
appetite, curb the storage of body fat, and facilitate the
bodys 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. |
41
|
|
|
|
|
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 bodys 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 |
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 on our Medical
Advisory Board with respect to developments in nutritional
science, product enhancements and new products. Since 2000, we
have introduced six new products, including ReversAge, NOW for
Kids, Reliv Delight, CardioSentials, ReversAge Performing
Enhancing Skin Care and SoySense (which was discontinued in
2005). We have also reformulated and enhanced two of our core
products Reliv Classic and Reliv NOW
twice in the past five years, most recently in February 2006. We
currently are in the later development stages of a new product
that we anticipate introducing during 2006. 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, 2005, 2004 and 2003, our
research and development expenses were $558,000, $525,000 and
$493,000, respectively.
42
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. We believe that the efficacy of our
products, network model and compensation model is proven by the
growth of our Master Affiliates and above, generally our most
productive distributor ranks.
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
distributors 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.
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
43
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 distributors level of
achievement, as indicated above.
Distributors receive payments 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 distributors 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 Directors 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.
44
Master Directors and Presidential Directors may also be invited
to participate in the Ambassador Program. As of
December 31, 2005, we had 298 Ambassadors. Qualifications
to be invited by us to participate in the Ambassador Program
include demonstrated competence and leadership qualities.
Ambassadors receive recognition and awards for achieving
Ambassador status and can then achieve additional levels of
accomplishment. We utilize our Ambassadors to lead meetings and
conferences, and to provide training and education to our
distributors. Ambassadors achieving the level of Silver and
higher also participate in the Reliv Inner Circle,
which may entitle them to receive additional compensation, paid
participation in our sponsored events, health insurance and car
allowances.
In addition to the levels of compensation described, we also
provide a variety of incentives, bonuses, awards and trips to
distributors who achieve high sales volumes and who advance in
the distributor ranks.
Distributor Training, Motivation and Management
Our marketing efforts are focused on the development, training,
motivation and support of our independent distributors. We
support an active training program for our distributors in which
our representatives and experienced distributors, usually
Ambassadors, lead group training sessions. We provide
distributors with manuals, brochures and other promotional,
training and informational publications. We encourage
distributors to hold regular Tuesday evening recruiting meetings
and Saturday training sessions. We sponsor weekly training
conference calls in which a significant number of distributors
participate.
Our sponsorship generally includes the following:
|
|
|
|
|
During 2005, we sponsored approximately 40 training schools on a
quarterly basis in all of our markets for new Master Affiliates; |
|
|
|
In the United States, we sponsor five regional distributor
conferences annually; |
|
|
|
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 2005, we invested approximately $4.2 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
45
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.
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 distributors
agreement.
Geographic Presence
Markets
We currently sell our products throughout the United States and
in 10 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 2005,
approximately 9.7% 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 |
|
|
|
(1) |
Includes Great Britain, Scotland, Wales and Northern Ireland. |
46
Within the United States, we sell our products to distributors
in all 50 states. We derived more than 5.0% of our net
sales in 2005 in each of California, Kansas, Illinois, Arizona,
Nebraska and Utah. 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,
2005, 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. We
have utilized this method of separate corporations in most of
our markets, as local business licensing and product approvals
require a local entity.
We believe that there is a significant opportunity to increase
sales in all of our current international markets. We have
established a uniform business model and compensation plan
across all of our markets, and we have recently begun to support
our international markets with the marketing support and
know-how of our proven distributors. We are currently embarking
on a targeted plan of developing new distributor groups in
Australia, using one of our top distributors to work
on-site in Australia to
establish and then cultivate a new distributor network. We
believe that other of our top distributors will have a similar
interest to expand their distributor networks internationally
and can do so effectively with similar support from us.
In addition to increasing sales in current international
markets, our expansion strategy targets selected new foreign
markets. Our recent entry into Germany and our 10 years of
experience in the UK offer us the opportunity to expand into
additional EU markets. Similarly, our presence in Malaysia,
Singapore and the Philippines provides us with familiarity from
which to expand into other areas of Asia.
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
47
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 nutritional supplements for distribution both
domestically and internationally. 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.
Our ability to manufacture our 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 difficulty in obtaining
supplies of raw materials for our nutritional supplements. 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 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 2004, 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
22 product pick-up
centers located throughout the country which are operated by
local business contractors and two company-owned and operated
business centers located in Makati and Davao. In Mexico, product
is warehoused and shipped in and from approximately
48
12 distribution centers located throughout the country.
With the exception of our Canada and New Zealand 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.
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 1.20%, 0.91% and 0.81% of net sales for the years
ended December 31, 2005, 2004 and 2003, 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
currently have an initiative 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.
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 nineteen marks registered with the
U.S. Patent and Trademark Office, or USPTO, including Reliv
and the names of twelve of our thirteen 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.
49
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.
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 products
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 FDAs regulations, the
FDA has numerous enforcement tools, including the ability to
issue warning letters, initiate product seizures and injunctions
and pursue criminal penalties.
The manufacture of dietary supplements is subject to existing
FDA current good manufacturing practice, or cGMP, regulations
for food. In March 2003, the FDA proposed more detailed
cGMP regulations
50
specifically for dietary supplements. The FDA is expected to
publish final cGMP regulations for dietary supplements in the
near future.
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
FTCs 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.
51
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.,
Natures 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 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, 2005, we and all of our subsidiaries had
approximately 241 full-time employees compared with 238
such employees at the end of 2004.
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.
52
The following table summarizes information related to our
worldwide facilities as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
9,000 |
|
|
|
leased |
|
Oakville, Ontario, Canada
|
|
warehouse/distribution |
|
|
2,100 |
|
|
|
leased |
|
Mexico City, Mexico
|
|
central office/warehouse/distribution |
|
|
27,900 |
|
|
|
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 |
|
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.
53
MANAGEMENT
The following table sets forth the names and ages, as of
December 31, 2005, of our executive officers and directors:
|
|
|
|
|
|
|
Name |
|
Age | |
|
Position |
|
|
| |
|
|
Robert L. Montgomery
|
|
|
63 |
|
|
Director, Chairman, President and Chief Executive Officer |
Stephen M. Merrick
|
|
|
64 |
|
|
Director, Senior Vice President, International and Corporate
Development, General Counsel and Secretary |
Carl W. Hastings, Ph.D.
|
|
|
63 |
|
|
Director and Vice President |
R. Scott Montgomery
|
|
|
36 |
|
|
Senior Vice President, Worldwide Operations |
Steven D. Albright
|
|
|
44 |
|
|
Vice President, Finance and Chief Financial Officer |
Steven G. Hastings
|
|
|
40 |
|
|
Vice President, Sales |
Ryan A. Montgomery
|
|
|
32 |
|
|
Vice President, Sales |
Donald L. McCain
|
|
|
61 |
|
|
Director |
John B. Akin
|
|
|
77 |
|
|
Director |
Robert M. Henry
|
|
|
58 |
|
|
Director |
Denis St. John
|
|
|
62 |
|
|
Director |
Directors and Officers
Robert L. Montgomery is our Chairman of the Board,
President and Chief Executive Officer. Mr. Montgomery
became Chairman of our board of directors and Chief Executive
Officer on February 15, 1985, and President on July 1,
1985. Mr. Montgomery has been a director of Reliv
International since 1985. Mr. Montgomery is also the
President and a director of Reliv, Inc. and President and
a director of Reliv World Corporation, both wholly owned
subsidiaries of Reliv International. Mr. Montgomery
received a B.A. degree in Economics from the University of
Missouri in Kansas City, Missouri in 1965. Mr. Montgomery
is the father of R. Scott Montgomery, our Senior Vice President,
Worldwide Operations, and Ryan A. Montgomery, our Vice
President, Sales.
Stephen M. Merrick has been our Senior Vice President,
International and Corporate Development, Secretary, General
Counsel and a member of our board of directors since
July 20, 1989. Mr. Merrick is Of Counsel to Vanasco
Genelly & Miller, which has served as counsel to us
with respect to certain matters, and has been engaged in the
practice of law for over 30 years. Mr. Merrick has
represented us since our founding. Mr. Merrick received a
Juris Doctor degree from Northwestern University School of Law
in 1966. Mr. Merrick is also Executive Vice President and a
director of CTI Industries Corporation, a manufacturer of
packaging and novelty items.
Carl W. Hastings has been our Vice President since
July 1, 1992. Dr. Hastings has been employed by us
since April 1991. Dr. Hastings was re-elected to our board
of directors in May 2005 and formerly served as a member of our
board of directors from February 1990 until May 2004.
Dr. Hastings holds B.S. and M.S. degrees and a Ph.D. degree
in Food Science from the University of Illinois. For more than
the past 30 years, Dr. Hastings has been engaged in a
variety of employment and consulting capacities as a food
scientist. Dr. Hastings is the father of Steven G.
Hastings, our Vice President, Sales.
R. Scott Montgomery has been our Senior Vice
President of Worldwide Operations since August 2004.
Mr. Montgomery joined us in 1993 and previously served as
our Vice President of International Operations
54
from 2001 to 2004. Mr. Montgomery graduated from Southwest
Missouri State University with a B.S. degree in Finance and
Investments. Mr. Montgomery is the son of Robert L.
Montgomery, our Chairman, President and Chief Executive Officer,
and the brother of Ryan A. Montgomery, our Vice President, Sales.
Steven D. Albright has been our Vice President, Finance
and Chief Financial Officer since March 2005. Mr. Albright
was our Vice President, Finance/ Controller from 2002 to 2005
and was our Controller since 1992. Prior to his employment with
us, Mr. Albright was employed from 1987 to 1992 as
Assistant Controller for Kangaroos USA, Inc., an athletic shoe
importer and distributor. For the period from 1983 to 1987, he
was employed by the public accounting firm of Ernst &
Young LLP. Mr. Albright received a B.S. degree in
Accountancy from the University of Illinois at
Urbana-Champaign in May
1983 and is a CPA.
Steven G. Hastings was appointed our Vice President,
Sales in February 2004. Mr. Hastings was our Vice President
of International Marketing from 2002 to 2004 and our Director of
International Marketing from 1996 to 2002. Mr. Hastings
started with us in January 1993 as Director of Marketing.
Mr. Hastings graduated from the University of Illinois in
1987 with a Marketing degree and obtained his Masters in
Business from Butler University in Indianapolis in 1995.
Mr. Hastings is the son of Dr. Carl Hastings, our Vice
President.
Ryan A. Montgomery was appointed our Vice President,
Sales in November 2004. Mr. Montgomery served as our
corporate counsel from September 1999 to October 2004.
Mr. Montgomery received his B.A. degree in Economics from
Vanderbilt University in 1995 and graduated from Saint Louis
University Law School in 1999. Mr. Montgomery is the son of
Robert L. Montgomery, our Chairman, President and Chief
Executive Officer, and the brother of R. Scott Montgomery, our
Senior Vice President of Worldwide Operations.
Donald L. McCain has been a member of our board of
directors since July 20, 1989. Mr. McCain is the
Corporate Secretary and
co-owner of The Baughan
Group Inc., formerly Robertson International Inc., a supplier
and manufacturer of mining equipment and supplies. He is also
co-owner of Coal
Age Incorporated, a mining equipment manufacturer and
rebuilding company. Mr. McCain co-founded G&T
Resources, Inc., an owner and operator of nursing homes, in 1980
and was engaged in the management of that company until he sold
his interest in September 1994. Prior to that time,
Mr. McCain was employed in the food processing industry for
fifteen years, most of that time was with Archer Daniels Midland
Company as a manager of plant operations. Mr. McCain is the
father of Ronald McCain, our Director of Customer Service and
the son-in-law of
Robert L. Montgomery, our Chairman, President and Chief
Executive Officer.
John B. Akin has been a member of our board of directors
since June 1986. Mr. Akin retired as Vice President, A.G.
Edwards & Sons and resident manager of the Decatur,
Illinois branch office in 1995. Mr. Akin had been
associated with A.G. Edwards & Sons as a stock broker,
manager and officer since April 1973. Mr. Akin holds a B.A.
degree from the University of Northern Iowa, Cedar Falls, Iowa.
Robert M. Henry has been a member of our board of
directors since May 2004. On December 4, 2004,
Mr. Henry became Chairman and Chief Executive Officer of
Arbonne International, Inc., a skin care products company. From
2000 to 2003, he served as Chief Executive Officer and board
member for Mannatech, Incorporated, a public multi-level
marketing company that sells dietary supplements, wellness and
weight-management products to independent distributors. From
1998 to 2000, Mr. Henry acted as an Operating Consultant
for Gryphon Investors where he gave advice on the investment
opportunities in the network marketing industry. From 1986 to
1998, Mr. Henry served in various executive positions in
the advertising, communications, investment and womens
apparel industries. From 1982 to 1986, he served as Corporate
Controller Worldwide for Amway Corporation, a multi-level
marketer of various products. From 1971 to 1982, Mr. Henry
served various management roles for Avon Products Inc.,
including Regional
55
Controller, Manufacturing/ Sales/ Distribution, Chief Financial
Officer for Avon Fashions, and Manager A/P &
Intercompany Accounting. He received a B.S. degree in Accounting
from Hunter College in New York and a J.D. from Brooklyn
Law School. Mr. Henry has been a member of the
New York State Bar since 1975 and also served on the
Network Marketing Association board of directors during 2002.
Denis St. John has been a member of our board of
directors since May 2004. Mr. St. John is a CPA and
principal with the Larson Allen Health Care Group, focusing on
physicians and institutions involved in clinics, nursing homes,
medical office buildings, and other real estate intensive
projects. For 15 years, Mr. St. John was
associated with various accounting firms working primarily in
the tax area, serving mid-size, closely held companies.
Mr. St. John graduated from the University of Missouri
with a Bachelor of Science in Business Administration with a
major in Accounting and a minor in Economics. He is a former
NASD registered representative, holding Series 6 and 63
securities licenses. Mr. St. John is a member of the
Missouri Society of CPAs and the American Institute of CPAs.
Audit Committee
Since 2000, we have had a standing Audit Committee, which is
presently composed of Messrs. McCain, St. John and Henry.
Mr. St. John has been designated and is our Audit
Committee Financial Expert pursuant to Item 401 of
Regulation S-K of
the Securities Exchange Act of 1934. The Audit Committee held
eight meetings during fiscal year 2005, including quarterly
meetings with management and the independent registered public
accounting firm to discuss our financial statements.
Mr. St. John and each appointed member of the Committee
satisfies the definition of independent as that term
is defined in the rules governing companies whose stock is
traded on the Nasdaq National Market.
56
Executive Compensation
The following table sets forth a summary of the compensation
paid during the last three fiscal years to our Chief Executive
Officer and to each of our other four most highly compensated
officers who were officers at December 31, 2005, and any
executive officer who left during the last fiscal year who would
have been included in this group, the named executive officers.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term compensation | |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
Awards | |
|
|
|
|
|
|
Annual compensation | |
|
Securities | |
|
All other | |
Name and principal |
|
|
|
| |
|
underlying | |
|
compensation | |
position |
|
Year | |
|
Salary ($) | |
|
Bonus(1) ($) | |
|
options | |
|
($) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Robert L. Montgomery
|
|
|
2005 |
|
|
$ |
642,625 |
|
|
$ |
616,168 |
|
|
|
160,000 |
|
|
$ |
17,765 |
(2) |
|
Chairman, Chief Executive |
|
|
2004 |
|
|
$ |
642,625 |
|
|
$ |
442,400 |
|
|
|
|
|
|
$ |
23,368 |
(3) |
|
Officer and President |
|
|
2003 |
|
|
$ |
642,625 |
|
|
$ |
366,660 |
|
|
|
|
|
|
$ |
17,464 |
(4) |
Stephen M. Merrick
|
|
|
2005 |
|
|
$ |
225,000 |
|
|
$ |
154,042 |
|
|
|
50,000 |
|
|
|
|
|
|
Senior Vice President, |
|
|
2004 |
|
|
$ |
124,800 |
|
|
$ |
94,800 |
|
|
|
|
|
|
|
|
|
|
Secretary and General Counsel |
|
|
2003 |
|
|
$ |
124,800 |
|
|
$ |
78,570 |
|
|
|
|
|
|
|
|
|
Carl W. Hastings
|
|
|
2005 |
|
|
$ |
277,500 |
|
|
|
|
|
|
|
20,000 |
|
|
$ |
17,398 |
(2) |
|
Vice President |
|
|
2004 |
|
|
$ |
270,000 |
|
|
|
|
|
|
|
|
|
|
$ |
23,752 |
(3) |
|
|
|
|
2003 |
|
|
$ |
270,000 |
|
|
|
|
|
|
|
|
|
|
$ |
12,792 |
(4) |
R. Scott Montgomery
|
|
|
2005 |
|
|
$ |
160,000 |
|
|
$ |
176,048 |
|
|
|
50,000 |
|
|
$ |
9,231 |
(2) |
|
Senior Vice President of |
|
|
2004 |
|
|
$ |
136,500 |
|
|
$ |
79,000 |
|
|
|
|
|
|
$ |
6,498 |
(3) |
|
Worldwide Operations |
|
|
2003 |
|
|
$ |
120,000 |
|
|
$ |
65,475 |
|
|
|
|
|
|
$ |
3,347 |
(4) |
Steven D. Albright
|
|
|
2005 |
|
|
$ |
150,000 |
|
|
$ |
154,042 |
|
|
|
20,000 |
|
|
$ |
10,810 |
(2) |
|
Vice President, Finance and |
|
|
2004 |
|
|
$ |
136,500 |
|
|
$ |
79,000 |
|
|
|
|
|
|
$ |
10,008 |
(3) |
|
Chief Financial Officer |
|
|
2003 |
|
|
$ |
130,000 |
|
|
$ |
65,475 |
|
|
|
|
|
|
$ |
9,240 |
(4) |
|
|
(1) |
Reflects bonus payments under our 2001 Incentive Compensation
Plan. |
|
(2) |
Includes the value of cash contributions by us to the
Reliv International, Inc. 401(k) Plan, a defined
contribution plan, of $13,500 for each of Messrs. Robert L.
Montgomery and Hastings, $9,000 for Mr. R. Scott Montgomery
and $10,500 for Mr. Albright. Also includes the portion of
premiums paid by us on life insurance policies on each
executives life attributable to the death benefit, to
which each executives estate is entitled. The allocated
portion of premium paid was $4,265 for Mr. Robert L.
Montgomery, $3,898 for Mr. Hastings, $231 for Mr. R.
Scott Montgomery and $310 for Mr. Albright. |
|
(3) |
Includes the value of cash contributions by us to the
Reliv International, Inc. 401(k) Plan, a defined
contribution plan, of $11,750 for each of Messrs. Robert L.
Montgomery and Hastings, $6,300 for Mr. R. Scott Montgomery
and $9,750 for Mr. Albright. Also includes the portion of
premiums paid by us on life insurance policies on each
executives life attributable to the death benefit, to
which each executives estate is entitled. The allocated
portion of premium paid was $7,338 for Mr. Robert L.
Montgomery, $2,402 for Mr. Hastings, $198 for Mr. R.
S. Montgomery and $258 for Mr. Albright. |
|
(4) |
Includes the value of cash contributions by us to the
Reliv International, Inc. 401(k) Plan, a defined
contribution plan, of $10,500 for each of Messrs. Robert L.
Montgomery and Hastings, $3,157 for Mr. R. Scott Montgomery
and $9,000 for Mr. Albright. Also includes the portion of
premiums paid by us on life insurance policies on each
executives life attributable to the death benefit, to
which each executives estate is entitled. The allocated
portion of premium paid was $6,964 for Mr. Robert L.
Montgomery, $2,292 for Mr. Hastings, $190 for Mr. R.
Scott Montgomery and $240 for Mr. Albright. |
We have never granted any stock appreciation rights. During the
period from January 1, 1998 to December 31, 2005,
there have been no awards or payments made for long-term
incentive compensation (other than stock option grants) and
there have been no restricted stock awards to any of our named
executive officers.
57
The following table provides information related to options to
purchase our common stock granted to our named executive
officers during the fiscal year ended December 31, 2005:
Option Grants in Last Fiscal Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individual grants(1) | |
|
|
|
|
| |
|
|
|
|
Number of | |
|
Percent of | |
|
|
|
Potential realizable value at | |
|
|
securities | |
|
total | |
|
|
|
assumed annual rates of stock | |
|
|
underlying | |
|
options | |
|
Exercise | |
|
|
|
price appreciation for option | |
|
|
options | |
|
granted to | |
|
or base | |
|
|
|
term(2) | |
|
|
granted | |
|
employees in | |
|
price | |
|
Expiration | |
|
| |
Name |
|
(#) | |
|
fiscal year | |
|
($/Sh) | |
|
date | |
|
5% | |
|
10% | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Robert L. Montgomery
|
|
|
160,000 |
|
|
|
29.47 |
|
|
|
7.92 |
|
|
|
1/5/2015 |
|
|
$ |
796,935 |
|
|
$ |
2,019,590 |
|
Stephen M. Merrick
|
|
|
50,000 |
|
|
|
9.21 |
|
|
|
7.92 |
|
|
|
1/5/2015 |
|
|
|
249,042 |
|
|
|
631,122 |
|
Carl W. Hastings
|
|
|
20,000 |
|
|
|
3.68 |
|
|
|
7.92 |
|
|
|
1/5/2015 |
|
|
|
99,617 |
|
|
|
252,449 |
|
R. Scott Montgomery
|
|
|
50,000 |
|
|
|
9.21 |
|
|
|
7.92 |
|
|
|
1/5/2015 |
|
|
|
249,042 |
|
|
|
631,122 |
|
Steven D. Albright
|
|
|
20,000 |
|
|
|
3.68 |
|
|
|
7.92 |
|
|
|
1/5/2015 |
|
|
|
99,617 |
|
|
|
252,449 |
|
|
|
(1) |
The options were granted at 100% of the market price on the date
of grant and were vested immediately. |
|
(2) |
The potential realizable values shown illustrate the values that
might be realized upon exercise immediately prior to the
expiration of the options term using 5% and 10%
appreciation rates set by the SEC, compounded annually and,
therefore, are not intended to forecast possible future
appreciation, if any, of our stock price. |
The following table provides information related to options to
purchase our common stock exercised by our named executive
officers during the fiscal year ended December 31, 2005,
and the number and value of such options held as of the end of
such fiscal year:
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of unexercised in- | |
|
|
|
|
|
|
Number of securities | |
|
the-money options at fiscal | |
|
|
|
|
|
|
underlying unexercised | |
|
|
|
|
Shares | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
year end ($) | |
|
|
|
|
|
|
options at year end (#) | |
|
| |
|
|
acquired on | |
|
Value | |
|
| |
|
|
Name |
|
exercise (#) | |
|
realized | |
|
Exercisable/unexercisable | |
|
Exercisable/unexercisable(1) | |
|
|
| |
|
| |
|
| |
|
| |
Robert L. Montgomery
|
|
|
243,302 |
|
|
$ |
1,835,165 |
|
|
|
160,000/128,720 |
|
|
$ |
841,600/$1,596,617 |
|
Stephen M. Merrick
|
|
|
180,058 |
|
|
|
1,408,846 |
|
|
|
50,000/0 |
|
|
|
263,000/0 |
|
Carl W. Hastings
|
|
|
22,321 |
|
|
|
176,881 |
|
|
|
20,000/0 |
|
|
|
105,200/0 |
|
R. Scott Montgomery
|
|
|
34,970 |
|
|
|
311,387 |
|
|
|
50,000/0 |
|
|
|
263,000/0 |
|
Steven D. Albright
|
|
|
0 |
|
|
|
0 |
|
|
|
54,970/0 |
|
|
|
541,430/0 |
|
|
|
(1) |
The value of unexercised
in-the-money options is
based on the difference between the exercise price and the fair
market value of our common stock on December 31, 2005. |
Employment Agreements
In June 1997, we entered into an Employment Agreement with
Robert L. Montgomery replacing a prior agreement. The agreement
was originally for a term of six years commencing on
January 1, 1997 with a provision for automatic one year
renewal terms, and provides for Mr. Montgomery to receive
base annual compensation during the term of not less than
$485,000. Mr. Montgomery is also to participate in our
annual incentive compensation and our long-term incentive
compensation plans adopted in April 1994, our stock option plan
and such other compensation plans as we may from time to time
have for our executives. In the event of
Mr. Montgomerys death during the term of the
agreement, payments equal to his total compensation under the
agreement will be made to his heirs for a period of six months.
The agreement also allows Mr. Montgomery the option, upon
reaching age 60, to reduce his level of service to us by
58
approximately one-half with a corresponding decrease in position
and compensation. Mr. Montgomery also has the option upon
reaching age 60 to terminate his active service and
continue in a consulting capacity. The term of the consulting
period will be 10 years and Mr. Montgomery will
receive approximately 20% of his prior annual compensation as a
consulting fee. The agreement includes the obligation of
Mr. Montgomery to maintain the confidentiality of our
confidential information and contains a covenant of
Mr. Montgomery not to compete with us.
In June 2002, we entered into a Services Agreement with
Dr. Hastings replacing a prior employment agreement. The
services agreement is for a period of twenty years with a
provision for automatic one year renewal terms. The employment
of Dr. Hastings will be for a term commencing on
July 1, 2001 and expiring on June 30, 2006. During the
initial term of employment, we are obligated to pay
Dr. Hastings a basic salary at the rate of $22,500 per
month. Effective December 15, 2005, our compensation
committee increased Dr. Hastings basic salary to
$30,000 per month. Upon expiration of the term of
employment, Dr. Hastings will be retained to provide
consulting services to us for the remainder of the term of the
services agreement. During the consulting term, we will pay
Dr. Hastings the sum of $10,000 per month. In the
event of Dr. Hastings death during the term of the
agreement, payments equal to his total compensation under the
agreement will be made to his heirs for a period of six months.
During the term of the services agreement, we will be entitled
to use the name and likeness of Dr. Hastings in connection with
our promotional materials and activities. The services agreement
also includes the obligation of Dr. Hastings to maintain
the confidentiality of our confidential information and to hold
any and all inventions made or conceived by him during the term
of the agreement as our fiduciary and a covenant of
Dr. Hastings not to compete with us.
In April 2002, we entered into an Employment Agreement with
R. Scott Montgomery under which he was employed as
Vice-President of International Operations. The agreement was
originally for a term of one year commencing on April 3,
2002 with a provision for automatic one year renewal terms, and
provides for Mr. Montgomery to receive base annual
compensation of not less than $105,000. Mr. Montgomery is
also to participate in our annual incentive compensation plan
and such other compensation plans as we may from time to time
have for our executives. In the event of
Mr. Montgomerys termination for reasons other than an
event of default or permanent mental or physical disability,
Mr. Montgomery will receive a severance payment equal to
six months salary. The agreement includes the obligations of
Mr. Montgomery to maintain the confidentiality of our
confidential information and hold certain inventions for our
company in his fiduciary capacity, and contains a covenant not
to solicit our distributors for a period of 24 months after
the date of termination of this agreement.
In April 2002, we entered into an Employment Agreement with Ryan
A. Montgomery under which he was employed as Corporate Counsel.
The agreement was originally for a term of one year commencing
on April 18, 2002 with a provision for automatic one year
renewal terms, and provides for Mr. Montgomery to receive
base annual compensation of not less than $85,000.
Mr. Montgomery is also to participate in our annual
incentive compensation plan and such other compensation plans as
we may from time to time have for our executives. In the event
of Mr. Montgomerys termination for reasons other than
an event of default or permanent mental or physical disability,
Mr. Montgomery will receive a severance payment equal to
six months salary. The agreement includes the obligations of
Mr. Montgomery to maintain the confidentiality of our
confidential information and hold certain inventions for our
company in his fiduciary capacity, and contains a covenant not
to solicit our distributors for a period of 24 months after
the date of termination of this agreement.
In May 2002, we entered into an Employment Agreement with
Steven G. Hastings under which he was employed as
Vice-President of U.S. and International Marketing. The
agreement was originally for a term of one year commencing on
May 6, 2002 with a provision for automatic one year renewal
terms, and provides for Mr. Hastings to receive base annual
compensation of not less than $103,500. Mr. Hastings is
also to participate in our annual incentive compensation plan
and such other compensation plans as we may from
59
time to time have for our executives. In the event of
Mr. Hastings termination for reasons other than an
event of default or permanent mental or physical disability,
Mr. Hastings will receive a severance payment equal to six
months salary. The agreement includes the obligations of
Mr. Hastings to maintain the confidentiality of our
confidential information and hold certain inventions for our
company in his fiduciary capacity, and contains a covenant not
to solicit our distributors for a period of 24 months after
the date of termination of this agreement.
In March 1997, we entered into Split-Dollar Agreements with each
of Messrs. Robert L. Montgomery, R. Scott Montgomery, Carl
W. Hastings, Steven G. Hastings and Steven D. Albright. In
August 2002, we entered into a Split-Dollar Agreement with
Mr. Ryan A. Montgomery. Under these agreements, we pay the
premiums on life insurance policies covering each above-named
officers life. Upon the death of any of
Messrs. Robert L. Montgomery, R. Scott Montgomery,
Ryan A. Montgomery, Carl W. Hastings, Steven G. Hastings or
Steven D. Albright, we are entitled to receive the greater
of (1) one-third of the insurance proceeds, (2) the
cash surrender value of the policy or (3) the total
premiums paid under the policy, with the insureds
beneficiary receiving the balance of the insurance proceeds. On
termination of the agreement prior to the death of the insured,
he shall have the right to purchase the policy for the greater
of (a) the cash surrender value of the policy or
(b) the total premiums paid under the policy.
In March 1997, we entered into a Salary Continuation Plan
Agreement with each of Messrs. R. Scott Montgomery,
Steven G. Hastings and Steven D. Albright. The agreement
provides for continuation of each officers salary for a
period of 10 years upon termination of employment,
retirement or death, after he has reached the age of 55 and has
been employed by us for 15 years. Salary continuation
payments are also made in the event the officer is terminated
prior to reaching these thresholds for reasons other than cause
as defined in the agreement.
Compensation of Directors
Members of our board of directors who are not our employees
receive a monthly fee of $2,500 and $1,500 per attendance
at meetings of our board of directors or any committees of the
board of directors. On January 5, 2005, we issued to each
of our non-employee members of our board of directors
non-qualified stock options to purchase our common stock at an
exercise price of $7.92 per share, the closing price on
January 5, 2005. Under these options, Mr. McCain was
granted the right to purchase up to 50,000 shares of our
common stock and Messrs. Henry, Akin and St. John were each
granted the right to purchase up to 10,000 shares of our
common stock.
60
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Stephen M. Merrick is our Senior Vice President and a director.
Mr. Merrick previously was a principal of the law firm of
Merrick & Associates, P.C. and has served as our
General Counsel since our inception. During the year ended
December 31, 2005, the aggregate amounts paid or incurred
by us to Merrick & Associates, P.C. for services
provided to us was $40,000.
During 2005, we repurchased an aggregate of 535,008 shares
of our common stock held by certain of our officers and
directors for an aggregate purchase price of $5,082,576. The
purchase price for each repurchase transaction was determined
using a 7% discount to the closing market price per share on
each respective repurchase date in order to approximate the
dilutive impact of any corresponding sale on the open market.
The terms and conditions of each repurchase transaction were
approved by our board of directors, excluding the vote of any
interested director.
The following table provides information regarding the aggregate
repurchase transactions between us and each director or
executive officer that occurred during 2005.
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Number of Shares | |
|
|
Name |
|
Repurchased | |
|
Aggregate Purchase Price | |
|
|
| |
|
| |
Robert L. Montgomery
|
|
|
245,533 |
|
|
$ |
2,332,564 |
|
Stephen M. Merrick
|
|
|
110,527 |
|
|
|
1,050,006 |
|
Carl W. Hastings
|
|
|
178,948 |
|
|
|
1,700,006 |
|
|
|
|
|
|
|
|
|
Total(1)
|
|
|
535,008 |
|
|
$ |
5,082,576 |
|
|
|
|
|
|
|
|
|
|
(1) |
The total aggregate purchase price has been adjusted due to
rounding. |
In 2005, we also purchased 489,193 shares of our common
stock from Donald Gibbons, Jr., a former officer, and David
Kreher, a former officer and director, and his wife for an
aggregate purchase price of $4,402,737. In connection with these
repurchases from Mr. and Mrs. Kreher, we issued notes
in the amount of $4,050,000.
Our Chief Executive Officer and Chairman of the Board, Robert L.
Montgomery, is the father of R. Scott Montgomery and Ryan A.
Montgomery. R. Scott Montgomery is our Senior Vice President of
Worldwide Operations and as a result of serving in such
capacity, we paid him cash compensation of $336,048 for 2005.
Ryan A. Montgomery is our Vice President Sales and
as a result of serving in such capacity, we paid him cash
compensation of $304,042 for 2005. Ronald McCain is the son of
Donald L. McCain, one of our directors, and Ronald McCain is the
son-in-law of our Chief
Executive Officer and Chairman of the Board, Robert L.
Montgomery. Ronald McCain is our Director of Customer Service
and as a result of serving in such capacity, we paid him cash
compensation of $208,024 for 2005.
Our Vice President and director, Dr. Carl W. Hastings, is
the father of Steven G. Hastings and Brett M. Hastings. Steven
G. Hastings is our Vice President Sales and as a
result of serving in such capacity, we paid him cash
compensation of $304,042 for 2005. Brett M. Hastings is our
Associate General Counsel and as a result of serving in such
capacity, we paid him cash compensation of $163,823 for 2005.
61
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of:
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30,000,000 shares of common stock, par value $.001 per
share; and |
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3,000,000 shares of preferred stock, par value
$.001 per share |
Common Stock
The holders of our common stock are entitled to one vote per
share on all matters to be voted upon by stockholders. Subject
to the relative rights, limitations and preferences of the
holders of any then outstanding preferred stock, holders of our
common stock are entitled, among other things, (1) to share
ratably in dividends if, when and as declared by our board of
directors out of funds legally available therefore and
(2) in the event of liquidation, dissolution or winding up
of the company, to share ratably in the distribution of assets
legally available therefore, after payment of debts and
expenses. The holders of our common stock do not have cumulative
voting rights in the election of directors and have no
preemptive rights to subscribe for additional shares of our
capital stock. The rights, preferences and privileges of holders
of our common stock are subject to the terms of any series of
preferred stock which we may issue in the future.
Preferred Stock
Our board of directors has the authority, within the limitations
and restrictions stated in our certificate of incorporation, to
authorize the issuance of shares of preferred stock, in one or
more classes or series, and to fix the preferences, conversion
rights, cumulative, relative, participating, option or other
rights, qualifications, limitations or restrictions thereof and
the number of shares constituting any series or the designation
of such series. The issuance of preferred stock could have the
effect of decreasing the market price of our common stock and
could adversely affect the voting and other rights of the
holders of our common stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is
American Stock Transfer & Trust Company.
Listing
Our shares of common stock are quoted on the Nasdaq National
Market under the symbol RELV.
62
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of January 31,
2006, and as adjusted to reflect the sale of common stock in
this offering (assuming no exercise of the over-allotment option
granted by the selling stock holders to the underwriters), by:
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each person known by us to be a beneficial owner of more than
5.0% of our outstanding common stock; |
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each of our executive officers; |
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each of our directors; |
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all executive officers and directors as a group; and |
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all selling stockholders. |
The amounts and percentage of common stock beneficially owned
are reported on the basis of regulations of the Securities and
Exchange Commission, or SEC, governing the determination of
beneficial ownership of securities. Under the rules of the SEC,
a person is deemed to be a beneficial owner of a
security if that person has or shares voting power,
which includes the power to vote or to direct the voting of such
security, or investment power, which includes the
power to dispose of or to direct the disposition of such
security. A person is also deemed to be a beneficial owner of
any securities of which that person has a right to acquire
beneficial ownership within 60 days after January 31,
2006. Under these rules, more than one person may be deemed a
beneficial owner of the same securities and a person may be
deemed a beneficial owner of securities as to which he has no
economic interest. Percentage of class is based on
15,613,052 shares of common stock outstanding as of
January 31, 2006.
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Before Offering | |
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After Offering | |
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Shares | |
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Number of | |
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Percent of | |
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Being | |
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Number of | |
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Percent of | |
Individual/Group(1) |
|
Shares | |
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Class | |
|
Offered | |
|
Shares | |
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Class | |
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Robert L.
Montgomery(2)
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4,048,186 |
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25.5 |
% |
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400,000 |
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3,648,186 |
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21.3 |
% |
Carl W.
Hastings, Ph.D.(3)
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931,453 |
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6.0 |
% |
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160,000 |
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771,453 |
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4.6 |
% |
Stephen M.
Merrick(4)
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868,969 |
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5.5 |
% |
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160,000 |
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708,969 |
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4.2 |
% |
R. Scott
Montgomery(5)
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125,243 |
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* |
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125,243 |
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* |
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Steven D.
Albright(6)
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88,536 |
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* |
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88,536 |
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* |
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Steven G.
Hastings(7)
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62,965 |
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* |
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62,965 |
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* |
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Ryan A.
Montgomery(8)
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30,171 |
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* |
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30,171 |
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* |
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Donald L.
McCain(9)
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470,545 |
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3.0 |
% |
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80,000 |
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390,545 |
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2.3 |
% |
John B.
Akin(10)
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22,647 |
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* |
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22,647 |
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* |
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Robert M.
Henry(11)
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12,000 |
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* |
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12,000 |
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* |
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Denis St.
John(12)
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12,500 |
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* |
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12,500 |
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* |
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All executive officers and directors as a Group (11
persons)(13)
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6,673,215 |
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41.2 |
% |
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800,000 |
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5,873,215 |
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33.7 |
% |
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(1) |
Unless otherwise indicated below, the person named in the table
has sole voting and investment power with respect to all shares
beneficially owned, subject to community property laws where
applicable. Unless otherwise indicated, the address for each
person is c/o Reliv International, Inc., 136
Chesterfield Industrial Boulevard, Chesterfield, Missouri 63005. |
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(2) |
Includes 288,720 shares subject to options exercisable
within 60 days after January 31, 2006,
1,154,970 shares held through the Montgomery Family Limited
Partnership, 470,114 shares held through Montgomery
Enterprises, Ltd., for which Mr. Montgomery has sole voting
and investment power, and 125,920 shares held by Mr.
Montgomerys spouse. |
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63
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(3) |
Includes 20,000 shares subject to options exercisable
within 60 days after January 31, 2006. |
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(4) |
Includes 50,000 shares subject to options exercisable
within 60 days after January 31, 2006. |
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(5) |
Includes 50,000 shares subject to options exercisable
within 60 days after January 31, 2006. |
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(6) |
Includes 54,970 shares subject to options exercisable
within 60 days after January 31, 2006. |
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(7) |
Includes 20,743 shares subject to options exercisable
within 60 days after January 31, 2006. |
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(8) |
Includes 25,000 shares subject to options exercisable
within 60 days after January 31, 2006. |
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(9) |
Includes 50,000 shares subject to options exercisable
within 60 days after January 31, 2006. |
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(10) |
Includes 21,321 shares subject to options exercisable
within 60 days after January 31, 2006. |
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(11) |
Includes 10,000 shares subject to options exercisable
within 60 days after January 31, 2006. |
|
(12) |
Includes 10,000 shares subject to options exercisable
within 60 days after January 31, 2006. |
|
(13) |
Includes 600,754 shares subject to options exercisable
within 60 days after January 31, 2006. |
64
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
General
The following is a summary of certain material U.S. federal
income tax considerations related to the ownership and
disposition of our common stock that may be relevant to you.
This summary is based on the Internal Revenue Code of 1986, as
amended (the Code), existing and proposed Treasury
regulations promulgated under the Code and administrative and
judicial interpretations of the Code, all as of the date of this
prospectus and all of which are subject to change, possibly with
retroactive effect. The Internal Revenue Service is referred to
as IRS in this summary.
This summary discusses only the tax consequences to the initial
investors who purchase our common stock pursuant to the initial
offering and does not discuss the tax consequences applicable to
subsequent purchasers of our common stock. This summary deals
only with common stock held as a capital asset within the
meaning of Section 1221 of the Code. It does not discuss
all of the tax considerations that may be relevant to holders of
our common stock in light of their particular circumstances or
to holders of common stock subject to special rules, such as
financial institutions, regulated investment companies, persons
subject to the alternative minimum tax, insurance companies,
pension funds, tax exempt organizations, expatriates, persons
treated as residents of more than one jurisdiction, partnerships
or other entities treated as partnerships for U.S. federal
income tax purposes and persons holding our common stock through
any such entities, dealers in securities or currencies, traders
who elect to mark to market their securities, persons holding
our common stock as part of a hedging, straddle, conversion,
constructive sale or other integrated transaction, or persons
whose functional currency is not the U.S. dollar. We have
not requested a ruling from the IRS on the tax consequences of
owning or disposing of our common stock and the IRS could
disagree with portions of this discussion. Persons considering
the purchase of our common stock should consult with their own
tax advisors about the application of the U.S. federal
income tax laws to their particular situations as well as any
tax considerations under other U.S. federal tax laws (such
as estate and gift tax laws), or the laws of any state, local or
foreign jurisdiction.
As used in this prospectus, the term
U.S. Holder means a beneficial owner of our
common stock that is, for U.S. federal income tax purposes:
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a citizen or individual resident of the United States; |
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a corporation, or other entity treated as a corporation, created
in or under the laws of the United States or of any political
subdivision thereof; |
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an estate, the income of which is subject to U.S. federal
income taxation regardless of its source; |
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a trust if (i) a court within the United States is able to
exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust, or (ii) the
trust has in effect a valid election to be treated as a
U.S. person; or |
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a person whose ownership of our common stock is effectively
connected with the conduct of a trade or business in the United
States. |
As used in this prospectus, the term
Non-U.S. Holder
means a beneficial owner of common stock that is an individual,
corporation (including any entity treated as a corporation for
U.S. federal income tax purposes), trust or estate that is
not a U.S. Holder.
If an entity treated as a partnership for U.S. federal
income tax purposes holds shares of common stock, the tax
treatment of its owners will generally depend on their
particular status and upon the activity of the entity. If you
are an owner of an interest in such an entity, we suggest you
consult your own tax advisor.
Distributions to U.S. Holders
If distributions are paid on the shares of our common stock,
these distributions generally will constitute dividends for
U.S. federal income tax purposes to the extent paid from
our current or accumulated earnings
65
and profits, as determined under U.S. federal income tax
principles, and will constitute a tax-free return of capital
that is applied against your tax basis in the common stock to
the extent these distributions exceed those earnings and
profits. Distributions in excess of our current and accumulated
earnings and profits and your tax basis in the common stock will
be treated as a gain from the sale or exchange of the common
stock, the treatment of which is discussed below. Under current
law, non-corporate U.S. Holders are generally subject to a
maximum tax rate on dividends equal to 15%, which corresponds to
the maximum tax rate for long-term capital gains.
Distributions to
Non-U.S. Holders
Dividends paid to a
Non-U.S. Holder
that are not effectively connected with the conduct of a
U.S. trade or business of the
Non-U.S. Holder
generally will be subject to U.S. federal withholding tax
at a 30% rate unless an applicable income tax treaty reduces or
eliminates such tax and the
Non-U.S. Holder
claims the benefit of that treaty by timely providing a properly
completed and duly executed IRS
Form W-8BEN.
Non-U.S. Holders
should consult their own tax advisors regarding their
entitlement to benefits under a relevant income tax treaty.
Withholding generally is imposed on the gross amount of a
distribution, regardless of whether we have sufficient earnings
and profits to cause the distribution to be a dividend for
U.S. federal income tax purposes. However, we may elect to
withhold on less than the gross amount of the distribution if we
determine that the distribution is not paid out of our current
or accumulated earnings and profits, based on our reasonable
estimates.
A Non-U.S. Holder
may generally obtain a refund of any excess income tax amounts
withheld with respect to a distribution on our common stock by
filing an appropriate claim for a refund together with the
required information with the IRS.
Dividends that are effectively connected with a
Non-U.S. Holders
conduct of a trade or business within the United States and, if
an income tax treaty applies, attributable to a
Non-U.S. Holders
U.S. permanent establishment, are exempt from
U.S. federal withholding tax if the
Non-U.S. Holder
timely provides a properly completed and duly executed IRS
Form W-8ECI and other applicable requirements are met.
However, dividends exempt from U.S. federal withholding tax
because they are effectively connected or
attributable to a U.S. permanent establishment under an
applicable income tax treaty are subject to U.S. federal
income tax on a net income basis at the regular graduated
U.S. federal income tax rates. Any such effectively
connected dividends received by a foreign corporation may, under
certain circumstances, be subject to an additional branch
profits tax at a 30% rate or a lower rate specified by an
applicable income tax treaty.
Gain on Disposition of Common Stock by U.S. Holders
A U.S. Holder will recognize gain or loss on the sale or
exchange of our common stock to the extent of the difference
between the amount realized on such sale or exchange and the
holders adjusted tax basis in such shares. Such gain or
loss generally will constitute long-term capital gain or loss if
the holder has held such shares for more than one year. Under
current law, non-corporate U.S. Holders are generally
subject to a maximum tax rate of 15% on long-term capital gain.
Gain on Disposition of Common Stock by
Non-U.S. Holders
A Non-U.S. Holder
generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale or other disposition
of our common stock unless one of the following applies:
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the gain is effectively connected with a
Non-U.S. Holders
conduct of a trade or business within the United States and, if
an income tax treaty applies, the gain is attributable to a
Non-U.S.
Holders |
66
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U.S. permanent establishment. In such case, the
Non-U.S. Holder
will, unless an applicable income tax treaty provides otherwise,
generally be taxed on its net gain derived from the sale at
regular graduated U.S. federal income tax rates, and in the
case of a foreign corporation, may also be subject to the branch
profits tax; |
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a Non-U.S. Holder
who is an individual holds our common stock as a capital asset,
is present in the United States for 183 or more days in the
taxable year of the sale or other disposition, and certain other
conditions are met. In such a case, unless an applicable tax
treaty provides otherwise, the
Non-U.S. Holder
will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by certain U.S. capital
losses; or |
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we are or have been a United States real property holding
corporation (a USRPHC) for U.S. federal
income tax purposes at any time during the shorter of the
five-year period ending on the date of the sale or other
disposition and the period a
Non-U.S. Holder
held our common stock (the shorter period hereinafter referred
to as the lookback period); provided that if our
common stock is regularly traded on an established securities
market, this rule will generally not cause any gain to be
taxable unless the
Non-U.S. Holder
owned more than 5% of our common stock at some time during the
lookback period. We do not believe that we are a USRPHC and do
not expect to become one in the future. However, we could become
a USRPHC as a result of future changes in assets or operations. |
Information Reporting and Backup Withholding Tax
Under certain circumstances, U.S. Treasury regulations
require information reporting and backup withholding on certain
payments on common stock.
A U.S. Holder may be subject to information reporting and
backup withholding (currently at a rate of 28%) with respect to
dividends on, and the proceeds from the sale or redemption of,
common stock, unless such holder (a) is an entity that is
exempt from withholding, which includes, among others,
corporations, and when required, demonstrates this fact, or
(b) provides the payor with its correct taxpayer
identification number, which, for an individual, is ordinarily
his or her social security number, and otherwise complies with
applicable requirements of the backup withholding rules.
Dividends on common stock paid to a
Non-U.S. Holder
will generally be exempt from backup withholding, provided the
Non-U.S. Holder
meets applicable certification requirements or otherwise
establishes an exemption. The amount of dividends paid to a
Non-U.S. Holder
and any U.S. federal withholding tax deducted from those
dividends will be reported annually to the IRS and the
Non-U.S. Holder.
Under Treasury regulations, payments on the sale of our common
stock effected through a foreign office of a broker to its
customer generally are not subject to information reporting or
backup withholding. However, if the broker is a
U.S. person, a controlled foreign corporation, a foreign
person 50% or more of whose gross income is effectively
connected with a U.S. trade or business for a specified
three-year period, a foreign partnership with significant
U.S. ownership, or a U.S. branch of a foreign bank or
insurance company, then information reporting (but not backup
withholding) will be required, unless the broker has in its
records documentary evidence that the beneficial owner of the
payment is not a U.S. person or is otherwise entitled to an
exemption, and other applicable certification requirements are
met. Information reporting and backup withholding generally will
apply to sale payments effected at a U.S. office of any
U.S. or foreign broker, unless the broker has in its
records documentary evidence that the beneficial owner of the
payment is not a U.S. person or is otherwise entitled to an
exemption, and other applicable certification requirements are
met.
Backup withholding does not represent an additional income tax.
Any amounts withheld from a payment to a holder under the backup
withholding rules will be allowed as a credit against the
holders U.S. federal income tax liability and may
entitle the holder to a refund, provided that the required
information or returns are timely furnished by the holder to the
IRS.
67
UNDERWRITING
Canaccord Adams Inc., Avondale Partners, LLC and The
Seidler Companies Incorporated are acting as representatives of
the underwriters named below. Subject to the terms and
conditions described in an underwriting agreement among us, the
selling stockholders and the underwriters, the selling
stockholders have agreed to sell to the underwriters, and the
underwriters severally have agreed to purchase from the selling
stockholders, the number of shares listed opposite their names
below.
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Number of | |
Underwriter |
|
Shares | |
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| |
Canaccord Adams Inc.
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800,000 |
|
Avondale Partners, LLC
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600,000 |
|
The Seidler Companies Incorporated
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600,000 |
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|
|
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|
Total
|
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2,000,000 |
|
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|
|
The underwriters have agreed to purchase all of the shares sold
under the underwriting agreement if any of these shares are
purchased. If an underwriter defaults, the underwriting
agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the underwriting
agreement may be terminated.
Some of the selling stockholders have granted to the
underwriters an option to purchase up to 300,000 additional
shares of common stock at the public offering price less the
underwriting discount. The underwriters may exercise this option
for 30 days from the date of this prospectus solely for the
purpose of covering any over-allotments, if any, made in
connection with the offering of the shares of common stock
offered by this prospectus. If the underwriters exercise this
option, each underwriter will be obligated, subject to
conditions contained in the underwriting agreement, to purchase
a number of additional shares proportionate to that
underwriters initial amount reflected in the above table.
We and the selling stockholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act, and to contribute to payments that the
underwriters may be required to make for certain liabilities.
The underwriters are offering the shares, subject to prior sale
by us to the underwriters, which sale is subject to approval of
legal matters by the underwriters counsel, including the
validity of the shares, and other conditions contained in the
underwriting agreement, such as the receipt by the underwriters
of officers certificates and legal opinions. The
underwriters reserve the right to withdraw, cancel or modify
offers to the public and to reject orders in whole or in part.
The offering of the shares may concurrently be made in one or
more of the Canadian provinces of British Columbia, Alberta,
Saskatchewan, Manitoba, Ontario and Quebec. This prospectus is
not, and under no circumstances is to be construed as, an
advertisement or a public offering of shares in Canada or any
province or territory thereof. Any offer or sale of the shares
in Canada will be made only under an exemption from the
requirements to file a prospectus with the relevant Canadian
securities regulators and only by a dealer properly registered
under applicable Canadian securities laws or, alternatively,
pursuant to an exemption from the dealer registration
requirement in the relevant province or territory of Canada in
which such offer or sale is made.
The underwriters have advised us and the selling stockholders
that they propose to offer the shares of common stock directly
to the public at the public offering price set forth on the
cover page of this prospectus, and to dealers at the public
offering price less a selling concession not in excess of
$0.405 per share. The underwriters also may allow, and the
dealers may reallow, a concession not in excess of
$0.10 per share to brokers and dealers. After the offering,
the underwriters may change the offering price and other selling
terms.
68
The following table shows the public offering price,
underwriting discount and proceeds before expenses to the
selling stockholders. The information assumes either no exercise
or full exercise by the underwriters of their over-allotment
options.
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Without | |
|
With | |
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|
|
Over- | |
|
Over- | |
|
|
Per | |
|
Allotment | |
|
Allotment | |
|
|
Share | |
|
Exercise | |
|
Exercise | |
|
|
| |
|
| |
|
| |
Public offering price
|
|
$ |
11.25 |
|
|
$ |
22,500,000 |
|
|
$ |
25,875,000 |
|
Underwriting discount paid by us
|
|
|
0.675 |
|
|
|
810,000 |
|
|
|
810,000 |
|
Proceeds, before expenses, to us
|
|
|
10.575 |
|
|
|
12,690,000 |
|
|
|
12,690,000 |
|
Proceeds, before expenses, to the selling stockholders
|
|
|
10.575 |
|
|
|
8,460,000 |
|
|
|
11,632,500 |
|
The expenses of the offering, not including the underwriting
discount, are estimated at $700,000 and are payable by us. Of
the $700,000 estimated expenses, we expect $300,000 will be
expenses incurred by us, including fees and expenses for our
independent registered public accountants and our counsel,
printing expenses and our registration fees with the Securities
and Exchange Commission and the National Association of
Securities Dealers. We will also pay estimated maximum expenses
of $400,000 to the underwriters, including a portion of the fees
and expenses of the underwriters counsel and any
additional expenses incurred by the underwriters in excess of
$250,000. We expect these expenses will consist of $100,000 of
expenses incurred by the underwriters in connection with the
road show and $300,000 for fees and expenses of the
underwriters counsel. We also paid $7,688 to The Seidler
Companies Incorporated since August 25, 2005. This amount
reflects a brokers commission of $0.06 per share paid to
Seidler for each share we repurchased under our two
Rule 10b5-1 trading plans, each of which has terminated.
We, each of our executive officers and directors and the selling
stockholders have agreed that, subject to certain exceptions,
during the period ending 90 days after the date of this
prospectus, which we refer to as the restricted period, neither
we nor our executive officers and directors will, without the
prior consent of Canaccord Adams Inc., directly or indirectly
offer, sell or otherwise dispose of any shares of common stock
or any securities that may be converted into or exchanged or
exercisable for any such shares of common stock or enter into
any swap or other arrangement that transfers to another person,
in whole or in part, any of the economic consequences of
ownership of the common stock. The
90-day restricted
period will be extended if (1) during the 17 calendar days
before the last day of the restricted period, we issue an
earnings release or material news or a material event relating
to us occurs, or (2) prior to the expiration of the
restricted period, we announce that we will release earnings
results during the
16-day period after the
end of the restricted period.
In connection with the offering, the underwriters may purchase
and sell the common stock in the open market. These transactions
may include over-allotment and stabilizing transactions, passive
market making and purchases to cover syndicate short positions
created in connection with the offering.
The underwriters also may impose a penalty bid, whereby the
underwriters may reclaim selling concessions allowed to
syndicate members or other broker-dealers in respect of the
common stock sold in the offering for their account if the
underwriters repurchase the shares in stabilizing or covering
transactions. These activities may stabilize, maintain or
otherwise affect the market price of the common stock, which may
be higher than the price that might otherwise prevail in the
open market.
Neither we nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
the common shares. In addition, neither we nor any of the
underwriters makes any representation that the representatives
or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued
without notice.
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us
and the selling stockholders. They have received customary fees
and commissions for these transactions.
69
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange
Commission, or SEC. You may read and copy these reports, proxy
statements and other information at the SECs public
reference room at Room 1500,
100 F Street, NE, Washington, D.C. 20549.
You should call
1-800-SEC-0330 for
further information. The SEC maintains an internet site at
www.sec.gov where certain information regarding issuers
(including Reliv) may be found. Our web site address
is www.reliv.com.
This prospectus is part of a registration statement that we
filed with the SEC (Registration
No. 333-131974).
The registration statement contains more information than this
prospectus regarding Reliv and its common stock, including
certain exhibits and schedules. You can get a copy of the
registration statement from the SEC at the address listed above
or from its internet site.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We incorporate by reference information into this
prospectus. This means that we disclose important information to
you by referring you to another document filed separately with
the SEC. The information incorporated by reference is considered
to be part of this document, except for any information that is
superseded by information that is included directly in this
document.
We incorporate by reference the documents listed below that we
have previously filed with the SEC. They contain important
information about us and our financial condition. We also
incorporate by reference all future documents we file with the
SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (other than
information furnished under Item 2.02 or Item 7.01 of
any Form 8-K that
is listed below or that is filed in the future, which
information is not deemed filed under the Exchange Act), until
the underwriters have sold all of the securities offered hereby.
|
|
|
|
|
Annual Report on
Form 10-K for the
fiscal year ended December 31, 2005, filed with the SEC on
March 16, 2006; and |
|
|
|
The descriptions of our common stock and our preferred share
purchase rights which are contained in registration statements
filed under the Securities Exchange Act of 1934, including any
amendment or reports filed for the purpose of updating such
descriptions. |
Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for all
purposes to the extent that a statement contained in this
prospectus, or in any subsequently filed document that is also
incorporated or deemed to be incorporated by reference, modifies
or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this prospectus.
You may obtain any of the documents incorporated by reference in
this prospectus through us or from the SEC through the
SECs website at www.sec.gov. Documents incorporated by
reference are available from us without charge, excluding any
exhibits to those documents, unless the exhibit is specifically
incorporated by reference into the information that this
prospectus incorporates. You may obtain documents incorporated
by reference in this prospectus by requesting them in writing or
by telephone from us at the following address:
Reliv International, Inc.
136 Chesterfield Industrial Boulevard
Chesterfield, Missouri 63005
(636) 537-9715
Attn: Corporate Secretary
70
LEGAL MATTERS
The validity of the shares to be sold in this offering will be
passed upon by Vanasco Genelly & Miller, Chicago,
Illinois. Certain legal matters in connection with this offering
will be passed upon for the underwriters by
OMelveny & Myers LLP, Los Angeles,
California.
EXPERTS
Ernst & Young LLP, independent registered public
accounting firm, has audited our consolidated financial
statements and schedule at December 31, 2005 and 2004, and
for each of the three years in the period ended
December 31, 2005, and managements assessment of the
effectiveness of our internal control over financial reporting
as of December 31, 2005, as set forth in their reports,
which are included or incorporated by reference in this
prospectus and elsewhere in the registration statement. We have
included or incorporated by reference our financial statements
and schedule and managements assessment in reliance on
Ernst & Young LLPs reports, given on their
authority as experts in accounting and auditing.
71
INDEX TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
Page | |
|
|
| |
Reliv International, Inc. and Subsidiaries
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2 |
|
|
Consolidated Balance Sheets as of December 31, 2005 and 2004
|
|
|
F-3 |
|
|
Consolidated Statements of Income for the years ended
December 31, 2005, 2004, and 2003
|
|
|
F-5 |
|
|
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2005, 2004, and 2003
|
|
|
F-6 |
|
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004, and 2003
|
|
|
F-7 |
|
|
Notes to Consolidated Financial Statements
December 31, 2005
|
|
|
F-8 |
|
Financial Statement Schedule:
|
|
|
|
|
|
Valuation and Qualifying Accounts for the years ended
December 31, 2005, 2004, and 2003
|
|
|
F-25 |
|
F-1
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, 2005 and 2004, and the related consolidated
statements of income, stockholders equity, and cash flows
for each of the three years in the period ended
December 31, 2005. Our audits also included the financial
statement schedule. These financial statements and schedule are
the responsibility of the Companys 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, 2005 and 2004, and the
consolidated results of their income and their cash flows for
each of the three years in the period ended December 31,
2005, 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.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Reliv International, Inc. and
Subsidiaries internal control over financial reporting as
of December 31, 2005, 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 10, 2006, expressed
an unqualified opinion thereon.
St. Louis, Missouri
March 10, 2006
F-2
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
5,653,594 |
|
|
$ |
10,151,503 |
|
|
Accounts and notes receivable; less allowance of $39,700 in 2005
and $11,500 in 2004
|
|
|
775,623 |
|
|
|
872,592 |
|
|
Accounts due from employees and distributors
|
|
|
152,760 |
|
|
|
70,620 |
|
|
Inventories:
|
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
|
3,569,449 |
|
|
|
3,528,135 |
|
|
|
Raw materials
|
|
|
1,441,107 |
|
|
|
1,877,210 |
|
|
|
Sales aids and promotional materials
|
|
|
573,900 |
|
|
|
491,437 |
|
|
|
|
|
|
|
|
|
Total inventories
|
|
|
5,584,456 |
|
|
|
5,896,782 |
|
|
|
Refundable income taxes
|
|
|
|
|
|
|
1,288,260 |
|
|
Prepaid expenses and other current assets
|
|
|
1,240,138 |
|
|
|
1,052,428 |
|
|
Deferred income taxes
|
|
|
452,430 |
|
|
|
286,430 |
|
|
|
|
|
|
|
|
Total current assets
|
|
|
13,859,001 |
|
|
|
19,618,615 |
|
|
Other assets
|
|
|
1,626,330 |
|
|
|
1,196,780 |
|
Accounts due from employees and distributors
|
|
|
355,651 |
|
|
|
213,123 |
|
|
Property, plant, and equipment
|
|
|
19,055,766 |
|
|
|
18,594,197 |
|
Less accumulated depreciation
|
|
|
8,915,325 |
|
|
|
8,626,048 |
|
|
|
|
|
|
|
|
|
|
|
10,140,441 |
|
|
|
9,968,149 |
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
25,981,423 |
|
|
$ |
30,996,667 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
Reliv International, Inc. and Subsidiaries
Consolidated Balance Sheets (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$ |
8,158,770 |
|
|
$ |
7,826,073 |
|
|
Income taxes payable
|
|
|
820,246 |
|
|
|
|
|
|
Current maturities of long-term debt
|
|
|
916,244 |
|
|
|
325,895 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,895,260 |
|
|
|
8,151,968 |
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current maturities
|
|
|
2,211,065 |
|
|
|
3,357,691 |
|
|
Noncurrent deferred income taxes
|
|
|
89,000 |
|
|
|
289,000 |
|
|
Other noncurrent liabilities
|
|
|
1,221,270 |
|
|
|
1,007,255 |
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
3,521,335 |
|
|
|
4,653,946 |
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001 per share;
3,000,000 shares authorized; -0- shares issued and
outstanding in 2005 and 2004
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001 per share;
30,000,000 shares authorized; 15,613,644 shares issued
and 15,563,562 shares outstanding in 2005;
16,323,668 shares issued and 16,320,931 shares
outstanding in 2004
|
|
|
15,614 |
|
|
|
16,324 |
|
|
Additional paid-in capital
|
|
|
22,972,463 |
|
|
|
22,661,179 |
|
|
Accumulated deficit
|
|
|
(9,252,413 |
) |
|
|
(3,719,711 |
) |
|
Accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
(669,346 |
) |
|
|
(758,331 |
) |
|
Treasury stock
|
|
|
(501,490 |
) |
|
|
(8,708 |
) |
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
12,564,828 |
|
|
|
18,190,753 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
25,981,423 |
|
|
$ |
30,996,667 |
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Sales at suggested retail
|
|
$ |
163,968,979 |
|
|
$ |
139,442,752 |
|
|
$ |
110,569,576 |
|
Less distributor allowances on product purchases
|
|
|
50,403,815 |
|
|
|
42,460,319 |
|
|
|
33,609,853 |
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
113,565,164 |
|
|
|
96,982,433 |
|
|
|
76,959,723 |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
|
19,264,347 |
|
|
|
16,662,935 |
|
|
|
13,228,050 |
|
|
Distributor royalties and commissions
|
|
|
45,479,062 |
|
|
|
38,622,537 |
|
|
|
29,916,744 |
|
|
Selling, general, and administrative
|
|
|
36,348,526 |
|
|
|
32,710,657 |
|
|
|
26,438,447 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12,473,229 |
|
|
|
8,986,304 |
|
|
|
7,376,482 |
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(313,329 |
) |
|
|
(243,118 |
) |
|
|
(234,956 |
) |
|
Other income
|
|
|
339,516 |
|
|
|
264,503 |
|
|
|
157,914 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
12,499,416 |
|
|
|
9,007,689 |
|
|
|
7,299,440 |
|
Provision for income taxes
|
|
|
4,978,000 |
|
|
|
3,621,000 |
|
|
|
2,902,000 |
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,521,416 |
|
|
|
5,386,689 |
|
|
|
4,397,440 |
|
Preferred dividends accrued and paid
|
|
|
|
|
|
|
12,292 |
|
|
|
56,762 |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$ |
7,521,416 |
|
|
$ |
5,374,397 |
|
|
$ |
4,340,678 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share Basic
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
15,885,000 |
|
|
|
15,662,000 |
|
|
|
14,969,000 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share Diluted
|
|
$ |
0.46 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
|
|
|
16,388,000 |
|
|
|
17,137,000 |
|
|
|
16,706,000 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivable- | |
|
|
|
Accumulated | |
|
|
|
|
|
|
Preferred Stock | |
|
Common Stock | |
|
Additional | |
|
Officers | |
|
Accumu- | |
|
Other | |
|
Treasury Stock | |
|
|
|
|
| |
|
| |
|
Paid-In | |
|
and | |
|
lated | |
|
Comprehen- | |
|
| |
|
|
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Capital | |
|
Directors | |
|
Deficit | |
|
sive Loss | |
|
Shares | |
|
Amount | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balance at December 31, 2002
|
|
|
|
|
|
$ |
|
|
|
|
12,006,761 |
|
|
$ |
12,007 |
|
|
$ |
17,863,505 |
|
|
$ |
(2,449 |
) |
|
$ |
(8,960,782 |
) |
|
$ |
(775,383 |
) |
|
|
84,829 |
|
|
$ |
(339,252 |
) |
|
$ |
7,797,646 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,397,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,397,440 |
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,856 |
|
|
|
|
|
|
|
|
|
|
|
60,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,458,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of preferred stock
|
|
|
150,000 |
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000 |
|
|
Redemption of preferred stock
|
|
|
(52,500 |
) |
|
|
(525,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(525,000 |
) |
|
Preferred stock dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,762 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(56,762 |
) |
|
Repayment of loans by officers/directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,449 |
|
|
Warrants granted under DSPP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,068 |
|
|
Common stock purchased for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,059 |
|
|
|
(1,199,913 |
) |
|
|
(1,199,913 |
) |
|
Retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(306,698 |
) |
|
|
(307 |
) |
|
|
(424,436 |
) |
|
|
|
|
|
|
(1,059,674 |
) |
|
|
|
|
|
|
(306,698 |
) |
|
|
1,484,417 |
|
|
|
|
|
|
Proceeds from sale of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,000 |
) |
|
|
46,040 |
|
|
|
142,240 |
|
|
Options and warrants exercised
|
|
|
|
|
|
|
|
|
|
|
448,906 |
|
|
|
449 |
|
|
|
523,418 |
|
|
|
|
|
|
|
(196,096 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,771 |
|
|
Tax benefit from exercise of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
535,583 |
|
|
Stock split declared September 4, 2003
|
|
|
|
|
|
|
|
|
|
|
2,994,992 |
|
|
|
2,995 |
|
|
|
|
|
|
|
|
|
|
|
(2,995 |
) |
|
|
|
|
|
|
547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
97,500 |
|
|
|
975,000 |
|
|
|
15,143,961 |
|
|
|
15,144 |
|
|
|
18,684,338 |
|
|
|
|
|
|
|
(5,878,869 |
) |
|
|
(714,527 |
) |
|
|
2,737 |
|
|
|
(8,708 |
) |
|
|
13,072,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,386,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,386,689 |
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,804 |
) |
|
|
|
|
|
|
|
|
|
|
(43,804 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,342,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock dividends paid, $0.065 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,030,040 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,030,040 |
) |
|
Redemption of preferred stock
|
|
|
(97,500 |
) |
|
|
(975,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(975,000 |
) |
|
Preferred stock dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,292 |
) |
|
Warrants granted under DSPP/compensation shares
|
|
|
|
|
|
|
|
|
|
|
8,000 |
|
|
|
8 |
|
|
|
129,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,287 |
|
|
Common stock purchased for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,564 |
|
|
|
(1,293,980 |
) |
|
|
(1,293,980 |
) |
|
Retirement of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(191,564 |
) |
|
|
(191 |
) |
|
|
(228,019 |
) |
|
|
|
|
|
|
(1,065,770 |
) |
|
|
|
|
|
|
(191,564 |
) |
|
|
1,293,980 |
|
|
|
|
|
|
Proceeds from sale of common stock
|
|
|
|
|
|
|
|
|
|
|
8,934 |
|
|
|
9 |
|
|
|
48,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,601 |
|
|
Options and warrants exercised
|
|
|
|
|
|
|
|
|
|
|
1,354,337 |
|
|
|
1,354 |
|
|
|
1,409,830 |
|
|
|
|
|
|
|
(1,119,429 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291,755 |
|
|
Tax benefit from exercise of options and warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,617,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,617,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
Reliv International, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
7,521,416 |
|
|
$ |
5,386,689 |
|
|
$ |
4,397,440 |
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,417,166 |
|
|
|
1,209,577 |
|
|
|
935,292 |
|
|
Stock-based third-party compensation
|
|
|
66,674 |
|
|
|
129,287 |
|
|
|
90,068 |
|
|
Tax benefit from exercise of options
|
|
|
1,370,000 |
|
|
|
2,617,159 |
|
|
|
535,583 |
|
|
Deferred income taxes
|
|
|
(366,000 |
) |
|
|
220,332 |
|
|
|
(132,189 |
) |
|
Foreign currency transaction loss/(gain)
|
|
|
268,436 |
|
|
|
(99,628 |
) |
|
|
(63,273 |
) |
|
Increase in accounts and notes receivable
|
|
|
(108,587 |
) |
|
|
(275,604 |
) |
|
|
(46,951 |
) |
|
(Increase) decrease in inventories
|
|
|
327,447 |
|
|
|
(1,210,461 |
) |
|
|
(1,188,179 |
) |
|
(Increase) decrease in refundable income taxes
|
|
|
1,288,260 |
|
|
|
(1,288,260 |
) |
|
|
7,942 |
|
|
Increase in prepaid expenses and other current assets
|
|
|
(173,057 |
) |
|
|
(320,920 |
) |
|
|
(94,995 |
) |
|
Increase in other assets
|
|
|
(465,991 |
) |
|
|
(403,690 |
) |
|
|
(350,164 |
) |
|
Increase in accounts payable and accrued expenses
|
|
|
538,723 |
|
|
|
1,549,544 |
|
|
|
1,384,499 |
|
|
Increase (decrease) in income taxes payable
|
|
|
819,344 |
|
|
|
(146,683 |
) |
|
|
(116,109 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
12,503,831 |
|
|
|
7,367,342 |
|
|
|
5,358,964 |
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant, and equipment
|
|
|
148,506 |
|
|
|
119,609 |
|
|
|
79,414 |
|
Purchase of property, plant, and equipment
|
|
|
(1,710,523 |
) |
|
|
(1,870,632 |
) |
|
|
(983,269 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,562,017 |
) |
|
|
(1,751,023 |
) |
|
|
(903,855 |
) |
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term borrowings and line of credit
|
|
|
|
|
|
|
|
|
|
|
218,343 |
|
Principal payments on long-term borrowings and line of credit
|
|
|
(3,655,514 |
) |
|
|
(433,116 |
) |
|
|
(513,330 |
) |
Principal payments under capital lease obligations
|
|
|
|
|
|
|
(5,750 |
) |
|
|
(67,155 |
) |
Proceeds from issuance of common stock
|
|
|
|
|
|
|
48,601 |
|
|
|
|
|
Proceeds from issuance of preferred stock
|
|
|
|
|
|
|
|
|
|
|
1,500,000 |
|
Redemption of preferred stock
|
|
|
|
|
|
|
(975,000 |
) |
|
|
(525,000 |
) |
Preferred stock dividends paid
|
|
|
|
|
|
|
(12,292 |
) |
|
|
(56,762 |
) |
Common stock dividends paid
|
|
|
(1,188,288 |
) |
|
|
(1,030,040 |
) |
|
|
|
|
Proceeds from options and warrants exercised
|
|
|
273,520 |
|
|
|
291,754 |
|
|
|
327,771 |
|
Repayment of loans by officers and directors
|
|
|
|
|
|
|
|
|
|
|
50,699 |
|
Purchase of stock for treasury
|
|
|
(10,690,375 |
) |
|
|
(1,293,980 |
) |
|
|
(1,199,913 |
) |
Proceeds from sale of treasury stock
|
|
|
33,360 |
|
|
|
|
|
|
|
142,240 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(15,227,297 |
) |
|
|
(3,409,823 |
) |
|
|
(123,107 |
) |
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(212,426 |
) |
|
|
42,499 |
|
|
|
206,022 |
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
(4,497,909 |
) |
|
|
2,248,995 |
|
|
|
4,538,024 |
|
Cash and cash equivalents at beginning of year
|
|
|
10,151,503 |
|
|
|
7,902,508 |
|
|
|
3,364,484 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
5,653,594 |
|
|
$ |
10,151,503 |
|
|
$ |
7,902,508 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
300,329 |
|
|
$ |
267,926 |
|
|
$ |
247,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net of refunds
|
|
$ |
1,838,000 |
|
|
$ |
2,144,000 |
|
|
$ |
2,582,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations entered into
|
|
$ |
|
|
|
$ |
|
|
|
$ |
64,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of promissory notes for purchase of stock for treasury
|
|
$ |
4,050,000 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-7
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2005
|
|
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,
Canada, New Zealand, Mexico, the United Kingdom/ Ireland,
Germany, the Philippines, Malaysia, and Singapore.
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.
Property, Plant, and Equipment
Property, plant, and equipment are stated on the cost basis.
Depreciation is computed using the straight-line or an
accelerated method over the useful life of the related assets,
including assets recorded under capital leases. Generally,
computer equipment and software are depreciated over
5 years, office equipment and machinery over 7 years,
and real property over 39 years.
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 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
Companys investments in
non-U.S. subsidiaries
are deemed to be reinvested for an indefinite period of time.
The transaction losses/(gains) were $268,436, ($99,628), and
($63,273) for 2005, 2004, and 2003, 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. The
net sales price is the suggested retail price less the
distributor discount of 20 percent to 40 percent of
such suggested retail price. Sales revenue and commission
expenses are recorded when the merchandise is shipped, as this
is the point title and risk of loss pass. In accordance with
EITF 01-09, the
Company presents distributor
F-8
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
1. |
Nature of Business and Significant Accounting Policies
(continued) |
Revenue Recognition (continued)
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 Companys return policy and
historical experience. The Company records shipping and handling
revenue as a component of sales and records shipping and
handling costs as a component of cost of products sold.
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.
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 7 for additional information regarding earnings per
share.
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 6.
Effective January 1, 2003, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based Compensation
Transition and Disclosure, which allows the Company to
continue to account for stock option plans under the intrinsic
value method in accordance with Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees and related Interpretations.
Accordingly, no stock-based employee compensation cost is
reflected in net income, as all options granted under our
current or prior plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.
Pursuant to the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, pro
forma net income and earnings per share are presented in the
F-9
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
1. |
Nature of Business and Significant Accounting Policies
(continued) |
Stock-Based Compensation (continued)
table below as if compensation cost for stock options was
determined as of the grant date under the fair value method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, as reported
|
|
$ |
7,521,416 |
|
|
$ |
5,374,397 |
|
|
$ |
4,340,678 |
|
|
Deduct: total stock-based employee compensation expense
determined under fair value-based method for all awards, net of
related tax effects
|
|
|
1,645,036 |
|
|
|
52,125 |
|
|
|
194,507 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available to common shareholders
|
|
$ |
5,876,380 |
|
|
$ |
5,322,272 |
|
|
$ |
4,146,171 |
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, as reported
|
|
$ |
7,521,416 |
|
|
$ |
5,386,689 |
|
|
$ |
4,397,440 |
|
|
Deduct: total stock-based employee compensation expense
determined under fair value-based method for all awards, net of
related tax effects
|
|
|
1,645,036 |
|
|
|
52,125 |
|
|
|
194,507 |
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income available to common shareholders
|
|
$ |
5,876,380 |
|
|
$ |
5,334,564 |
|
|
$ |
4,202,933 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$ |
0.46 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$ |
0.36 |
|
|
$ |
0.31 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
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.
The compensation expense associated with the fair value of the
options calculated for the years ended December 31, 2005,
2004 and 2003, is not necessarily representative of the
potential effects on reported net income in future years. The
fair value of each option grant is estimated on the date of the
grant by use of the Black-Scholes option pricing model.
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 $52,000, $64,000,
and $35,000 of advertising expense in 2005, 2004, and 2003,
respectively.
F-10
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
1. |
Nature of Business and Significant Accounting Policies
(continued) |
Research and Development Expenses
Research and development expenses which are charged to selling,
general, and administrative expenses as incurred were $558,000,
$525,000, and $493,000 in 2005, 2004, and 2003, respectively.
Cash Equivalents
The Companys policy is to consider demand deposits and
short-term investments with a maturity of three months or less
when purchased as cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with
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.
New Accounting Pronouncements
Share-Based Payments
In December 2004, the FASB issued SFAS No. 123(R),
Share-Based Payment, which is a revision of
SFAS No. 123, Accounting for Stock Based
Compensation, and supersedes APB No. 25. Among other
items, SFAS No. 123(R) eliminates the use of APB
No. 25 and the intrinsic value method of accounting and
requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments, based on
the grant date fair value of those awards, in the financial
statements.
The effective date of SFAS No. 123(R) for the company
is the first annual reporting period beginning after
June 15, 2005. SFAS No. 123(R) permits companies
to adopt its requirements using either a modified
prospective method or a modified retrospective
method. Under the modified prospective method,
compensation cost is recognized in the financial statements
beginning with the effective date, based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after that date and based on the requirements of
SFAS No. 123 for all unvested awards granted prior to
the effective date of SFAS No. 123(R).
The Company adopted SFAS No. 123(R) beginning on
January 1, 2006 using the modified prospective method. This
change in accounting is not expected to materially impact our
financial position. However, because we currently account for
share-based payments to our employees using the intrinsic value
method, our results of operations have not included the
recognition of compensation expense for the issuance of stock
option awards. Had we applied the fair-value criteria
established by SFAS No. 123(R) to previous stock
option grants, the impact to our results of operations would
have approximated the impact of applying SFAS No. 123,
which was a reduction to net income of approximately $1,645,000
in 2005, $52,000 in 2004, and $195,000 in 2003. The impact of
applying SFAS No. 123 to previous stock option grants
is further summarized above. The Company expects the recognition
of compensation expense for stock options previously issued,
unvested and outstanding at December 31, 2005 to reduce
fiscal year 2006 net earnings by approximately $63,000.
SFAS No. 123(R) also requires the benefits associated
with the tax deductions in excess of recognized compensation
cost be reported as a financing cash flow, rather than as an
operating cash flow as required under current literature. This
requirement will reduce net operating cash flows and increase
net financing
F-11
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
1. |
Nature of Business and Significant Accounting Policies
(continued) |
New Accounting Pronouncements (continued)
cash flows in periods after the effective date. These future
amounts cannot be estimated, because they depend on, among other
things, when employees exercise stock options.
Inventory Costs
In November 2004, the FASB issued 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
current-period charges and requires the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. The provisions of
SFAS No. 151 apply prospectively and are effective for
inventory costs incurred after January 1, 2006. While the
Company believes that SFAS No. 151 will not have a
material effect on its consolidated financial position and
results of operations, the impact of adopting these new rules is
dependent on events that could occur in future periods, and
cannot be determined until the event occurs in future periods.
Income Taxes
On December 21, 2004, the FASB issued two FSPs
regarding the accounting implications of the American Jobs
Creation Act of 2004. FSP No. 109-1, Application of
FASB Statement No. 109 Accounting for Income
Taxes to the Tax Deduction on Qualified Production
Activities Provided by the American Job Creation Act of
2004 is effective for fiscal year 2005 and is described in
Note 11. FSP No. 109-2, Accounting and
Disclosure Guidance for the Foreign Provision within the
American Jobs Creation Act of 2004 became effective in
fiscal year 2004 and is also described in Note 11.
Reclassifications
Certain reclassifications have been made to the 2004 and 2003
financial statements to conform to the 2005 presentation.
|
|
2. |
Property, Plant, and Equipment |
Property, plant, and equipment at December 31, 2005 and
2004, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Land
|
|
$ |
829,222 |
|
|
$ |
829,222 |
|
Building
|
|
|
9,553,311 |
|
|
|
9,027,577 |
|
Machinery and equipment
|
|
|
4,736,274 |
|
|
|
4,926,048 |
|
Office equipment
|
|
|
1,400,544 |
|
|
|
1,092,285 |
|
Computer equipment and software
|
|
|
2,536,415 |
|
|
|
2,719,065 |
|
|
|
|
|
|
|
|
|
|
|
19,055,766 |
|
|
|
18,594,197 |
|
Less accumulated depreciation and amortization
|
|
|
8,915,325 |
|
|
|
8,626,048 |
|
|
|
|
|
|
|
|
|
|
$ |
10,140,441 |
|
|
$ |
9,968,149 |
|
|
|
|
|
|
|
|
F-12
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
3. |
Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses at December 31, 2005
and 2004, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Trade payables
|
|
$ |
3,165,871 |
|
|
$ |
3,155,071 |
|
Distributors commissions
|
|
|
3,578,405 |
|
|
|
3,561,110 |
|
Sales taxes
|
|
|
518,870 |
|
|
|
493,571 |
|
Interest expense
|
|
|
31,000 |
|
|
|
18,000 |
|
Payroll and payroll taxes
|
|
|
864,624 |
|
|
|
598,321 |
|
|
|
|
|
|
|
|
|
|
$ |
8,158,770 |
|
|
$ |
7,826,073 |
|
|
|
|
|
|
|
|
In June 2005, the Company entered into a new
$15 million revolving line of credit facility with the
Companys primary lender. This new facility replaced the
Companys previous operating line of credit that had a
maximum borrowing limit of $1 million. The new facility
expires in April 2007, and any advances accrue interest at
a variable interest rate based on LIBOR. The new facility
includes covenants to maintain total stockholders equity
of not less than $10.5 million, and that the 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, 2005, the Company had not
utilized any of the new revolving line of credit facility and
was in compliance with the minimum stockholders equity
covenant.
Long-term debt at December 31, 2005 and 2004, consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Term loan payable in monthly installments of $24,955, (plus
interest at prime); secured by land and building (net book value
of $5,701,000 at December 31, 2004); balance due paid June
2005
|
|
$ |
|
|
|
$ |
3,627,413 |
|
Promissory note payable to a former officer/director payable in
annual installments, interest payable quarterly at 4% per
annum (see Note 15)
|
|
|
3,100,000 |
|
|
|
|
|
Notes payable primarily vehicle loans
|
|
|
27,309 |
|
|
|
56,173 |
|
|
|
|
|
|
|
|
|
|
|
3,127,309 |
|
|
|
3,683,586 |
|
Less current maturities
|
|
|
916,244 |
|
|
|
325,895 |
|
|
|
|
|
|
|
|
|
|
$ |
2,211,065 |
|
|
$ |
3,357,691 |
|
|
|
|
|
|
|
|
Principal maturities of long-term debt at December 31, 2005
are as follows:
|
|
|
|
|
2006
|
|
$ |
916,244 |
|
2007
|
|
|
911,065 |
|
2008
|
|
|
1,300,000 |
|
|
|
|
|
|
|
$ |
3,127,309 |
|
|
|
|
|
F-13
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Board of Directors declared a five-for-four stock split on
September 4, 2003. The dividends were paid on
November 14, 2003, to stockholders of record on
October 29, 2003. Average shares outstanding, all per share
amounts, and stock option and warrant data included in the
accompanying consolidated financial statements and notes are
based on the increased number of shares as restated for the
stock split.
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 fully vested in the year of grant. As of December 31,
2005, 457,000 shares remain available for grant under the
2003 Plan.
The Company grants stock options for a fixed number of shares to
directors and employees with an exercise price equal to the fair
value of the shares at the time of the grant. Accordingly, the
Company has not recognized compensation expense for its stock
option grants.
For the purposes of the pro forma disclosures in Note 1,
the estimated fair value of the options is recognized as
compensation expense over the options vesting period. 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
Companys stock ranging from 0.448 to 0.516; and a weighted
average expected life of 7.0 years. The weighted average
fair value of options granted during 2005 was $4.19 per
share.
There were no options granted during the years ended
December 31, 2004, 2003, and 2002. As of December 31,
2005, there exist 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 Companys 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 per share.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
F-14
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
6. |
Stockholders Equity (continued) |
Stock Options (continued)
A summary of the Companys stock option activity and
related information for the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Avg. | |
|
|
|
Avg. | |
|
|
|
Avg. | |
|
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
Options | |
|
Price | |
|
Options | |
|
Price | |
|
Options | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding beginning of the year
|
|
|
985,114 |
|
|
$ |
0.73 |
|
|
|
2,413,433 |
|
|
$ |
0.91 |
|
|
|
2,897,171 |
|
|
$ |
0.94 |
|
Granted
|
|
|
543,000 |
|
|
|
7.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(710,286 |
) |
|
|
0.72 |
|
|
|
(1,428,319 |
) |
|
|
1.04 |
|
|
|
(483,738 |
) |
|
|
1.08 |
|
Forfeited
|
|
|
(4,754 |
) |
|
|
0.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
813,074 |
|
|
$ |
5.57 |
|
|
|
985,114 |
|
|
$ |
0.73 |
|
|
|
2,413,433 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
684,354 |
|
|
|
|
|
|
|
727,676 |
|
|
|
|
|
|
|
2,034,671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 | |
|
|
| |
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Avg. | |
|
|
|
Avg. | |
Range of |
|
Number | |
|
Weighted Avg. | |
|
Exercise | |
|
Number | |
|
Exercise | |
Exercise Prices |
|
Outstanding | |
|
Remaining Life | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.71 $0.78
|
|
|
270,074 |
|
|
|
0.53 |
|
|
$ |
0.74 |
|
|
|
141,354 |
|
|
$ |
0.71 |
|
$7.92 $8.68
|
|
|
543,000 |
|
|
|
9.05 |
|
|
$ |
7.97 |
|
|
|
543,000 |
|
|
$ |
7.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.71 $8.68
|
|
|
813,074 |
|
|
|
6.22 |
|
|
$ |
5.57 |
|
|
|
684,354 |
|
|
$ |
6.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the options exercised in 2005, 523,344 shares were paid
with 44,960 mature shares of Company stock, owned six months or
greater. In 2004, options for 1,183,438 shares were paid
with 157,656 mature shares. In 2003, options for
202,248 shares were paid with 42,332 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 Companys 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
Companys 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
Companys 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 25,303, 22,959 and
27,279 warrants were issued during the years ended
December 31, 2005, 2004, and 2003, respectively. The
warrants are fully vested upon grant. The weighted average fair
values of warrants granted during 2005, 2004, and 2003 were
$4.04, $2.94 and $2.33 per share, respectively.
F-15
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
6. |
Stockholders Equity (continued) |
Distributor Stock Purchase Plan
The Company records expense under the fair value method of
SFAS No. 123 for warrants granted to distributors. The
adoption of SFAS No. 123(R) is not expected to
significantly impact the accounting treatment of warrants
granted under the plan. Total expense recorded for these
warrants was $66,674, $77,367, and $90,068 in 2005, 2004, and
2003, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Expected warrant life (years)
|
|
|
2.5 |
|
|
|
2.5 |
|
|
|
2.5 |
|
Risk-free weighted average interest rate
|
|
|
4.37 |
% |
|
|
3.08 |
% |
|
|
1.84 |
% |
Stock price volatility
|
|
|
0.448 |
|
|
|
0.516 |
|
|
|
0.743 |
|
Dividend yield
|
|
|
0.6 |
% |
|
|
0.8 |
% |
|
|
0.0 |
% |
A summary of the Companys warrant activity and related
information for the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Avg. | |
|
|
|
Avg. | |
|
|
|
Avg. | |
|
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
Warrants | |
|
Price | |
|
Warrants | |
|
Price | |
|
Warrants | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding beginning of the year
|
|
|
76,852 |
|
|
$ |
5.70 |
|
|
|
137,957 |
|
|
$ |
2.51 |
|
|
|
162,679 |
|
|
$ |
1.56 |
|
Granted
|
|
|
25,303 |
|
|
|
13.18 |
|
|
|
22,959 |
|
|
|
8.94 |
|
|
|
27,279 |
|
|
|
5.12 |
|
Exercised
|
|
|
(35,347 |
) |
|
|
3.94 |
|
|
|
(83,675 |
) |
|
|
1.35 |
|
|
|
(52,001 |
) |
|
|
0.92 |
|
Forfeited
|
|
|
(89 |
) |
|
|
3.73 |
|
|
|
(389 |
) |
|
|
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
66,719 |
|
|
$ |
9.47 |
|
|
|
76,852 |
|
|
$ |
5.70 |
|
|
|
137,957 |
|
|
$ |
2.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
66,719 |
|
|
|
|
|
|
|
76,852 |
|
|
|
|
|
|
|
113,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 | |
|
|
| |
|
|
Warrants Outstanding | |
|
Warrants Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Avg. | |
|
|
|
Avg. | |
Range of |
|
Number | |
|
Weighted Avg. | |
|
Exercise | |
|
Number | |
|
Exercise | |
Exercise Prices |
|
Outstanding | |
|
Remaining Life | |
|
Price | |
|
Exercisable | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$5.12
|
|
|
18,829 |
|
|
|
1.00 |
|
|
$ |
5.12 |
|
|
|
18,829 |
|
|
$ |
5.12 |
|
$8.94
|
|
|
22,587 |
|
|
|
2.00 |
|
|
|
8.94 |
|
|
|
22,587 |
|
|
|
8.94 |
|
$13.18
|
|
|
25,303 |
|
|
|
3.00 |
|
|
|
13.18 |
|
|
|
25,303 |
|
|
|
13.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.12 $13.18
|
|
|
66,719 |
|
|
|
2.10 |
|
|
$ |
9.47 |
|
|
|
66,719 |
|
|
$ |
9.47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of Preferred Stock
On March 31, 2003, the Company sold an aggregate of
150,000 shares of preferred stock to three executive
officers/directors. The Series A Preferred
Stock (Preferred Stock), was designated by the
Companys Board of Directors out of the 3,000,000
previously authorized shares of $0.001 par value
F-16
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
6. |
Stockholders Equity (continued) |
Sale of Preferred Stock (continued)
preferred stock. Each of the preferred stockholders purchased
50,000 shares of Preferred Stock for $500,000
($10.00 per share).
The preferred stockholders were entitled to receive dividends at
an annual rate of 6% of the shares purchase price. These
dividends accrued on a daily basis and were payable quarterly
when declared by the Companys Board of Directors. All
dividends on shares of Preferred Stock were cumulative.
In August 2003, the Company redeemed 17,500 shares from
each executive officer/director for a total redemption of
52,500 shares at a value of $525,000. In February 2004, the
Company redeemed an additional 15,000 shares from each
executive officer/director for a total redemption of
45,000 shares at a value of $450,000. In April 2004,
the Company redeemed the remaining 17,500 shares from each
officer/director for a total redemption of 52,500 shares at
a value of $525,000.
The following table sets forth the computation of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings per share
net income available to common shareholders
|
|
$ |
7,521,416 |
|
|
$ |
5,374,397 |
|
|
$ |
4,340,678 |
|
|
Effect of convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
12,292 |
|
|
|
56,762 |
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share
|
|
$ |
7,521,416 |
|
|
$ |
5,386,689 |
|
|
$ |
4,397,440 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share weighted
average shares
|
|
|
15,885,000 |
|
|
|
15,662,000 |
|
|
|
14,969,000 |
|
|
Effect of convertible preferred stock and dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
52,000 |
|
|
|
237,000 |
|
|
|
Employee stock options and warrants
|
|
|
503,000 |
|
|
|
1,423,000 |
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share adjusted
weighted average shares
|
|
|
16,388,000 |
|
|
|
17,137,000 |
|
|
|
16,706,000 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$ |
0.46 |
|
|
$ |
0.31 |
|
|
$ |
0.26 |
|
|
|
|
|
|
|
|
|
|
|
The Company leases certain manufacturing, storage, office
facilities, equipment, and automobiles. These leases have
varying terms, and certain leases have renewal and/or purchase
options. Future minimum
F-17
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
8. Leases (continued)
payments under non-cancelable leases with initial or remaining
terms in excess of one year consist of the following at
December 31, 2005:
|
|
|
|
|
2006
|
|
$ |
65,785 |
|
2007
|
|
|
64,679 |
|
2008
|
|
|
28,388 |
|
2009
|
|
|
19,416 |
|
2010
|
|
|
8,090 |
|
|
|
|
|
|
|
$ |
186,358 |
|
|
|
|
|
Rent expense for all operating leases was $57,632, $75,529, and
$161,792 for the years ended December 31, 2005, 2004, and
2003, respectively.
|
|
9. |
Fair Value of Financial Instruments |
The carrying values and fair values of the Companys
financial instruments are approximately as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Carrying | |
|
Fair | |
|
Carrying | |
|
Fair | |
|
|
Amount | |
|
Value | |
|
Amount | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
Cash and cash equivalents
|
|
$ |
5,654,000 |
|
|
$ |
5,654,000 |
|
|
$ |
10,152,000 |
|
|
$ |
10,152,000 |
|
Long-term debt, including current maturities
|
|
|
3,127,000 |
|
|
|
3,077,000 |
|
|
|
3,684,000 |
|
|
|
3,686,000 |
|
The carrying amount of cash equivalents approximates fair value
because of the short maturity of those instruments. The fair
value of long-term debt and capital lease obligations is
estimated based on the current rates offered to the Company for
debt of the same remaining maturities.
|
|
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 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.
The aggregate accrued loss on these contracts was $59,000 and
$101,000 as of December 31, 2005 and 2004, respectively.
The increase (decrease) in the aggregate accrued loss on these
contracts was ($42,000), $55,000, and 46,000 for the years ended
December 31, 2005, 2004, and 2003, respectively.
F-18
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
15,186,474 |
|
|
$ |
9,548,384 |
|
|
$ |
7,731,363 |
|
Foreign
|
|
|
(2,687,058 |
) |
|
|
(540,695 |
) |
|
|
(431,923 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,499,416 |
|
|
$ |
9,007,689 |
|
|
$ |
7,299,440 |
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
4,594,000 |
|
|
$ |
2,963,000 |
|
|
$ |
2,657,000 |
|
|
State
|
|
|
705,000 |
|
|
|
392,000 |
|
|
|
351,000 |
|
|
Foreign
|
|
|
45,000 |
|
|
|
44,000 |
|
|
|
26,000 |
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
5,344,000 |
|
|
|
3,399,000 |
|
|
|
3,034,000 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(327,000 |
) |
|
|
138,000 |
|
|
|
(88,000 |
) |
|
State
|
|
|
(39,000 |
) |
|
|
18,000 |
|
|
|
(12,000 |
) |
|
Foreign
|
|
|
|
|
|
|
66,000 |
|
|
|
(32,000 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(366,000 |
) |
|
|
222,000 |
|
|
|
(132,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,978,000 |
|
|
$ |
3,621,000 |
|
|
$ |
2,902,000 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes is different from the amounts
computed by applying the United States federal statutory income
tax rate of 34%. The reasons for these differences are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Income taxes at U.S. statutory rate
|
|
$ |
4,250,000 |
|
|
$ |
3,063,000 |
|
|
$ |
2,482,000 |
|
State income taxes, net of federal benefit
|
|
|
666,000 |
|
|
|
410,000 |
|
|
|
339,000 |
|
Effect of foreign losses without an income tax benefit
|
|
|
50,000 |
|
|
|
126,000 |
|
|
|
58,000 |
|
Foreign corporate income taxes
|
|
|
45,000 |
|
|
|
45,000 |
|
|
|
|
|
Executive life insurance expense
|
|
|
33,000 |
|
|
|
8,000 |
|
|
|
(8,000 |
) |
Meals and entertainment
|
|
|
41,000 |
|
|
|
40,000 |
|
|
|
37,000 |
|
Extraterritorial income exclusion
|
|
|
(33,000 |
) |
|
|
(68,000 |
) |
|
|
|
|
Qualified production activities income American Jobs
Creation Act
|
|
|
(73,000 |
) |
|
|
|
|
|
|
|
|
Other
|
|
|
(1,000 |
) |
|
|
(3,000 |
) |
|
|
(6,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,978,000 |
|
|
$ |
3,621,000 |
|
|
$ |
2,902,000 |
|
|
|
|
|
|
|
|
|
|
|
F-19
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
11. |
Income Taxes (continued) |
The Companys 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 Companys 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.
The components of the deferred tax assets and liabilities, and
the related tax effects of each temporary difference at
December 31, 2005 and 2004, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Product refund reserve
|
|
$ |
145,000 |
|
|
$ |
99,000 |
|
|
Inventory obsolescence reserve
|
|
|
60,000 |
|
|
|
2,000 |
|
|
Vacation accrual
|
|
|
21,000 |
|
|
|
20,000 |
|
|
Compensation expense for warrants granted
|
|
|
42,000 |
|
|
|
37,000 |
|
|
Organization costs
|
|
|
70,000 |
|
|
|
54,000 |
|
|
Deferred compensation
|
|
|
406,000 |
|
|
|
352,000 |
|
|
Miscellaneous accrued expenses
|
|
|
39,430 |
|
|
|
25,430 |
|
|
Foreign net operating loss carryforwards
|
|
|
1,813,000 |
|
|
|
1,328,000 |
|
|
Valuation allowance
|
|
|
(1,764,000 |
) |
|
|
(1,125,000 |
) |
|
|
|
|
|
|
|
|
|
|
832,430 |
|
|
|
792,430 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
469,000 |
|
|
|
641,000 |
|
|
Inventories
|
|
|
|
|
|
|
154,000 |
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$ |
363,430 |
|
|
$ |
(2,570 |
) |
|
|
|
|
|
|
|
The Company has a deferred tax asset of $1,813,000, as of
December 31, 2005, and $1,328,000 as of December 31,
2004, 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 some portion of this asset will not
be realized before it expires beginning in 2006.
On October 22, 2004, the American Jobs Creation Act of 2004
(the Act) was signed into law. In December 2004, the
FASB issued Staff Position No. 109-1, Application of
FASB Statement No. 109, Accounting for Income Taxes, to the
Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004, (FSP
No. 109-1).
FSP No. 109-1 provides accounting guidance for companies
that will be eligible for a tax deduction resulting from
qualified production activities income as defined in
the Act. For 2005, the application of FSP
No. 109-1 provided
a tax benefit of approximately $73,000 and reduced the
companys effective tax rate approximately 0.6%.
Another provision of the Act provides for a special one-time tax
deduction of 85% of certain repatriated foreign earnings. In
December 2004, the FASB issued Staff Position No. 109-2,
Accounting and Disclosure Guidance for the Foreign
Earnings Repatriation Provision within the American Jobs
Creation Act of 2004, (FSP No. 109-2).
The Company did not take advantage of this special provision.
Through
F-20
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
11. |
Income Taxes (continued) |
December 31, 2005, 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 $238,000 at December 31, 2005.
The Company has a license agreement with the individual who
developed several of the Companys products. This agreement
provides the Company with the exclusive worldwide license to
manufacture and sell all products created by the licensor and
requires monthly royalty payments of 5% of net sales, with a
minimum payment of $10,000 and a maximum payment of $22,000. The
royalty payments terminated upon the death of the licensor,
which occurred in February 2003. However, under the terms of the
license agreement, the Company has the right to continue to use
the name and likeness of the licensor in connection with
marketing the related products for an annual fee of $10,000 for
the duration of the agreement. As a result, the amounts of the
expense in the years ended December 31, 2005, 2004, and
2003, were $10,000, $10,000, and $54,000, respectively. The
license agreement expired in April 2005.
|
|
13. |
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 75%
of the employees contribution. Company contributions under
the 401(k) plan totaled $384,000, $337,000, and $288,000 in
2005, 2004, and 2003, respectively.
|
|
14. |
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.
The Company expensed a total of $2,141,500, $1,580,000, and
$1,309,500 to the participants of the bonus pool for 2005, 2004,
and 2003, respectively.
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 participants annual contribution. In 2005,
2004, and 2003, 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.
F-21
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
15. |
Related Party Transactions |
An officer/director of the Company is a principal in a law firm
which provides legal services to the Company. During the years
ended December 31, 2005, 2004, and 2003, the Company
incurred consulting fees to the officer/director and legal fees
to his firm totaling approximately $429,000, $410,000, and
$372,000, respectively.
In January 2004, the Company purchased a total of
116,564 shares of the Companys common stock from
three officer/directors and one director. The total cost of the
purchases was $607,178, for a weighted average purchase price of
$5.21 per share. In April 2004, the Company purchased a
total of 75,000 shares of the Companys common stock
from two officer/directors. The total cost of the purchases was
$686,802, for a weighted average purchase price of
$9.16 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 Companys common stock ($9.00 per share) owned by
the Seller. Subsequently, in 2005, the Company made principal
payments on the Notes totaling $950,000 resulting in a
December 31, 2005 outstanding balance due on the Notes of
$3,100,000. Additional principal payments of $900,000 are each
due on March 31, 2006 and 2007, respectively, with a final
principal payment of $1,300,000 due on January 15, 2008.
Interest, at 4% per annum, accrues on the outstanding
balance of the Notes and is payable quarterly.
In March 2005 and May 2005, the Company purchased a total of
574,201 shares of the Companys 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.
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.
The Company proposes to issue 1,200,000 shares of its
common stock and the remaining 800,000 shares are proposed
to be offered by selling stockholders. In connection with the
offering, some of the selling stockholders expect to grant the
underwriters a 30-day
option to purchase up to 300,000 additional shares of Company
stock to cover over-allotments, if any.
The Company intends to use the net proceeds from the offering
for the repayment of debt and for general corporate purposes,
including working capital, continued domestic and international
growth, and for possible product acquisitions. The Company will
not receive any proceeds from the sale of common stock by the
selling stockholders.
F-22
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
|
Description of Products and Services by Segment |
The Company operates in one reportable segment, a network
marketing segment consisting of seven 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, 2005,
2004, and 2003, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales to external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
102,549,244 |
|
|
$ |
83,873,430 |
|
|
$ |
65,832,045 |
|
|
Australia/ New Zealand
|
|
|
2,215,465 |
|
|
|
2,542,695 |
|
|
|
2,059,928 |
|
|
Canada
|
|
|
1,667,555 |
|
|
|
1,750,704 |
|
|
|
1,255,836 |
|
|
Mexico
|
|
|
1,607,473 |
|
|
|
2,634,394 |
|
|
|
3,338,071 |
|
|
United Kingdom
|
|
|
846,273 |
|
|
|
545,534 |
|
|
|
475,319 |
|
|
Malaysia/ Singapore
|
|
|
2,031,045 |
|
|
|
2,770,664 |
|
|
|
579,988 |
|
|
Philippines
|
|
|
2,328,178 |
|
|
|
2,865,012 |
|
|
|
3,418,536 |
|
|
Germany
|
|
|
319,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
113,565,164 |
|
|
$ |
96,982,433 |
|
|
$ |
76,959,723 |
|
|
|
|
|
|
|
|
|
|
|
Assets by area
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
20,920,384 |
|
|
$ |
25,315,646 |
|
|
$ |
18,738,771 |
|
|
Australia/ New Zealand
|
|
|
670,787 |
|
|
|
754,089 |
|
|
|
865,823 |
|
|
Canada
|
|
|
176,760 |
|
|
|
221,160 |
|
|
|
252,443 |
|
|
Mexico
|
|
|
1,323,482 |
|
|
|
1,834,229 |
|
|
|
2,300,299 |
|
|
United Kingdom
|
|
|
195,399 |
|
|
|
273,408 |
|
|
|
247,740 |
|
|
Malaysia/ Singapore
|
|
|
1,414,909 |
|
|
|
1,716,929 |
|
|
|
1,353,677 |
|
|
Philippines
|
|
|
764,471 |
|
|
|
881,206 |
|
|
|
922,163 |
|
|
Germany
|
|
|
515,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated assets
|
|
$ |
25,981,423 |
|
|
$ |
30,996,667 |
|
|
$ |
24,680,916 |
|
|
|
|
|
|
|
|
|
|
|
The Company classifies its sales into three categories of
products. Net sales by product category data for the years ended
December 31, 2005, 2004, and 2003, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net sales by product category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nutritional supplements
|
|
$ |
99,254,075 |
|
|
$ |
83,982,424 |
|
|
$ |
66,597,426 |
|
|
Skin care products
|
|
|
1,131,012 |
|
|
|
1,229,187 |
|
|
|
1,056,133 |
|
|
Sales aids and other
|
|
|
13,180,077 |
|
|
|
11,770,822 |
|
|
|
9,306,164 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$ |
113,565,164 |
|
|
$ |
96,982,433 |
|
|
$ |
76,959,723 |
|
|
|
|
|
|
|
|
|
|
|
F-23
Reliv International, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
|
|
18. |
Quarterly Financial Data (Unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in thousands, except per share amounts) | |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
28,979 |
|
|
$ |
28,546 |
|
|
$ |
28,555 |
|
|
$ |
27,485 |
|
Gross profit
|
|
|
24,036 |
|
|
|
23,835 |
|
|
|
23,681 |
|
|
|
22,749 |
|
Net income
|
|
|
2,063 |
|
|
|
1,979 |
|
|
|
1,668 |
|
|
|
1,811 |
|
Preferred dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
|
2,063 |
|
|
|
1,979 |
|
|
|
1,668 |
|
|
|
1,811 |
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.13 |
|
|
|
0.12 |
|
|
|
0.11 |
|
|
|
0.11 |
|
|
Diluted
|
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.11 |
|
|
$ |
0.11 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
23,478 |
|
|
$ |
23,891 |
|
|
$ |
24,172 |
|
|
$ |
25,441 |
|
Gross profit
|
|
|
19,624 |
|
|
|
19,891 |
|
|
|
20,032 |
|
|
|
20,772 |
|
Net income
|
|
|
1,642 |
|
|
|
1,201 |
|
|
|
1,264 |
|
|
|
1,280 |
|
Preferred dividends
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
|
1,629 |
|
|
|
1,201 |
|
|
|
1,264 |
|
|
|
1,280 |
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.11 |
|
|
|
0.08 |
|
|
|
0.08 |
|
|
|
0.07 |
|
|
Diluted
|
|
$ |
0.10 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
F-24
Financial Statement Schedule
Reliv International, Inc. and Subsidiaries
Valuation and Qualifying Accounts
For the years ended December 31, 2005, 2004, and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A |
|
Column B | |
|
Column C | |
|
Column E | |
|
Column F | |
|
|
| |
|
| |
|
| |
|
| |
|
|
Balance at | |
|
|
|
|
|
Balance at | |
|
|
Beginning of | |
|
Charged to Costs | |
|
Deductions | |
|
End of | |
Classification |
|
Year | |
|
and Expenses | |
|
Describe | |
|
Year | |
|
|
| |
|
| |
|
| |
|
| |
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
8,600 |
|
|
$ |
55,300 |
|
|
$ |
52,400 |
(1) |
|
$ |
11,500 |
|
|
|
Reserve for obsolete inventory
|
|
|
46,800 |
|
|
|
(7,200 |
) |
|
|
27,600 |
(2) |
|
|
12,000 |
|
|
Liability accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for refunds
|
|
|
150,000 |
|
|
|
879,000 |
(3) |
|
|
772,000 |
(3) |
|
|
257,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from asset accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
10,000 |
|
|
$ |
22,000 |
|
|
$ |
23,400 |
(1) |
|
$ |
8,600 |
|
|
|
Reserve for obsolete inventory
|
|
|
57,900 |
|
|
|
18,200 |
|
|
|
29,300 |
(2) |
|
|
46,800 |
|
|
Liability accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserve for refunds
|
|
|
88,000 |
|
|
|
626,000 |
(3) |
|
|
564,000 |
(3) |
|
|
150,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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-25
2,000,000 shares
Reliv International, Inc.
Common Stock
PROSPECTUS
Canaccord Adams
Avondale Partners
The Seidler Companies Incorporated
April 5, 2006
No action is being taken in any jurisdiction outside the United
States to permit a public offering of the common stock of
possession or distribution of this prospectus in that
jurisdiction. Persons who come into possession of this
prospectus in jurisdictions outside the United States are
required to inform themselves about and to observe any
restrictions as to this offering and the distribution of this
prospectus applicable to that jurisdiction.