Annual Report -- [X] Reg. S-K Item 405 ˇ Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K for Fiscal Year End December 31, 1999 40 130K
2: EX-3.1 Articles of Incorporation 3 12K
3: EX-3.2 Bylaws of Royal Bodycare, Inc. As of 10/5/99 18 60K
4: EX-4.1 Specimen Stock Certificate 2 8K
5: EX-10.4 Indemnification Agreement 14 65K
6: EX-27.1 Financial Data Schedule 1 6K
7: EX-27.2 Restated Financial Data Schedule 1 6K
10-K405 ˇ Form 10-K for Fiscal Year End December 31, 1999
Document Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 33-20323
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ROYAL BODYCARE, INC.
(Exact name of registrant as specified in its charter)
NEVADA 91-2015186
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2301 CROWN COURT
IRVING, TEXAS 75038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-893-4000
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X 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 by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
On February 29, 2000, the closing price at which Registrant's common
stock sold was $.88 per share. At such date, 6,308,298 shares of Registrant's
Common Stock were held by non-affiliates. Based upon the price at such date, the
aggregate market value of Registrant's voting stock held by non-affiliates on
that date was $5,551,302 (6,308,298 shares time $.88 per share).
As of February 29, 2000, 13,916,294 shares of the registrant's Common
Stock were outstanding.
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FORWARD LOOKING STATEMENTS
The statements, other than statements of historical facts included in
this report are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may",
"will", "expect", "intend", "estimate", "anticipate" or "believe". We believe
that the expectations reflected in such forward-looking statements are accurate.
However, we cannot assure you that such expectations will occur. Our actual
future performance could differ materially from such statement. Factors that
could cause or contribute to such differences include, but are not limited to:
o general economic conditions
o general market acceptance of our products and distribution methods
o introduction of competitive products
o pricing of competitive products
o regulatory actions effecting the market of our products and distribution
methods
o reduction in demand for our products or the rate at which new distributors
are recruited to join us
o the discontinuance or reduction of the production of Flanagan
Microclusters(R) and Nanocolloidal Hydride, essential ingredients in
certain of our products and which are produced at a single manufacturing
facility
ROYAL BODYCARE, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PAGE
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PART I .........................................................................................................1
Item 1. Business...............................................................................1
Item 2. Properties.............................................................................6
Item 3. Legal Proceedings......................................................................6
Item 4. Submission of Matters to a Vote of Securities Holders..................................7
PART II .........................................................................................................8
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.................8
Item 6. Selected Financial Data................................................................8
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................9
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.............................12
Item 8. Financial Statements and Supplemental Data............................................12
Item 9. Changes in and Disagreements with Accounts on Financial Disclosure....................12
PART III ........................................................................................................13
Item 10. Directors and Executive Officers ............................................13
Item 11. Executive Compensation.......................................................15
Item 12. Security Ownership and Certain Beneficial Owners and Management.......................15
Item 13. Certain Relationships and Related Transactions...............................17
PART IV ........................................................................................................18
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................18
SIGNATURES.......................................................................................................20
PART I
ITEM 1. BUSINESS
GENERAL/HISTORY
We are a Nevada corporation engaged in marketing the following products
through a worldwide network of independent distributors:
o herbal formulas o fitness and weight management
programs
o vitamins
o hair and skin products
o minerals
o environmentally-friendly
o antioxidants household cleaners
Our principal offices are located at 2301 Crown Court, Irving, Texas
75038. We can be reached by phone at 972-893-4000, by fax at 972- 893-4111 and
by e-mail at webmaster@royalbodycare.org. Our Chief Executive Officer is Clinton
H. Howard and our Chief Financial Officer is Steven E. Brown, and both of them
can be reached at our principal offices.
In October 1999, we changed our name from GlobeNet International I,
Inc. to Royal BodyCare, Inc. In conjunction with the name change, we also
redomesticated to the State of Nevada.
Our history, and that of our predecessors, is as follows: In February
1988, the Jason Ray Corporation was organized under Delaware law for the purpose
of combining with other businesses. In April 1988, the Jason Ray Corporation
filed an initial public offering registration statement on Form S-1 with the
Securities and Exchange Commission. The Jason Ray Corporation changed its name
to Seven Oaks Farms, Ltd. on July 1, 1988. From May 1991 until October 1995,
Seven Oaks Farms was a dormant entity, conducting no business activities.
Effective November 1, 1995, Seven Oaks Farms merged with Mighty Power, Inc., a
privately held Oklahoma corporation. The merger, a purchase under Accounting
Principles Board Opinion 16, was accounted for as a reverse merger with Seven
Oaks Farms being the survivor but Mighty Power being treated as the acquirer.
Seven Oaks Farms then changed its name to Mighty Power USA, Inc. Mighty Power
USA, Inc. merged with GlobeNet Inc. in 1997.
GlobeNet Inc. was incorporated in June 1995, to serve as a holding
company for affiliated corporations owned or controlled by Clinton Howard. In
July, 1995, Mr. Howard and members of his immediate family contributed the stock
of these affiliated corporations to GlobeNet in exchange for shares of its
stock. The affiliated corporations acquired by GlobeNet in this manner were
Royal BodyCare, Inc., a Texas corporation, Royal BodyCare, Inc., a Canadian
corporation, Royal BodyCare S.A. de C.V., a Mexican corporation, Arlington
Laboratories, Inc., a Texas corporation, and KaloVita, Inc., a Delaware
corporation.
Mr. Howard formed Royal BodyCare, Inc., a Texas corporation, in 1991 to
market a line of aloe vera based personal care products and an aloe drink in the
United States through a multi-level network of independent distributors. Its
product line was expanded in 1992 to also include nutritional supplements.
Mr. Howard formed Royal BodyCare, Inc., a Canadian corporation, in 1992
to market through a network of independent distributors in Canada the same line
of products being marketed domestically by the Texas-incorporated Royal
BodyCare, Inc. Shortly after its formation, the Canadian-incorporated Royal
BodyCare acquired Pure Life International Products Inc., then a 12-year old
company which distributed its Pure Life brand of nutritional products in Canada.
After this acquisition, the Pure Life line of products was introduced into the
domestic market through the Texas-incorporated Royal BodyCare, Inc.
1
Both the Texas and Canadian-incorporated Royal BodyCare companies are
part of our on-going operations that we conduct. Their product lines,
distributor networks and sales are continuing to increase. The other three
affiliated corporations acquired by GlobeNet, however, have discontinued
operations. Royal BodyCare S.A. de C.V., which was formed in 1993 to market
through a network of independent distributors in Mexico a limited number of our
nutritional, skin care and personal care products, discontinued operations in
1995, when it could not reach a break-even operating level. KaloVita, Inc.,
which was a direct marketing company with a product line and a 25,000-member
distributor network similar to ours, was acquired by Mr. Howard in 1994 from Dr.
M. G. Robertson for nominal consideration at a time when KaloVita was in
extremely poor financial condition having never shown a profit and having
exhausted its working capital. Efforts to streamline their operations by closing
its Virginia facility and moving it to Dallas, Texas were not successful due to
aggressive action by its creditors, and KaloVita, Inc. was forced into filing
for protection under Chapter 11 of the Bankruptcy Code in November of 1994. A
liquidating plan was approved by the bankruptcy court in 1996 and the case was
closed in 1998, with KaloVita being dissolved. We have absorbed and merged into
us the quality control testing and laboratory operations formerly performed by
Arlington Lab. Arlington Lab discontinued operations in 1995.
Light Force, Inc., a non-affiliated California corporation, was
acquired by GlobeNet in June, 1996. Light Force distributed a line of
nutritional supplements featuring Flanagan Microclusters(R) and with spirulina
as the main ingredient. The Light Force distributor network was merged into
GlobeNet's distributor network. GlobeNet entered into an exclusive world-wide
license agreement to make Flanagan Microclusters(R) its leading line of products
and to promote such products and others made available to GlobeNet by Dr.
Patrick Flanagan.
Effective April 1, 1997, Mighty Power USA, Inc., now at this time a
corporation whose stock was publicly traded on the NASDAQ Bulletin Board, merged
with GlobeNet. In connection with the merger, Mighty Power USA effected a
one-for-seven reverse stock split. All share figures in this report have been
adjusted to reflect this reverse split. Mighty Power USA then issued 7,886,415
new shares to the shareholders of GlobeNet in exchange for 100% of the
outstanding stock of GlobeNet. In addition, under the terms of the merger
agreement, certain shareholders of Mighty Power USA transferred an additional
2,541,427 shares of common stock to the GlobeNet shareholders. As a result, the
shareholders of GlobeNet obtained 86% of the then outstanding common stock of
Mighty Power USA. In connection with these transactions, Mighty Power USA
changed its name to GlobeNet International I, Inc. The merger, a purchase under
Accounting Principles Board Opinion 16, has been accounted for as a reverse
merger with GlobeNet being the acquirer. Therefore, GlobeNet's historical
financial statements are now our historical financial statements.
Concurrent with the merger of Mighty Power USA and GlobeNet, an
affiliate of Mighty Power USA, Great Xpectations Marketing, Inc., acquired all
the assets and liabilities of two other affiliates of Mighty Power USA for
$100,000 in notes payable. Great Xpectations is a direct marketer of nutritional
supplements, automobile and household products and services. We then purchased
all the outstanding common stock of Great Xpectations for an additional $100,000
note payable. These transactions were also accounted for as a purchase. In June,
1998, we announced our intention to spin off Great Xpectations to our
shareholders. Great Xpectations was unable to adequately execute its business
plan and does not currently have any meaningful assets. As a result, we have
decided to discontinue the planned spin-off of Great Xpectations. Our 1998
financial statements were prepared as if the spinoff of Great Xpectations had
been completed on June 30, 1998. We have now restated our 1998 financial
statements to reflect our decision to discontinue the spin-off and discontinue
Great Xpectations' operations.
2
As mentioned above, in October 1999, we changed our name from GlobeNet
International I, Inc. to Royal BodyCare, Inc. In conjunction with the name
change, we also redomesticated to the State of Nevada.
PLANT AND EQUIPMENT
Our line of products that we market are purchased from unaffiliated
manufacturers and suppliers according to our specifications. The production of
these products can be obtained from a number of sources at competitive prices,
but some of the ingredients, most notably Flanagan Microclusters(R), including
the silica hydride form, are subject to license agreements specifying the source
and price for such ingredients. Accordingly, we do not have or need any plant or
manufacturing facilities, machinery or equipment. Other than normal office
furniture and computer equipment, the only other property or equipment that we
own or use is laboratory equipment owned and maintained for internal quality
control testing of our products and distribution of our products to our
independent distributors.
EMPLOYEES
We currently have 138 employees, of whom 7 are executive officers or
management employees, 15 are department heads, 24 are warehouse employees, 53
are in customer service or order entry, 6 are in financial or accounting and the
remaining are clerical or administrative. We do not foresee any significant
increase being necessary for our workforce in 2000. None of our employees are
represented by labor unions, and we have not experienced work stoppages or other
labor strife with our employees.
DISTRIBUTOR NETWORK
Our two Royal BodyCare companies had approximately 132,000 independent
distributors at December 31, 1999, of whom approximately 112,000 are located in
the United States and 20,000 are located in Canada. We recruit people who can
effectively explain our line of products, demonstrate their uses and
applications and effectively utilize our direct marketing techniques to sell our
products and sponsor other distributors. This type of direct marketing strategy
is commonly referred to as multi-level or network marketing. We compensate our
distributors through a "Stair Step" program consistent with other industry
recognized compensation programs. Under this compensation program we pay sales
commissions and cash rebates to our distributors. These commissions and cash
rebates are based on the amount of purchases by the distributor and his/her
sales group. Distributor compensation is paid monthly. Except for sales meetings
and certain promotional activities that we sponsor, our distributors are
responsible for all expenses incurred by them in their sales programs.
We use the Internet to support our marketing efforts and enhance
communication with our distributors. Presently though our web site distributors
can obtain information about us and our products, and other current information
such as new product announcements and descriptions of product specials and other
sales promotions. Also through our web site, we provide our distributors the
ability to enroll new distributors and to place orders. To help our distributors
better manage their businesses, we are currently testing an interface that will
allow our distributors to obtain information related to their sales groups
directly from our database through the Internet.
3
OVERSEAS DISTRIBUTORS
We have entered into exclusive license agreements with seven overseas
licensee groups for marketing the our line of products in the following nations:
o Japan o Finland o Thailand
o The Republic of Indonesia o Iceland o Australia
o Sweden o Switzerland o New Zealand
o Norway o Austria o South Korea
o Denmark
Pursuant to these agreements these overseas licensees, which are
unaffiliated third parties, are granted exclusive rights to sell our products in
their respective territories through office/warehouse facilities. The
independent distributors in these territories are compensated upon the same
compensation plan as that used by us for our distributors in the United States
and Canada.
PRODUCTS
We currently market a line of over 200 nutritional supplements and
personal care products, including herbs, vitamins and minerals, as well as
natural skin, hair and body care products. All of our products are marketed
under our Royal BodyCare trade name. We procure these products from unaffiliated
manufacturers and suppliers and have them made or processed according to our
specifications or formulas. Our line of products features several proprietary
ingredients including Flanagan Microclusters(R), a mineral catalyst that
increases absorption of nutritional supplements, and Nanocolloidal Mineral
Hydride, a nutritional form of hydrogen that is an antioxidant and has other
beneficial properties. Because these ingredients are proprietary to Dr. Patrick
Flanagan it is unlikely that we would be able to find an alternative supplier of
these ingredients. Our product line also features spirulina as a main ingredient
in nutritional supplements and aloe vera as a main ingredient in our skin and
personal care products. We maintain quality control of our products by our
in-house laboratory facilities and operations.
INDUSTRY/COMPETITORS
We are in a highly competitive industry both domestically and
internationally. We compete against companies that sell heavily advertised
products through retail stores as well as other network marketing companies.
Many of our competitors are significantly larger than we are and have far
greater financial resources. We compete with other network marketing companies
close to our size such as Envion, Reliv International and Nutrition for Life. We
also compete with much larger companies such as Amway, Nu Skin and Herbalife. At
a consumer level, we compete with large health food chains such as GNC, small
independently-owned health food stores, as well as drug stores, department
stores and supermarkets that sell nutritional supplements and personal care
products.
We offer a wide selection of products with a reputation for high
quality. Our leading products incorporate proprietary ingredients or have unique
formulations such that they are not available though other outlets. We believe
that our products possess features and provide benefits that are desired by
consumers looking for natural health products. We place a high degree of
emphasis on new product development to insure our product line remains current
with developing trends in our industry and new scientific evidence. We generally
do not attempt to compete based on price, although price is a consideration.
Prices are justified through product quality and benefits and, to the extent
possible, the proprietary ingredients and unique formulations.
4
CAPITAL STOCK
We have authorized 50 million shares of common stock. As of February
29, 2000, we had issued and outstanding 13,916,294 shares of common stock.
REPORTS TO SECURITY HOLDERS
We are subject to the continuous disclosure requirements of the
Securities and Exchange Commission because we have had previous offerings
registered pursuant to Section 15(d) of the Securities Act of 1933, as amended.
Due to the fact that we are a Section 15(d) company, we are not required to
distribute an annual report to our shareholders. However, all of our filings
with the Securities and Exchange Commission are available on-line for all
shareholders to access. In addition, we distribute quarterly news releases to
our shareholders as well as a year-end news release that includes operating
results from our audited financial statements.
INVENTORY REQUIREMENTS, BACKLOGS
Our independent distributors do not maintain large inventories of our
products. They depend on us to maintain our inventory at a level that will allow
us to fill their orders and the orders of their customers as they are placed. We
generally ship orders within 48 hours after we receive them so there is no
significant backlog of orders.
RESEARCH AND DEVELOPMENT
We have contracted with scientists at universities, medical colleges,
and private research organizations to conduct a series of studies over the past
few years to evaluate the safety and functions of our dietary supplements,
primarily Microhydrin(R). Prior to acquiring Light Force in 1996, Light Force
contracted for more than one million dollars in research studies conducted at
Harvard Medical school on the product Phycotene(R).
TRADEMARKS, PATENTS OR OTHER INTELLECTUAL PROPERTY
We own trademarks on the name Royal BodyCare(R) and the names of
certain key products such as Microhydrin(R). Through an agreement with Dr.
Patrick Flanagan, we have exclusive marketing rights to Flanagan
Microclusters(R), a mineral catalyst that increases absorption of nutritional
supplements, and Nanocolloidal Mineral Hydride, a nutritional form of hydrogen
with antioxidant and other beneficial properties. These substances are produced
through proprietary technology developed and owned by its inventor, Dr. Patrick
Flanagan. Nanocolloidal Mineral Hydride is the principal ingredient in our
leading product, Microhydrin(R).
GOVERNMENTAL REGULATIONS
One or more of the following agencies regulates the formulation,
labeling and advertising of our products: the Food and Drug Administration, the
Federal Trade Commission, the Consumer Product Safety Commission and various
agencies of the states and foreign countries into which our products are shipped
or sold. In addition, our distribution and sales program is, like that of other
companies operating in interstate commerce, subject to the jurisdiction of the
Federal Trade Commission and a number of other federal agencies. Various state
agencies regulate our multi-level distribution activities.
5
ITEM 2. PROPERTIES
We do not own any real properties. We rent an office-warehouse building
of approximately 119,000 square feet at an increasing annual rental of $328,000
for the first year and $417,000 for the last year under a 10-year lease expiring
2008. We also lease distribution facilities in Vancouver, British Columbia and
Toronto, Ontario for our sales operations in Canada at an aggregate annual
rental of $112,000.
ITEM 3. LEGAL PROCEEDINGS
We, as a corporation, nor any of our officers or directors are parties
to any material legal proceedings or litigation other than as set forth below:
NO. DV98-5504-C; NATERRA INTERNATIONAL, INC., v. ROYAL BODYCARE, INC., and
ARLINGTON LABORATORIES, INC.
On July 17, 1998, Plaintiff, a former manufacturer of Royal BodyCare
products, sued us and Arlington Laboratories asserting causes of action for
breach of contract and suit on sworn account. Although the amount of damages
claimed were unspecified, discovery revealed that Plaintiff was attempting to
effectively set aside a sale of equipment that they claimed was defective, which
equipment at one time had been used by us in our manufacturing process. Total
damages claimed, together with attorney's fees, exceeded $150,000.00. The
parties attended a court ordered mediation in late 1999, which mediation
resulted in a settlement of all claims. Under the terms of the settlement, we
agreed to pay Plaintiff the sum of $90,000.00 and take the referenced equipment
back. We were thus able to recoup at least the salvage value of the equipment
or, to the extent any of it remained useful, to resell without warranty. By
Order dated January 3, 2000, all claims in the lawsuit were dismissed with
prejudice to their refiling.
NO. 97-08040-C; DON WHIGHAM and WHIGHAM & ASSOCIATES, INC. v. CLINTON H. HOWARD,
ROYAL BODYCARE, INC. and INTERNATIONAL, INC.
On August 28, 1997, Plaintiffs, former distributors of our products,
sued Defendants asserting causes of action for, among other things, breach of
contract and fraud in connection with a special marketing arrangement with us as
network marketing experts and distributors. Defendants filed an answer denying
all the material allegations of Plaintiffs' petition and asserting
counter-claims for breach of contract, negligence and tortious interference with
business relations. In October 1999, the parties agreed to settle this
litigation. By Order dated November 8, 1999, all matters in controversy were
resolved by an Order of Dismissal with Prejudice, of all claims and
counterclaims. In the settlement, we agreed to pay the sum of $300,000.00 in
quarterly installments beginning October 29, 1999 and ending April 26, 2000. In
addition, we agreed to the payment of $5,000.00 per month for 48 months
beginning May 26, 2000. The amount in controversy asserted by Plaintiff in the
case exceeded $3 million. We have made the first two quarterly installments.
NO. 3:99-CV-0686; ROYAL BODYCARE JAPAN, DUDLEY A. OLSEN AND DUANE ENGHOLM v.
ROYAL BODYCARE, INC. and CLINTON HOWARD
On December 14, 1999, the parties reached an agreement in principal to
settle all claims and controversies. Under the terms of the settlement, we
agreed to pay the sum of $10,000.00 and to reinstate a particular distributor
plan for company distributors and related parties who performed sales services
on our behalf in Japan. That settlement has not been consummated, as the
Plaintiffs in that case have now discharged their attorneys. The case has been
administratively closed by the Court and it is uncertain whether the Court will
permit a reopening of the case or whether it will simply be considered to be
effectively dismissed.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On August 18, 1999, in accordance with the Delaware General Corporation
Law, by a consent of a majority of the stockholders of Globnet International I,
Inc., our predecessor company, we approved the redomestication of our company
from Delaware to Nevada and the change of our name.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the Nasdaq over-the-counter Bulletin
Board published by the National Quotation Bureau, Inc. The following reflects
the range of high and low bid quotes for each calendar quarter during each of
the past two years as adjusted for the 1 for 7 reverse stock split in April,
1997:
[Download Table]
QUARTER
ENDED 3/31/98 6/30/98 9/30/98 12/31/98
------- ------- ------- ------- --------
HIGH 1.672 4.125 1.875 1.1875
LOW .562 .625 .75 .75
[Download Table]
QUARTER
ENDED 3/31/99 6/30/99 9/30/99 12/31/99
------- ------- ------- ------- --------
HIGH 2.375 1.625 1.34375 1.03125
LOW .875 .9375 .75 .6875
As of March 5, 2000 there were approximately 436 holders of our common
stock. Since our inception, we have paid no dividends on our stock. We do not
anticipate that we will pay dividends in the foreseeable future.
SALES OF UNREGISTERED SECURITIES
During the last year we have sold our securities in offerings which
have not been registered for sale with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, or any state securities
commissioner as set forth below.
These transactions were exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended. During the second quarter of 1999, two
of our distributors advanced us a total of $40,000 under short-term note
agreements. In the fourth quarter of 1999, these distributors exchanged these
notes for 53,332 shares of our common stock.
These convertible notes, and the shares of our common stock issued upon
conversion of these notes, are subject to certain restrictions upon the sale or
transfer thereof which are denoted prominently upon the certificates of these
securities as required by the applicable federal and state securities laws. We
have further instructed our transfer agent to not transfer these securities in
the absence of registration or satisfactory evidence that the transfer would be
in compliance with the applicable securities laws pertaining thereto. Exemption
from registration of the sale of these securities under the applicable federal
and state securities laws is claimed by us under Section 4(2) of the Federal
Securities Act of 1933 as a transaction by an issuer which does not involve a
public offering and comparable limited offering exemptions under the state
securities laws.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the table shown below has been selected
by us and has been derived from the financial statements for the periods
indicated. The consolidated balance sheets as of December 31, 1999 and 1998 and
the related statements of operations, shareholders' equity and cash flows for
each of the three years ended December 31, 1999, 1998 and 1997 have been
examined by Swalm, Thomas & Associates, PLLC, formerly Osborn, Swalm, Thomas &
Associates, PLLC.
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[Enlarge/Download Table]
YEARS ENDED DECEMBER 31
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1999 1998 1997 1996 1995
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STATEMENT OF OPERATIONS DATA:
Total Revenue $ 34,194,445 $ 27,188,800 $ 12,843,287 $ 8,638,875 $ 6,082,728
Income (loss) from
continuing operations 130,697 511,270 (614,578) (25,441) (805,477)
Net Income (Loss) 268,273 (33,587) (686,881) (25,447) (905,477)
BALANCE SHEET DATA:
Cash and cash equivalents 208,225 382,409 10,405 94,630 74,703
Working Capital (Deficit) (16,364) 454,954 763,722 (149,181) (331,066)
Total Assets 9,000,396 8,207,633 5,608,426 3,967,493 2,470,673
Long Term Debt 1,256,786 1,004,927 803,561 367,571 339,953
Shareholders' Equity 4,388,052 4,061,602 3,583,543 1,984,081 226,234
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES; MATERIAL CHANGES IN FINANCIAL CONDITION
During the year ended December 31, 1999, we had a net decrease in cash
of $174,000. This decrease in cash resulted from net cash used by investing
activities that was not fully offset by net cash provided by operating
activities and financing activities. The net cash provided by financing
activities came mainly from borrowing proceeds of $168,000 and our sale of
53,332 shares of unregistered common stock that provided cash of $40,000. The
net cash used by investing activities was primarily related to the purchase of
computer software and related hardware. During 1999 we began the development of
a computer system that would provide us with an upgraded software platform. Our
new software platform was designed to support continued growth in our
distributor base and enhance our Internet capabilities. We began using portions
of the new computer system in January 2000.
Consistent with industry practice, most of our sales are paid at the
time of order. Therefore, our primary working capital need is to fund increases
in inventory required to support sales growth. Since our sales are generated
through independent distributors who do not maintain a significant inventory, it
is necessary for us to have products on hand when the distributors place their
orders. During periods of sales growth we must purchase inventory in
anticipation of sales, thereby creating the need for additional working capital.
Inventory increased $236,000 during 1999 due to our growth.
We believe that we will be able to fund further moderate sales
increases through our operations. Should sales growth increase beyond our
ability to finance our growth internally, we will again seek outside sources of
capital including bank borrowings, other types of debt financing, or an equity
offering. There is no assurance, however, that we would be able to obtain any
additional outside financing.
During 2000, we will require additional capital to complete the upgrade
of the software used to manage our distributor network. We plan to finance the
completion of these upgrades through cash flow from operations and existing
credit lines. We have no plans or requirements for any other significant capital
expenditures during the next twelve months.
Other than those factors already described, we are not aware of any
trends or uncertainties that would significantly effect our liquidity or capital
resources in the future.
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RESULTS OF OPERATIONS - 1999 COMPARED WITH 1998
Our sales for the year ended December 31, 1999 were $34,194,000
compared with sales for the prior year of $27,189,000, an increase of $7,005,000
or 26%. In 1999, sales increased in all of our markets. Sales in the United
States, Canada and other international markets increased $5,080,000, $1,365,000
and $560,000, respectively. The sales increase in the United States resulted
from the rapid growth in the United States distributor base that began in late
1997 and continued into the third quarter of 1998. Since the third quarter of
1998, the United States distributor base has grown but at a much lower rate. The
increase in Canadian sales was primarily related to increased sales in Eastern
Canada. Prior to 1999, our sales were heavily concentrated in Western Canada.
However, during the second quarter of 1999, we attracted a distributor group in
Eastern Canada that continues to grow rapidly. The increase in sales in our
other international markets related to the initiation of operations by our
licensees in Austria, Australia and Russia, and increased sales by our licensees
in Sweden, Indonesia and Japan.
Our cost of goods sold for the year ended December 31, 1999 was
$8,749,000 compared with cost of goods sold in the prior year of $7,100,000, an
increase of $1,649,000 or 23%. As a percentage of sales, cost of goods sold in
1999 and 1998 was 26%.
Our general and administrative expenses for the year ended December 31,
1999, were $10,376,000 compared with such expenses in 1998 of $8,081,000, an
increase of $2,295,000 or 28%. As percentage of sales, general and
administrative expenses were 30% in 1999 and 1998. A significant portion of this
increase represented expenses we incurred in the settlement of three lawsuits.
Settlement and legal expenses associated with these lawsuits totaled
approximately $650,000. Excluding these expenses, our general and administrative
expenses for 1999 were $9,726,000 or 28% of sales. The remainder of the increase
in general and administrative expenses from 1998 to 1999 was related to
increases in personnel and other expenses required to support the increases in
our distributor base.
Our distributor commissions for the year ended December 31, 1999 were
$14,250,000 compared with distributor commissions in 1998 of $11,057,000, an
increase of $3,193,000 or 29%. As a percentage of sales, distributor commissions
in 1999 were 42% compared with 41% in 1998. The increase in distributor
commissions as a percentage of sales was primarily attributable to an increase
in the percentage of our distributors who qualified to receive maximum
commission percentages under our distributor compensation plan.
Our interest expense did not change significantly from 1998 to 1999,
increasing from $96,000 in 1998 to $116,000 in 1999.
Depreciation and amortization for the year ended December 31, 1999 was
$456,000 compared with depreciation and amortization in 1998 of $348,000, an
increase of $108,000 or 31%. This increase was mainly due to depreciation
associated with the capital investments that we made during 1998 and 1999. These
capital investments were necessary to install distribution systems and
technology systems that we needed to support our distributor base and stay
competitive with other companies in our industry.
Our income from continuing operations for the year ended December 31,
1999 was $131,000 compared with income from continuing operations in the prior
year of $511,000, a decrease of $380,000. This decrease was the result of the
expenses we incurred to settle the three lawsuits as previously described.
Discontinued operations represent the operations of Great Xpectations.
Income from discontinued operations was $138,000 for the year ended December 31,
1999 compared with a loss of $545,000 in 1998. The 1998 loss was mainly the
result of expenses incurred by Great Xpectations in the last six months of 1998
to streamline its operations in an attempt to become profitable. Income in 1999
mainly resulted from the
10
reversal of certain liabilities recorded in prior years that were settled for
less than the original contractual commitment.
Our net income for the year ended December 31, 1999 was $268,000, or
$.02 per share, compared with a net loss in the prior year of $34,000, an
improvement of $302,000. This improvement was the result of the factors
described above.
There have been no economic events or changes that have affected our
sales or operating results and we are not aware of any economic trends or
uncertainties that would have a material impact on our future sales or operating
results. We believe that we have purchased our products at the best price
available and that any price increases in the foreseeable future will be small.
Any such price increases would be passed through to our customers. In addition,
we do not believe at this time that inflation will have a material impact on our
operating results.
RESULTS OF OPERATIONS - 1998 COMPARED WITH 1997
Our sales for the year ended December 31, 1998 were $27,189,000
compared with our sales for the prior year of $12,843,000, an increase of
$14,346,000 or 112%. The increase in our sales was mainly the result of growth
in our independent distributor base in the U.S. This growth in the distributor
base was mainly attributable to a successful direct mail campaign that centered
on our leading product, Microhydrin(R). Microhydrin(R) is an antioxidant product
that we introduced in September 1997. It currently accounts for approximately
33% of our sales.
Our cost of goods sold for the year ended December 31, 1998 was
$7,100,000 compared with our cost of goods sold in the prior year of $3,593,000,
an increase of $3,507,000 or 98%. As a percentage of our sales, cost of goods
sold in 1998 was 26% compared with 28% in 1997. The improvement in the
percentage of cost of goods sold in 1998 was mainly attributable to the change
in product sales mix. Microhydrin(R) has a lower cost of goods sold percentage
than the average of our other products. In addition, we realized some
improvement in gross margin due to increased volumes.
Our general and administrative expenses for the year ended December 31,
1998 were $8,081,000 compared with such expenses in 1997 of $4,802,000, an
increase of $3,279,000 or 68%. As percentage of our sales, general and
administrative expenses in 1998 was 30% compared with 37% in 1997. The increase
in general and administrative expenses was due to increases in personnel and
other expenses required to support the additional distributors who joined us
during 1998 and related sales growth.
Distributor commissions for the year ended December 31, 1998 were
$11,057,000 compared with distributor commissions in 1997 of $4,692,000, an
increase of $6,365,000 or 136%. As a percentage of sales, distributor
commissions in 1998 were 41% compared with 37% in 1997. The increase in our
distributor commissions as a percentage of sales was primarily attributable to
the change in product sales mix. A higher percentage of commission is paid on
Microhydrin(R) than the average of our other products. The increase in
distributor commissions in 1998 was also due to an increase in the percentage of
our distributors who qualified to receive maximum commission percentages under
the distributor compensation plan.
Our interest expense did not change significantly from 1997 to 1998,
increasing from $92,000 in 1997 to $96,000 in 1998.
Depreciation and amortization for the year ended December 31, 1998 was
$348,000 compared with depreciation and amortization in 1997 of $267,000, an
increase of $81,000 or 30%. This increase was mainly due to depreciation
associated with property and equipment additions during 1997 and 1998 along with
an increase in goodwill amortization expense. Our goodwill amortization expense
increased in 1998 due to the
11
amortization of additional goodwill recorded in 1997 and 1998 in connection with
the issuance of shares of our common stock pursuant to the Light Force
acquisition agreement.
Our income from continuing operations for the year ended December 31,
1998 was $511,000, compared with a loss from continuing operations in the prior
year of $615,000, an improvement of $1,126,000. This improvement is the result
of the increased gross profit generated from the sales growth that occurred
during 1998. We incurred a net loss in 1997 primarily due to the expenses
incurred to attract new distributors and to set up internal systems and staffing
required to support our anticipated sales growth.
Discontinued operations represent the operations of Great Xpectations.
These operations are classified as discontinued because we announced plans in
June 1998 to spin off Great Xpectations to our shareholders.
Our net loss for the year ended December 31, 1998 was $34,000, or $.01
per share, compared with a net loss in the prior year of $687,000, an
improvement of $631,000. This improvement was the result of the factors
described above.
There have been no economic events or changes that have affected our
sales or operating results and we are not aware of any economic trends or
uncertainties that would have a material impact on our future sales or operating
results. We believe that we have purchased our products at the best price
available and that any price increases in the foreseeable future will be small.
Any such price increases would be passed through to our customers. In addition,
we do not believe at this time that inflation will have a material impact on our
operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplementary data are listed in the Index
to Financial Statements appearing on Page F-1 and the Financial Schedule
appearing on Page S-2 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON FINANCIAL DISCLOSURE
We have had no disagreements with our certified public accountants with
respect to accounting practices or financial disclosure.
12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of March 7, 2000, the name, age, and
position of each of our Executive Officers and Directors and the month in which
such Director or Officer began his term of office.
[Download Table]
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
Clinton H. Howard 71 Chairman of the Board, May 1991
President and CEO
Steven E. Brown 44 Director, Vice President- May 1994
Chief Financial Officer
Andrew V. Howard 41 Director, Vice President-
Corporate Counsel March 1995
Frank Franasiak, M.D. 52 Director July 1998
Kenneth Sabot 53 Senior Vice President-Operations February 1998
Richard Howard 49 Vice President-Sales and Marketing December 1999
Nelson J. Rogers 53 Vice President-International November 1994
TERM OF OFFICE
Each of our directors serves for a term of one year, and thereafter
until his or her successor is elected at our annual shareholder's meeting, and
is qualified, subject to removal by our shareholders. Each officer serves, at
the pleasure of our Board of Directors, for a term of one year.
FAMILY RELATIONSHIPS
Katherine M. Howard, our Secretary, is the wife of Clinton H. Howard,
our Chairman, President and Chief Executive Officer. Mr. Andrew V. Howard, a
Director and Vice President-Corporate Counsel, is the son of Clinton H. Howard.
BIOGRAPHICAL INFORMATION
Set forth below is certain biographical information regarding each of
our Directors and Executive Officers.
CLINTON H. HOWARD. Mr. Clinton Howard is our Chairman of the Board,
President and Chief Executive Officer. He graduated from Rice University with a
BA degree and from Southwestern Medical School with an MA degree, after which he
studied graduate business courses at S.M.U. and the University of Dallas and
medical arts courses at Johns Hopkins Medical School. Mr. Howard founded
American Biomedical Corporation in 1958, and built it into a chain of 40 medical
testing laboratories. He took American Biomedical public in 1969. In 1974,
American Biomedical was merged with National Health Laboratories, then one of
the nation's largest medical laboratory chains. In 1974, Mr. Howard founded
Carrington Laboratories, Inc.,
13
originally named Avacare, Inc., a personal care products, direct sales marketing
firm. In 1981, he established a research division which isolated an active
medicinal compound in aloe vera, acemannan. He then sold the skin care business
and converted Carrington to a pharmaceutical company. Mr. Howard retired from
Carrington in 1990. The following year he founded Royal BodyCare.
STEVEN E. BROWN. Mr. Steven Brown is a Director and Vice
President-Chief Financial Officer and has held the same positions since joining
us in May 1994. Prior to joining us, Mr. Brown was the Vice President, Finance
and Chief Financial Officer of Carrington Laboratories, Inc. from 1980 through
April 1994. Mr. Brown was treasurer of Carrington from 1982 through 1994 and
served as a director from 1981 until August 1987. Mr. Brown is a Certified
Public Accountant and was previously associated with the international
accounting firm of Arthur Andersen & Co. from 1977 to 1980.
ANDREW V. HOWARD. Mr. Andrew Howard is a Director and Vice
President-Corporate Counsel and has held these positions since joining us in
March 1995. He is a son of Clinton Howard. Prior to completing his academic
training in February 1995, he worked as a salesman and sales manager for various
companies and, earlier, he worked full time as an independent distributor of
health care products and nutritional supplements, building his own organization
which grew to revenue levels of over $400,000 per month. He graduated with a
bachelors degree from the University of Dallas, and earned an MBA at Regent
University in Virginia where he subsequently completed law school, earning a JD
degree. He passed the Texas Bar exam in early 1995 and is presently a licensed
attorney in the State of Texas.
FRANK FRANASIAK, M.D. Dr. Frank Franasiak became a director in July
1998. He is a physician and runs his own practice in Virginia. Dr. Franasiak
earned his BA degree in Chemistry in 1974, and earned his M.D. in 1977, both
from State University of New York at Buffalo, New York.
KENNETH SABOT. Mr. Kenneth Sabot became the Senior Vice President of
Operations in February 1998. Prior to joining us, Mr. Sabot was the
Vice-President-Operations of To Life! L.L.C., a start up network marketing
company, from August 1996 until February 1998. Prior to joining To Life, he was
employed by Light Force, Inc. from 1981 through January 1996. Mr. Sabot joined
Light Force as the Controller in 1981 and served as Chief Operating Officer from
1986 until leaving Light Force in January 1996. Mr. Sabot became a Certified
Public Accountant in 1969.
RICHARD HOWARD. Mr. Richard Howard recently joined us in December 1999,
as Vice President-Sales & Marketing. He has more than twenty years of experience
in the network marketing industry, including serving as a top executive at a
$200 million network marketing company.
NELSON J. ROGERS. Mr. Nelson Rogers joined us as Vice
President-International in November 1994, when we acquired KaloVita. There he
was Chief Operating Officer and Vice President of Marketing. Prior to that
position, Mr. Rogers had, since 1969, been affiliated with firms in the direct
sales and network marketing industry, including Avon and Nature's Sunshine
Products as well as private concerns, WeCare and Watkins. His past international
experience includes opening and responsibility for 25 foreign markets worldwide
as well as two overseas assignments living in the Philippines and Venezuela,
while with Avon.
14
ITEM 11. EXECUTIVE COMPENSATION
[Download Table]
NAME CAPACITY 1999 1998 1997
---- -------- ---- ---- ----
Clinton H. Howard(1) President,
Chief Executive Officer $267,000 $253,000 $177,000
Steven E. Brown Vice President, $170,570 $170,200 $105,000
Chief Financial Officer
Andrew V. Howard(2) Vice President, $226,993 $207,300 $96,400
Corporate Counsel
Kenneth L. Sabot Senior Vice President, $140,523 $101,700 -0-
Operations
Nelson J. Rogers Vice President, $124,505(3) $101,800 $90,000
International
--------------------
(1) Clinton Howard has use of a company car with an aggregate incremental cost
to us of $10,000. The company also pays his country club dues of $1,100.
(2) Andrew Howard has use of a company car with an aggregate incremental cost
to us of $10,000.
(3) Includes a 1999 bonus of $22,705
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGES IN CONTROL
ARRANGEMENTS
There are no compensatory plans or arrangements, including payments to
be received from us, with respect to any person named in cash compensation set
out above which would in any way result in payments to any such person because
of his resignation, retirement, or other termination of such person's employment
by us or our subsidiaries, or any change in control of us, or a change in the
person's responsibilities following a changing in control of us.
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth as of December 31, 1999, the address,
and the number of shares of our common stock held of record or beneficially by
each person who held of record, or was known by us to own beneficially, more
than 5% of the then 13,916,294 issued and outstanding shares of our Common
Stock, and the name and share holdings of each director and of all officers and
directors as a group. As a result of us not being registered under Section 12(g)
of the Securities Exchange Act of 1934, beneficial owners of more than 5% are
not required to file Schedule 13Gs with the Securities and Exchange Commission.
Therefore, there may be additional persons who are beneficial owners of more
than 5% of whom we do not have knowledge.
15
[Enlarge/Download Table]
AS OF DECEMBER 31, 1999
-----------------------------------------------------
CLASS BENEFICIAL OWNER AMOUNT % OF CLASS
----- ---------------- ------ ----------
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Common Clinton H. Howard 7,765,188(1) 54.6%
3917 Fox Glen Drive
Irving, Texas 75062
Common Penny Slinger Hills 1,231,003 8.8%
Hills 1998 Living Trust
910 Herman Gulch Road
Boulder Creek, California 95006
Common Dr. M. G. Robertson 2,000,000(2) 13.4%
977 Centerville Turnpike
Virginia Beach, Virginia 23463
Common My Garden, L.P. 7,100,000 51.0%
3917 Fox Glen Drive
Irving, Texas 75062
SECURITY OWNERSHIP OF MANAGEMENT
Common Clinton H. Howard 7,765,188(1) 54.6%
Common Steven E. Brown 31,100(3) *%
Common Andrew V. Howard 16,951(4) *%
Common Kenneth Sabot 2,500(3) *%
Common Nelson J. Rogers 4,000(3) *%
ALL OFFICERS, DIRECTORS & BENEFICIAL
PERSONS AS A GROUP (7 PERSONS) 8,105,453(5) 56.2%
-------------------
* less than 1%
(1) Includes 317,000 shares that may be acquired by presently exercisable
common stock options; includes 7,100,000 shares held by a limited
partnership, My Garden, L.P., the general partners of which are The Clinton
H. Howard Family Trust and The Katherine M. Howard Family Trust and also
includes 2,799 shares owned of record by Mr. Howard's wife. Mr. Clinton H.
Howard disclaims beneficial ownership of these shares except to the extent
of his pecuniary interest.
(2) Includes 1,000,000 shares that may be acquired by presently exercisable
common stock warrants.
(3) Represents shares that may be acquired by presently exercisable common
stock options.
(4) Held in the name of The Andrew Vincent Howard 1992 Trust.
(5) Includes 497,457 shares that may be acquired by presently exercisable
common stock options and the shares referred to in footnote (1).
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH AND INDEBTEDNESS OF MANAGEMENT AND OTHERS
From time to time we have advanced money to Mr. Clinton Howard.
Currently the outstanding balance of this account payable is $90,526 and is
accruing a rate of interest at 6% per year and is payable before December 31,
2002.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS. The following financial statements are filed as part
of this 10-K
Title of Document
Independent Auditors Report of Swalm, Thomas & Associates, PLLC, Certified
Public Accounts
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Operations for the Years December 31, 1999, 1998
and 1997.
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES. None.
(a)(3) EXHIBITS. The following exhibits are included as part of this report:
Ex. No. Description
3.1 Articles of Incorporation
3.2 By-Laws
4.1 Specimen copy of Certificate for Common Stock
4.2 Specimen copy of 10% Convertible Notes issued in 1997 (1)
4.3 The 1998 Stock Option Plan for our Directors, Employees and
Consultants (1)
4.4 Stock Purchase Agreement dated 10/27/97 with Dr. M. G.
Robertson (1)
10.1 10 year Lease Agreement as of 8/1/98 with CIIF Associates L.P.
for office/warehouse (1)
10.2 Exclusive License Agreement with Flanagan Technologies for its
Microclusters (1)
10.3 Form of Member Agreement and Policies with Distributors (1)
10.4 Form of Indemnification Agreement
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
-------------
(1) Incorporated by reference to the Annual Report on Form 10-K-1A filed 5/7/99
18
(b) FINANCIAL DATA SCHEDULE
(c) REPORTS ON FORM 8-K
We filed no reports on Form 8-K during the last quarter of Fiscal 1999.
19
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.
ROYAL BODYCARE, INC.,
a Nevada corporation
/s/ CLINTON H. HOWARD
Date: April 24, 2000 ------------------------------------------
Clinton H. Howard, Chief Executive Officer
/s/ STEVEN E. BROWN
-----------------------------------------
Date: April 24, 2000 Steven E. Brown, Chief Financial Officer
SIGNATURES
Pursuant to the requirements to the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ CLINTON H. HOWARD
---------------------------------------- Chairman of the Board of
Clinton H. Howard Directors, President and
Chief Executive Officer April 24, 2000
/s/ STEVEN E. BROWN
---------------------------------------- Director, Vice President-
Steven E. Brown Chief Financial Officer April 24, 2000
/s/ ANDREW V. HOWARD
---------------------------------------- Director, Vice President-
Andrew V. Howard Corporate Counsel April 24, 2000
/s/ FRANK FRANASIAK
---------------------------------------- Director April 24, 2000
Frank Franasiak, M.D.
20
ROYAL BODYCARE, INC. AND SUBSIDIARIES
December 31, 1999
INDEX TO FINANCIAL STATEMENTS
[Download Table]
Page
Independent Accountants' Report F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
All other schedules and financial statements are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Royal BodyCare, Inc. and Subsidiaries
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Royal BodyCare,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the three year period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 and schedules. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinions.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Royal BodyCare,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the three year period ended December 31,
1999, in conformity with generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company reversed the
planned spin-off of Great Xpectations Marketing, Inc. The 1998 financial
statements were restated to consolidate Great Xpectations Marketing, Inc. for
the full year.
SWALM, THOMAS & ASSOCIATES, PLLC
April 14, 2000
Plano, Texas
F-2
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
[Enlarge/Download Table]
ASSETS
1999 1998
------------ ------------
CURRENT ASSETS
Cash $ 208,225 $ 382,409
Accounts receivable, net of allowance for doubtful accounts 542,191 439,501
Inventory 2,904,603 2,668,407
Deferred tax asset 248,981 404,905
Prepaid expenses 75,465 138,201
------------ ------------
Total Current Assets 3,979,465 4,033,423
PROPERTY AND EQUIPMENT, net of accumulated depreciation 2,185,617 1,275,508
GOODWILL, net of accumulated amortization 2,516,945 2,680,974
OTHER ASSETS 318,369 217,728
------------ ------------
$ 9,000,396 $ 8,207,633
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 944,071 $ 852,888
Accrued expenses 2,059,495 1,667,944
Current portion of long-term debt 671,806 494,145
Notes payable 108,071 51,589
Net liabilities of discontinued operation 212,386 511,903
------------ ------------
Total Current Liabilities 3,995,829 3,578,469
------------ ------------
DEFERRED TAX LIABILITY, NON-CURRENT 31,535 56,780
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION 584,980 510,782
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value; authorized
20,000,000 shares; none outstanding -- --
Common stock, $.001 par value; authorized
50,000,000 shares; outstanding; 1999
13,916,294 shares; 1997 13,862,205 shares 13,916 13,862
Paid in capital 12,147,818 12,106,872
Accumulated deficit (7,785,407) (8,053,680)
Cumulative translation adjustment 11,725 (5,452)
------------ ------------
4,388,052 4,061,602
------------ ------------
$ 9,000,396 $ 8,207,633
============ ============
See notes to consolidated financial statements.
F-3
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
[Enlarge/Download Table]
1999 1998 1997
------------ ------------ ------------
Sales $ 34,194,445 $ 27,188,800 $ 12,843,287
Cost of sales 8,748,559 7,099,770 3,592,921
------------ ------------ ------------
Gross profit 25,445,886 20,089,030 9,250,366
------------ ------------ ------------
Operating expenses:
General and administrative 10,376,112 8,081,478 4,801,597
Distributor commissions 14,249,788 11,056,714 4,691,995
Interest 116,393 95,992 91,511
Depreciation and amortization 455,517 347,630 266,875
------------ ------------ ------------
Total operating expenses 25,197,810 19,581,814 9,851,978
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 248,076 507,216 (601,612)
------------ ------------ ------------
Income taxes (benefit):
Current income taxes 57,571 36,938 12,966
Deferred income taxes (benefit) 59,808 (40,992) --
------------ ------------ ------------
117,379 (4,054) 12,966
------------ ------------ ------------
Income (loss) from continuing operations 130,697 511,270 (614,578)
------------ ------------ ------------
Income (loss) from discontinued operations 137,576 (544,857) (72,303)
------------ ------------ ------------
Net Income (loss) $ 268,273 $ (33,587) $ (686,881)
============ ============ ============
Pro forma information (unaudited):
Net loss continuing operations $ (614,578)
Net loss discontinued operation (62,777)
------------
Pro forma net loss $ (677,355)
============
Basic and Diluted earnings (loss) per share:
Income from continuing operations $ 0.009 $ 0.038 $ (0.049)
Loss from discontinued operation 0.010 (0.045) (0.005)
------------ ------------ ------------
Earnings (loss) per share $ 0.019 $ (0.007) $ (0.054)
============ ============ ============
Weighted average shares outstanding 13,893,883 13,699,163 12,552,977
============ ============ ============
See notes to consolidated financial statements.
F-4
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
[Enlarge/Download Table]
Common Stock Accumulated Total
----------------------------- Paid In Accumulated Translation Shareholders'
Shares Amount Capital Deficit Adjustment Equity
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 1996 4,235,714 $ 4,236 $ 9,311,476 $ (7,333,212) $ 1,581 $ 1,984,081
Reverse Merger 7,886,415 7,887 (7,887) -- -- --
Conversion of Notes Payable 163,498 163 216,837 -- -- 217,000
Lightforce Earn-out Shares 251,353 251 876,341 -- -- 876,592
Private Placement 1,000,000 1,000 1,196,442 -- -- 1,197,442
Net Loss -- -- -- (686,881) -- (686,881)
Translation Adjustment -- -- -- -- (4,691) (4,691)
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 1997 13,536,980 13,537 11,593,209 (8,020,093) (3,110) 3,583,543
Conversion of Notes Payable 22,619 22 29,978 -- -- 30,000
Lightforce Earn-out Shares 47,157 47 94,465 -- -- 94,512
Private Placement 255,449 256 389,220 -- -- 389,476
Net loss -- -- -- (33,587) -- (33,587)
Translation Adjustment -- -- -- -- (2,342) (2,342)
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 1998 13,862,205 13,862 12,106,872 (8,053,680) (5,452) 4,061,602
Conversion of Notes Payable 757 1 999 -- -- 1,000
Shares purchased 53,332 53 39,947 -- -- 40,000
Net Income -- -- -- 268,273 -- 268,273
Translation Adjustment -- -- -- -- 17,177 17,177
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 1999 13,916,294 $ 13,916 $ 12,147,818 $ (7,785,407) $ 11,725 $ 4,388,052
============= ============= ============= ============= ============= =============
See notes to consolidated financial statements.
F-5
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
[Enlarge/Download Table]
1999 1998 1997
----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) from operations $ 268,273 $ (33,587) $ (686,881)
Less (income) loss from discontinued operation (137,576) 544,857 72,303
----------- ----------- -----------
Net income (loss) from continuing operations 130,697 511,270 (614,578)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) continuing operations:
Depreciation and amortization 468,124 347,630 266,875
Lawsuit settlement 480,249 -- --
Loss on sale of equipment -- -- 299
Deferred income taxes (31,263) (40,993) --
Translation adjustments 17,177 (2,342) (4,691)
Change in assets and liabilities:
Accounts receivable (102,690) (335,486) (76,985)
Prepaid assets 62,737 (73,720) (922)
Inventory (236,197) (1,059,142) (379,593)
Other assets (100,640) (81,329) (81,405)
Accounts payable 91,183 547,415 (520,322)
Accrued expenses 391,554 750,766 257,929
Notes payable -- 2,917 (16,528)
----------- ----------- -----------
Cash provided by (used for) continuing operations 1,170,931 566,986 (1,169,921)
Cash provided by (used for) discontinued operations -- 2,244 (236,393)
----------- ----------- -----------
Cash provided by (used for) operating activities 1,170,931 569,230 (1,406,314)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Investing activities of discontinued operation -- (19,914) (6,516)
Purchase of furniture, fixtures and equipment (998,999) (473,334) (104,453)
Proceeds from sale of equipment -- -- 15,288
----------- ----------- -----------
Cash provided by (used for) investing activities (998,999) (493,248) (95,681)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from sale of stock 40,000 389,476 1,197,442
Proceeds from long term debt and notes payable 167,500 -- 730,000
Payments of long-term debt and notes payable (553,616) (93,454) (357,904)
Financing activities of discontinued operation -- -- (100,000)
Repayment to stockholders -- -- (51,768)
----------- ----------- -----------
Cash provided by (used for) financing activities (346,116) 296,022 1,417,770
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (174,184) 372,004 (84,225)
CASH, BEGINNING OF YEAR 382,409 10,405 94,630
----------- ----------- -----------
CASH, END OF YEAR $ 208,225 $ 382,409 $ 10,405
=========== =========== ===========
See notes to consolidated financial statements.
F-6
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. ORGANIZATION AND HISTORY
HISTORY - The Company was organized February 12, 1988 as Jason Ray
Corporation ("JRC") for the purpose of combining with other businesses. In
April 1988, JRC filed an initial public offering registration statement on
Form S-1 with the Securities and Exchange Commission ("SEC"). JRC changed
its name to Seven Oaks Farms, Ltd. ("Seven Oaks") on July 1, 1998. From May
1991 until October 1995 Seven Oaks was a dormant entity, conducting no
business activities. Effective November 1, 1995 Seven Oaks merged with
Mighty Power, Inc. ("MPI"). The merger, a purchase under Accounting
Principles Board Opinion 16, was accounted for as a reverse merger with MPI
being the acquirer. Seven Oaks then changed its name to Mighty Power USA,
Inc. ("Mighty Power").
Effective April 1, 1997, Mighty Power merged with GlobeNet Inc. (GlobeNet)
(the "Merger"). In connection with the Merger Mighty Power effected a one
for seven reverse stock split (all share figures have been adjusted to
reflect this reverse split). Mighty Power then issued 7,886,415 new shares
to the shareholders of GlobeNet in exchange for 100% of the outstanding
stock of GlobeNet. In addition, under the terms of the Merger agreement,
certain shareholders of Mighty Power transferred an additional 2,541,427
shares of common stock to the GlobeNet shareholders. As a result, the
shareholders of GlobeNet obtained 86% of the then outstanding common stock
of the Mighty Power. In connection with these transactions, Mighty Power
changed it name to GlobeNet International I, Inc. ("GNI").
The Merger, a purchase under Accounting Principles Board Opinion 16, has
been accounted for as a reverse merger with GlobeNet Inc. being the
acquirer. Therefore, GlobeNet Inc.'s historical financial statements are
now the Company's historical financial statements.
Concurrent with the Merger, an affiliate of Mighty Power, Great Xpectations
Marketing, Inc.("GXI"), acquired all the assets and liabilities of two
other affiliates, (Health Thru Nature, Inc. and Mighty Power USA L.C.) for
$100,000 in notes payable. GNI then purchased all the outstanding common
stock of GXI for an additional $100,000 note payable. These transactions
were also accounted for as purchases.
In October, 1999 the Company changed its name to Royal BodyCare, Inc.
("RBCI") in order to be more easily identified with its products.
ORGANIZATION - The Company is engaged in the marketing of nutritional
supplements and personal care products. The Company operates its business
through the Royal BodyCare Division, which represents the separate business
strategies and product lines of RBCI preceding the merger described above.
The operations conducted by Mighty Power and its affiliates prior to the
merger are conducted by GXI and are classified in the accompanying
consolidated financial statements as discontinued operations (See Note 12).
RBCI was incorporated in Texas in June 1995 by Clinton H. Howard, to serve
as a holding company for certain companies affiliated with Mr. Howard. In
July 1995, all of the outstanding capital stock of these affiliated
companies was contributed to RBCI by Mr. Howard and his immediate family.
RBCI's principle U. S. marketing operations are conducted through Royal
BodyCare USA, Inc. ("RBC- US"), formed by Mr. Howard in 1991. In 1992 Mr.
Howard formed Royal BodyCare Canada, Inc. (" RBC-Canada") to market
products in Canada through a network of independent distributors. RBC-
Canada owns all of the outstanding stock of Pure Life International
Products, Inc.("Pure Life") which it purchased in 1992. Pure Life has been
in business since 1982.
F-7
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. ORGANIZATION AND HISTORY (CONTINUED)
In 1995, the Company began entering into agreements to license the
exclusive rights to sell its products internationally through third parties
licensees in the respective countries. Since 1995, the Company entered into
seven such arrangements to market the Company's products. Under these
agreements distributors in these countries are compensated according to the
same compensation plan as that is used for the RBC Division independent
distributors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of RBCI, and its wholly owned subsidiaries; Royal BodyCare
USA, Inc., Royal BodyCare Canada, Inc., and Pure Life International
Products, Inc., (collectively the "Company"). RBC-Canada and Pure Life are
organized under the Canadian Business Corporation Act. All significant
inter-company accounts and transactions have been eliminated.
TRANSLATION OF FOREIGN CURRENCIES - All current assets and liabilities of
foreign subsidiaries were translated into U. S. dollars at the exchange
rate in effect at the balance sheet date. Long-term assets and equity were
translated at historical exchange rates. Revenue and expense accounts were
translated at weighted average exchange rates. Translation gains and losses
are reflected as a separate component of shareholders' equity.
REVENUE RECOGNITION - The Company sells its products through a network of
independent distributors. The Company recognizes revenue upon sale to its
distributors and records an allowance for sales returns.
INVENTORIES - Inventories, consisting of finished goods held for resale,
work-in-process, raw materials and packaging materials are stated at the
lower of cost of market. Inventories at December 31, 1999 and 1998 consist
of finished goods and packaging materials.
CASH EQUIVALENTS - For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation and amortization are being provided over the estimated useful
lives of the related assets, principally on the straight-line and declining
balance methods, ranging from three to seven years.
The Company reviews its property and other noncurrent assets for impairment
when changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment is measured as the amount by which the
carrying amount of the asset exceeds the fair market value of the asset
less disposal costs.
GOODWILL - Goodwill represents the excess cost over fair value of assets
acquired and is being amortized using the straight line method over 20
years. The carrying value of goodwill is periodically reviewed by the
Company for impairment based on expected future undiscounted operating cash
flows of the related business unit. If it is determined that impairment has
occurred, any excess will be charged to operations.
F-8
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES - The Company has adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109
requires an asset and liability approach to financial accounting for income
taxes. In the event differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities result in deferred
tax assets, SFAS 109 requires an evaluation of the probability of being
able to realize the future benefits indicated by such assets. A valuation
allowance is provided for a portion or all of the deferred tax assets when
there is an uncertainty regarding the Company's ability to recognize the
benefits of the assets in future years.
RBCI files a consolidated tax return with its U.S. subsidiaries. RBC-Canada
and Pure Life file a consolidated Canadian tax return. Deferred income
taxes are the result of net operating loss carry-forwards expected to be
fully utilized in the near future and other temporary differences.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share (EPS) are calculated
in accordance with Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share", which was adopted in 1997 for all years
presented. Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted EPS does not apply to the Company due to the
absence of dilutive potential common shares.
SEC Staff Accounting Bulletin Number 1B.2 "Pro Forma Financial Statements
and Earnings per Share" ("SAB 1B.2"), requires pro forma statement of
operations information and earnings per share when historical financial
statements are not indicative of ongoing activity. As a result of the
Company's reverse merger with Mighty Power in April 1997 the consolidated
Statement of Operations does not reflect the complete historical earnings
(losses) of the combined entities. Therefore, unaudited pro forma
information has been presented on the bottom of the consolidated Statement
of Operations which reflects the Company's earnings (losses) and earnings
per share as if the merger had occurred at the beginning of 1997. As
required by SAB 1B.2 pro forma earnings per share has only been presented
for 1997.
CREDIT RISK - The Company's trade accounts receivable arise in the normal
course of business and primarily relate to sales of its products to its
distributor network throughout the United States, Canada and its overseas
licensees. Such receivables are unsecured. The company performs ongoing
credit evaluations of the entities from whom such accounts are receivable.
The Company places its cash investments in high credit quality institutions
and limits the amount of credit exposure to any one institution.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
FINANCIAL INSTRUMENTS - The carrying value of cash and cash equivalents,
accounts receivable and payable, accrued liabilities and notes payable
approximate fair value due to the short-term maturities of these assets and
liabilities. Fair value of long-term debt is estimated based on interest
rates for the same or similar debt offered to the Company having the same
or similar maturities and collateral requirements.
SEGMENT INFORMATION - The Company operates through its two separately
managed segments: Royal BodyCare US/Canada and Great Xpectations Marketing,
Inc.
F-9
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), requires that total
comprehensive income be reported in the financial statements. For the years
ended December 31, 1998, 1997 and 1996, the Company's comprehensive income
(loss) was equal to its net income (loss) and the Company does not have
income meeting the definition of other comprehensive income.
3. INVENTORIES
At December 31, 1999 and 1998, inventories consist of finished goods, bulk
products ready for packaging and packaging materials.
4. PROPERTY AND EQUIPMENT
At December 31, property and equipment consist of the following:
[Download Table]
1999 1998
-------------- --------------
Furniture and fixtures $ 2,900,850 $ 1,779,941
Warehouse equipment 304,854 236,950
Automotive equipment 15,609 9,562
Leasehold improvements 106,525 87,181
-------------- --------------
Total property and equipment 3,327,838 2,113,634
Less accumulated depreciation and amortization (1,142,221) (838,126)
-------------- --------------
Net property and equipment $ 2,185,617 $ 1,275,508
============== ==============
5. GOODWILL
Goodwill was recorded as a result of the acquisition of Pure Life in April
1992 and Lightforce (see note 13) in June 1996 as follows:
[Download Table]
1999 1998
-------------- --------------
Lightforce $ 2,378,727 $ 2,378,727
Pure Life 843,622 843,622
-------------- --------------
3,222,349 3,222,349
Accumulated amortization (705,404) (541,375)
-------------- --------------
Net goodwill $ 2,516,945 $ 2,680,974
============== ==============
F-10
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
6. ACCRUED EXPENSES
At December 31 accrued expenses consist of the following:
[Download Table]
1999 1998
-------------- --------------
Distributor commissions $ 1,496,558 $ 1,307,337
Sales and other taxes 165,000 150,215
Interest 12,552 10,956
Other 385,385 199,436
-------------- --------------
Total $ 2,059,495 $ 1,667,944
============== ==============
7. NOTES PAYABLE
At December 31, notes payable consist of the following:
[Download Table]
1999 1998
-------------- --------------
Line of Credit ($100,000 maximum) - bank
Prime plus 3.25% $ 100,000 $ -
Demand note payable - bank
bearing interest at 10% per annum - 42,491
Other 8,071 9,098
-------------- --------------
Total $ 108,071 $ 51,589
============== ==============
8. LONG-TERM OBLIGATIONS
At December 31, long-term obligations consists of the following:
[Download Table]
1999 1998
-------------- --------------
Notes payable - banks $ 146,736 $ 69,356
Convertible notes payable 273,000 508,000
Debentures 25,000 25,000
Whigham settlement 380,248 -
Capital leases 431,802 402,571
-------------- --------------
1,256,786 1,004,927
Less - current portion (671,806) (494,145)
-------------- --------------
Total $ 584,980 $ 510,782
============== ==============
Included in notes payable - banks are three notes assumed in connection
with the Lightforce acquisition totaling $23,540 and $65,095 at December
31, 1999 and 1998, respectively, bearing interest at prime plus 5%, due in
monthly payments aggregating $3,311 plus interest through November 2000.
One note was assumed at the time of the acquisition and two additional
notes were assumed in 1997 in lieu of cash payment for commissions payable.
F-11
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
8. LONG-TERM OBLIGATIONS (CONTINUED)
Included in notes payable - banks are three notes payable totaling $57,442
and $41,822 at December 31, 1999 and 1998, respectively for the purchase of
automotive equipment. These notes are payable through 2002, bear interest
ranging from 4.9% to 18%, and are collateralized by the automobiles
financed.
Also included in notes payable - banks is an equipment repurchase note of
$65,754 at December 31, 1999, payable $2,146 a month, including interest at
9%, through 2002.
In 1997, the Company sold convertible debentures aggregating $730,000. The
notes bear interest at 10% payable quarterly, and are due two years from
the date of issuance. The notes are convertible into common stock of the
Company at any time prior to maturity at the option of the holder based on
per share conversion price of $1.32. As of December 31, 1999 $209,000 has
been repaid and $248,000 has been converted into 186,885 shares of the
Company's common stock.
In 1994, RBC-US sold two debentures in the amount of $25,000 each, the
proceeds of which were used for working capital. The principal portion of
these debentures was due upon maturity in 1998. In 1997 the 10% Debenture
holder exchanged their Debenture for a convertible note described above. In
1998, the holder of the other debenture extended the due date by four
years. Interest on the debenture is payable monthly at a rate of 15%.
In 1999 the Company settled a claim by a former marketing consultant and
distributor of Company products ("Whigham" Settlement) by agreeing to pay
$540,000 over a 54 month period. The settlement is payable $100,000 in
January and April, 2000 and $5,000 a month beginning May, 2000 through
April, 2004. The settlement is without interest and has been discounted at
10%.
Certain purchases of equipment by RBC-US have been financed through capital
leases. Such leases have terms ending in 2004 and have various interest
rates approximating 15%.
Long-term obligation payments payable in the next five years are as
follows:
[Download Table]
DEBT CAPITAL LEASES
-------------- ---------------
2000 $ 550,637 177,830
2001 89,561 172,362
2002 110,180 112,496
2003 55,016 42,716
2004 19,590 8,883
-------------- ---------------
$ 824,984 514,287
==============
Less amount representing interest 82,485
---------------
$ 431,802
===============
9 . CAPITAL TRANSACTIONS
PRIVATE PLACEMENT - In 1999, the Company sold 53,332 shares of common stock
to two distributors for $40,000. The proceeds of this stock placement was
used to purchase a new product line.
F-12
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
9. CAPITAL TRANSACTIONS (CONTINUED)
In 1998, the Company sold 255,440 shares of unregistered common stock at
prices ranging from $1.35 to $1.66 per share. In addition, Company granted
warrants to purchase 216,932 shares of common stock, exercisable through
October 2003 at an exercise price of $2.00 per share. The offering raised
$389,476.
In 1997, the Company sold 1,000,000 shares of unregistered common stock
through a private placement offering at a per share price of $1.25. The
offering raised $947,442 in cash (net of offering costs) and included the
conversion of a $250,000 note payable due the investor. In addition, the
investor received a five-year warrant to purchase 1,000,000 shares of
unregistered common stock of the Company at an exercise price of $2.00 per
share. The investor also received a demand registration right covering the
private placement and warrant shares exercisable under certain
circumstances covered in the stock purchase agreement. In 1996, the Company
sold 120,000 shares of common stock in a private placement that raised
$287,500.
OPTIONS - In addition to the warrants described above, issued in connection
with private placements, the Company has granted, to employees and
distributors, options to purchase an additional 1,113,120 shares of common
stock at exercise prices ranging from $0.73 to $2.40, expiring at various
dates through 2003. All options were issued at or above market price at the
time of issuance.
[Download Table]
Balance December 31, 1996 22,600 $1.11
Granted 768,600 $1.06 - $2.40
Exercised --
Expired (6,000) $1.06
-------------
Balance December 31, 1997 785,200 $1.03 - $2.40
Granted 653,200 $0.73 - $2.00
Exercised --
Expired (8,000) $1.06
-------------
Balance December 31, 1998 1,430,400 $0.73 - $2.40
Granted 207,720 $0.77 - $1.54
Exercised --
Expired (525,000) $1.06 - $1.33
-------------
Balance December 31, 1999 1,113,120 $0.73 - $2.40
=============
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary timing
differences between the carrying amounts of assets and liabilities
reflected on the financial statements and the amounts used for income tax
purposes. The tax effects of temporary differences and net operating loss
carryforwards that give rise to significant portions of the deferred tax
assets recognized at December 31, 1999 and 1998 are presented below:
F-13
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
10. INCOME TAXES (CONTINUED)
[Download Table]
December 31,
----------------------
1999 1998
--------- ---------
Deferred tax assets (liabilities):
Lawsuit settlement $ 129,285 $ --
Depreciation (117,980) (28,220)
Amortization (42,840) (28,560)
Allowance for doubtful accounts receivable 25,500 8,500
Federal deferred tax benefit arising
from net operating loss carry-forwards 223,481 396,405
Less valuation allowance -- --
--------- ---------
Net deferred tax asset $ 217,446 $ 348,125
========= =========
The Company has a loss carryforward of approximately $657,000 that may be
offset against future taxable income. The carryforward will expire between
the years 2013 and 2015.
Income tax expense (benefit) for continuing operations consists of the
following:
[Download Table]
December 31,
----------------------
1999 1998
--------- ---------
Current
Federal $ 2,000 $ --
Foreign 55,571 36,938
Deferred
Federal 59,808 (40,992)
Foreign -- --
--------- ---------
Income tax expense (benefit) - continuing operations 117,379 (4,054)
========= =========
The following table presents the principal reasons for the difference
between the Company's effective tax rates and the United States federal
statutory income tax rates of 34%.
[Download Table]
December 31,
----------------------
1999 1998
--------- ---------
U.S. federal statutory income tax rate 34% 34%
Federal income tax expense at statutory rate 84,686 172,453
Non-deductible expenses 146,285 8,500
Depreciation and amortization differences (103,837) (56,780)
Tax benefit of NOL carryforward (65,326) (165,165)
Foreign income taxes 55,571 36,938
--------- ---------
Income tax expense (benefit) $ 117,379 $ (4,054)
========= =========
Effective income tax rate 47% (1)%
========= =========
F-14
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
11. LEASE COMMITMENT
The Company leases its office and warehouse space and certain equipment
using operating leases for various periods through 2008. Basic annual rents
for each of the next five years and thereafter are as follows:
[Download Table]
2000 $445,571
2001 465,380
2002 486,457
2003 480,221
2004 479,932
Thereafter 1,663,908
12. DISCONTINUED OPERATION
In June 1998, RBCI announced its intention to separate GXI from its network
marketing business through a spin-off to its shareholders ("the
Distribution"). The Company's Board of Directors voted to approve, in
principal, the Distribution subject to other approvals and consents and
satisfactory implementation of the arrangements for the Distribution. The
Company accounted for the Distribution effective June 30, 1998, as a
special dividend to its stockholders.
In July 1998, management control of GXI was transferred to the new Board of
Directors of GXI. In late 1998 and early 1999 GXI, with RBCI assistance,
proceed with its efforts to register the shares of GXI with the Securities
and Exchange Commission ("SEC"). During this time GXI became in default on
certain notes payable held by an officer of GXI. The notes were
collateralized by all the outstanding common stock of GX Marketing, Inc.
("GXM") a subsidiary of GXI. All operating assets of GXI were held by GXM.
Effective September 30, 1999, the note holder foreclosed on the note and
took possession of GXM common stock and GXI's operating assets. As a
result, the SEC registration process was halted and, the spin-off reversed
and the remaining operations of GXI closed.
The decision to reverse the spin-off results in a change in reporting
entity for 1998, since GXI was not consolidated beyond June 30, 1998 in the
previously issued financial statements. Therefore, the 1998 financial
statements included in this report have been restated to include the
accounts of GXI for all of 1998, increasing net loss from discontinued
operations by $468,461.
GXI has been accounted for as a discontinued operation in these
consolidated financial statements. Accordingly, the revenues, expenses,
assets and liabilities, and cash flows of GXI have been excluded from their
respective captions in the Consolidated Balance Sheets, Consolidated
Statements of Operations and Consolidated Statements of Cash Flows. These
items have been reported as "Net assets of discontinued operation", "Loss
from discontinued operation", "Net cash flows from discontinued operation"
and "Investing and Financing activities of discontinued operation" for all
years presented.
F-15
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
13. LIGHTFORCE ACQUISITION
In June 1996 the Company acquired certain assets and assumed certain
liabilities of Lightforce, Inc. ("Lightforce") for 600,000 shares of
Company common stock valued at $1,500,000. In connection with the
acquisition the Company received inventory and fixed assets and agreed to
assume certain trade accounts payable, notes payable and commissions
payable.
The purchase agreement called for additional shares of common stock to be
paid, for the first two years, based on sales to the Lightforce
distributors. Additional common stock, valued at market price share, was
paid equal to 25% of sales generated by the Lightforce distributor network
during the first year after the purchase; and 25% of incremental sales
above the first year generated during the second year. In 1998 and 1997 the
company issued 47,160 and 251,353 shares, respectively, of the Company's
common stock, valued at $876,592 and $94,512 under this provision.
In addition, the agreement specified that the seller will receive a
lifetime 5% commission on all sales of Lightforce products. This commission
amounted to $151,799, $153,641 and $117,605 in 1999, 1998 and 1997,
respectively.
14. CONTINGENCIES
From time to time the Company is involved in various legal matters arising
in the normal course of business. In the opinion of Management, such
matters are without merit and the outcome will not have a material effect
on the financial position of the Company.
15. NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company had the following non-cash investing and financing activities:
[Enlarge/Download Table]
1999 1998 1997
------------ ----------- -------------
Conversion of debt into common stock $ 1,000 $ 30,000 $ 217,000
Lightforce purchase with common stock - 94,512 876,592
Fixed assets purchases by notes or capital leases 215,206 324,821 217,062
F-16
INDEX TO EXHIBITS
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Articles of Incorporation
3.2 By-Laws
4.1 Specimen copy of Certificate for Common Stock
10.4 Form of Indemnification Agreement
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
Dates Referenced Herein and Documents Incorporated By Reference
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