-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J+U10o5akyKCawHCt4wOtNf6OYa9g8nh6b1rFyxH6QzOf34hLt9pVzwuUdmYiXOb CJmRJ/UMDaYZNqJU0VppgQ== 0000768710-98-000001.txt : 19980330 0000768710-98-000001.hdr.sgml : 19980330 ACCESSION NUMBER: 0000768710-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RELIV INTERNATIONAL INC CENTRAL INDEX KEY: 0000768710 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 371172197 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19932 FILM NUMBER: 98575818 BUSINESS ADDRESS: STREET 1: 136 CHESTERFIELD INDUSTRIAL BLVD STREET 2: P O BOX 405 CITY: CHESTERFIELD STATE: MO ZIP: 63006-0405 BUSINESS PHONE: 3145379715 MAIL ADDRESS: STREET 1: 136 CHESTERFIELD INDUSTRIAL BLVD STREET 2: P O BOX 405 CITY: CHESTERFIELD STATE: MO ZIP: 63006-0405 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN LIFE INVESTORS INC DATE OF NAME CHANGE: 19920315 10-K 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 Commission File Number 1-11768 RELIV' INTERNATIONAL, INC. (Exact name of Registrant as specified in its charter) Illinois 371172197 -------- --------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 136 Chesterfield Industrial Boulevard Chesterfield, Missouri 63006 -------------------------------------- ----- (Address of principal executive offices) (Zip Code) (314) 537-9715 -------------- Registrant's telephone number, including area code Securities registered pursuant to Sections 12(b) and 12(g) of the Act: Name of each exchange Title of Class on which registered: -------------- -------------------- Common Stock, without par value NASDAQ National Market tier of The NASDAQ Stock Market Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ___X___ Yes _______ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated in Part III of the Form 10-K or any amendment to the Form 10-K. [ ] Based upon the closing price of $4.25 per share of Registrant's Common Stock as reported on NASDAQ National Market tier of The NASDAQ Stock Market at February 25, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was then approximately $25,248,000. (Determination of stock ownership by non-affiliates was made solely for the purpose of responding to the requirements of the Form and the Registrant is not bound by this determination for any other purpose.) The number of shares outstanding of the Registrant's Common Stock as of February 25, 1998, was 9,617,307 (excluding treasury shares). DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders to be filed with the Commission within 120 days of the end of Registrant's last fiscal year is incorporated by reference into Part III. PART I Item No. 1 - Business - --------------------- General - ------- Reliv' International, Inc. (the "Company") was incorporated in Illinois on February 11, 1985, under the name American Life Investors, Inc. The name of the Company was changed to its current name on January 20, 1992. The Company maintains its principal executive offices at 136 Chesterfield Industrial Boulevard, Chesterfield, Missouri 63006. The Company produces a line of food products including nutritional supplements, diet management products, functional foods, a line of granola bars and a sports drink mix. Functional foods are products designed to influence specific functions of the body. The Company also distributes a line of premium skin care products. These products are sold by subsidiaries of the Company to a sales force of independent distributors who sell products directly to consumers. The Company and its subsidiaries sell products to distributors throughout the United States and in Australia, Canada, New Zealand, Mexico and the United Kingdom. The Company has two wholly-owned subsidiaries, Reliv', Inc. ("Reliv'") and Reliv' World Corporation ("Reliv' World"). Reliv' World has five subsidiaries - Reliv' Australia, Reliv' Canada, Reliv' New Zealand, Reliv' Mexico and Reliv' Europe. Reliv' was organized as an Illinois corporation on May 24, 1988, as a wholly-owned subsidiary of the Company, and began selling nutritional supplement products in October, 1988, in the United States. In Australia, Canada, New Zealand, Mexico and the United Kingdom, the Company's products are sold through Reliv' World and its subsidiaries in each of such countries. Reliv' World was organized as an Illinois corporation on March 30, 1992, as a wholly-owned subsidiary of Reliv'. Reliv' World was organized to conduct the foreign sales operations of the Company and to own foreign sales operations and subsidiaries. On July 1, 1992, Reliv' declared a dividend of all of the stock of Reliv' World and distributed all of such stock to its sole shareholder, the Company. In February, 1991, Reliv' entered into a joint venture agreement with an Australian corporation and the joint venture began to market, sell and distribute Reliv' products in Australia in May, 1991. Reliv' Australia Pty, Ltd. ("Reliv' Australia"), a wholly-owned subsidiary of Reliv' World, entered into an agreement to purchase the joint venture interest of the Australian corporation. Reliv' Australia also entered into an agreement with the three shareholders of the Australian corporation under which a partnership of such persons, as a distributor of Reliv' Australia, is to receive, for a period of 10 years from March 1, 1992, 2 percent of sales in Australia and New Zealand (defined as the designated retail selling price of all products, on which commissions are payable to distributors), up to approximately $10 million (AUS) in 1992, and $12 million (AUS) in all subsequent years during the term, and 3 percent of sales 2 that exceed those figures. Since March 1, 1992, the business of the Company in Australia and sales of the Company's products there has been conducted by Reliv' Australia. During April, 1992, Reliv' New Zealand Limited ("Reliv' New Zealand") was organized as a New Zealand company and as a wholly-owned subsidiary of Reliv' World (except for nominal shares held by an officer). In June, 1992, Reliv' New Zealand began selling the Company's products through independent distributors in New Zealand. On June 9, 1992, Reliv' Canada, Ltd. ("Reliv' Canada") was organized as an Ontario, Canada corporation and as a wholly-owned subsidiary of Reliv' World. Reliv' Canada commenced operations during October, 1992, and began selling the Company's products to distributors in Canada in November, 1992. On December 31, 1995, Reliv' Canada was converted to a Nova Scotia, Canada unlimited liability company, wholly-owned by Reliv' World (except for one percent owned by the Company), under the name Reliv' Canada Company. On June 28, 1993, Reliv' Mexico S.A. de C.V. ("Reliv' Mexico") was organized as a Mexican corporation and as a wholly-owned subsidiary of Reliv' World (except for one share owned by the Company). Reliv' Mexico commenced operations in June, 1993, and began selling the Company's products to distributors in Mexico in August, 1993. On December 20, 1994, Reliv' Mexico was converted to a Mexican limited liability company under the name Reliv' Mexico, S. de R.L. de C.V. On July 1, 1995, Reliv' UK began the marketing and sale of the Company's products in the United Kingdom in accordance with the Reliv' system under a license and distributor arrangement with the Company. Pursuant to the terms of the arrangement, Reliv' UK purchased all of its requirements for products from the Company and paid Reliv' World a royalty on products sold. On February 1, 1998, Reliv' Europe, Inc., an Illinois corporation and wholly-owned subsidiary of Reliv' World, assumed ownership and control of the United Kingdom operation, and is currently negotiating a formal purchase of all of Reliv' U.K.'s capital stock. Principal Products - ------------------ Through its subsidiaries, the Company markets and sells a line of related products including nutritional supplements, weight control products, functional foods, granola bars, sports drink mixes and a premium skin care line. The nutritional supplements include Reliv' NOW(R) and Reliv' Classic(R). Both products are designed to provide a balanced nutritional supplement for an individual's diet and contain a variety of vitamins and minerals, soy and other protein sources and various herbs. The products are in powdered form to be mixed with juice or other beverages. The Reliv' Classic formula has a U.S. patent and the Reliv' NOW formula is a no-yeast derivative of the Reliv' Classic formula. Reliv' NOW is available with all natural flavoring or in the original formula. 3 Reliv' Ultrim-Plus(R) is designed as a meal replacement (for a maximum of two meals per day) in a weight loss program. The product incorporates the core formulation of Reliv' NOW, including vitamins, minerals, proteins and herbs, as well as additional protein and nutrient sources. Reliv' Ultrim-Plus is available in three flavors - vanilla, chocolate and strawberry. It is also available in aspartame-free vanilla. The product is in powdered form for mixture with water or milk. Reliv' Cellebrate(R) is a patented weight loss aid designed to suppress appetite, curb the storage of body fat, and facilitate the body's fat burning process. Reliv' Cellebrate is in powdered form and is recommended to be used alone or with Reliv' Ultrim Plus meal replacement. Reliv' Celleboost(R) is also a weight loss aid designed to suppress appetite and reduce body fat. Reliv' Celleboost is in capsule form and is recommended to supplement Reliv' Cellebrate, Reliv' Ultrim-Plus or to be used alone. Reliv' Celleboost was introduced in January, 1996. Reliv' Ultra Bar(R) is a line of granola bars containing a mixture of grains and nuts which use the core formulation of Reliv' NOW vitamins, minerals, proteins and herbs. Flavors include yogurt, chocolate and raspberry carob. The bars are a snack food and nutritional supplement and are used with Reliv' Ultrim-Plus as a meal replacement in a weight loss program. Reliv' Innergize!(R) is a patented powdered sports drink containing a mixture of vitamins and minerals. Reliv' Innergize is available in lemon, orange and cool punch flavors. Reliv' Fibrestore(R) is a patented nutritional supplement containing fiber, vitamins, minerals and herbs. The product is in powdered form for mixture with water or juice. A modified version of the Reliv' Fibrestore formula is marketed in Canada under the name Herbal Harmony in compliance with that country's nutritional regulations. Reliv' Arthaffect(R) is a nutritional supplement and functional food containing Arthred(TM), a patented form of hydrolyzed collagen protein, which is clinically reported to nutritionally support healthy joint function. The product is in powdered form for mixture with water, milk or juice. Reliv' Arthaffect was introduced in October, 1996. Reliv' Getabetterbody(TM) Weight Loss System is a weight loss system kit containing Reliv' Ultrim Plus, Reliv' Cellebrate and Reliv' Celleboost together with product information and other tools to be used in a weight loss program. Reliv' ProVantage(TM) is a nutritional supplement containing soy, designed to enhance athletic performance. The product is also of benefit to dieters and others wanting to increase their soy intake. The product is in powdered form for mixture with water or juice. Reliv' ProVantage was introduced in October, 1997. In May, 1997, the Company introduced Reliv' Healthy Pantry(TM) premium entrees, a line of soy-based functional foods. The meals are designed to offer the advantages of soy in low fat, easy to prepare meals. The line includes Pasta Prima Vera, Hearty Chili, Hearty Burger and Ala King dinner. The meals are in dried form and can be prepared quickly with a minimum of additional ingredients. 4 The Company also markets a line of skin care products which is based on compounds found only in the avocado. The products are designed to be used individually or in combination with each other. The product line includes: (i) Reliv' Face and Body Bar, a mild face and body soap; (ii) Reliv' Pathway(R), a skin cleanser and primer which contains a variety of avocado based ingredients; (iii) Reliv' Reavo(R), a skin care cream designed to reduce the appearance of aging in the skin caused by natural and environmental causes; and (iv) Reliv' R.P. 1.5(R), a skin care cream having the active ingredient retinyl palmitate is designed to reduce the appearance of aging caused by environmental causes such as exposure to the sun. The Company's skin care line also includes toners, moisturizers, sunless tanning lotions and related items. The Company conducts ongoing research and development on its product line and intends to introduce additional product items. See "Research and Development." Patents and Trademarks - ---------------------- The Company has obtained U.S. patents on the formulations of Reliv' Innergize!, Reliv' Fibrestore and Reliv' Cellebrate. The Reliv' Classic formula has a U.S. Patent. Reliv' NOW is a trade secret formulation which is a derivative of the Reliv' Classic formulation. The core mixture of Reliv' NOW is incorporated in Reliv' Ultrim-Plus and the Reliv' Ultra Bars. These products are manufactured and sold by the Company under an Exclusive License Agreement dated December 1, 1991 ("License Agreement"). The License Agreement is worldwide in scope and continues through the life of the patent. Pursuant to the License Agreement, the Company is obligated to pay the owner of the patent and the developer of the formulations, Dr. Theodore P. Kalogris, a royalty of 5 percent of the revenues from the sale of products containing the licensed formulas, with a minimum $10,000 and maximum $22,000 monthly royalty. The Company's obligation to pay the royalty payments will terminate on the later of (i) 10 years from the date of the License Agreement or (ii) the death of Dr. Kalogris, and the License Agreement will be deemed to be paid in full at that time. The principal ingredient of Reliv' Arthaffect is the subject of an issued U.S. patent. Under an agreement dated November 6, 1996, Traco Labs, Inc. ("Traco"), exclusive licensee of the patent rights, sublicensed the rights to sell the product to the Company ("Traco Agreement"). The license is exclusive for direct sales in certain sales areas and is for a term ending upon the later of (i) the termination of Traco's rights to market the product or (ii) December 31, 2014. The Traco Agreement provides that the Company will purchase its requirements of the product from Traco, and the exclusivity of the license is contingent on minimum purchases of the product being made by the Company. 5 The principal ingredient of Reliv' Reavo is the subject of an issued U.S. patent. On July 1, 1995, Avogen, Inc. ("Avogen") granted to the Company a license under such patent and other proprietary rights relating to the skin care line of products, to purchase such products from or through Avogen and to sell and distribute the products (the "Avogen Agreement"). On April 25, 1997, the Avogen Agreement was amended. The Avogen Agreement is worldwide in scope and continues through the later of the last to expire of the patents subject to the Avogen Agreement or December 31, 2014. Pursuant to the Avogen Agreement, as amended, the Company was granted an exclusive license to market its current line of skin care products subject to the Agreement, and is obligated to pay Avogen royalties which vary depending on the product sold. Trademark registrations for "Reliv'" and for the many of the Company's product names are either issued or pending in the U.S. Patent and Trademark Office. Trademark registrations for selected marks have been issued or applied for in Australia, New Zealand, Canada, Mexico, the United Kingdom and several other foreign countries. The Company considers its trademarks and tradenames to be an important asset of its business. Sales and Marketing - ------------------- The Company sells its products to a network of independent contractors, designated as "distributors", who in turn sell the products directly to consumers. The Company's products are marketed and sold to distributors in the United States, Australia, Canada, New Zealand, Mexico and the United Kingdom through a subsidiary in each country. The marketing efforts of the Company and these subsidiaries are focused on the development, training and support of this network of independent distributors. The Company, through these subsidiaries, supports an active training program for distributors in which Company representatives and experienced distributors lead group training sessions. The Company and these subsidiaries also create and provide distributors with manuals, brochures and other promotional, training and informational publications. Periodically, each subsidiary sponsors distributor meetings at which Company representatives provide training and information concerning the Company's products. Company subsidiaries also sponsor group telephone conference calls for training and promotional activities. Distributors consist principally of individuals, although a limited number of distributors are corporations or partnerships. New distributors are sponsored by existing distributors. A new distributor is required to complete a distributor application and, in most areas, to purchase a package of distributor materials (for $39.95 in the United States) consisting of a distributor manual, business forms and promotional materials. Distributors purchase products from Company subsidiaries or from other distributors for resale or consumption by the distributor or his or her family. In each country in which the Company conducts business, distributors operate under a uniform distributor system which compensates distributors at varying levels based on sales volumes. Initially, a distributor is designated a Retail Distributor and is entitled to purchase products from a Company subsidiary or other distributors at a discount of 25 percent from the Company's suggested retail price. A distributor is promoted to higher levels in the system by increasing his or her sales of the Company's products, directly or through other distributors sponsored in the distributor's sales group, and by achieving designated sales volumes. These higher ranks of distributor are designated in order as Affiliate, Key Affiliate, Senior Affiliate and Master Affiliate. At each higher level, a distributor is entitled to purchase products at an increasingly higher discount; a Master Affiliate receives a 45 percent discount. 6 Distributors receive retail profits equal to the difference between the price at which they sell the product to customers and the discounted price they paid for the product. Distributors also earn wholesale commissions on products purchased by other distributors in the distributor's sponsored group equal to the difference between the price at which the distributor is entitled to purchase product at and the price at which downline distributors purchase product. The Company pays a Master Affiliate a commission with respect to products purchased directly from the Company by Retail Distributors, Affiliates, Key Affiliates or Senior Affiliates directly sponsored by them or who are in their personally sponsored group (i.e., individuals sponsored by the Master Affiliate's distributors, directly or indirectly). The commission is equal to the difference between the prices at which such distributors were entitled to purchase products and the 45 percent discounted price available to Master Affiliates. Senior Affiliates, Key Affiliates and Affiliates are entitled to receive from their Master Affiliate a portion of the commission paid to the Master Affiliate, based upon the purchases of products from Company subsidiaries by distributors sponsored by them or by distributors in their personal group. Master Affiliates are also entitled to receive additional compensation payments of two percent to five percent of the retail sales volume of product purchased from Company subsidiaries by Master Affiliates (and their personal groups) whom they have sponsored, and for up to five levels of sponsorship. To qualify for these additional compensation payments, Master Affiliates are required to maintain certain monthly sales volumes and document specified levels of retail sales. Master Affiliates who sponsor other distributors to the level of Master Affiliate are entitled to become part of the Director Program, and attain higher positions in the program based on the size of their additional compensation payments. The levels of Director, in order, are Director, Key Director, Senior Director, Master Director and Presidential Director. Distributors reaching these levels receive pins and/or rings recognizing their achievement and recognition in Company publications and at Company sponsored activities. In mid-1996, the Company introduced the Star Director Program, which allows Directors to receive increased additional compensation payments based on the number of Master Affiliates they have sponsored since the program commenced. Directors are entitled to receive an additional one percent to three percent of additional compensation on the retail sales volume of Master Affiliates in their sponsorship. The Company also sponsors an Ambassador Program. To qualify as an Ambassador a distributor must hold the level of Master Director and must assist personally sponsored Master Affiliates in meeting specified levels of additional compensation payments. The levels of Ambassador are, in order, Ambassador, Bronze Ambassador, Silver Ambassador, Gold Ambassador and Platinum Ambassador. 7 As higher levels are reached, Ambassadors are entitled to increased percentages of the retail sales volume of Master Affiliates below them through five levels of sponsorship, and at the two highest levels, a percentage of the sixth level of sponsorship below their personally sponsored Master Affiliates. Ambassadors are also entitled, depending on the level, to additional benefits, such as participation in Company sponsored events, paid hotel rooms at conventions, health insurance and car allowances. Once a month, a group of high level Ambassadors meet with Company executives in the "Reliv Inner Circle" to exchange ideas on new programs, products and marketing opportunities. The Company's Direct Selectsm program is available in the United States whereby distributors and their retail customers may order product in less than case lots directly from the Company by phone. An automatic monthly reorder program is also available. Product is shipped directly to the customer and distributors earn a commission on Direct Select sales made to their customers. Company subsidiaries also provide a variety of additional incentives or bonuses to the most productive distributors. As of December 31, 1997, 37,826 persons or entities were registered as distributors of Company subsidiaries of which 4,374 were Master Affiliates. This is an increase from March, 1997 totals of 36,465 distributors of which 3,325 were Master Affiliates. The number of registered distributors and Master Affiliates in each country in which Company subsidiaries operate is as follows: Master Distributors Affiliates ------------ ---------- United States 29,616 3,631 Australia 3,118 221 New Zealand 1,083 83 Canada 2,130 244 Mexico 867 158 United Kingdom 1,012 37 Not all persons registered as distributors of Company subsidiaries are active. Reliv' requires that persons wishing to continue as distributors renew their distributorship annually by the payment of a fee ($20 in the United States); the number of distributors shown in the preceding table reflects persons who have become distributors within the past 12 months and those who renewed their distributorship during 1997. 8 The Company recognizes that its sales growth is based upon the continued development of its independent distributor force and strives to maintain an active and motivated distributor network through a combination of quality products, discounts, commissions and bonus payments, sales conventions and training, personal recognition and a variety of publications and promotional materials. The Company recognizes that businesses in the network marketing industry risk the possibility that a portion of sales made to distributors may not be consumed or sold to consumers and instead, may remain as inventory in the distributors' possession. The Company's distributor organization and compensation system is designed and intended to promote the sale of the Company's products to consumers by distributors. Sales training and promotional efforts emphasize that intention. To that end, and to comply with applicable governmental regulations of multilevel selling organizations, the Company and each subsidiary have established specific programs and requirements for distributors including (i) monitoring by the Company of purchases by distributors to identify potentially excessive individual purchases, (ii) requiring that distributors certify to a specified amount of retail sales to receive commissions, and (iii) requiring that distributors certify the sale of at least 70 percent of previous purchases prior to the purchase of additional amounts of product. The Direct Select program, as described above, further promotes sales of the Company's products to consumers. Distributors are not required at any time to purchase product, although Master Affiliates are required to maintain certain minimum sales levels in their personal groups to continue receiving royalty compensation payments. Each subsidiary maintains a policy that unused product may be returned by customers to the selling distributor or the subsidiary or licensee for a full refund within 30 days after purchase. Each subsidiary also maintains a policy that any distributor who terminates his distributorship may return resalable product for a refund of 90 percent of the purchase price less any discounts or commissions received relating to the purchase of the products. The Company has established a suggested retail price for each of the Company's products in each country in which the Company conducts business, but distributors are free to determine the price at which they will sell the Company's products. Distributors are not assigned territories and there are no restrictions on marketing areas for distributors. In the United States, the Company's products are warehoused and shipped by common carrier to distributors. A facility in Chesterfield, Missouri serves the east and central parts of the country and the Company utilizes a public warehouse facility in Las Vegas, Nevada to supply the West Coast. See "Item No. 2 - Properties". Products are also warehoused in, and shipped to local distributors from: Sydney, Australia; Auckland, New Zealand; Toronto, Canada; Mexico City, Mexico; and London, England. Each subsidiary of the Company maintains an office and personnel to receive, record and fill orders from distributors. Distributors order product from Company subsidiaries in case lots and pay for the goods prior to shipment. In general, state or local governmental sales taxes are collected by Company subsidiaries for taxing authorities. 9 Manufacturing and Product Sources - --------------------------------- The Company established a manufacturing line at its facility in Chesterfield, Missouri and had begun manufacture of its nutritional products in early 1993. Shortly after manufacturing commenced, the facility was flooded in July 1993, as a result of a break in a levee on the Missouri River. The Company initiated the return of manufacturing to its Chesterfield facility in mid-1995 and currently manufactures all of its products (except granola bars and skin care products) at this facility. The Company expanded its Chesterfield facility in 1997. See "Item No. 2 - Properties". In 1996, the Company received approval from the Australian Therapeutic Goods Authority ("TGA") to manufacture products sold in Australia at its Chesterfield plant. The Company is in the process of reducing its use of contract manufacturers in Australia and intends to manufacture the majority of Australia's requirements of nutritional products at its Chesterfield facility. The certification of the Company's Chesterfield site by the Australian TGA, also satisfied Canadian manufacturing requirements and the Company manufactures substantially all of the nutritional products sold in Canada. The Company has not experienced any difficulty in obtaining supplies of raw materials for its nutritional products and does not believe it will encounter any such difficulty in the future. The Company's granola bars are manufactured by contract manufacturers, predominantly located in the United States, who produce the products in accordance with formulas provided by the Company, subject to quality control requirements and inspections by representatives of the Company. During 1997, the Company's line of skin care products was supplied to it pursuant to the Avogen Agreement and was purchased from Avogen and various contract manufacturers. Arthred(TM), the principal ingredient of Reliv' Arthaffect, is supplied to the Company by Traco. The Company has had no difficulty in obtaining contract manufacturing and there has been no material effect on the timely supply of goods. Research and Development - ------------------------ At its Chesterfield facility, the Company conducts research, product development and formulation, testing and quality control, all relating to food products. Research and development costs were $286,000 in 1997, $289,000 in 1996 and $294,000 in 1995. Employees - --------- As of December 31, 1997, the Company and all subsidiaries had approximately 162 full-time employees compared with 202 such employees at the end of 1996. This resulted from an increase in sales, marketing and distribution personnel to support increased network maketing sales and a decrease in manufacturing and warehouse employees as a result of a decrease in the contract manufacturing business segment. The Company believes that its relationship with its employees is satisfactory. In June of 1996, the Company's manufacturing and warehouse employees certified representation by the local Teamsters Union. The Union and the Company are currently negotiating a collective bargaining agreement. 10 Product Regulation - ------------------ The formulation, labeling and advertising or promotion of the Company's products are subject to regulation by the Federal Food and Drug Administration (FDA) which regulates the Company's products under the Federal Food, Drug and Cosmetic Act (the "FDCA"), the Federal Trade Commission (FTC) and various agencies of the states or countries into which the Company's products are shipped or sold. FDA regulations include requirements and limitations with respect to the labeling of the Company's food products and also with respect to the formulation of those products. The skin care products sold by the Company are also subject to FDA regulations with respect to formulation and marketing of cosmetics. FDA regulations also limit and control the extent to which health or other claims can be made with respect to the efficacy of any food or cosmetic. The FDCA has been amended several times with respect to nutritional supplements, most recently by the Nutrition Labeling and Education Act of 1990 (the "NLEA") and the Dietary Supplement Health and Education Act of 1994 (the "DSHEA") and related regulations. Such legislation governs the marketing and sale of nutritional supplements, including the content and presentation of health related information included on the labels or labeling of nutritional supplements. The Company does not believe these laws or regulations will have a material effect on its products or operations. Nutritional and dietary supplements such as those manufactured and sold by the Company, for which no therapeutic claim is made, are not subject to FDA approval prior to their sale. The Company presently does not anticipate marketing new products which would require FDA approval. However, these products can be removed from the market if shown to be unsafe, and if the FDA determines, based on the labeling of products, that the intended use of the product is for the diagnosis, cure, mitigation treatment or prevention of disease, it can regulate those products as drugs and require pre-market clearance. In addition, if the FDA determines that the claims concerning a product's affect on the "structure or function" of the body do not meet the requirements of DSHEA, such claims could result in such product being subject to regulation as a drug. The Company's advertising of its nutritional supplement products is also subject to regulation by the FTC under the Federal Trade Commission Act, which prohibits unfair or deceptive trade practices, including false or misleading advertising. The FTC in recent years has brought a number of actions challenging claims by companies (other than the Company) for weight loss and "fat burning" dietary supplement products and plans. Governmental regulations in foreign countries where the Company plans to commence or expand sales may prevent or delay entry into the market or prevent or delay the introduction, or require the reformulation, of certain of the Company's products. Such regulations have caused delays in introducing certain of the Company's products in the past and such delays have had negative affects on sales. The Company may be subject to additional laws or regulations administered by the FDA or other federal, state or foreign regulatory authorities, the repeal of laws or regulations which the Company considers favorable, such as the DSHEA, or more stringent interpretations of current laws or regulations, from time to time in the future. The Company is unable to predict the nature of such future laws, regulations, interpretations or applications, nor can it predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. 11 Sales Program Regulation - ------------------------ The Company's distribution and sales program is subject to regulation by the FTC and other federal and state regulation. Various state agencies regulate multi-level distribution activities. The Company is required to register with, and submit information to, certain of such agencies and has complied fully. The Company actively strives to comply with all applicable state and federal laws and regulations affecting its products and its sales and distribution programs. The Attorney Generals of several states have taken an active role in investigating and prosecuting companies whose compensation plans they feel violate local anti-pyramid and/or consumer protection statutes. The Company is unable to predict the effect such increased activity will have on its business in the future nor is the Company able to predict the probability of future laws, regulations or interpretations which may be passed by state or federal regulatory authorities. Under current law, the Company's distributors are treated for federal income tax purposes as independent contractors and compensation paid to them is not subject to withholding by the Company. Several bills have been introduced in Congress which would restrict the definition of independent contractor and possibly jeopardize the exempt status enjoyed by direct sellers. Such a change would negatively impact the Company's recruiting efforts. The direct selling industry is strongly opposing such bills as they relate to direct sellers. The Company is unable to assess the likelihood of these or similar bills being enacted. In several states, legislation has been introduced which would narrow the definition of independent contractor for purposes of income tax withholding as well as unemployment compensation, worker's compensation and other employee benefits. To date, the status of direct sellers as independent contractors has not been affected. States are becoming increasingly active in this area, however, and there is no assurance that future legislation at the state level affecting direct sellers will not be enacted. Competition - ----------- The Company's products are sold in highly competitive markets against companies with substantially greater sales volume and financial resources than the Company and with brands that are, through advertising and other methods, better known to consumers. The Company competes against other direct selling companies and against companies which sell heavily advertised and promoted products through retail stores, including supermarkets, drug stores and health food stores. The Reliv' Ultrim-Plus, Cellebrate and Celleboost products compete with numerous other products in the weight loss market, including nationally advertised products such as SlimFast(tm). Many companies have entered, or have plans to enter, the sports drink market in which Reliv' Innergize! and ProVantage compete, a market long dominated by Gatorade(tm). Reliv' NOW, Reliv' Classic and Reliv' Fibrestore compete with numerous mineral and vitamin supplement products. The Company's skin care line competes with products sold by numerous, well-established cosmetic companies, including several direct selling companies such as Mary Kay and Avon. With Arthaffect, the Company has entered the relatively new "functional foods" market, which is expected to be extremely competitive and led by the major food companies. 12 International Operations - ------------------------ Prior to 1991, the Company marketed and sold its products solely within the United States. In February, 1991, Reliv' entered into a joint venture with an Australian corporation and the joint venture began marketing and selling the Company's products in Australia in May, 1991. As of March, 1992, the Company organized Reliv' World to conduct international operations, acquired the business of the Australian joint venture and began conducting business in Australia through Reliv' Australia. In June, 1992, the Company began marketing and selling its products in New Zealand through Reliv' New Zealand, in November, 1992, began marketing and selling its products in Canada through Reliv' Canada, and in August, 1993, began marketing and selling its products in Mexico through Reliv' Mexico. In July, 1995, the Company began marketing and selling its products in the United Kingdom through Reliv' UK, a licensee. In February, 1998, Reliv' Europe assumed the operations of Reliv' U.K. Each foreign subsidiary markets, sells and uses substantially the same line of products, labeling and method of distribution as Reliv' in the United States, although not all of the Company's products are available in each country and the formulation of some of the products vary to comply with local governmental regulations or requirements. Reference is made to Note 18 of the Consolidated Financial Statements contained in Part IV hereof for financial information on geographical segments. Contract Manufacturing - ---------------------- In the last quarter of 1995, the Company commenced providing contract processing and packaging services at its Chesterfield manufacturing facility. These services include blending, processing and packaging food products in accordance with specifications or materials provided by the customer. Revenues from these services during 1996 were $3,310,000, but decreased to $1,525,000 in 1997, as a result of the loss of a major customer. The Company is actively seeking additional contract manufacturing business. Reference is made to Note 17 of the Consolidated Financial Statements contained in Part IV hereof for financial information on business segments. Item No. 2 - Properties - ----------------------- The Company owns approximately six acres of land and a building containing approximately 136,000 square feet of office, manufacturing and warehouse space located at 136 Chesterfield Industrial Boulevard, Chesterfield, Missouri, 63006, where it currently maintains its corporate headquarters. The Company recently completed an expansion to the Chesterfield facility on land owned by the Company adjacent to existing building. Approximately 90,000 square feet of manufacturing, warehouse and office space was added to the existing 46,000 square foot facility. The Company obtained a construction loan of $4,430,000 to finance the expansion. The original property was purchased in July, 1991, and, as part of the purchase price for the premises, the Company assumed the remaining principal balance of $850,108 of a 1984 industrial revenue bond with an original principal sum of $975,000. In addition, the Company executed a promissory note to the seller in the amount of $250,000. The principal balances of the bond and 13 promissory note at December 31, 1997, are $598,000 and $205,000, respectively. The promissory note is secured by a deed of trust on the premises. The Company intends to fund its payments under the industrial revenue bond and promissory note from working capital. In 1992, the Company completed an addition to its building of approximately 12,000 square feet used for manufacturing of its products. In May, 1993, the Company purchased 3.4 acres of land adjacent to the original facility for $400,000. The main facility and surrounding land was severely damaged by a flood in July, 1993. The Company began repairs and improvements to its main facility, and finalized relocation of its corporate offices to the facility in February, 1995. The Company's decision to return to the facility was based on its ability to obtain adequate flood insurance to offset future losses if incurred and the government's direction toward upgrading the levee that protects the facility. During 1997, the Company leased approximately 20,800 square feet of warehouse space at a separate site in Chesterfield, Missouri, at a rental rate of $8,700 per month, for shipping and finished goods storage. The lease terminated in December, 1997, and the Company anticipates that its newly expanded facility will meet its local shipping and warehouse needs for the foreseeable future. The Company leases office space in Parramatta, Australia, Mississauga, Ontario, Canada and in Mexico City, Mexico to support its operations in those areas, and has a contract warehouse arrangement in Auckland, New Zealand. Item No. 3 - Legal Proceedings - ------------------------------ On May 21, 1997, Timothy Tobin, a former director and officer of the Company, filed a Demand for Arbitration with the American Arbitration Association in St. Louis, Missouri. The Demand claimed damages resulting from alleged misrepresentations made by the Company in connection with a Stock Purchase Agreement and Consulting Agreement entered into with Mr. Tobin in October 1992. The Company has filed an Answer and Counterclaim denying Mr. Tobin's allegations and claiming damages resulting from Mr. Tobin's breach of warranties contained in the October 1992 agreements. Item No. 4 - Submission of Matters to a Vote of Security Holders - ---------------------------------------------------------------- N/A 14 PART II Item No. 5 - Market for Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------------- Matters - ------- The Company's Common Stock was admitted to trading on the Emerging Company Market Place at the American Stock Exchange on March 8, 1993 and subsequently was approved for listing on the American Stock Exchange Main Board. Prior to that time, there was no established public trading market for the Company's Common Stock. On September 6, 1996, the Company moved the listing of its Common Stock to the NASDAQ National Market Tier of the NASDAQ Stock Market under the symbol: RELV. 1997 and 1996 Quarterly Stock Price Data ---------------------------------------- HI LO -- -- 1997 - ---- First Quarter 7.625 5.341 Second Quarter 8.625 6.00 Third Quarter 7.00 5.25 Fourth Quarter 5.75 2.75 1996 - ---- First Quarter 2.273 1.477 Second Quarter 3.864 1.818 Third Quarter 7.727 2.727 Fourth Quarter 11.136 5.227 All 1996 stock price data has been retroactively adjusted for the Company's 10% stock dividend issued in February 1997. As of February 25, 1998, there were approximately 1,641 holders of record of the Company's Common Stock. On May 15, 1996, a dividend of $.005 per share was paid to shareholders of record. On December 6, 1996, a dividend of $.015 per share was paid to shareholders of record. On February 28, 1997, a 10% stock dividend and a cash dividend of $.01 per share was paid to shareholders of record. The cash dividend on such date was paid on all shares after giving effect to the stock dividend. On June 13, 1997, a cash dividend of $.02 per share was paid to shareholders of record. On January 29, 1998, a cash dividend of $.01 per share was paid to shareholders of record. The amount and timing of future dividends will be subject to declaration of the Board of Directors consistent with results of operation of the Company and its financial condition at the time. In March, 1995, the Company instituted an automatic dividend reinvestment plan for its shareholders of record. Participation in the plan, which is voluntary, provides for dividends paid by the Company to be reinvested in shares of common stock at the then current market price. The plan also allows participants to make additional voluntary purchases of common stock on a quarterly basis at the market price. 15 Item No. 6 - Selected Financial Data The following selected financial data are derived from the consolidated financial statements of the Company. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included herein.
Year ended December 31 1997 1996 1995 1994 1993 ----------------------------------------------------------------- (1) Net Sales $46,836,270 $40,729,993 $28,913,873 $32,190,444 $43,553,022 Income from continuing operations, before extraordinary loss $ 2,028,988 $ 1,507,014 $ 569,823 $ 893,766 $ 3,062,398 Net Income $ 2,028,988 $ 1,507,014 $ 569,823 $ 893,766 $ 1,649,398 Earnings (loss) per common share(2): Basic: Income before extraordinary loss .21 .15 .06 .09 .29 Extraordinary loss --- -- --- --- (.13) ----------------------------------------------------------------- Net Income .21 .15 .06 .09 .16 Diluted: Income before extraordinary loss .20 .15 .06 .09 .29 Extraordinary loss --- --- --- --- (.14) ---------------------------------------------------------------- Net Income .20 .15 .06 .09 .15 Cash Dividends per share of Common Stock .03 .02 .01 .015 -- Total Assets $15,969,948 $11,401,665 $10,276,234 $ 9,660,013 $10,525,380 Long-term debt and capital lease obligations, less current maturities $ 5,148,625 $ 1,478,079 $ 1,416,764 $ 1,000,024 $ 1,072,070
(1) In July, 1993, during the Midwestern floods, a levee broke and flooded 300 area businesses, including the Company's headquarters and manufacturing facility. The effects of this event have been accounted for as an extraordinary loss. (2) All earnings per share data has been retroactively adjusted for the pro forma effect of the Company's 10% stock dividend issued in February 1997. 16 Item No. 7 - Management's Discussion and Analysis of Financial Condition and - -------------------------------------------------------------------------------- Results of Operations - --------------------- Results of Operations - --------------------- Net Income 1997 vs. 1996 The Company's 1997 net income was $2,029,000 or $.21 per share ($.20 per share diluted). This compares with net income of $1,507,000, or $.15 per share in 1996. Net income in the United States was $2,177,000 in 1997, compared to $1,686,000 in 1996. Net income from international operations was a loss of $148,000 in 1997, compared with a loss of $179,000 in 1996. Net sales increased in 1997 to $46.8 million, as compared to $40.7 million in 1996, as a result of the 21 percent increase in net sales in the United States from $34.4 million in 1996 to $41.7 million in 1997. Net sales in the United States, which accounts for 89 percent of total net sales, is comprised of network marketing sales and contract packaging services. In 1997 network marketing sales in the United States increased by 29 percent to $40.2 million compared to $31.1 million in 1996, while net sales from contract services declined to $1.5 million from $3.3 million in 1996. Net sales in the foreign operations declined to $5.1 million in 1997 from $6.3 million in 1996. Net sales for the fourth quarter of 1997 were $10.9 million, a decrease from fourth quarter 1996 net sales of $12.0 million. During the period network marketing sales in the United States increased to $9.6 million from $9.1 million in the fourth quarter 1996. The decrease in net sales was due to declines in net sales in the foreign operations from $1.8 million for the quarter in 1996 to $1.2 million, and in contract packaging services from $1.1 million to $150,000. The Company provides contract packaging services, including blending, processing and packaging food products in accordance with specifications provided by its customers. Net sales declined in 1997 to $1.5 from $3.3 million in 1996. The decrease was due to the loss of a substantial customer whose business has not been replaced. To address this the Company has established a management team charged with increasing sales of contract services, and is increasing its sales and marketing efforts in this area. In addition to another source of income, providing contract services allows the Company to better utilize the manufacturing and product development infrastructure, thus spreading overhead costs. The increase in network marketing sales during 1997 was a result of a larger and more productive network of distributors, primarily in the United States. In the United States, the Company's largest market, the number of active distributors increased 12 percent to 29,616. The retention rate of distributors who renew their annual agreement continued to remain high at 49 percent. Master Affiliates, distributors who have attained the highest level of discount and are eligible for generation royalties, increased to 3,631 in the United States in 1997 from 2,487 in 1996. In 1997 the Company processed 73,136 orders at an average retail price of $695, compared to 53,391 orders at an average of $733 in 1996. 17 The positive changes in the sales organization was a result of several sales and marketing programs coordinated to motivate and train distributors at all levels of the distributor organization. One element was the continued focus on the Road to Presidential, designed to encourage distributors to reach the highest level of earnings potential by building their downline organizations. This program was initially introduced in the United States in 1995 and then in the foreign subsidiaries throughout 1996. The Company believes the training and rewards of this program have contributed to the increase in sales. The Star Director Program, which reinforces the Road to Presidential, was introduced in June 1996. This program compensates distributors who reach certain levels of sales organization growth with bonuses based on the retail sales of their distributor network. In 1997, $1,329,000 was paid through this program compared to $420,000 in 1996. Another ingredient in the sales growth is the success of the Ambassador Program, which compensates distributors at the highest levels for their leadership and development of sales. At year end 1997 there were fifty-two Ambassadors who shared in bonuses totaling $838,000. The Company's Direct Select Program makes products available to consumers by ordering directly through the Company. In 1997, the program in the United States, produced $5.9 million, or nearly 10 percent of total product sales at retail value, compared to $4.3 million in 1996. The Company introduced the Direct Select Program in Canada in October 1997 and plans an introduction in Australia in early 1998. The United States 1997 net sales were affected by the introductions of two new products, Healthy Pantry Premium Entrees, a line of four hot meal products based on the use of soy protein, and Provantage, a sports nutrition product targeted for the fitness market. Both products expand the Company's product line in the growing functional foods category. 1997 network marketing sales strengthened throughout the United States. Sales remained strong in the top ten states, which account for 64 percent of total sales, with an increase of 20 percent in these states when compared to 1996 sales. Sales in the other states increased 44 percent over 1996 levels indicating the Company is developing strong markets outside its primary states. Illinois, Michigan and California were the Company's primary markets in 1997 contributing 31 percent of total sales, a decrease of 4 percent when compared to the top three markets in 1996. The above trends indicate a more diverse base of sales growth. In Australia and New Zealand net sales declined to $3,449,000 in 1997 from $4,723,000 in 1996. Fourth quarter 1997 sales decreased to $753,000 from $1,260,000 in 1996. New distributor enrollments declined in Australia and New Zealand to 1,820 from 3,108 in 1996. Distributor renewals in Australia were 48% and in New Zealand 37% in 1997 as compared to 41% and 36% in 1996, respectively. Reported net sales in Australia and New Zealand were also affected by the decline in the value of their currency as compared to the United States dollar. During the year, both the Australian and New Zealand dollars declined 18% from their rates as of December 31, 1996. The Company has taken several steps to reverse the decline in sales in Australia and New Zealand, as well as all its foreign operations. A management team has been put in place with sole responsibilities for developing growth in the foreign operations. Previously, the responsibilities for the foreign operations fell under the management team responsible for the United States and 18 the holding company, Reliv International. The Company believes establishing a management team with direct responsibility will improve the efforts towards building successful sales operations. One element of this has been to replace the Australian and New Zealand sales manager with the Company's International Marketing Manager, who has been employed with the Company for seven years and served as sales manger of Australia and New Zealand from 1991 through 1994. During that period the market grew in net sales from a start-up to $9,353,000 in 1994. In late 1994 he was promoted to International Marketing Director and relocated to the United States and contributed to the growth in the United States. Sales in Australia and New Zealand have been affected by continued delays in the introduction of several new products due to regulatory policies, plus increased levels of competition. The Company has received approval in Australia and New Zealand to sell Reliv' Classic and plans to introduce it in April 1998. Reliv' Classic is the number one selling product in the United States accounting for approximately 25% of total retail sales. Fibrestore, a product which averages in excess of 10% of sales in the United States, was introduced in Australia in September, 1997. Both are strong additions to the product line. The Company plans to continue building the product lines in these countries during 1998. Net sales in Canada increased in 1997 to $1,338,000 from $1,247,000 in 1996. Fourth quarter sales decreased to $334,000 in 1997 compared to $416,000 in 1996. Fourth quarter net sales in 1996 were impacted by a sales promotion that created a large one time sales increase. New distributor enrollments declined to 991 from 1,165 in 1996. The 1996 net sales in Canada were affected by the introductions of Reliv A-Affect, a product similar to the United States Arthaffect that's designed to nutritionally support bone and joint conditions and Direct Select. A-Affect currently represents 7 percent of total product sales. The Company believes Canadian sales will be positively affected in 1998 with the addition of Classic in March 1998 and future product introductions throughout 1998. Direct Select, introduced in October 1997, accounts for approximately 7.5 percent of total retail sales at year end. In Mexico net sales declined slightly as the economy continued to contribute to Reliv Mexico's inability to increase net sales and reach profitability. Net sales in Mexico in 1997 were $330,000, compared to $352,000 in 1996. Net sales in the fourth quarter 1997 were $74,000 compared to $103,000 in 1996. New distributor enrollment declined in 1997 to 360 compared to 487 in 1996. In response, the Company introduced a revision to the distributor compensation plan in August 1997 to adjust for the devaluation of the peso. The Company believes the change will make the plan competitive with other network marketing companies in Mexico. The Company began marketing its products in the United Kingdom in July, 1995, through a licensee. Revenues under the license agreement in 1996 and 1997 were minimal and in February, 1998, the Company through its subsidiaries assumed ownership and control of the United Kingdom operations. The Company believes its direct management will improve sales efforts in this region. The Company believes that its computer hardware and software will meet is administrative needs in the United States and in its foreign subsidiaries in the foreseeable future. The Company does not anticipate significant changes to its computer system or material expenses to comply with year 2000. 19 1996 vs. 1995 The Company's 1996 net income was $1,507,000 or $ .15 per share ($.15 per share diluted). This compares with net income of $570,000, or $.06 per share in 1995. Net income in the United States was $1,686,000 in 1996, compared to $430,000 in 1995. Net income from international operations was a loss of $179,000 in 1996, compared with gain of $140,000 in 1995. The increase in net income as compared to 1995 is a result of a 41 percent increase in net sales in 1996 to $40.7 million, as compared to $28.9 million in 1995. Net sales in the United States increased to $34.4 million from $22.2 million in 1995, while net sales in the foreign operations declined slightly to $6.3 million in 1996 from $6.7 million in 1995. Net sales in the United States in 1996 were comprised of $31.1 million in network marketing sales and $3.3 million in contract packaging services. Net sales in the United States in 1995 consisted of $21.9 million in network marketing sales and $279,000 in contract packaging sales. In the fourth quarter of 1995, the Company began providing contract packaging services, including blending, processing and packaging food products in accordance with specifications provided by its customers. Direct costs of contract packaging services were 93 percent of revenue. Direct costs as a percent of revenue improved throughout the year from 108 percent in the first quarter, to 84 percent in the fourth quarter. In 1996 network marketing activity in the United States 16,622 new distributors enrolled and 10,305 distributors renewed their distributorship, compared to 14,653 new distributors and 5,470 renewals in 1995. The average wholesale order size in the U.S. (at retail) increased in 1996 to $733 compared to $670 in 1995. The United States 1996 net sales were affected by product introductions of Reliv' Celleboost and the Getabetterbody weight loss system, in January 1996, Cool Punch Innergize, in June 1996 and Arthaffect, in October 1996. In 1996, the Direct Select program produced sales at retail value of $4.3 million, compared to retail sales of $2.6 million in 1995. In Australia and New Zealand net sales declined to $4,723,000 in 1996 from $5,760,000 in 1995. Sales in Australia and New Zealand during 1996 have been affected by continued delays in the introduction of several new products due to regulatory policies, plus increased levels of competition. New distributor enrollments declined in Australia and New Zealand to 3,108 from 4,373 in 1995. Distributor renewals in Australia were 41% and in New Zealand 36% in 1996 as compared to 38% and 29% in 1995, respectively. Net sales in Canada increased in 1996 to $1,247,000 from $494,000 in 1995. New distributor enrollments increased to 1,165 from 376 in 1995. The 1996 net sales in Canada were affected by the introductions of Reliv Optain, an isotonic drink similar to the Innergize sold in the United States, and Celleboost, in January 1996. In Mexico net sales declined as the economy contributed to Reliv Mexico's inability to increase net sales and reach profitability. Net sales in Mexico in 1996 were $352,000, compared to $436,000 in 1995 and $1,008,000 in 20 1994. The Company offset the currency devaluation with a price increase of its products that hindered the ability to sell the product and therefore contributed to the reduction in sales. New distributor enrollment declined in 1996 to 487 compared to 1,001 in 1995 Cost of Sales: During 1997, cost of network marketing products sold improved to 18 percent of net sales compared with 19 percent in 1996, and 21 percent in 1995. The improvement in gross profit margins is a result of lower raw materials costs, improved manufacturing controls and utilization of the facility in providing contract manufacturing services. Cost of network marketing products sold was constant at 17 percent in the fourth quarter of 1997 and in the same period in 1996. Cost of goods for contract services improved for the year to 89% from 93% in 1996. The Company expanded its facility in 1997 adding approximately 60,000 square feet of warehouse and manufacturing space. The expansion space will be put into full operation during the first half of 1998. Distributor Royalties and Discounts: Distributor royalties and discounts as a percentage of network marketing sales increased to 37 percent in 1997 from 36 percent in 1996. Fourth quarter 1997 distributor royalties and discounts also increased to 37 percent from 36 percent in 1996. These expenses are governed by the distributor agreements and are directly related to the level of sales. The Company pays a percentage of sales up to 18 percent in royalties and as much as 45 percent in commissions. The 1997 increase compared to 1996 is partly due to an increase in net sales from the Company's Direct Select program. Sales in the Direct Select Program increased to $5.9 million from $4.3 million in 1996. In this program, customers purchase directly from the Company at full retail price and the Company distributes to the distributor force 45 percent of the purchase price as a commission earned. This is higher than the average commission paid by the Company to distributors for purchases made at wholesale price. In addition, in 1997, the Company paid royalties of $838,000 through the Ambassador Program as compared to $631,000 in 1996. Selling, General and Administrative: Selling, general and administrative expenses increased to 37% as a percentage of net sales for 1997, from 36 percent in 1996, but less than the 39 percent in 1995. The change in 1997 is primarily a result of increases in selling expenses, professional services and staff compensation. In 1997, sales meetings and convention expenses were $1,200,000 and sales promotion incentives were $489,000, compared to $845,000 and $342,000 in 1996, respectively. The Star Director program, which rewards eligible distributors with a bonus based on the retail sales of their distributor network, paid $1,329,000 in 1997 compared to $420,000 in 1996. The program was introduced in June 1996 and has a limit of 3% of total product retail sales. In 1997 2.2 percent was paid. 21 Consulting and professional services increased $357,000 to $642,000 in 1997 as the Company increased its use of marketing and public relations companies. The Company does not anticipate the level of these expenses to continue at 1997 levels. Staff compensation increased by 15 percent, primarily in the sales, marketing and distribution departments. These departments increased 50 percent in order to service the sales growth in the United States and contribute additional support to the foreign operations. Selling, general and administrative expenses as a percentage of net sales were higher in the fourth quarter 1997 as expenses were 39 percent of net sales compared to 35 percent during the fourth quarter 1996. The decrease in net revenues from $12,044,000 in 1996 to $10,915,000 is the primary reason, as well the items mentioned above. Interest Expense: Interest expense in 1997 was $210,000 compared to $213,000 in 1996 and $146,000 in 1995. Interest expense in 1998 will increase due to a loan package secured for the expansion of the Company's office and manufacturing facility, plus the lease of furnishings and equipment. Short-term debt, capital lease obligations and long-term debt increased to $5,507,000 from $1,761,000 in 1996. Other Income/Expense: Other income decreased to $113,000 in 1997 from $147,000 in 1996 and $226,000 in 1995. This is due to a decrease in interest earned from cash investments made by the Company in interest-bearing accounts or financial instruments and foreign exchange gains in 1995. Income Taxes: The provision for income taxes increased to $1,385,000, or 3.0 percent of net sales in 1997, from 2.3 percent of net sales or $950,000 in 1996, and .6 percent of net sales, or $187,000 in 1995. The effective tax rate for 1997 was 41 percent. Effective tax rates for 1996 and 1995 were 39 percent and 25 percent, respectively. The effective rate for 1995 was lower than the United States statutory rates as a result of the conversion of Reliv' Canada to an unlimited liability company in 1995. The 1997 effective rate was slightly higher than 1996 as the result of the settlement of an audit by the Internal Revenue Service for the fiscal years 1992 through 1994. Financial Condition - ------------------- The Company generated cash flow of $2,491,000 from operating activities during 1997 and $3,959,000 through long-term financing. This compares to $2,122,000 generated from operating activities and $364,000 through long-term financing in 1996. Cash and cash equivalents increased $318,000 to $2,426,000 by year-end 1997. The Company invested $5,055,000 in its facility, with the construction of approximately 90,000 square feet of office and manufacturing space, and the acquisition of office furnishings and plant equipment. The Company used $337,000 to repurchase shares of its common stock and $293,000 to pay dividends. 22 Current assets increased to $6,745,000 at December 31, 1997 from $6,553,000 as of December 31, 1996. Cash and cash equivalents increased $318,000 as described above. Accounts receivable decreased by $190,000 to $866,000 from the December 31, 1996 balance of $1,056,000 as a result of the decrease in contract packaging services, which are generally paid on 30 day terms. Inventories declined slightly to $2,642,000 from $2,762,000 at year end 1996. Property, plant and equipment, after dispositions, increased $4,926,000 to $11,922,000 at December 31, 1997, as a result of the expansion of its facility. The Company does not anticipate significant purchases of plant, property and equipment in 1998. Current liabilities decreased to $3,653,000 at December 31, 1997 from $3,866,000 at December 31, 1996. Trade accounts payable decreased to $1,433,000 from $1,689,000 at December 31, 1996 primarily due to the decrease in inventories. Distributor commissions payable increased $263,000 as a result of improved net sales as compared to December 31, 1996. Accrued payroll and payroll taxes decreased to $174,000 at December 31, 1997 from $392,000 for the prior year end, primarily due to $240,000 in accrued incentive compensation that was included at December 31, 1996. Long-term debt increased to $5,149,000 from $1,478,000 at December 31, 1996. The Company entered into a loan agreement of $4,430,000 in September 1997 to provide financing for the expansion of its facility. The term of the agreement is three years with a 20 year payment amortization schedule. The Company has a term loan with a principal balance of $662,000 as of December 31, 1997, as well as long-term debt totalling $803,000, relating to the purchase of its original building and land. The Company also has two operating lines of credit in the amounts of $800,000 and $500,000. At December 31, 1997, the Company was not utilizing the lines of credit. As a result of the increased long term debt, the Company's ratio of total liabilities to total assets increased to 55% from 47% at December 31, 1996. Stockholders' equity increased to $7.2 million compared with $6.1 million in 1996. The improvement is due to the 1997 net income of the Company. On January 31, 1997, the Company declared a 10% stock dividend and a cash dividend of $0.01 per share paid on February 28, 1997 to recordholders as of February 14, 1997. The stock dividend resulted in a transfer from retained earnings to the common stock account in the amount of $5,848,000, which was based on the closing price of $6.50 per share of Common Stock on the declaration date. Average shares outstanding and all per share amounts included in the accompanying consolidated financial statements and notes reflect the increased number of shares as a result of the stock dividend. During 1997, the Company paid cash dividends of $293,000. The Company's working capital balance has improved by $405,000 since December 31, 1996. The current ratio at December 31, 1997 improved to 1.85 from 1.7. Management believes that the Company's internally generated funds together with the loan agreement will be sufficient to meet working capital requirements in 1998. Forward-looking statements made in this filing involve material risks and uncertainties that could cause actual results and events to differ materially from those set forth, or implied, including the Company's ability to 23 continue to attract, maintain and motivate its distributors, changes in the regulatory environment affecting network marketing sales and sales of food and dietary supplements and other risks and uncertainties detailed in the Company's other SEC filings. Item No. 8 - Financial Statements and Supplementary Data - -------------------------------------------------------- Reference is made to the Consolidated Financial Statements contained in Part IV hereof. Item No. 9 - Changes in and Disagreements with Accountants on Accounting and - ---------------------------------------------------------------------------- Financial Disclosure -------------------- None. PART III Item No. 10 - Directors and Executive Officers of the Registrant - ---------------------------------------------------------------- Information called for by Item 10 of Part III is incorporated by reference to the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be held on May 21, 1998, to be filed with the Commission within 120 days of the end of the Company's last fiscal year. Item No. 11 - Executive Compensation - ------------------------------------ Information called for by Item 11 of Part III is incorporated by reference to the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be held on May 21, 1998, to be filed with the Commission within 120 days of the end of the Company's last fiscal year. Item No. 12 - Security Ownership of Certain Beneficial Owners and Management - ---------------------------------------------------------------------------- Information called for by Item 12 of Part III is incorporated by reference to the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be held on May 21, 1998, to be filed with the Commission within 120 days of the end of the Company's last fiscal year. Item No. 13 - Certain Relationships and Related Transactions - ------------------------------------------------------------ Information called for by Item 13 of Part III is incorporated by reference to the definitive Proxy Statement for the 1998 Annual Meeting of Shareholders to be held on May 21, 1998, to be filed with the Commission within 120 days of the end of the Company's last fiscal year. 24 PART IV - ------- Item No. 14 - Exhibits, Financial Statement Schedules and Reports on Form 8K - ---------------------------------------------------------------------------- (a) 1. The Consolidated Financial Statements filed as part of this report on Form 10-K are listed on the accompanying Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules. 2. The Consolidated Financial Statement Schedules filed as part of this report on Form 10-K are listed on the accompanying Index to Consolidated Financial Statements and Consolidated Financial Statement Schedules. 3. Exhibits: Exhibit Document Number -------- ------ Articles of Incorporation, as amended (incorporate by reference Exhibit 3.1 to the Form 10-K of the Registrant for year ended December 31, 1995) 3.1 By-laws, as amended (incorporate by reference Exhibit 3.2 to the Form 10-K of the Registrant for year ended December 31, 1992) 3.2 Amended Exclusive License Agreement (incorporate by reference Exhibit 10.1 to the Form 10-K of the Registrant for year ended December 31, 1992) 10.1 Asset Purchase Agreement (Australian Joint Venture) (incorporate by reference Exhibit 10.2 to the Form 10-K of the Registrant for year ended December 31, 1992) 10.2 Master Agent Agreement (re: Australia) (incorporate by reference Exhibit 10.3 to the Form 10-K of the Registrant for year ended December 31, 1992) 10.3 Tobin Stock Purchase Agreement (incorporate by reference Exhibit 10.6 to the Form 10-K of the Registrant for year ended December 31, 1992) 10.4 25 Exhibit Document Number -------- ------ Tobin Consulting Agreement (incorporate by reference Exhibit 10.7 to the Form 10-K of the Registrant for year ended December 31, 1992) 10.5 1995 Stock Option Plan (incorporate by reference Exhibit 10.7 to the Form 10-K of the Registrant for year ended December 31, 1995) 10.6 Montgomery Employment Agreement dated June 1, 1997 10.7 Hastings Employment Agreement dated June 1, 1997 10.8 Kreher Employment Agreement dated April 13, 1994 (incorporate by reference Exhibit 10.14 to the Registrant's Form 10-Q for quarter ended June 30, 1994). 10.9 1994 Annual Incentive Compensation Plan (incorporate by reference Exhibit 10.11 to the Form 10-K of the Registrant for year ended December 31, 1995) 10.10 1994 Long-Term Incentive Compensation Plan (incorporate by reference Exhibit 10.12 to the Form 10-K of the Registrant for year ended December 31, 1995) 10.11 Agreement with Avogen, Inc. dated July 1, 1995 (incorporate by reference Exhibit 10.13 to the Form 10-K of the Registrant for year ended December 31, 1995) 10.12 Agreement with Conkle & Olesten and Avogen, Inc. dated July 1, 1995 (incorporate by reference Exhibit 10.14 to the Form 10-K of the Registrant for year ended December 31, 1995) 10.13 26 Exhibit Document Number -------- ------ Agreement with Traco Labs, Inc. (incorporated by reference Exhibit 10.14 to the Form 10-K of the Registrant for year ended December 31, 1996) 10.14 Amendment to Avogen and Conkle & Oleston Agreements dated April 25, 1997 10.15 Statement re: computation of per share earnings (incorporated by reference to Note 7 of the Consolidated Financial Statements contained in Part IV) 11 Subsidiaries of the Registrant (incorporate by reference the the Registrants's Response to Item 1 of Part I of this Form 10-K) 22 Consent of Ernst & Young L.L.P., Independent Auditors 23 (b) N/A (c) The Exhibits listed in subparagraph (a)(3) of this Item 14 are attached hereto. Unless incorporated by reference to a previous filing. (d) The Schedules listed in subparagraph (a)(2) of this Item 14 are attached hereto. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RELIV' INTERNATIONAL, INC. -------------------------- By: /s/Robert L. Montgomery ---------------------------------------------------------------------- Robert L. Montgomery, Chairman of the Board of Directors, President and Chief Executive Officer, Treasurer Date: March 27, 1998 Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/Robert L. Montgomery ---------------------------------------------------------------------- Robert L. Montgomery, Chairman of the Board of Directors, President and Chief Executive Officer, Treasurer Date: March 27, 1998 By: /s/ David G. Kreher ---------------------------------------------------------------------- David G. Kreher, Senior Vice President, Chief Operating Officer, Assistant Secretary (principal financial and accounting officer) Date: March 27, 1998 By: /s/ Carl W. Hastings ---------------------------------------------------------------------- Carl W. Hastings, Executive Vice President, Assistant Secretary, Director Date: March 27, 1998 By: /s/ Thomas W. Pinnock ---------------------------------------------------------------------- Thomas W. Pinnock III, Director Date: March 27, 1998 By: /s/ Stephen M. Merrick ---------------------------------------------------------------------- Stephen M. Merrick, Secretary, Director Date: March 27, 1998 28 By: /s/ Donald L. McCain ---------------------------------------------------------------------- Donald L. McCain, Director Date: March 27, 1998 By: /s/ John Akin ---------------------------------------------------------------------- John Akin, Director Date: March 27, 1998 By: /s/ Sandra S. Montgomery ---------------------------------------------------------------------- Sandra S. Montgomery, Director Date: March 27, 1998 By: /s/ Thomas T. Moody ---------------------------------------------------------------------- Thomas T. Moody, Director Date: March 27, 1998 By: /s/ Marvin W. Solomonson ---------------------------------------------------------------------- Marvin W. Solomonson, Director Date: March 27, 1998 29 Reliv' International, Inc. and Subsidiaries Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Contents Consolidated Financial Statements: Report of Independent Auditors........................................... F-1 Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-2 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995...................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995...................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995....................................... F-6 Notes to Consolidated Financial Statements - December 31, 1997........... F-8 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995....................................... F-29 All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. [LETTERHEAD OF ERNST & YOUNG L.L.P.] Report of Independent Auditors Board of Directors and Stockholders Reliv' International, Inc. We have audited the accompanying consolidated balance sheets of Reliv' International, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Reliv' International, Inc. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young L.L.P. March 17, 1998 St. Louis, Missouri F-1 Reliv' International, Inc. and Subsidiaries Consolidated Balance Sheets
December 31 1997 1996 ------------------------------ Assets Current assets: Cash and cash equivalents $ 2,426,426 $ 2,108,770 Accounts and notes receivable, less allowances of $7,600 in 1997 and $13,000 in 1996 865,701 1,056,360 Inventories: Finished goods 1,453,282 1,219,295 Raw materials 785,706 1,136,897 Sales aids and promotional materials 403,830 405,768 ------------------------------ 2,642,818 2,761,960 Refundable income taxes 31,303 48,949 Prepaid expenses and other current assets 688,539 512,031 Deferred income taxes 90,065 65,000 ------------------------------ Total current assets 6,744,852 6,553,070 Deferred costs 4,232 79,223 Property, plant and equipment: Land 790,677 790,677 Building 2,854,548 2,863,457 Machinery and equipment 1,723,482 1,693,849 Office equipment 303,235 328,780 Computer equipment and software 1,452,577 1,245,137 Construction in progress 4,797,090 74,423 ------------------------------ 11,921,609 6,996,323 Less accumulated depreciation and amortization (2,700,745) (2,226,951) ------------------------------ 9,220,864 4,769,372 ------------------------------ $ 15,969,948 $ 11,401,665 ==============================
See accompanying notes. F-2 Reliv' International, Inc. and Subsidiaries Consolidated Balance Sheets
December 31 1997 1996 ------------------------------ Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 3,290,131 $ 3,496,058 Income taxes payable -- 65,102 Current maturities of long-term debt and capital lease obligations 358,124 282,502 Unearned income 5,003 22,602 ------------------------------ Total current liabilities 3,653,258 3,866,264 Capital lease obligations, less current maturities 39,105 13,211 Long-term debt, less current maturities 5,109,520 1,464,868 Stockholders' equity: Common stock, no par value; 20,000,000 shares authorized, 9,617,307 shares issued and outstanding in 1997 and 9,900,529 shares issued and outstanding in 1996 9,135,764 9,211,826 Notes receivable - officers and directors (4,633) (4,633) Retained earnings (deficit) (1,673,164) (2,516,181) Foreign currency translation adjustment (289,902) 10,970 Less cost of treasury stock - 250,580 shares in 1996 -- (644,660) ------------------------------ 7,168,065 6,057,322 ------------------------------ $ 15,969,948 $ 11,401,665 ==============================
See accompanying notes. F-3
Reliv' International, Inc. and Subsidiaries Consolidated Statements of Income Year ended December 31 1997 1996 1995 -------------------------------------------- Sales at suggested retail $ 71,066,845 $ 60,840,620 $ 46,466,287 Less distributor allowances on product purchases 24,230,575 20,110,627 17,552,414 -------------------------------------------- Net sales 46,836,270 40,729,993 28,913,873 Costs and expenses: Cost of products sold 9,404,283 10,193,418 6,386,806 Distributor royalties and commissions 16,837,084 13,429,386 10,678,500 Selling, general and administrative 17,083,792 14,585,127 11,171,344 -------------------------------------------- 43,325,159 38,207,931 28,236,650 -------------------------------------------- Income from operations 3,511,111 2,522,062 677,223 Other income (expense): Interest expense (210,268) (212,819) (146,476) Other income 113,145 147,771 226,076 -------------------------------------------- Income before income taxes 3,413,988 2,457,014 756,823 Provision for income taxes 1,385,000 950,000 187,000 -------------------------------------------- Net income $ 2,028,988 $ 1,507,014 $ 569,823 ============================================ Basic earnings per share (1) $ .21 $ .15 $ .06 Diluted earnings per share (1) $ .20 $ .15 $ .06 (1) Per share data for 1996 and 1995 reflects the pro forma effect of the Company's 10 percent stock dividend declared on January 31, 1997 and distributed on February 28, 1997.
See accompanying notes. F-4 Reliv' International, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity
Notes Foreign Common Stock Receivable - Retained Currency Treasury Stock ---------------------- Officers and Earnings Translation ------------------ Shares Amount Directors (Deficit) Adjustment Shares Amount ---------------------------------------------------------------------------------- Balance at December 31, 1994 9,472,913 $3,460,308 $(10,523) $ 2,739,422 $ 60,202 266,252 $(623,380) Common stock purchased for treasury -- -- -- -- -- 109,726 (365,544) Repayment of loans by officers and director -- -- 5,890 -- -- -- -- Foreign currency translation adjustment -- -- -- -- (139,836) -- -- Cancellation of treasury stock (161,612) (47,322) -- (500,776) -- (161,612) 453,098 Dividends paid ($.01 per share) -- -- -- (93,746) -- -- -- Net income -- -- -- 569,823 -- -- -- ---------------------------------------------------------------------------------- Balance at December 31, 1995 9,311,301 3,412,986 (4,633) 2,714,723 (79,634) 214,366 (535,826) ---------------------------------------------------------------------------------- Common stock purchased for treasury -- -- -- -- -- 309,189 (823,808) Options exercised 8,113 10,266 -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- 90,604 -- -- Cancellation of treasury stock (295,755) (59,154) -- (710,820) -- (295,755) 714,974 Dividends paid ($.02 per share) -- -- -- (179,370) -- -- -- Stock dividend declared January 31, 1997 876,870 5,847,728 -- (5,847,728) -- 22,780 -- Net income -- -- -- 1,507,014 -- -- -- ---------------------------------------------------------------------------------- Balance at December 31, 1996 9,900,529 9,211,826 (4,633) (2,516,181) 10,970 250,580 (644,660) ---------------------------------------------------------------------------------- Common stock purchased for treasury -- -- -- -- -- 86,306 (337,127) Options exercised 10,438 13,125 -- -- -- -- -- Warrants exercised 29,140 -- -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- (300,872) -- -- Cancellation of treasury stock (314,106) (89,187) -- (892,600) -- (314,106) 981,787 Adjustment to stock dividend (8,694) -- -- -- -- (22,780) -- Dividends paid ($.03 per share) -- -- -- (293,371) -- -- -- Net income -- -- -- 2,028,988 -- -- -- ---------------------------------------------------------------------------------- Balance at December 31, 1997 9,617,307 $9,135,764 $ (4,633) $(1,673,164) $(289,902) -- $ -- ==================================================================================
See accompanying notes. F-5 Reliv' International, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year ended December 31 1997 1996 1995 ------------------------------------------ Operating activities Net income $ 2,028,988 $ 1,507,014 $ 569,823 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 607,281 629,157 452,141 Provision for losses on accounts receivable -- 78,699 -- Provision for deferred income taxes (31,096) (1,974) 13,017 Foreign currency translation loss (23,019) 3,169 27,315 (Increase) decrease in accounts and notes receivable 185,115 (480,365) (470,654) (Increase) decrease in inventories 30,553 (216,431) 262,765 (Increase) decrease in refundable income taxes 21,496 183,454 41,199 (Increase) decrease in prepaid expenses and other current assets (183,098) (61,861) (187,073) (Increase) decrease in deferred costs 69,657 69,753 (122,689) Increase (decrease) in accounts payable and accrued expenses (128,082) 480,944 324,388 Increase (decrease) in income taxes payable (68,940) (77,890) (102,824) Increase (decrease) in unearned income (17,594) 7,839 (4,264) ------------------------------------------ Net cash provided by operating activities 2,491,261 2,121,508 803,144 Investing activities Proceeds from the sale of property, plant and equipment 73,010 837 -- Purchase of property, plant and equipment (5,054,726) (765,386) (1,330,083) Proceeds from the sale of investments -- 81,969 -- Repayment of loans to officers and directors -- -- 5,890 ------------------------------------------ Net cash used in investing activities (4,981,716) (682,580) (1,324,193) Financing activities Proceeds from long-term borrowings and line of credit 3,958,514 363,887 662,297 Principal payments on long-term borrowings and line of credit (220,144) (171,097) (112,236) Principal payments under capital lease obligations (84,723) (59,230) (61,774) Proceeds from stock options exercised 13,125 10,266 -- Dividends paid (293,371) (179,370) (93,745) Purchase of treasury stock (337,127) (878,808) (460,543) ------------------------------------------ Net cash provided (used) by financing activities 3,036,274 (914,352) (66,001) Effect of exchange rate changes on cash and cash equivalents (228,163) 77,018 (74,531) ------------------------------------------ Increase (decrease) in cash and cash equivalents 317,656 601,594 (661,581) Cash and cash equivalents at beginning of year 2,108,770 1,507,176 2,168,757 ------------------------------------------ Cash and cash equivalents at end of year $ 2,426,426 $ 2,108,770 $ 1,507,176 =========================================
F-6 Reliv' International, Inc. and Subsidiaries Consolidated Statements of Cash Flows (continued)
Year ended December 31 1997 1996 1995 ------------------------------------------ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (includes capitalized interest of $71,425) $ 219,997 $ 217,698 $ 138,404 ========================================== Income taxes $ 1,396,476 $ 845,632 $ 346,931 ========================================== Non cash investing and financing transactions: Capital lease obligations entered into $ 92,519 $ -- $ 35,230 ===========================================
See accompanying notes. F-7 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1997 1. Nature of Business and Significant Accounting Policies Nature of Business Reliv' International, Inc. (the Company) produces a line of food products including nutritional supplements, diet management products, granola bars and sports drink mixes. The Company also distributes a line of premium skin care products. These products are sold by subsidiaries of the Company to a sales force of independent distributors who 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 and the United Kingdom. In addition, in the fourth quarter of 1995, the Company began providing contract processing and packaging services. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its foreign and domestic subsidiaries. All significant intercompany accounts and transactions have been eliminated. Inventories Inventories are valued at the lower of cost or market. Product cost is determined using standard costs, which approximate the first-in, first-out basis. Other inventory cost is determined using the first-in, first-out basis. Property, Plant and Equipment Property, plant and equipment are stated on the cost basis. Depreciation and amortization, which includes the amortization of assets recorded under capital leases, are computed using the straight-line or accelerated method over the useful life of the related assets. Deferred Costs The costs of brochures, design fees for product labels and organization costs are capitalized and amortized on a straight-line basis over the respective assets' useful lives, typically three to five years. F-8 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Nature of Business and Significant Accounting Policies (continued) Revenue Recognition The Company generally receives its sales price in cash accompanying orders from independent distributors and makes related commission payments in the following month. The net sales price is the suggested retail price less the distributor discount of 25 percent to 45 percent of such suggested retail price. Sales revenue and commission expense are recorded when the merchandise is shipped. Unearned income represents prepaid orders for which the Company has not shipped the merchandise. Foreign Currency Translation Each foreign subsidiary's assets and liability accounts, which are originally recorded in the appropriate local currencies, are translated into United States dollar amounts at the year-end exchange rates. Revenue and expense accounts are translated at the average rates for the year. Transaction gains and losses, the amounts of which are immaterial, are included in selling, general and administrative expenses. Foreign exchange translation adjustments are accumulated in a separate component of stockholders' equity. The foreign exchange translation adjustment for 1995 reflects the consolidated effect on the Company resulting from the decline in the value of the Mexican peso relative to the U.S. dollar of approximately 36 percent in 1995. In 1996, the Mexican peso remained relatively stable, while the Australian and New Zealand dollars improved from their 1995 levels. In 1997, the Australian and New Zealand dollars declined substantially in the latter half of the year. The magnitude of the effect on the foreign exchange translation adjustment is mitigated by the fact that the U.S. dollar denominated intercompany financing of the Mexican subsidiary is considered of a long-term investment nature. Accordingly, the effect of exchange rate fluctuations on the intercompany financing is accumulated as a separate component of stockholders' equity. Income Taxes The provision for income taxes is computed using the liability method. The primary difference between financial statement and taxable income results from financial statement accruals and reserves. F-9 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Nature of Business and Significant Accounting Policies (continued) Stock-Based Compensation The Company accounts for stock options in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Since the Company grants stock options at an exercise price not less than the fair value of the shares at the date of grant, no compensation expense is recognized. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting and Disclosure of Stock-Based Compensation," effective for years beginning after December 1995. The Company has elected to disclose the effects of this pronouncement in a footnote to these financial statements (see Note 8). Basic and Diluted Earnings per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. Basic earnings per common share is computed using the weighted average number of common shares outstanding during the year. Diluted earnings per common share is computed using the weighted average number of common shares and potential dilutive common shares that were outstanding during the period. Potential dilutive common shares consist of outstanding stock options and warrants. See Note 7 for additional information regarding earnings per share. On January 31, 1997, the Company declared a 10 percent stock dividend on the Company's common stock which was distributed on February 28, 1997 to shareholders of record on February 14, 1997. The dividend was transferred from retained earnings to common stock in the amount of $5,848,000, which was based on the closing price of $6.50 per share on the declaration date. Average shares outstanding and all per share amounts included in the accompanying consolidated financial statements and notes are based on the increased number of shares giving retroactive recognition to the stock dividend. F-10 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. Nature of Business and Significant Accounting Policies (continued) Advertising Costs of sales aids and promotional materials are capitalized as inventories. All other advertising and promotional costs are expensed when incurred. Cash Equivalents The Company's policy is to consider demand deposits and short-term investments with a maturity of three months or less when purchased as cash equivalents. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Long-Lived Assets In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted SFAS 121 effective January 1, 1996 and determined that no impairment exists. Reclassifications Certain reclassifications have been made to prior years' financial statements to conform to the current presentation. 2. Subsequent Event In February 1998, the Company entered into a preliminary agreement to purchase the stock of its licensee in the United Kingdom in exchange for the debt owed to the Company. A formal agreement is pending and should be consummated in the near future. F-11 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 3. Research and Development Expenses Research and development expenses of $286,000, $289,000 and $294,000 in 1997, 1996 and 1995, respectively, were charged to selling, general and administrative expenses as incurred. 4. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses at December 31, 1997 and 1996, consist of the following: 1997 1996 ---------------------------------- Trade payables $1,432,901 $1,688,777 Distributors commissions 1,326,579 1,064,023 Sales taxes 192,130 225,509 Payroll and payroll taxes 173,689 391,905 Other 164,832 125,844 ---------------------------------- $3,290,131 $3,496,058 ================================== 5. Short-Term Borrowings In January 1996, the Company obtained two separate lines of credit amounting to $500,000 and $800,000, respectively. Borrowings under the $500,000 line of credit are due January 1998 and bear interest, payable monthly, at the prime rate. Borrowings under the $800,000 line of credit are due February 2001 and bear interest, payable monthly, at the prime rate. A portion of the Company's inventory and property, plant and equipment with a net book value of $2,747,000 as of December 31, 1997 are pledged as security under the terms of the agreements. The agreements include restrictive covenants, including a requirement that the Company maintain a current ratio of 1.5 to 1.0 and a minimum net worth of $5,500,000. As of December 31, 1997, the Company had no borrowings against these lines of credit. F-12 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 6. Long-Term Debt Long-term debt at December 31, 1997 and 1996, consists of the following:
1997 1996 ------------------------------- Industrial revenue bonds payable in monthly installments (including interest at 85% of prime) not to exceed $9,611, commencing August 1, 1991; secured by land and building (net book value $2,789,000 at December 31, 1997); balance due on March 1, 2005 $ 597,907 $ 649,476 Note payable in monthly installments (including interest at prime and additional interest at 15% of prime on the balance of the industrial revenue bonds) equal to $9,611 less installment applied to industrial revenue bond, commencing August 1, 1991; unsecured; balance due on March 1, 2005 204,755 204,755 Term loan payable in monthly installments of $19,550, including interest at 8.5% through April 2001; secured by equipment and inventory (net book value of $2,747,000 at December 31, 1997) 662,133 830,705 Construction loan payable in interest only at 8.5% through March 1998. Thereafter payable in monthly installments of $38,802 , with the balance due March 2001; secured by land and building (net book value of $5,157,000 at December 31, 1997) 3,958,514 -- ------------------------------- 5,423,309 1,684,936 Less current maturities (313,789) (220,068) ------------------------------- $5,109,520 $1,464,868 ===============================
F-13 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 6. Long-Term Debt (continued) Principal maturities of long-term debt at December 31, 1997 are as follows: 1998 $ 313,789 1999 358,210 2000 391,508 2001 3,829,270 2002 83,393 Thereafter 447,139 ------------- $ 5,423,309 ============= 7. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Year ended December 31 1997 1996 1995 ---------------------------------------- Numerator: Numerator for basic and diluted earnings per share - net income $ 2,028,988 $ 1,507,014 $ 569,823 Denominator: Denominator for basic earnings per share - weighted average shares 9,600,000 9,854,000 10,280,000 Effect of dilutive securities: Employee stock options and other warrants 707,000 471,000 24,000 ---------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares 10,307,000 10,325,000 10,304,000 ======================================== Basic earnings per share $ 0.21 $ 0.15 $ 0.06 ======================================== Diluted earnings per share $ 0.20 $ 0.15 $ 0.06 ========================================
F-14 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements Stock Options The Company had an incentive stock option plan for key employees which expired in January 1995. Accordingly, no additional options can be granted under this plan as of that date. At December 31, 1995, options for 189,200 shares and 250,800 shares were outstanding at an option price of $2.045 and $2.25 per share, respectively. The options are exercisable at various dates through December 1999. In May 1995, the Company adopted a stock option plan which provides for the grant of incentive stock options and nonqualified stock options for employees (including officers) and other consultants and advisors to the Company. A maximum of 1,100,000 shares can be purchased at an option price not less than the fair market value of the stock at the time the options are granted. As the result of the Company's 10% stock dividend in February 1997, all outstanding options and warrants were adjusted to reflect for the stock dividend. The Company has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related interpretations in accounting for its employee and nonemployee director stock options because, as discussed below, the alternative fair value accounting provided for under SFAS 123, "Accounting for Stock-Based Compensation," requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee and nonemployee director stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of the statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates ranging from 5.15% to 5.30% for 1995, 5.15% to 6.10% for 1996, and 5.70% to 5.97% for 1997; dividend yield of .50%; volatility factor of the expected price of the Company's stock of .658 for 1995 and 1996, .624 for 1997; and a weighted average expected life of the options of 3.54 years. F-15 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued) Stock Options (continued) The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee and nonemployee director stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee and nonemployee director stock options. For purposes of pro forma disclosures, the estimated fair value of the options and warrants is amortized to expense over the vesting period. The effects of applying the pro forma disclosure provisions of SFAS 123 are not likely to be representative of the effects on reported net income for future years. The Company's pro forma information follows: 1997 1996 1995 ----------------------------------------- Pro forma net income $1,861,748 $1,385,941 $537,842 Pro forma earnings per share: Basic $.19 $.14 $.05 Diluted $.18 $.13 $.05 F-16 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued) Stock Options (continued) A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1997 1996 1995 ------------------------------------------------------------------------------------ Weighted Weighted Weighted Avg. Avg. Avg. Exercise Exercise Exercise Options Price Options Price Options Price ------------------------------------------------------------------------------------ Outstanding beginning of the year 1,076,900 $1.841 883,850 $1.712 440,000 $2.162 Granted: Price = fair value 100,000 3.125 206,250 2.355 385,550 1.250 Price > fair value -- -- -- -- 58,300 1.375 Exercised (1) (11,000) 1.506 (10,450) 1.250 -- -- Forfeited -- -- (2,750) 1.250 -- -- ----------- ----------- ----------- Outstanding at end of year 1,165,900 $1.954 1,076,900 $1.841 883,850 $1.712 =========== =========== =========== Exercisable at end of year 723,332 -- 496,828 -- 271,514 -- =========== =========== ===========
As of December 31, 1997 Options Outstanding Options Exercisable ------------------------------------- ---------------------------------- Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg. Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price - ------------------- ----------------- ------------------- ------------------- ---------------- ----------------- $1.25 - $2.00 482,900 2.95 $1.325 274,999 $1.331 $2.01 - $2.875 583,000 2.31 2.273 348,333 2.233 $3.125 100,000 4.96 3.125 100,000 3.125 ---------- ----------- $1.25 - $3.125 1,165,900 2.80 $1.954 723,332 $2.014 =========== ===========
(1) Shares issued were less than options exercised due to cashless exercise provision. F-17 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued) Warrants In 1995, the Company, as part of a consulting agreement, issued warrants to purchase 3,364 shares of common stock. The exercise prices of these warrants ranged from $.045 per share to $1.932 per share and had a term of two years. In 1996, as part of this same agreement, the Company issued warrants to purchase 38,035 shares with the same range of exercise prices and terms of the warrants issued in the previous year. In 1997, as a renewal of this agreement, the Company issued warrants to purchase 9,600 shares at an exercise price of $6.25 per share with a term of two years. In July 1996, as part of another consulting agreement, the Company issued a warrant to purchase 101,948 shares of common stock at an exercise price of $4.182 per share. This warrant has a term of three years. A summary of the Company's warrant activity and related information for the years ended December 31 follows:
1997 1996 1995 ------------------------------------------------------------------------------------ Weighted Weighted Weighted Avg. Avg. Avg. Exercise Exercise Exercise Warrants Price Warrants Price Warrants Price ------------------------------------------------------------------------------------ Outstanding beginning of the year 143,347 $3.430 3,364 $1.496 -- $ -- Granted: Price < fair value -- -- 6,989 0.045 777 0.045 Price = fair value 9,600 6.250 31,046 1.932 2,587 1.932 Price > fair value -- -- 101,948 4.182 -- -- Exercised (1) (41,400) 1.578 -- -- -- -- Forfeited -- -- -- -- -- -- ----------- ----------- ----------- Outstanding at end of year 111,547 $4.360 143,347 $3.430 3,364 $1.496 =========== =========== =========== Exercisable at end of year 111,547 -- 143,347 -- 3,364 -- =========== =========== ===========
(1) Shares issued were less than warrants exercised due to cashless exercise provision. F-18 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 8. Stock Options, Warrants, Treasury Stock and Repurchase Agreements (continued) Warrants (continued)
As of December 31, 1997 Warrants Outstanding Warrants Exercisable ------------------------------------ ------------------------------------ Range of Exercise Number Weighted Avg. Weighted Avg. Number Weighted Avg. Prices Outstanding Remaining Life Exercise Price Exercisable Exercise Price - ------------------- ---------------- ------------------- ------------------ ----------------- ------------------ $4.182 101,947 1.496 $4.182 101,947 $4.182 $6.250 9,600 1.456 6.250 9,600 6.250 --------- ----------- $4.182 - $6.25 111,547 1.492 $4.360 111,547 $4.360 ========= ===========
Treasury Stock and Repurchase Agreements In October 1992, the Company entered into a stock repurchase agreement with a former officer/director of the Company. Under the agreement, which was retroactive to July 1992, the Company was obligated to purchase 259,686 of the individual's shares of Company common stock. The mandatory purchase occurred in six quarterly installments of 43,281 shares beginning in July 1992 and concluding in December 1993. As of December 31, 1993, the Company had redeemed all 259,686 shares required by the agreement for $657,683. Under the same agreement, the Company also had the option to purchase an additional 432,814 of the individual's shares on the basis of 43,281 shares each quarter beginning in January 1995 and concluding in April 1996. Through December 31, 1996, the Company had exercised all options under the agreement and redeemed an additional 432,814 shares for $870,218. As of December 31, 1997, all treasury shares had been retired. In May 1997, a former officer/director filed a demand for arbitration with respect to the stock purchase agreement and consulting agreement entered into in October 1992. The demand claims damages resulting from alleged misrepresentations made by the Company regarding these agreements. The Company believes the claim is without merit and intends to vigorously defend itself. At this time, the outcome of this matter is uncertain and a range of loss cannot be reasonably estimated. However, management believes that the final outcome will not have a material adverse effect on the financial position of the Company. F-19 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 9. Leases The Company leases certain manufacturing, storage and office facilities and certain equipment and automobiles. These leases have varying terms, and certain leases have renewal and/or purchase options. Future minimum payments under noncancelable leases with initial or remaining terms in excess of one year consist of the following at December 31, 1997: Capital Operating Leases Leases ----------------------------- 1998 $50,443 $239,442 1999 35,527 216,164 2000 6,040 136,736 2001 - 83,256 2002 - 70,004 Thereafter - - ----------------------------- Total minimum lease payments 92,010 $745,602 =============== Less amount representing interest 8,570 ----------- Present value of minimum lease payments (including current portion of $44,335) $83,440 =========== Machinery, office and computer equipment at December 31, 1997 and 1996, include approximately $246,333 and $410,662 of equipment under leases that have been capitalized. Accumulated depreciation and amortization for such equipment approximated $154,978 and $344,539 at December 31, 1997 and 1996, respectively. Rent expense for all operating leases was $311,554, $289,979 and $167,985 for the years ended December 31, 1997, 1996 and 1995, respectively. 10. License Agreement The Company has a license agreement with the individual who developed many of the Company's products. This agreement provides the Company with the exclusive worldwide license to manufacture and sell all products created by the licensor and requires monthly royalty payments of 5 percent of net sales, with a minimum payment of $10,000 and a maximum payment of $22,000. The agreement terminates the earlier of December 2001 or on the death of licensor. The amount of expense under this agreement was $264,000 for each of the years ended December 31, 1997, 1996 and 1995, respectively. F-20 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 11. Income Taxes The components of income before income taxes are as follows: Year ended December 31 1997 1996 1995 ----------------------------------------------------- Domestic $ 3,625,708 $ 2,710,323 $646,978 Foreign (211,720) (253,309) 109,845 ----------------------------------------------------- $ 3,413,988 $ 2,457,014 $756,823 ===================================================== The components of the provision for income taxes are as follows: Year ended December 31 1997 1996 1995 ----------------------------------------------------- Current: Federal $ 1,239,000 $ 758,000 $ 31,000 Foreign 38,000 88,000 124,000 State 134,000 108,000 18,000 ----------------------------------------------------- Total current 1,411,000 954,000 173,000 Deferred: Federal (24,000) (3,000) (1,000) Foreign - (1,000) 15,000 State (2,000) - - ----------------------------------------------------- Total deferred (26,000) (4,000) 14,000 ----------------------------------------------------- $ 1,385,000 $ 950,000 $ 187,000 ===================================================== F-21 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 11. Income Taxes (continued) The provision for income taxes is different from the amounts computed by applying the United States federal statutory income tax rate of 34 percent. The reasons for these differences are as follows: Year ended December 31 1997 1996 1995 ---------------------------------------- Income taxes at statutory rate $ 1,161,000 $ 835,000 $ 257,000 Difference between financial statement and federal income tax recognition of foreign losses -- -- (101,000) Differences between U.S. and foreign tax rates on foreign income 27,000 12,000 -- State income taxes, net of federal benefit 88,000 71,000 12,000 Provision for IRS audit settlement 75,000 -- -- Other 34,000 32,000 19,000 --------------------------------------- $ 1,385,000 $ 950,000 $ 187,000 ======================================= Effective December 31, 1995, the Company hybridized its Canadian subsidiary for federal income tax purposes. During 1995, the Company recognized an income tax benefit in excess of the foreign loss recognized for financial statement purposes as a result of this hybridization. The components of the deferred tax asset and the related tax effects of each temporary difference at December 31, 1997 and 1996, are as follows: 1997 1996 --------------------------- Deferred tax asset: Product refund reserve $ 18,000 $ 29,000 Obsolescence reserve 40,000 -- Bad debt reserve 3,000 6,000 Miscellaneous accrued expenses 29,065 30,000 --------------------------- $ 90,065 $ 65,000 =========================== Federal income taxes have not been provided on the undistributed earnings of the Company's Australian and New Zealand subsidiaries since the Company has foreign tax credits available to offset any related federal income taxes. F-22 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 11. Income Taxes (continued) The Internal Revenue Service (IRS) examinations of the Company's U.S. federal income tax returns for fiscal years 1992 through 1994 resulted in a proposed assessment against the Company. In early 1998, this examination was resolved with no material adverse effect on the Company's financial position or results of operation. 12. Employee Benefit Plans In 1995, the Company established a 401(k) employee savings plan which covers substantially all employees. During 1995 and 1996, employees could contribute up to 5 percent of their gross income to the plan, and the Company matched 50 percent of the employee's contribution. Company contributions totaled $23,000 and $11,000 in 1996 and 1995, respectively. For 1997, employees could contribute up to 7.5 percent of their gross income to the plan and the Company matched 100 percent of the employee's contribution. Company contributions under the 401(k) plan totaled $115,000 in 1997. In 1997, the Company merged a pre-existing profit sharing plan into the 401(k) plan. Company contributions totaled $0 and $35,000 in 1996 and 1995, respectively for discretionary contributions for the former profit sharing plan. 13. Incentive Compensation Plans Effective January 1, 1994, the Company adopted an annual incentive compensation plan and a long-term incentive plan. These plans include three officers/directors and are effective until termination of their employment. Participants in the plan are entitled to receive additional compensation based on the attainment of defined annual and long-term performance measures. Incentive compensation under each of the plans cannot exceed the participant's base salary rate. The base salary rates and the performance measures specified by both plans are established annually by the Board of Directors. The Company paid approximately $240,000, $525,000 and $0 in 1997, 1996 and 1995, respectively, under its incentive compensation plans. F-23 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 14. Employment Agreements In November 1992, the Company entered into a services agreement with a former officer for a term retroactively commencing in July 1992 and expiring in December 1999. The agreement provides for a minimum monthly salary and incentive compensation based upon the profits (defined as "income before income taxes and incentive compensation expense") of the foreign subsidiaries. The Company paid approximately $50,000, $50,000 and $120,000 in 1997, 1996 and 1995, respectively, under the terms of the agreement. Effective January 1, 1994, the Company entered into employment agreements with three officers/directors and in June, 1997, entered into new employment agreements with two of these officers/directors. The employment agreements provide for base salary rates established annually by the Board of Directors. The Company paid base salaries of $960,000, $960,000 and $768,750 in 1997, 1996 and 1995, respectively, under the terms of the agreements. 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, 1997, 1996 and 1995, the Company incurred fees to the officer/director and his firm of approximately $332,000, $231,000 and $305,000, respectively. Accounts and notes receivable include accounts receivable from officers/directors of $4,633, $4,633 and $219,082 at December 31, 1997, 1996 and 1995, respectively. During 1996, the Company paid $121,000 for goods and services to a company wholly owned by three officers/directors and one director of the company in connection with promotional activities. F-24 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 16. Consulting Agreements In October 1992, the Company entered into a consulting agreement with a former officer/director of the Company. Under the agreement, which retroactively commenced in July 1992 and expired in June 1996, (1) the officer/director's employment agreement was terminated, (2) the individual provided consulting services and advice to the Company for the term of the agreement and (3) the individual agreed not to compete with the Company anywhere within the United States from July 1992 through December 1995. The individual's compensation for providing consulting services and not competing was approximately $134,000 at the time the agreement was executed, plus $4,500 per month from July 1992 through December 1992 and 1 percent of the suggested retail value of the Company's United States sales from July 1992 through June 1996. Total expense under this agreement approximated $203,000 and $342,000 in 1996 and 1995, respectively. In conjunction with an acquisition, the Company entered into a consulting agreement with a partnership consisting of three individuals. Under the agreement, which commenced in March 1992 and expires in February 2002, the Company will pay annual consulting fees to the partnership equal to 2 percent of the new company's retail sales (defined as "the gross sales amount of all products sold by the Company in Australia and New Zealand determined by the suggested retail price") up to approximately $A10,000,000 in 1992 and $A12,000,000 in all subsequent years during the term and 3 percent of retail sales that exceed those figures. Total expense under this agreement approximated $96,000, $133,000 and $185,000 in 1997, 1996 and 1995, respectively. 17. Segment Information In 1995, substantially all of the Company's assets, sales and operating results were employed in or derived from the manufacture and direct sale of nutritional, diet and skin care products to a sales force of independent distributors who sell products directly to customers (network marketing). In late 1995, the Company began performing contract processing and packaging services for unrelated customers. F-25 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 17. Segment Information (continued) Segment data provided is for the 1997 and 1996 fiscal years only, as the Company began contract manufacturing in late 1995 and the results for 1995 were not material. 1997 1996 -------------------------------- Net sales Network marketing $ 45,311,467 $ 37,419,875 Contract manufacturing 1,524,803 3,310,118 -------------------------------- $ 46,836,270 $ 40,729,993 ================================ Operating income Network marketing $ 5,116,625 $ 4,055,671 Contract manufacturing (16,140) (200,532) Corporate expenses (1,589,374) (1,333,077) -------------------------------- Operating income 3,511,111 2,522,062 Nonoperating income (net) 113,145 147,771 Interest expense (210,268) (212,819) Income tax expense (1,385,000) (950,000) -------------------------------- Net income $ 2,028,988 $ 1,507,014 ================================ Identifiable assets Network marketing $ 12,740,414 $ 7,772,109 Contract manufacturing 803,108 1,420,786 Corporate 2,426,426 2,208,770 -------------------------------- $ 15,969,948 $ 11,401,665 ================================ Depreciation and amortization Network marketing $ 457,194 $ 452,483 Contract manufacturing 150,087 176,674 -------------------------------- $ 607,281 $ 629,157 ================================ Capital expenditures Network marketing $ 5,012,770 $ 384,818 Contract manufacturing 41,956 380,568 -------------------------------- $ 5,054,726 $ 765,386 ================================ Operating profit is total revenue less operating expenses, excluding interest, corporate expenses and income tax expense. Identifiable assets by business segment include both assets directly identified with those operations and an allocable share of jointly used assets. Corporate assets consist primarily of cash and nonoperating accounts receivable. F-26 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 18. Geographic Segment Data Financial information, summarized by geographic area, is as follows: United States inter-area transfers represent shipments of nutritional, diet and skin care products to the foreign subsidiaries.
United New States Australia Zealand Canada (1) Mexico (2) Eliminations Consolidated ------------------------------------------------------------------------------------------------ Year ended December 31, 1997 Net sales: Unaffiliated customers $41,718,773 $2,560,714 $888,710 $1,338,425 $329,648 $ -- $46,836,270 Inter-area transfers 751,555 48,570 -- -- -- (800,125) -- ----------------------------------------------------------------------------------------------- Total $42,470,328 $2,609,284 $888,710 $1,338,425 $329,648 $(800,125) $46,836,270 =============================================================================================== Net income (loss) $ 2,177,300 $ 49,910 $ (1,989) $ (109,750) $(86,483) $ -- $ 2,028,988 =============================================================================================== Identifiable assets $13,202,451 $1,488,667 $534,465 $ 467,467 $276,898 $ -- $15,969,948 =============================================================================================== (1) The Canadian subsidiary's loss from operations of $166,750 is offset by a United Stated federal tax benefit of approximately $57,000 related to the Canadian subsidiary's losses. (2) The Mexican subsidiary's loss from operations of $130,483 is offset by a United States federal tax benefit of approximately $44,000 related to the Mexican subsidiary's losses.
United New States Australia Zealand Canada (3) Mexico (4) Eliminations Consolidated ------------------------------------------------------------------------------------------------ Year ended December 31, 1996 Net sales: Unaffiliated customers $34,408,349 $3,550,213 $1,172,743 $1,246,624 $ 352,063 $ -- $40,729,992 Inter-area transfers 910,402 83,307 -- -- -- (993,709) -- ----------------------------------------------------------------------------------------------- Total $35,318,751 $3,663,520 $1,172,743 $1,246,624 $352,063 $(993,709) $40,729,992 =============================================================================================== Net income (loss) $ 1,685,771 $ 115,033 $ 19,717 $ (164,066) $(149,441) $ -- $ 1,507,014 =============================================================================================== Identifiable assets $ 8,340,211 $1,472,565 $ 668,501 $ 692,905 $ 227,483 $ -- $11,401,665 =============================================================================================== (3) Canadian subsidiary's loss from operations of $249,066 is offset by a United Stated federal tax benefit of approximately $85,000 related to the Canadian subsidiary's losses. (4) The Mexican subsidiary's loss from operations of $226,441 is offset by a United States federal tax benefit of approximately $77,000 related to the Mexican subsidiary's losses.
F-27 Reliv' International, Inc. and Subsidiaries Notes to Consolidated Financial Statements 18. Geographic Segment Data (continued)
United New States Australia Zealand Canada (5) Mexico (6) Eliminations Consolidated ---------------------------------------------------------------------------------------------- Year ended December 31, 1995 Net sales: Unaffiliated customers $22,223,817 $4,311,351 $1,448,785 $494,167 $ 435,753 $ -- $28,913,873 Inter-area transfers 92,976 197,620 -- -- -- (290,596) -- ---------------------------------------------------------------------------------------------- Total $22,316,793 $4,508,971 $1,448,785 $494,167 $ 435,753 $(290,596) $28,913,873 ============================================================================================== Net income (loss) $ 430,262 $ 232,536 $ 38,153 $ (185) $(130,943) $ -- $ 569,823 ============================================================================================== Identifiable assets $ 7,893,171 $1,473,242 $ 433,683 $342,990 $ 133,148 $ -- $10,276,234 ============================================================================================== (5) The Canadian subsidiary's loss from operations of $101,185 is offset by a United States federal tax benefit of approximately $101,000 related to the Canadian subsidiary's losses. (6) The Mexican subsidiary's loss from operations of $198,943 is offset by a United States federal tax benefit of approximately $68,000 related to the Mexican subsidiary's losses.
19. Quarterly Financial Data (Unaudited) First Second Third Fourth ---------------------------------------------------- (In thousands, except per share amounts) 1997 Net sales $ 12,670 $ 11,771 $ 11,480 $ 10,915 Cost of products sold $ 2,532 $ 2,337 $ 2,521 $ 2,015 Net income $ 819 $ 595 $ 282 $ 333 Earnings per share (1): Basic $ .09 $ .06 $ .03 $ .03 Diluted $ .08 $ .06 $ .03 $ .03 1996 Net sales $ 9,304 $ 9,448 $ 9,934 $ 12,044 Cost of products sold $ 2,568 $ 2,415 $ 2,348 $ 2,862 Net income $ 278 $ 302 $ 338 $ 589 Earnings per share (1): Basic $ .03 $ .03 $ .03 $ .06 Diluted $ .03 $ .03 $ .03 $ .06 (1) Per share data for 1996 reflects the pro forma effect of the Company's 10 percent stock dividend declared on January 31, 1997 and distributed on February 28, 1997. F-28 Reliv' International, Inc. and Subsidiaries Schedule II - Valuation and Qualifying Accounts For the years ended December 31, 1997, 1996 and 1995
Column A Column B Column C Column D Column E Column F - ---------------------------------------------------------------------------------------------------------- Additions ------------------------- Balance at Charged to Charged to Balance at beginning costs and other Deductions end Classification of year expenses accounts describe of year - ---------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 - ---------------------------- Deducted from asset accounts: Allowance for doubtful accounts $ 13,000 $ -- $ -- $ 5,400(1) $ 7,600 Reserve for obsolete inventory 125,000 -- -- 16,000(2) 109,000 Supporting liability accounts: Reserve for refunds 78,800 186,000 -- 214,800(3) 50,000 --------------------------------------------------------------------- Year ended December 31, 1996 - ---------------------------- Deducted from asset accounts: Allowance for doubtful accounts $ 7,000 $ 78,700 $ -- $ 72,700(1) $ 13,000 Reserve for obsolete inventory -- 125,000 -- -- 125,000 Supporting liability accounts: Reserve for refunds 78,800 92,000 -- 92,000(3) 78,800 ------------------------------------------------------------------------- Year ended December 31, 1995 - ---------------------------- Deducted from asset accounts: Allowance for doubtful accounts $ 29,000 $ -- 22,000(1) 7,000 Supporting liability accounts: Reserve for refunds 54,800 195,000 -- 171,000(3) 78,800 -------------------------------------------------------------------------- (1) Uncollectible accounts written off, net of recoveries. (2) Disposal of obsolete inventory. (3) Amounts refunded, net of salable amounts returned.
F-29 EX-10 2 EMPLOYMENT AGREEMENT EXHIBIT 10.7 EMPLOYMENT AGREEMENT THIS AGREEMENT is made and entered into this - day of June, 1997 effective for the term provided herein, by and between Reliv' International, Inc., an Illinois corporation (the "Company") and Robert L. Montgomery (hereinafter referred to as the "Executive"). WHEREAS, the Executive is presently, and for some time has been, employed as Chief Executive Officer the Company and has been instrumental in the organization and success of the Company; WHEREAS, the Company desires to be assured of the continued association and services of Executive and Executive desires to continue in the employment of the Company on the terms provided herein. NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1 . Employment, Duties and Authority. --------------------------------- 1.1 The Company hereby employs Executive and Executive hereby accepts employment by the Company on the terms, covenants and conditions herein contained. 1.2 The Executive is hereby employed by the Company as Chief Executive Officer. The Executive shall have such duties, responsibilities and authority as the by laws of the Company shall from time to time provide and as the Board of Directors of the Company shall from time to time prescribe in writing. 1.3 During the term of Executive's employment hereunder, and subject to the other provisions hereof, Executive shall devote his full energies, interest, abilities and productive time to the performance of his duties and responsibilities hereunder and will perform such duties and responsibilities faithfully and with reasonable care for the welfare of the Company. During the term of his employment hereunder, Executive shall not perform any services for compensation for any person, firm, partnership, company or corporation other than the Company without the express written consent of the Board of Directors of the Company. 2. Compensation and Benefits. ------------------------- 2.1 Basic Salary. ------------ 2.1.1 The Company shall pay to Executive during the initial term of employment hereunder and each renewal term a basic salary at an annual rate to be determined by the Board of Directors of the Company but not less than the 1 amount of $485,000. Such basic salary shall be paid by the Company to Executive each month, less amounts which the Company may be required to withhold from such payments by applicable federal state or local laws or regulations. 2.1.2 If the Executive shall be absent from work on account of personal injuries or sickness, he shall continue to receive the payments provided for in paragraph 2. 1.1 hereof; provided, however, that any such payment may, at the Company's option, be reduced by the amount which the Executive may receive, for the period covered by any such payments, in disability payments (i) pursuant to any disability insurance which the Company, in its sole discretion, may maintain, or (ii) under any governmental program for disability compensation. 2.1.3 The Company agrees that the rate of the basic salary of the Executive hereunder shall be reviewed annually by the Board of Directors or such committee of the Board of Directors designated by it to review such matters and that the rate of the basic salary shall be determined and adjusted for each year during the term of Executive's employment hereunder by the Board of Directors or such committee commensurate with (i) the performance of Executive, (ii) the net income of the Company during the preceding fiscal year and as projected for the fiscal year for which the basic salary determination is made, (iii) comparable rates of compensation for executives and (iv) such other factors as the Board of Directors or such committee may deem relevant to the determination. 2.2 Additional Compensation. ------------------------ 2.2.1 Executive shall be a participant in the Company's Annual and Long Term Incentive Compensation Plans adopted by the Board of Directors of the Company as of April 13, 1994, as amended from time to time, and any other incentive compensation or executive bonus plan which the Company may adopt or which shad be in effect at any time during the term hereof. 2.2.2 The Company has adopted a Stock Option Plan and Executive shag participate in stock options issued to executives of the Company pursuant to such Plan, or such other stock options or bonus plans as the Company may adopt from time to time, in such amounts and on such terms as the Board of Directors of the Company shall from time to time determine. 2.3 Benefits: Expense Reimbursement. -------------------------------- 2.3.1 The Executive shall be entitled to, and shall receive, all other benefits of employment available to other executives of the Company generally, including, without limitation, participation in any hospital surgical medical or other group health plans or accident benefits, life insurance benefits, pension or 2 profit-sharing plans, bonus plans or vacation plans as shall be instituted by the Company, in its sole discretion 2.3.2 During the term hereof the Company shall reimburse Executive for all reasonable and necessary expenses incurred by Executive in the performance of his duties hereunder, including without limitation, travel meals, lodging, office supplies or equipment subject to such reasonable limitations, restrictions and reporting standards as the Board of Directors of the Company may from time to time establish. Executive shall provide to the Company promptly after incurring any such expenses a detailed report thereof and such information relating thereto as the Company shall from time to time require. Such information shall be sufficient to support the deductibility of all such expenses by the Company for federal income tax purposes. 2.3.3 The Company shall provide to Executive the use of an automobile. 2.4 Reduced Services and Compensation. ---------------------------------- 2.4.1 At the election of Executive at any time during the term hereof after Executive shall have attained the age of 60, Executive shall be entitled to elect to continue employment with the Company hereunder at a reduced level of service in accordance with the provisions of this paragraph. 2.4.2 Executive shall make the election by written notice to the Company. The terms of this paragraph shall become applicable and effective on the first day of the month immediately following the month in which such notice is given and shall remain effective until termination of this Agreement or the election of Executive pursuant to paragraph 5 hereof 2.4.3 During the period that the election of Executive pursuant to this paragraph shall be effective: (A) Executive shall continue as an employee of the Company for the remaining term or renewal terms of this Agreement; (B) Executive's obligation to perform services for the Company shall be at the rate of approximately 85 hours per month. The time of performance of services shall be within the discretion of Executive and in accordance with such arrangements as Executive and the Company shall determine. (C) Executive's title and duties shall be modified as Executive and the Company shall agree, provided that Executive shall remain Executive Vice President of the Company and shall retain duties and authority consistent with such position. 3 (D) Executive's compensation shall be adjusted consistent with the reduction in his service. Executive's rate of base salary shall be adjusted to an amount equal to one-half of the annual rate of base salary in effect at the time of Executive's election pursuant to this paragraph, subject to modification in accordance with the provisions of paragraph 2.1.3 hereof (E) The provisions of this paragraph shall control and shall supersede any conflicting provisions of this Agreement. Except as modified by the provisions of this paragraph, all provisions of this Agreement shall remain in full force and effect. 3. Term. ---- The employment of Executive hereunder shall be for a term commencing on January 1, 1997 and expiring on December 31, 2002. Upon the expiration of the initial term or any renewal term of Executive's employment hereunder, the term of such employment automatically shall be renewed for an additional term of one year commenci on January 1 and expiring on the, succeeding December 31 unless Executive or the Company shall give notice of the termination of Executive's employment and this Agreement by written notice to the other more than 120 days prior to the date of expiration of the initial or any renewal term. In the event that such notice of termination shall be given timely, subject to any accrued rights of Executive to incentive or other compensation, including without limitation pursuant to the provisions of paragraph 5 hereof, this Agreement shall terminate on the date of expiration of such initial or renewal term. 4. Termination. ----------- 4.1 The Company shall be entitled to terminate this Agreement prior to the expiration of its term or any renewal term on the occurrence of either: 4.1.1 an event of default with respect to Executive as provided herein, or 4.1.2 the permanent mental or physical disability of Executive as provided herein occurring during the term or any renewal term of Executive's employment hereunder. 4.2 For purposes of this Agreement, an event of default with respect to Executive shall include: 4.2.1 Any failure by Executive to perform his duties, responsibilities or obligations hereunder in a faithful and diligent manner or with reasonable care and (if such failure can be cured) the failure by Executive to cure such failure within 10 days after written notice thereof shall have been given to Executive by the Company; or 4 4.2.2 Commission by Executive of any material act of dishonesty as an employee of the Company or of disloyalty to the Company, or any wrongful or unauthorized appropriation, taking or misuse of funds, property or business opportunities of the Company. 4.3 Permanent mental or physical disability of Executive shall be deemed to have occurred hereunder when Executive shall have failed or been unable to perform his duties hereunder on a full-time basis for an aggregate of 180 days in any one period of 210 consecutive days and with a certification from a licensed physician in the State of Missouri that Executive is permanently disabled from performing his duties hereunder. 4.4 Executive shall be entitled to terminate his employment with the Company under this Agreement prior to the expiration of its term upon the occurrence of an event of default with respect to the Company. 4.5 For purposes of this Agreement an event of default with respect to the Company shall include: 4.5.1 Any failure by the Company to perform its obligations to Executive under this Agreement and (if such failure can be cured) the failure by the Company to cure such failure within 10 days after written notice thereof shall have been given to the Company by Executive; 4.5.2 The Company shall: (a) admit in writing its inability to pay its debts generally as they become due, (b) file a petition for relief under any chapter of Title 11 of the United States Code or a petition to take advantage of any insolvency under the laws of the United States of America or any state thereof, (c) make an assignment for the benefit of its creditors, (d) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, (e) suffer the entry of an order for relief under any chapter of Title 11 of the United Sates Code, or file a petition or answer seeking reorganization under the Federal Bankruptcy Laws or any other applicable law or statute of the United States of America or any state thereof. 4.6 In the event of termination of this Agreement and Executive's employment hereunder by the Company pursuant to paragraph 4.1 hereof all rights and obligations of 5 the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.6.1 Executive shall be entitled to receive (subject to any rights of set off or counterclaim by the Company) all salary, additional compensation and benefits, including without limitation pursuant to the Supplemental Executive Retirement Plan of the Company, which shall have accrued prior to the date of such termination and the obligation of the Company for the payment of salary, additional compensation or benefits shall terminate as at the date of such termination; 4.6.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination, and all provisions of this Agreement provided herein to survive termination of employment of Executive hereunder, shall survive such termination and the Company and Executive shall continue to be bound by such provisions in accordance with the terms thereof, 4.7 In the event of termination of the Agreement by Executive in accordance with paragraph 4.4 hereof, all rights and obligations of the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.7.1 Executive shall be entitled to receive all salary, additional compensation and benefits which shall have accrued prior to the date of such termination and the Company's obligation for the payment of salary, additional compensation and benefits shall terminate as of the date of such termination; 4.7.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination and the obligations of Executive pursuant to paragraphs 6, 7 and 8 provided herein to survive termination of employment of Executive hereunder shall survive such termination and the Executive shall continue to be bound by such provisions in accordance with their terms. 4.8 This Agreement and all rights and obligations of the parties hereunder shall terminate immediately upon the death of Executive except that the Company shall pay to the heirs, legatees or personal representative of Executive (i) all compensation or benefits hereunder accrued but not paid to the date of Executive's death, (ii) all amounts which may become due pursuant to any compensation program providing for payments to the beneficiaries of Executive upon his death and (iii) an amount equal to the total compensation which would have been payable to Executive hereunder, but for his death, for a period of six months from the date of his death. 6 5. Consultation Period. -------------------- 5.1 The Executive may at any time during the term of this Agreement and after the Executive has attained the age of 60 deliver to the Company a notice in writing to the effect that the active employment of Executive with the Company is to terminate as of the first day of the calendar month next following the date on which the notice is delivered, or as of the first day of any specified calendar month thereafter. The active employment of Executive hereunder shall terminate on the date so specified and then from and after such termination date and for a period of 120 months (the "Consultation Period"), he shall serve as a consultant to the Company with respect to such business matters and at such time or times as the Company may reasonably request. However, Executive shall not be required to undertake any assignment inconsistent with the dignity, importance, and scope of his prior position or with his physical and mental health at the time. Moreover, while it is the intent of this Agreement that the mutual convenience of the parties be served, it is understood that Executive shall act during the Consultation Period in the capacity of an independent contractor and shall not be subject to the direction, control or supervision of the Company with respect to the time spent, research undertaken, or procedures followed in the performance of his consulting services hereunder. In particular, Executive will not be required without his consent to undertake any assignment which would require him to leave his city of residence at the time for purposes of such consultation. During the Consultation Period, the Company shall pay to Executive the Deferred Compensation Benefit (as defined in paragraph 5.2 below). Executive shall have no right to receive Additional Compensation as provided in paragraph 2.2 or Benefits as provided in paragraph 2.3 during the Consultation Period. Upon the termination of his active employment hereunder, and again upon expiration of the Consultation Period, Executive or his estate shall deliver to the Company all original files then in his or its possession pertaining to the business of the Company. 5.2 Executive's Deferred Compensation Benefit shall be paid not less frequently than monthly at an initial annual rate equal to 20% percent of the average annual compensation paid to Executive in the form of salary and bonuses (but excluding all other payments made to or for his benefit and any reimbursement of expenses) with respect to the five complete fiscal years of the Company immediately preceding the earlier of (a) his termination of employment or (b) his election to continue employment at a reduced level of service pursuant to paragraph 2.4 hereof Effective July I in each year during the Consultation period and for the twelve months ending the following June 30, payments of the Deferred Compensation Benefit shall be automatically increased or decreased, as the case may be, by the percentage change in the Consumer Price Index U.S. City Average from that published for the month of June preceding the date of Executive's termination of employment as compared with that published for the month of June immediately preceding such July 1. No Deferred Compensation Benefit payable hereunder shall be deemed salary or other compensation to Executive for the purpose of computing benefits to which Executive may be entitled under any pension or profit-sharing plan or other arrangement of the Company for the benefit of its employees, nor 7 shall anything contained herein affect any rights or obligations which Executive may now have under any such plan or arrangement. 5.3 All payments of the Deferred Compensation Benefit shall be paid in cash from the general funds of the Company and no special or separate fund shall be established and no other segregation of assets shall be made to assure the payment of such Deferred Compensation Benefit. Executive shall have no right, title, or interest whatever in or to any investments which the Company may make to aid it in meeting its obligation hereunder. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and Executive or any other person. To the extent that any person acquires a right to receive payments from the Company, such right shall be no greater than the right of an unsecured creditor. 5.4 The Company may terminate the Consultation Period and its obligation to make payments of the Deferred Compensation Benefit upon the occurrence of an event of default with respect to Executive as specified in Section 4.2.2 or upon breach by Executive of its continuing obligations under paragraphs 6, 7, 8 or 9 of this Agreement. 6. Confidential Information. ------------------------- 6.1 "Confidential Information" means information disclosed by the Company to Executive, or developed or obtained by Executive during his employment by the Company, either before the date or during the term of this Agreement, or during the Consultation Period, provided that such information is not generally known in the business and industry in which the Company is or may subsequently become engaged, relating to or concerning the business, projects, products, processes, formulas, know-how, techniques, designs or methods of the Company, whether relating to research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, selling or otherwise. Without limitation, Confidential Information shall include all know-how, technical information, inventions, ideas, concepts, processes and designs relating to products of the Company, whether now existing or hereafter developed, and all prices, customer or distributor names, customer or distributor lists, marketing and other relationships, whether contractual or not, between the Company, its suppliers, customers, distributors, employees, agents, consultants and independent contractors but shall exclude the names of customers or distributors known to Executive prior to the effective date hereof. 6.2 Executive agrees that, during the term hereof or while Executive shall receive compensation hereunder and after termination of his employment with the Company for so long as the Confidential Information shall not be generally known or generally disclosed (except by Executive or by means of wrongful use or disclosure), Executive shall not use any Confidential Information, except on behalf of the Company, or disclose any Confidential Information to any person, firm, partnership, company, 8 corporation or other entity, except as authorized by the President or the Board of Directors of the Company. 7. Inventions. ----------- 7.1 "Inventions" shall mean discoveries, concepts, ideas, designs, methods, formulas, know-how, techniques or any improvements thereon, whether patentable or not, made, conceived or developed, in whole or in part, by Executive. 7.2 Executive covenants and agrees to communicate and fully disclose to the Board of Directors of the Company any and all Inventions made or conceived by him during the term hereof or while receiving any compensation or payment from the Company and further agrees that any and all such Inventions which he may conceive or make, during the term hereof or while receiving any compensation or payments from the Company, shall be at all times and for all purposes regarded as acquired and held by him in a fiduciary capacity and solely for the benefit of the Company and shall be the sole and exclusive property of the Company. The provisions of this subparagraph shall not apply to an invention for which no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on the Executive's own time, unless (a) the invention relates (i) to the business of the Company, or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) the invention relates from any work performed by Executive for the Company. 7.3 Executive also covenants and agrees that he will assist the Company in every proper way upon request to obtain for its benefit patents for any and all inventions referred to in paragraph 7.2 hereof in any and all countries. All such patents and patent applications are to be, and remain, the exclusive property of the Company for the RM term thereof and to that end, the Executive covenants and agrees that he will, whenever so requested by the Company or its duly authorized agent, make, execute and deliver to the Company, its successors, assigns or nominees, without charge to the Company, any all applications, applications for divisions, renewals, reissues, specifications, oaths, assignments and all other instruments which the Company shall deem necessary or appropriate in order to apply for and obtain patents of the United States or foreign countries for any and all Inventions referred to in paragraph 7.2 hereof or in order to assign and convey to the Company, its successors, assigns or nominees, the sole and exclusive right, title and interest in and to such Inventions, applications or patents. Executive likewise covenants and agrees that his obligations to execute any such instruments or papers shall continue after the expiration or termination of this Agreement with respect to any and all such Inventions, and such obligations shall be binding upon his heirs, executors, assigns, administrators or other legal representatives. 8. Writings and Working Papers. ---------------------------- Executive covenants and agrees that any and all books, textbooks, letters, pamphlets, drafts, memoranda or other writings of any kind written by him for or on behalf of the Company 9 or in the performance of Executive's duties hereunder, Confidential Information referred to in paragraph 6.1 hereof and all notes, records and drawings made or kept by him of work performed in connection with his employment by the Company shall be and are the sole and exclusive property of the Company and the Company shall be entitled to any and all copyrights thereon or other rights relating thereto. Executive agrees to execute any and all documents or papers of any nature which the Company or its successors, assigns or nominees deem necessary or appropriate to acquire, enhance, protect, perfect, assign, sell or transfer its rights under this paragraph. Executive also agrees that upon request he will place all such notes, records and drawings in the Company's possession and will not take with him without the written consent of a duly authorized officer of the Company any notes, records, drawings, blueprints or other reproductions relating or pertaining to or connected with his employment of the business, books, textbooks, pamphlets, documents work or investigations of the Company. The obligations of this paragraph survive the term of employment hereunder or the termination or expiration of the term or any renewal term hereof or the term or termination of the Consultation Period. 9. Covenant Not to Compete. ------------------------ 9.1 For purposes of this paragraph: 9.1.1 "Conflicting organization" means any person, firm, company, partnership, business, corporation or other entity engaged in, or intending to engage in, research, development, production, marketing or selling a Conflicting Product. 9.1.2 "Conflicting Product" means any product, process, service or design which competes with, or is reasonably interchangeable as a substitute for, any product, process, service or design developed, planned, under development, produced marketed or sold by the Company or any Affiliate during the term of the covenant in this paragraph 9. Without limitation, Conflicting Product includes any food product or nutritional supplement or product, or skin care product, which is marketed or sold, or intended to be marketed or sold, by direct or multilevel sales. 9.1.3 "Territory" means the geographic area within which the Company or any Affiliate or any distributor or representative of the Company or any Affiliate is actively engaged in the sale of, or efforts to sell the products of the Company or any Affiliate at any time during the term of this Agreement. 9.1.4 "Affiliate" shall mean any corporation of which the Company, or any Affiliate, shall own majority of the capital stock. 9.2 Executive acknowledges and agrees as follows: 9.2.1 That the Company and its Affiliates have developed, and are developing and establishing, a valuable and extensive trade in its services and products, including without limitation, nutritional food and dietary products, and 10 skin care products and that they have developed, and are developing, operations and distributors to sell such products and services throughout the United States and in foreign countries. 9.2.2 That the Company and its Affiliates have developed, and are developing, at great expense, technical information concerning their products and methods of marketing and sale which are kept and protected as Confidential Information and trade secrets and are of great value to the Company and its affiliates. 9.2.3 That, during the course of his employment with the Company or an Affiliate and during the term of this Agreement, Executive has participated, and will participate, in such matters and has acquired and will acquire, possession of Confidential Information, and that Executive has had significant responsibility for the development activities of the Company and the development of unique products, methods and techniques of the Company and its Affiliates. 9.2.4 That, for Executive to utilize Confidential information of the Company and its Affiliates, or unique skills, techniques or information developed by him while an employee of the Company or its Affiliates or during the term of this Agreement for a Conflicting Organization within the area or time provided herein would result in material and irreparable injury to the Company. 9.2.5 That the area and conduct covered by the restrictive covenant in this paragraph includes only a percentage of the total number of organizations and individuals who are customers or distributors or potential customer or distributors for products, processes or services with respect to which Executive has knowledge or expertise, that Executive would be able to utilize his knowledge, experience and expertise for an employer while fully complying with the terms of this paragraph and that the terms and conditions of this paragraph are reasonable and necessary for the protection of the Company's business and assets. 9.3 Executive agrees that, during the term of this Agreement, during the term of the Consultation Period, for so long as Executive shall be receiving compensation hereunder, and for a period of 36 months from and after the date of termination of this Agreement (other than by Executive pursuant to paragraph 4.4 hereof), he will not, anywhere within the Territory, directly or indirectly, whether as an employee, agent, officer, consultant, partner, owner, shareholder or otherwise: 9.3.1 solicit, or enter into any arrangement or agreement with, or participate with, provide services to, or be employed by any person, company, partnership, business or corporation which shall solicit, or enter into any arrangement with, any person who is, or at any time during the term of this Agreement has been, a distributor for the Company or any Affiliate, to become a 11 distributor for a Conflicting Organization or for any organization engaged in the direct or multilevel sale of any product or service; 9.3.2 solicit for the sale of, or participate with, provide services to, or be employed by any person, company, partnership, business or corporation which shall solicit for the sale of any Conflicting Product by a Conflicting Organization to any person who has been, during the term hereof a customer of the Company or any Affiliate; and 9.3.3 engage or participate in, be employed by, or provide services or assistance to, any Conflicting Organization. 10. Specific Enforcement. --------------------- Executive is obligated under this Agreement to render service of a special unique, unusual extraordinary and intellectual character, thereby giving this Agreement peculiar value so that the loss of such service or violation by Executive of this Agreement could not reasonably or adequately be compensated in damages in an action at law. Therefore, in addition to other remedies provided by law, the Company shall have the right during the term or any renewal term of this Agreement (or thereafter with respect to obligations continuing after the expiration or termination of this Agreement) to compel specific performance hereof by Executive or to obtain injunctive relief against violations hereof by Executive, and if the Company prevails in any proceeding therefor, it will also be entitled to recover all costs and expenses incurred by the Company in connection therewith, including attorneys' fees. 11. Assignment. ----------- The rights and duties of a party hereunder shall not be assignable by that party, except that the Company may assign this Agreement and all rights and obligations hereunder to, and may require the assumption thereof by, any corporation or any other business entity which succeeds to all or substantially all the business of the Company through merger, consolidation or corporate reorganization or by acquisition of all or substantially all of the assets of the Company. 12. Binding Effect. --------------- This Agreement shall be binding upon the parties hereto and their respective successors in interest, heirs and personal representatives and, to the extent permitted herein, the assigns of the Company. 13. Severability. ------------- If any provision of this Agreement or any part hereof or application hereof to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the remainder of such provision or the application of such provision to persons or circumstances other than those as to which it 12 has been held invalid or unenforceable, shall not be affected thereby and each provision of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The parties also agree that, if any portion of this Agreement, or any part hereof or application hereof to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, any court may so modify the objectionable provision so as to make it valid, reasonable and enforceable. 14. Notices. -------- All notices, or other communication required or permitted to be given hereunder shall be in writing and shall be delivered personally or mailed, certified mail return receipt requested, postage prepaid, to the parties as follows: If to the Company: Carl W. Hastings Executive Vice President Reliv' International, Inc. P. 0. Box 405 Chesterfield, MO 63006-0405 If to Executive: Robert L. Montgomery 17945 Wild Horse Creek Road Chesterfield, MO 63005 Any notice mailed in accordance with the terms hereof shall be deemed received on the third day following the date of mailing. Either party may change the address to which notices to such party may be given hereunder by serving a proper notice of such change of address to the other party. 15. Entire Agreement. ----------------- This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, agreements, commitments, contracts or understandings with respect thereto and no modification, alteration or amendment to this Agreement may be made unless the same shall be in writing and signed by both of the parties hereto. 16. Waivers. -------- No failure by either party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by either party to demand exact compliance with the terms hereof Waiver by either party of any particular default by the other party shall not affect or impair such party's rights in respect to any subsequent default of 13 the same or a different nature, nor shall any delay or omission of either party to exercise any rights arising from any default by the other party affect or impair such party's rights as to such default or any subsequent default. 17. Governing Law-, Jurisdiction. ----------------------------- 17.1 For purposes of construction, interpretation and enforcement, this Agreement shall be deemed to have been entered into under the laws of the State of Missouri and its validity, effect, performance, interpretation, construction and enforcement shall be governed by and subject to the laws of the State of Missouri. 17.2 Any and all suits for any and every breach of this Agreement may be instituted and maintained in any court of competent jurisdiction in the State of Missouri and the parties hereto consent to the jurisdiction and venue in such court and the service of process by certified mail to the addresses for the parties provided for notices herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, and year first above written. RELIV INTERNATIONAL, INC. By: /s/ Carl W. Hastings -------------------- Authorized Officer Attest: /s/ Stephen M. Merrick - ---------------------- Secretary EXECUTIVE: /s/ Robert L. Montgomery ------------------------ Robert L. Montgomery 14 EX-10 3 EMPLOYMENT AGREEMENT EXHIBIT 10.8 EMPLOYMENT AGREEMENT -------------------- THIS AGREEMENT is made and entered into this - day of June, 1997 effective for the term provided herein, by and between Reliv' International, Inc., an Illinois corporation (the "Company") and Carl W. Hastings (hereinafter referred to as the "Executive"). WHEREAS, the Executive is presently, and for some time has been, employed as Executive Vice President of the Company and has been instrumental in the organization and success of the Company; WHEREAS, the Company desires to be assured of the continued association and services of Executive and Executive desires to continue in the employment of the Company on the terms provided herein. NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1 . Employment, Duties and Authority. --------------------------------- 1.1 The Company hereby employs Executive and Executive hereby accepts employment by the Company on the terms, covenants and conditions herein contained. 1.2 The Executive is hereby employed by the Company as Executive Vice President. The Executive shall have such duties, responsibilities and authority as the bylaws of the Company shall from time to time provide and as the Board of Directors of the Company shall from time to time prescribe in writing. 1.3 During the term of Executive's employment hereunder, and subject to the other provisions hereof, Executive shall devote his full energies, interest, abilities and productive time to the performance of his duties and responsibilities hereunder and will perform such duties and responsibilities faithfully and with reasonable care for the welfare of the Company. During the term of his employment hereunder, Executive shall not perform any services for compensation for any person, firm, partnership, company or corporation other than the Company without the express written consent of the Board of Directors of the Company. 1 2. Compensation and Benefits. -------------------------- 2.1 Basic Salary. ------------ 2.1.1 The Company shall pay to Executive during the initial term of employment hereunder and each renewal term a basic salary at an annual rate to be determined by the Board of Directors of the Company but not less than the amount of $275,000. Such basic salary shall be paid by the Company to Executive each month, less amounts which the Company may be required to withhold from such payments by applicable federal state or local laws or regulations. 2.1.2 If the Executive shall be absent from work on account of personal injuries or sickness, he shall continue to receive the payments provided for in paragraph 2. 1.1 hereof; provided, however, that any such payment may, at the Company's option, be reduced by the amount which the Executive may receive, for the period covered by any such payments, in disability payments (i) pursuant to any disability insurance which the Company, in its sole discretion, may maintain, or (ii) under any governmental program for disability compensation. 2.1.3 The Company agrees that the rate of the basic salary of the Executive hereunder shall be reviewed annually by the Board of Directors or such committee of the Board of Directors designated by it to review such matters and that the rate of the basic salary shall be determined and adjusted for each year during the term of Executive's employment hereunder by the Board of Directors or such committee commensurate with (i) the performance of Executive, (ii) the net income of the Company during the preceding fiscal year and as projected for the fiscal year for which the basic salary determination is made, (iii) comparable rates of compensation for executives and (iv) such other factors as the Board of Directors or such committee may deem relevant to the determination. 2.2 Additional Compensation. ----------------------- 2.2.1 Executive shall be a participant in the Company's Annual and Long Term Incentive Compensation Plans adopted by the Board of Directors of the Company as of April 13, 1994, as amended from time to time, and any other incentive compensation or executive bonus plan which the Company may adopt or which shad be in effect at any time during the term hereof. 2.2.2 The Company has adopted a Stock Option Plan and Executive shag participate in stock options issued to executives of the Company pursuant to such Plan, or such other stock options or bonus plans as the 2 Company may adopt from time to time, in such amounts and on such terms as the Board of Directors of the Company shall from time to time determine. 2.3 Benefits: Expense Reimbursement. -------------------------------- 2.3.1 The Executive shall be entitled to, and shall receive, all other benefits of employment available to other executives of the Company generally, including, without limitation, participation in any hospital surgical medical or other group health plans or accident benefits, life insurance benefits, pension or profit-sharing plans, bonus plans or vacation plans as shall be instituted by the Company, in its sole discretion 2.3.2 During the term hereof the Company shall reimburse Executive for all reasonable and necessary expenses incurred by Executive in the performance of his duties hereunder, including without limitation, travel meals, lodging, office supplies or equipment subject to such reasonable limitations, restrictions and reporting standards as the Board of Directors of the Company may from time to time establish. Executive shall provide to the Company promptly after incurring any such expenses a detailed report thereof and such information relating thereto as the Company shall from time to time require. Such information shall be sufficient to support the deductibility of all such expenses by the Company for federal income tax purposes. 2.3.3 The Company shall provide to Executive the use of an automobile. 2.4 Reduced Services and Compensation. --------------------------------- 2.4.1 At the election of Executive at any time during the term hereof after Executive shall have attained the age of 60, Executive shall be entitled to elect to continue employment with the Company hereunder at a reduced level of service in accordance with the provisions of this paragraph. 2.4.2 Executive shall make the election by written notice to the Company. The terms of this paragraph shall become applicable and effective on the first day of the month immediately following the month in which such notice is given and shall remain effective until termination of this Agreement or the election of Executive pursuant to paragraph 5 hereof 3 2.4.3 During the period that the election of Executive pursuant to this paragraph shall be effective: (A) Executive shall continue as an employee of the Company for the remaining term or renewal terms of this Agreement; (B) Executive's obligation to perform services for the Company shall be at the rate of approximately 85 hours per month. The time of performance of services shall be within the discretion of Executive and in accordance with such arrangements as Executive and the Company shall determine. (C) Executive's title and duties shall be modified as Executive and the Company shall agree, provided that Executive shall remain Executive Vice President of the Company and shall retain duties and authority consistent with such position. (D) Executive's compensation shall be adjusted consistent with the reduction in his service. Executive's rate of base salary shall be adjusted to an amount equal to one-half of the annual rate of base salary in effect at the time of Executive's election pursuant to this paragraph, subject to modification in accordance with the provisions of paragraph 2.1.3 hereof (E) The provisions of this paragraph shall control and shall supersede any conflicting provisions of this Agreement. Except as modified by the provisions of this paragraph, all provisions of this Agreement shall remain in full force and effect. 3. Term. ---- The employment of Executive hereunder shall be for a term commencing on January 1, 1997 and expiring on December 31, 2002. Upon the expiration of the initial term or any renewal term of Executive's employment hereunder, the term of such employment automatically shall be renewed for an additional term of one year commenci on January 1 and expiring on the, succeeding December 31 unless Executive or the Company shall give notice of the termination of Executive's employment and this Agreement by written notice to the other more than 120 days prior to the date of expiration of the initial or any renewal term. In the event that such notice of termination shall be given timely, subject to any accrued rights of Executive to incentive or other 4 compensation, including without limitation pursuant to the provisions of paragraph 5 hereof, this Agreement shall terminate on the date of expiration of such initial or renewal term. 4. Termination. ------------ 4.1 The Company shall be entitled to terminate this Agreement prior to the expiration of its term or any renewal term on the occurrence of either: 4.1.1 an event of default with respect to Executive as provided herein, or 4.1.2 the permanent mental or physical disability of Executive as provided herein occurring during the term or any renewal term of Executive's employment hereunder. 4.2 For purposes of this Agreement, an event of default with respect to Executive shall include: 4.2.1 Any failure by Executive to perform his duties, responsibilities or obligations hereunder in a faithful and diligent manner or with reasonable care and (if such failure can be cured) the failure by Executive to cure such failure within 10 days after written notice thereof shall have been given to Executive by the Company; or 4.2.2 Commission by Executive of any material act of dishonesty as an employee of the Company or of disloyalty to the Company, or any wrongful or unauthorized appropriation, taking or misuse of funds, property or business opportunities of the Company. 4.3 Permanent mental or physical disability of Executive shall be deemed to have occurred hereunder when Executive shall have failed or been unable to perform his duties hereunder on a full-time basis for an aggregate of 180 days in any one period of 210 consecutive days and with a certification from a licensed physician in the State of Missouri that Executive is permanently disabled from performing his duties hereunder. 4.4 Executive shall be entitled to terminate his employment with the Company under this Agreement prior to the expiration of its term upon the occurrence of an event of default with respect to the Company. 5 4.5 For purposes of this Agreement an event of default with respect to the Company shall include: 4.5.1 Any failure by the Company to perform its obligations to Executive under this Agreement and (if such failure can be cured) the failure by the Company to cure such failure within 10 days after written notice thereof shall have been given to the Company by Executive; 4.5.2 The Company shall: (a) admit in writing its inabilitY to pay its debts generally as they become due, (b) file a petition for relief under any chapter of Title 11 of the United States Code or a petition to take advantage of any insolvency under the laws of the United States of America or any state thereof, (c) make an assignment for the benefit of its creditors, (d) consent to the appointment of a receiver of itself or of the whole or any substantial part of its property, (e) suffer the entry of an order for relief under any chapter of Title 11 of the United Sates Code, or file a petition or answer seeking reorganization under the Federal Bankruptcy Laws or any other applicable law or statute of the United States of America or any state thereof. 4.6 In the event of termination of this Agreement and Executive's employment hereunder by the Company pursuant to paragraph 4.1 hereof all rights and obligations of the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.6.1 Executive shall be entitled to receive (subject to any rights of set off or counterclaim by the Company) all salary, additional compensation and benefits, including without limitation pursuant to the Supplemental Executive Retirement Plan of the Company, which shall have accrued prior to the date of such termination and the obligation of the Company for the payment of salary, additional compensation or benefits shall terminate as at the date of such termination; 6 4.6.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination, and all provisions of this Agreement provided herein to survive termination of employment of Executive hereunder, shall survive such termination and the Company and Executive shall continue to be bound by such provisions in accordance with the terms thereof, 4.7 In the event of termination of the Agreement by Executive in accordance with paragraph 4.4 hereof, all rights and obligations of the Company and Executive hereunder shall terminate on the date of such termination, subject to the following: 4.7.1 Executive shall be entitled to receive all salary, additional compensation and benefits which shall have accrued prior to the date of such termination and the Company's obligation for the payment of salary, additional compensation and benefits shall terminate as of the date of such termination; 4.7.2 All rights of the Company or Executive which shall have accrued hereunder prior to the date of such termination and the obligations of Executive pursuant to paragraphs 6, 7 and 8 provided herein to survive termination of employment of Executive hereunder shall survive such termination and the Executive shall continue to be bound by such provisions in accordance with their terms. 4.8 This Agreement and all rights and obligations of the parties hereunder shall terminate immediately upon the death of Executive except that the Company shall pay to the heirs, legatees or personal representative of Executive (i) all compensation or benefits hereunder accrued but not paid to the date of Executive's death, (ii) all amounts which may become due pursuant to any compensation program providing for payments to the beneficiaries of Executive upon his death and (iii) an amount equal to the total compensation which would have been payable to Executive hereunder, but for his death, for a period of six months from the date of his death. 5. Consultation Period. -------------------- 5.1 The Executive may at any time during the term of this Agreement and after the Executive has attained the age of 60 deliver to the Company a notice in writing to the effect that the active employment of Executive with the Company 7 is to terminate as of the first day of the calendar month next following the date on which the notice is delivered, or as of the first day of any specified calendar month thereafter. The active employment of Executive hereunder shall terminate on the date so specified and then from and after such termination date and for a period of 120 months (the "Consultation Period"), he shall serve as a consultant to the Company with respect to such business matters and at such time or times as the Company may reasonably request. However, Executive shall not be required to undertake any assignment inconsistent with the dignity, importance, and scope of his prior position or with his physical and mental health at the time. Moreover, while it is the intent of this Agreement that the mutual convenience of the parties be served, it is understood that Executive shall act during the Consultation Period in the capacity of an independent contractor and shall not be subject to the direction, control or supervision of the Company with respect to the time spent, research undertaken, or procedures followed in the performance of his consulting services hereunder. In particular, Executive will not be required without his consent to undertake any assignment which would require him to leave his city of residence at the time for purposes of such consultation. During the Consultation Period, the Company shall pay to Executive the Deferred Compensation Benefit (as defined in paragraph 5.2 below). Executive shall have no right to receive Additional Compensation as provided in paragraph 2.2 or Benefits as provided in paragraph 2.3 during the Consultation Period. Upon the termination of his active employment hereunder, and again upon expiration of the Consultation Period, Executive or his estate shall deliver to the Company all original files then in his or its possession pertaining to the business of the Company. 5.2 Executive's Deferred Compensation Benefit shall be paid not less frequently than monthly at an initial annual rate equal to 20% percent of the average annual compensation paid to Executive in the form of salary and bonuses (but excluding all other payments made to or for his benefit and any reimbursement of expenses) with respect to the five complete fiscal years of the Company immediately preceding the earlier of (a) his termination of employment or (b) his election to continue employment at a reduced level of service pursuant to paragraph 2.4 hereof Effective July I in each year during the Consultation period and for the twelve months ending the following June 30, payments of the Deferred Compensation Benefit shall be automatically increased or decreased, as the case may be, by the percentage change in the Consumer Price Index U.S. City Average from that published for the month of June preceding the date of Executive's termination of employment as compared with that published for the month of June immediately preceding such July 1. No Deferred Compensation Benefit payable hereunder shall be deemed salary or other compensation to Executive for the purpose of computing benefits to which Executive may be entitled under any 8 pension or profit-sharing plan or other arrangement of the Company for the benefit of its employees, nor shall anything contained herein affect any rights or obligations which Executive may now have under any such plan or arrangement. 5.3 All payments of the Deferred Compensation Benefit shall be paid in cash from the general funds of the Company and no special or separate fund shall be established and no other segregation of assets shall be made to assure the payment of such Deferred Compensation Benefit. Executive shall have no right, title, or interest whatever in or to any investments which the Company may make to aid it in meeting its obligation hereunder. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and Executive or any other person. To the extent that any person acquires a right to receive payments from the Company, such right shall be no greater than the right of an unsecured creditor. 5.4 The Company may terminate the Consultation Period and its obligation to make payments of the Deferred Compensation Benefit upon the occurrence of an event of default with respect to Executive as specified in Section 4.2.2 or upon breach by Executive of its continuing obligations under paragraphs 6, 7, 8 or 9 of this Agreement. 6. Confidential Information. 6.1 "Confidential Information" means information disclosed by the Company to Executive, or developed or obtained by Executive during his employment by the Company, either before the date or during the term of this Agreement, or during the Consultation Period, provided that such information is not generally known in the business and industry in which the Company is or may subsequently become engaged, relating to or concerning the business, projects, products, processes, formulas, know-how, techniques, designs or methods of the Company, whether relating to research, development, manufacture, purchasing, accounting, engineering, marketing, merchandising, selling or otherwise. Without limitation, Confidential Information shall include all know-how, technical information, inventions, ideas, concepts, processes and designs relating to products of the Company, whether now existing or hereafter developed, and all prices, customer or distributor names, customer or distributor lists, marketing and other relationships, whether contractual or not, between the Company, its suppliers, customers, distributors, employees, agents, consultants and independent contractors but shall exclude the names of customers or distributors known to Executive prior to the effective date hereof. 9 6.2 Executive agrees that, during the term hereof or while Executive shall receive compensation hereunder and after termination of his employment with the Company for so long as the Confidential Information shall not be generally known or generally disclosed (except by Executive or by means of wrongful use or disclosure), Executive shall not use any Confidential Information, except on behalf of the Company, or disclose any Confidential Information to any person, firm, partnership, company, corporation or other entity, except as authorized by the President or the Board of Directors of the Company. 7. Inventions. ----------- 7.1 "Inventions" shall mean discoveries, concepts, ideas, designs, methods, formulas, know-how, techniques or any improvements thereon, whether patentable or not, made, conceived or developed, in whole or in part, by Executive. 7.2 Executive covenants and agrees to communicate and fully disclose to the Board of Directors of the Company any and all Inventions made or conceived by him during the term hereof or while receiving any compensation or payment from the Company and further agrees that any and all such Inventions which he may conceive or make, during the term hereof or while receiving any compensation or payments from the Company, shall be at all times and for all purposes regarded as acquired and held by him in a fiduciary capacity and solely for the benefit of the Company and shall be the sole and exclusive property of the Company. The provisions of this subparagraph shall not apply to an invention for which no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on the Executive's own time, unless (a) the invention relates (i) to the business of the Company, or (ii) to the Company's actual or demonstrably anticipated research or development, or (b) the invention relates from any work performed by Executive for the Company. 7.3 Executive also covenants and agrees that he will assist the Company in every proper way upon request to obtain for its benefit patents for any and all inventions referred to in paragraph 7.2 hereof in any and all countries. All such patents and patent applications are to be, and remain, the exclusive property of the Company for the RM term thereof and to that end, the Executive covenants and agrees that he will, whenever so requested by the Company or its duly authorized agent, make, execute and deliver to the Company, its successors, assigns or nominees, without charge to the Company, any all applications, applications for divisions, renewals, reissues, specifications, oaths, assignments and all other instruments which the Company shall deem necessary or appropriate in order to apply for and obtain patents of the United States or foreign countries for any and 10 all Inventions referred to in paragraph 7.2 hereof or in order to assign and convey to the Company, its successors, assigns or nominees, the sole and exclusive right, title and interest in and to such Inventions, applications or patents. Executive likewise covenants and agrees that his obligations to execute any such instruments or papers shall continue after the expiration or termination of this Agreement with respect to any and all such Inventions, and such obligations shall be binding upon his heirs, executors, assigns, administrators or other legal representatives. 8. Writings and Working Papers. ---------------------------- Executive covenants and agrees that any and all books, textbooks, letters, pamphlets, drafts, memoranda or other writings of any kind written by him for or on behalf of the Company or in the performance of Executive's duties hereunder, Confidential Information referred to in paragraph 6.1 hereof and all notes, records and drawings made or kept by him of work performed in connection with his employment by the Company shall be and are the sole and exclusive property of the Company and the Company shall be entitled to any and all copyrights thereon or other rights relating thereto. Executive agrees to execute any and all documents or papers of any nature which the Company or its successors, assigns or nominees deem necessary or appropriate to acquire, enhance, protect, perfect, assign, sell or transfer its rights under this paragraph. Executive also agrees that upon request he will place all such notes, records and drawings in the Company's possession and will not take with him without the written consent of a duly authorized officer of the Company any notes, records, drawings, blueprints or other reproductions relating or pertaining to or connected with his employment of the business, books, textbooks, pamphlets, documents work or investigations of the Company. The obligations of this paragraph survive the term of employment hereunder or the termination or expiration of the term or any renewal term hereof or the term or termination of the Consultation Period. 9. Covenant Not to Compete. ------------------------ 9.1 For purposes of this paragraph: 9.1.1 "Conflicting organization" means any person, firm, company, partnership, business, corporation or other entity engaged in, or intending to engage in, research, development, production, marketing or selling a Conflicting Product. 9.1.2 "Conflicting Product" means any product, process, service or design which competes with, or is reasonably interchangeable as a substitute for, any product, process, service or design developed, planned, 11 under development, produced marketed or sold by the Company or any Affiliate during the term of the covenant in this paragraph 9. Without limitation, Conflicting Product includes any food product or nutritional supplement or product, or skin care product, which is marketed or sold, or intended to be marketed or sold, by direct or multilevel sales. 9.1.3 "Territory" means the geographic area within which the Company or any Affiliate or any distributor or representative of the Company or any Affiliate is actively engaged in the sale of, or efforts to sell the products of the Company or any Affiliate at any time during the term of this Agreement. 9.1.4 "Affiliate" shall mean any corporation of which the Company, or any Affiliate, shall own majority of the capital stock. 9.2 Executive acknowledges and agrees as follows: 9.2.1 That the Company and its Affiliates have developed, and are developing and establishing, a valuable and extensive trade in its services and products, including without limitation, nutritional food and dietary products, and skin care products and that they have developed, and are developing, operations and distributors to sell such products and services throughout the United States and in foreign countries. 9.2.2 That the Company and its Affiliates have developed, and are developing, at great expense, technical information concerning their products and methods of marketing and sale which are kept and protected as Confidential Information and trade secrets and are of great value to the Company and its affiliates. 9.2.3 That, during the course of his employment with the Company or an Affiliate and during the term of this Agreement, Executive has participated, and will participate, in such matters and has acquired and will acquire, possession of Confidential Information, and that Executive has had significant responsibility for the development activities of the Company and the development of unique products, methods and techniques of the Company and its Affiliates. 9.2.4 That, for Executive to utilize Confidential information of the Company and its Affiliates, or unique skills, techniques or information developed by him while an employee of the Company or its Affiliates or 12 during the term of this Agreement for a Conflicting Organization within the area or time provided herein would result in material and irreparable injury to the Company. 9.2.5 That the area and conduct covered by the restrictive covenant in this paragraph includes only a percentage of the total number of organizations and individuals who are customers or distributors or potential customer or distributors for products, processes or services with respect to which Executive has knowledge or expertise, that Executive would be able to utilize his knowledge, experience and expertise for an employer while fully complying with the terms of this paragraph and that the terms and conditions of this paragraph are reasonable and necessary for the protection of the Company's business and assets. 9.3 Executive agrees that, during the term of this Agreement, during the term of the Consultation Period, for so long as Executive shall be receiving compensation hereunder, and for a period of 36 months from and after the date of termination of this Agreement (other than by Executive pursuant to paragraph 4.4 hereof), he will not, anywhere within the Territory, directly or indirectly, whether as an employee, agent, officer, consultant, partner, owner, shareholder or otherwise: 9.3.1 solicit, or enter into any arrangement or agreement with, or participate with, provide services to, or be employed by any person, company, partnership, business or corporation which shall solicit, or enter into any arrangement with, any person who is, or at any time during the term of this Agreement has been, a distributor for the Company or any Affiliate, to become a distributor for a Conflicting Organization or for any organization engaged in the direct or multilevel sale of any product or service; 9.3.2 solicit for the sale of, or participate with, provide services to, or be employed by any person, company, partnership, business or corporation which shall solicit for the sale of any Conflicting Product by a Conflicting Organization to any person who has been, during the term hereof a customer of the Company or any Affiliate; and 9.3.3 engage or participate in, be employed by, or provide services or assistance to, any Conflicting Organization. 13 10. Specific Enforcement. --------------------- Executive is obligated under this Agreement to render service of a special unique, unusual extraordinary and intellectual character, thereby giving this Agreement peculiar value so that the loss of such service or violation by Executive of this Agreement could not reasonably or adequately be compensated in damages in an action at law. Therefore, in addition to other remedies provided by law, the Company shall have the right during the term or any renewal term of this Agreement (or thereafter with respect to obligations continuing after the expiration or termination of this Agreement) to compel specific performance hereof by Executive or to obtain injunctive relief against violations hereof by Executive, and if the Company prevails in any proceeding therefor, it will also be entitled to recover all costs and expenses incurred by the Company in connection therewith, including attorneys' fees. 11. Assignment. ----------- The rights and duties of a party hereunder shall not be assignable by that party, except that the Company may assign this Agreement and all rights and obligations hereunder to, and may require the assumption thereof by, any corporation or any other business entity which succeeds to all or substantially all the business of the Company through merger, consolidation or corporate reorganization or by acquisition of all or substantially all of the assets of the Company. 12. Binding Effect. -------------- This Agreement shall be binding upon the parties hereto and their respective successors in interest, heirs and personal representatives and, to the extent permitted herein, the assigns of the Company. 13. Severability. ------------ If any provision of this Agreement or any part hereof or application hereof to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid or unenforceable to any extent, the remainder of this Agreement, or the remainder of such provision or the application of such provision to persons or circumstances other than those as to which it has been held invalid or unenforceable, shall not be affected thereby and each provision of this Agreement shall remain in full force and effect to the fullest extent permitted by law. The parties also agree that, if any portion of this Agreement, or any part hereof or application hereof to any person or circumstance shall be finally determined by a court of competent jurisdiction to be invalid 14 or unenforceable to any extent, any court may so modify the objectionable provision so as to make it valid, reasonable and enforceable. 14. Notices. -------- All notices, or other communication required or permitted to be given hereunder shall be in writing and shall be delivered personally or mailed, certified mail return receipt requested, postage prepaid, to the parties as follows: If to the Company: David G. Kreher Chief Operating Officer Reliv' International, Inc. P. 0. Box 405 Chesterfield, MO 63006-0405 If to Executive: Carl W. Hastings 18180 Bent Ridge Dr. Glencoe, MO 63038 Any notice mailed in accordance with the terms hereof shall be deemed received on the third day following the date of mailing. Either party may change the address to which notices to such party may be given hereunder by serving a proper notice of such change of address to the other party. 15. Entire Agreement. ---------------- This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior written or oral negotiations, representations, agreements, commitments, contracts or understandings with respect thereto and no modification, alteration or amendment to this Agreement may be made unless the same shall be in writing and signed by both of the parties hereto. 16. Waivers. -------- No failure by either party to exercise any of such party's rights hereunder or to insist upon strict compliance with respect to any obligation hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver by either 15 party to demand exact compliance with the terms hereof Waiver by either party of any particular default by the other party shall not affect or impair such party's rights in respect to any subsequent default of the same or a different nature, nor shall any delay or omission of either party to exercise any rights arising from any default by the other party affect or impair such party's rights as to such default or any subsequent default. 17. Governing Law, Jurisdiction. ---------------------------- 17.1 For purposes of construction, interpretation and enforcement, this Agreement shall be deemed to have been entered into under the laws of the State of Missouri and its validity, effect, performance, interpretation, construction and enforcement shall be governed by and subject to the laws of the State of Missouri. 17.2 Any and all suits for any and every breach of this Agreement may be instituted and maintained in any court of competent jurisdiction in the State of Missouri and the parties hereto consent to the jurisdiction and venue in such court and the service of process by certified mail to the addresses for the parties provided for notices herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, and year first above written. RELIV INTERNATIONAL, INC. By: /s/ Robert L. Montgomery ------------------------ Authorized Officer Attest: /s/ Stephen M. Merrick - ---------------------- Secretary EXECUTIVE: /s/ Carl W. Hastings -------------------- Carl W. Hastings 16 EX-10 4 AMENDMENT TO AGREEMENT EXHIBIT 10.15 A G R E E M E N T ----------------- THIS AGREEMENT is made and entered into this 25th day of April, 1997, by and among Reliv' International, Inc. ("Reliv"), Avogen, Inc. ("Avogen"), Conkle & Olesten PLC ("Conkle") and Richard Huber ("Huber"). WHEREAS, Reliv and Avogen entered into an agreement dated July 1, 1995, whereby Avogen granted Reliv a certain license for the marketing and sale of a skin care line of products utilizing technology developed by Avogen (the "Avogen Agreement"); WHEREAS, Reliv, Avogen and Conkle entered into an agreement dated July 1, 1995, whereby Conkle assigned its rights in such technology to Avogen, in order to allow Avogen to enter into the Avogen Agreement with Reliv (the "Conkle Agreement"); WHEREAS, Reliv and Huber entered into an agreement dated July 1, 1995, whereby Huber was to provide certain consulting services to Reliv (the "Huber Consulting Agreement"); WHEREAS, certain disputes have arisen between the parties relating to such agreements resulting in a mediation proceeding before Judge Eli Chernow, as mediator (the "Mediation"); WHEREAS, the parties have reached a settlement of their disputes; NOW, THEREFORE, in consideration of the premises and of the terms, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. Amendment to Avogen Agreement. The Avogen Agreement shall be amended by including the following provisions effective as of the date of this Agreement: 1.1 Transfer of Technology. Upon payment of the sum specified in paragraph 1.2 below, Avogen and Huber transfer to Reliv the Technology and agree to transfer all technical information regarding the production of MW302 to Reliv and will cooperate fully with Reliv to effect such transfer. Reliv hereby designates David Huesgen as the individual to receive such information and promptly upon the execution of this Agreement, Huber shall meet with such individual to transfer such information. The transfer of information shall include an actual demonstration of the process now in use for the production of MW302 as well as all ingredients, methods of production and manufacture, sources of supply, and other information necessary for production of MW302. Such individual shall execute a confidentiality agreement and shall agree not to use or disclose such information except as set forth in this Agreement. Reliv agrees that it shall not disclose such technical information nor shall Reliv use such information, unless and until Avogen and Huber shall (i) fail to provide MW302 to Reliv as required by Reliv from time to time and/or (ii) Reliv and Avogen shall enter into a separate agreement regarding the royalties payable with respect to the production and sale of MW302. 1 1.2 Payment. Upon the transfer of the Technology as provided in paragraph 1.1 above, Reliv shall pay the amount of $60,000. Such amount shall constitute an advance payment of royalties and Reliv shall be deemed to have paid all minimum royalties as provided for in paragraph 5.3 and the Minimum Amount as provided for in paragraph 3.5 in full through June of 1997. In the event Reliv purchases any product during such period it may apply such advance payment against any royalties due and owing on such purchases. All of the funds provided under this paragraph 1.2 shall be used by Avogen solely for the purposes of developing a system for the commercial production of MW302. The funds shall be paid to and held by Conkle and shall be released by Conkle to Avogen only upon receipt of written verification from Avogen that such funds will be used for the purposes as set forth above. Such verification shall be signed by an executive officer of Avogen and shall set forth in reasonable detail the use of such funds. Avogen shall provide Reliv a monthly detailed accounting of the use of such funds, in such form as Reliv shall prescribe, until such time as all the funds have been applied. 1.3 Defective Pathway/ Past Due Minimum Royalty. The parties agree that Avogen's liability to Reliv for the defective batches of Pathway product delivered to Reliv shall be settled for the amount of $30,000. The parties further agree that the total amount due and owing Avogen by Reliv for minimum royalties under paragraph 5.3 to the date of this Agreement is $30,000. The parties agree to apply and offset such obligations against each other. 1.4 Supply of MW302. Avogen and Huber agree that they shall use their best efforts to supply Reliv's requirements of MW302, as ordered by Reliv. The MW302 shall be supplied to Reliv at Avogen's cost of production for such product and all royalties thereon shall be deemed paid through June of 1997. Avogen and Huber agree that they shall provide Reliv with the best and most favored client status, and shall not produce or sell, or have produced or sold, MW302 for any person other than Reliv if, at the time, there shall be any outstanding unfilled orders from Reliv therefor. 1.5 Non-Exclusive License. Commencing on July 1, 1997, the license granted to Reliv shall be non-exclusive and Avogen shall be entitled to make, use, sell and grant licenses to make and use the Rights, except that Reliv shall retain the exclusive worldwide license to practice and use the Rights with respect to the manufacture, sale or other disposition of Reliv's current line of Commercial Products. Reliv's exclusive license shall not extend to any product which is not one of Reliv's then Commercial Products. Avogen will grant no license or right that would limit or restrict the non-exclusive and exclusive rights granted to Reliv hereunder. However, the license shall not preclude Avogen from practicing, using, selling or licensing the Rights in a manner that would not limit or restrict the non-exclusive and exclusive rights granted to Reliv hereunder. For example, Avogen could license use of MW302 in Asia, in a product not constituting a Commercial Product. In the event Reliv and Avogen enter into an agreement to license additional products or product lines that constitute a line extension(s) for Reliv, Avogen will not subsequently grant any further license or right that would limit or restrict Reliv's rights to such products or product lines as set forth in such agreement. Effective July 1, 1997, the provisions of 2 Sections 3.5 and 5.3 of this Agreement regarding Minimum Royalties and Minimum Royalty Payments shall be void and of no further force or effect. 1.6 Royalty. The royalty payable with respect to the manufacture and sale of MW302 shall be as set forth on Exhibit A attached hereto. 1.7 Certain Covenants. As the license granted to Reliv' shall be non-exclusive after July 1, 1997 (except with respect to its current Commercial Products for which the license shall remain exclusive), the provisions of paragraph 15.1.4(a) containing covenants against providing products utilizing the Technology in the Field to other parties, shall not apply to products other than the Commercial Products. The other provisions of 15.1.4(a) relating to owning or operating a Conflicting Organization, the other provisions of paragraph 15, and paragraph 7 relating to Confidential Information shall remain in full force and effect. The principal officers and shareholders of Avogen have executed agreements consistent with paragraphs 7 and 15 and, to the extent that this Agreement is amended and modified with respect to Avogen, those agreements shall also be modified to the same extent with respect to such principals. 2. Amendment to Conkle Agreement. The Conkle Agreement shall be amended by including the following provision: 2.1 Waiver. Conkle has entered into an agreement with Avogen whereby it shall receive a portion of the payments made by Reliv' to Avogen pursuant to the terms of the Avogen Agreement. Conkle agrees that for as long as the Avogen Agreement is in effect and has not been terminated, and for long as Conkle shall have received its portion of payments made by Reliv' to Avogen pursuant to its agreement with Avogen, it will not assert any claim against Reliv' with respect to the License or Rights which are the subject of the Avogen Agreement, and will not take any actions, as assignee of such rights, which will affect Reliv's rights under the Avogen Agreement including, without limitation, terminating this Agreement (Conkle agreement). In the event Avogen fails to remit to Conkle a portion of the payments received by Reliv' as agreed between Conkle and Avogen, Conkle shall notify Reliv' and Reliv' shall have the right, but not the obligation, to make a payment directly to Conkle equal to the amount Conkle is due under its agreement with Avogen. The amount due to Avogen from Reliv' shall be reduced by the amount of such payment to Conkle and Avogen agrees and consents to such direct payment. 3. Mutual Release. Effective from and after the date hereof, Avogen, Huber and Conkle, on the one hand, and Reliv, on the other, acting for themselves and for any and all of their respective employees, agents, attorneys, predecessors, successors and all other lawful representatives, do hereby forever release, acquit, forgive and fully discharge each other and the other's employees, agents, attorneys, predecessors, successors and all other lawful representatives, from any and all past, present or future claims, losses, actions, causes of actions, demands, rights, damages, injuries, costs, loss of services, expenses and compensation, whether known or unknown, disclosed or undisclosed, legal or equitable, foreseen or unforseen, fixed or contingent, by statute, in contract or in tort or otherwise, together with any and all consequential, special or other damages 3 relating thereto (collectively the "Claims") which each may have or ever may have had, or which may hereafter accrue on account of or in any way arising out of or attributable to (i) the matters set forth or averred in the Mediation, (ii) any matters resulting out of the operation or performance of the License Agreement, Conkle Agreement or Huber Consulting Agreement and (iii) all actions or inactions done by any of the other party prior to the date hereof; excepting only those Claims arising out of the failure to perform the terms, conditions and obligations, or breach of any representation, warranty or covenant of this Agreement and all continuing and future obligations under the Avogen Agreement, Conkle Agreement and Huber Consulting Agreement. There are no releases between Avogen, Huber and Conkle. 4. Remaining Terms. Except as amended hereby, the terms of the Avogen Agreement and Conkle Agreement shall remain in full force and effect. 5. Non-Disclosure. Neither party to this Agreement shall disclose either the existence or the contents of this Agreement to any persons except its own authorized management personnel. RELIV' INTERNATIONAL, INC. By: /s/ Robert L. Montgomery ------------------------- Authorized Officer AVOGEN, INC. By: /s/ Richard Huber ------------------ Authorized Officer CONKLE & OLESTEN PLC By: /s/ Christina Olesten ---------------------- Authorized Officer /s/ Richard Huber ------------------- RICHARD HUBER 4 EX-23 5 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8, No. 33-81025) pertaining to Reliv' International, Inc. 1995 Stock Option Plan of our report dated March 17, 1998 with respect to the consolidated financial statements and schedule of Reliv' International, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1997. /S/ Ernst & Young L.L.P. St. Louis, Missouri March 25, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE AMOUNTS PRESENTED FOR EARNINGS PER SHARE FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 HAVE BEEN RESTATED IN ACCORDANCE WITH SFAS NO. 128, "EARNINGS PER SHARE," WHICH WAS ADOPTED BY THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 1997. 0000768710 RELIV' INTERNATIONAL, INC. 12-mos 12-mos 12-mos DEC-31-1997 DEC-31-1996 DEC-31-1995 JAN-01-1997 JAN-01-1996 JAN-01-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 2,426,426 2,108,770 1,507,176 0 0 0 873,301 1,069,360 665,607 7,600 13,000 7,000 2,642,818 2,761,960 2,513,167 6,744,852 6,553,070 5,498,752 11,921,609 6,996,323 6,275,435 2,700,745 2,226,951 1,656,687 15,969,948 11,401,665 10,276,234 3,653,258 3,866,264 3,351,854 5,109,520 1,464,868 1,341,191 0 0 0 0 0 0 9,135,764 9,211,826 3,412,986 (1,967,699) (3,154,504) (2,094,630) 15,969,948 11,401,665 10,276,234 46,836,270 40,729,993 28,913,873 46,836,270 40,729,993 28,913,873 9,404,283 10,193,418 6,386,806 9,404,283 10,193,418 6,386,806 33,807,731 27,866,742 21,623,768 0 0 0 210,268 212,819 146,476 3,413,988 2,457,014 756,823 1,385,000 950,000 187,000 2,028,988 1,507,014 569,823 0 0 0 0 0 0 0 0 0 2,028,988 1,507,014 569,823 .21 .15 .06 .20 .15 .06
EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION ORINGINALLY EXTRACTED FROM FORM 10-Q FOR THE QUARTERLY PERIODS ENDED MARCH 31, 1997, JUNE 30, 1997 AND SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORMS 10-Q. THE AMOUNTS PRESENTED FOR EARNINGS PER SHARE HAVE BEEN RESTATED IN ACCORDANCE WITH SFAS NO. 128, "EARNINGS PER SHARE," WHICH WAS ADOPTED BY THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR ALL APPLICABLE PRIOR PERIODS. 0000768710 RELIV' INTERNATIONAL, INC. 3-mos 6-mos 9-mos DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 3,215,655 2,563,252 2,419,058 0 0 0 909,173 736,681 756,070 13,000 11,000 9,500 3,074,111 3,211,299 2,822,708 7,679,513 7,298,475 6,853,304 7,221,979 7,561,338 9,817,787 2,370,411 2,505,533 2,654,234 12,590,413 12,399,436 14,040,269 4,644,670 4,236,925 3,825,957 1,475,962 1,405,001 3,213,264 0 0 0 0 0 0 9,211,863 9,221,513 9,224,951 (2,742,045) (2,464,003) (2,223,851) 12,590,413 12,399,436 14,040,269 12,670,151 24,441,198 35,921,416 12,670,151 24,441,198 35,921,416 2,532,245 4,868,920 7,389,443 2,532,245 4,868,920 7,389,443 8,789,592 17,262,638 25,731,331 0 0 0 38,016 80,923 126,108 1,350,206 2,314,113 2,778,758 531,359 900,443 1,082,959 818,847 1,413,670 1,695,799 0 0 0 0 0 0 0 0 0 818,847 1,413,670 1,695,799 .09 .15 .18 .08 .14 .17
EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY INFORMATION ORINGINALLY EXTRACTED FROM FORM 10-Q FOR THE QUARTERLY PERIODS ENDED MARCH 31, 1996, JUNE 30, 1996 AND SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORMS 10-Q. THE AMOUNTS PRESENTED FOR EARNINGS PER SHARE HAVE BEEN RESTATED IN ACCORDANCE WITH SFAS NO. 128, "EARNINGS PER SHARE," WHICH WAS ADOPTED BY THE COMPANY FOR THE YEAR ENDED DECEMBER 31, 1997 AND FOR ALL APPLICABLE PRIOR PERIODS. 0000768710 RELIV' INTERNATIONAL, INC. 3-mos 6-mos 9-mos DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 1,769,395 1,664,376 2,041,599 0 0 0 906,188 622,590 691,707 9,000 1,000 6,711 2,664,587 2,815,692 2,490,655 6,155,210 6,234,443 6,290,118 6,649,079 6,733,308 6,792,108 1,753,781 1,907,790 2,061,989 11,189,567 11,179,073 11,119,523 3,825,238 3,769,940 3,391,952 1,691,223 2,016,082 2,102,759 0 0 0 0 0 0 3,404,330 3,356,720 3,353,835 2,268,776 2,036,331 2,270,977 11,189,567 11,179,073 11,119,523 9,303,549 18,751,861 28,686,309 9,303,549 18,751,861 28,686,309 2,567,511 4,983,017 7,331,330 2,567,511 4,983,017 7,331,330 6,227,416 12,854,596 19,737,301 0 0 0 71,106 118,010 170,830 437,516 914,248 1,446,848 159,916 334,709 529,125 277,600 579,539 917,723 0 0 0 0 0 0 0 0 0 277,600 579,539 917,723 .03 .06 .09 .03 .06 .09
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