<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: September 30, 1997
Commission file number: 33-20323
GlobeNet International I, Inc. (Formerly Mighty Power U.S.A., Inc.)
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(exact name of registrant as specified in its charter)
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Delaware 75-2224643
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(State of Incorporation) (IRS Employer ID No.)
10575 Newkirk, Suite 780, Dallas, Texas 75220
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 972-401-0052
------------
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 Act of 1934
during the past 12 months and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
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Shares of common stock outstanding at September 30, 1997:
12,512,980
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page Number
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of
Operations for the quarters ended September 30,
1997 and 1996 4
Condensed Consolidated Statements of
Operations for the nine months ended September 30,
1997 and 1996 5
Condensed Consolidated Statements of
Cash Flows for the nine months ended September 30,
1997 and 1996 6
Notes to Condensed Consolidated Financial
Statements 7-12
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13-16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Matters 17
</TABLE>
<PAGE> 3
Item 1. FINANCIAL STATEMENTS
GLOBENET INTERNATIONAL I, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 252,917 $ 94,630
Accounts receivable 132,959 27,030
Inventories 1,765,387 1,229,672
Prepaids and other 66,161 63,560
------------- ------------
Total current assets 2,217,424 1,414,892
Property & equipment, net 636,294 487,803
Goodwill, net 2,929,387 2,009,803
Other assets 169,348 54,995
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$ 5,952,453 $ 3,967,493
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 59,091 $ 63,833
Notes payable 200,000 65,199
Accounts payable 1,110,153 843,151
Accrued liabilities 1,057,316 591,890
------------- ------------
Total current liabilities 2,426,560 1,564,073
Long term debt, net of current portion 1,010,104 367,571
Note payable to shareholder -- 51,768
Shareholders' equity:
Common stock, $0.001 par value;
50,000,000 shares authorized;
12,512,980 and 12,101,905 shares
issued and outstanding, respectively 12,512 12,102
Paid in capital 10,302,031 9,303,610
Accumulated deficit (7,799,519) (7,333,212)
Cumulative translation adjustment 765 1,581
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2,515,789 1,984,081
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$ 5,952,453 $ 3,967,493
============= ============
</TABLE>
See notes to condensed consolidated financial statements.
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GLOBENET INTERNATIONAL I, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended September 30,
------------------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Sales $ 3,661,364 $ 2,339,546
Cost of goods sold 1,018,516 685,292
-------------- --------------
Gross margin 2,642,848 1,654,254
Operating expenses
Distributor commissions 1,364,764 818,532
Selling, general and administrative 1,546,604 842,569
-------------- --------------
Total operating expenses 2,911,368 1,661,101
-------------- --------------
Income (loss) before income taxes (268,520) (6,847)
Provision for income taxes -- 5,076
-------------- --------------
Net income (loss) $ (268,520) $ (11,923)
============== ==============
Income (loss) per share:
Weighted average common shares outstanding 12,339,134 12,000,205
Income (loss) per share $ (0.02) $ --
============== ============
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE> 5
GLOBENET INTERNATIONAL I, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
--------------------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
Sales $ 9,893,919 $ 5,772,713
Cost of goods sold 2,599,944 1,692,835
-------------- --------------
Gross margin 7,293,975 4,079,878
Operating expenses
Distributor commissions 3,621,859 2,034,415
Selling, general and administrative 4,138,423 1,981,912
-------------- --------------
Total operating expenses 7,760,282 4,016,327
-------------- --------------
Income (loss) before income taxes (466,307) 63,551
Provision for income taxes -- 17,415
-------------- --------------
Net income (loss) $ (466,307) $ 46,136
============== ==============
Income (loss) per share:
Weighted average common shares outstanding 12,205,592 11,171,187
Income (loss) per share $ (0.04) $ --
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
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GLOBENET INTERNATIONAL I, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
-------------------------------------------
1997 1996
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (466,307) $ 46,136
Adjustment for non-cash items:
Depreciation and amortization 199,416 140,229
(Increase) decrease in accounts receivable (94,178) (52,631)
(Increase) decrease in inventory (429,150) (339,290)
(Increase) decrease in prepaids and other 4,509 (27,790)
(Increase) decrease in other assets (77,378) (22,634)
Increase (decrease) in accounts payable
and accrued expenses 479,390 199,896
Increase (decrease) in notes payable (65,755) --
-------------- ---------------
Total cash provided by (used for) operating activities (449,453) (56,084)
-------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (107,025) (8,058)
Proceeds from sale of equipment 15,000 1,050
Cash acquired by merger 61,694 --
-------------- ---------------
Total cash provided by (used for) investing activities (30,331) (7,008)
-------------- ---------------
Cash flows from investing activities:
Proceeds from private placement -- 287,500
Issuance of long term debt 750,000 --
Payments of long term debt and capital leases (61,291) (76,627)
Repayment of advances from shareholder (51,768) (167,747)
-------------- ---------------
Total cash provided by (used for) financing activities 636,941 43,126
-------------- ---------------
Effect of exchange rate changes on cash flows 1,130 (2,031)
-------------- ---------------
Net increase (decrease) in cash 158,287 (21,997)
Cash, beginning of period 94,630 74,703
-------------- ---------------
Cash, end of period $ 252,917 $ 52,706
============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
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GLOBENET INTERNATIONAL I, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The accompanying condensed consolidated financial statements were prepared by
management without audit. These financial statements have not been examined by
independent public accountants. Management believes that these financial
statements present fairly, in all material respects, the information set forth
therein. However, certain disclosures required by generally accepted accounting
principles have been omitted or condensed. These financial statements should be
read in conjunction with the Company's Form 10-K for the year ended December
31, 1996, the Company's Form 10-Q for the quarter ended June 30, 1997 and the
Company's Form 8-K/A dated June 3, 1997.
NOTE 2 - BUSINESS HISTORY:
The Company was organized February 12, 1988, as a Delaware corporation under
the name Jason Ray Corporation. On July 1, 1988, the Company's name was changed
to Seven Oaks Farms, Ltd. and conducted operations that were ultimately
liquidated in 1991. The Company conducted no operating activities from 1991
through October 1995.
Effective November 1, 1995 the Company merged with Mighty Power USA, Inc.
(Mighty Power), an Oklahoma corporation in the development stage. Mighty Power
was being organized to distribute nutritional and food supplements through a
network of independent distributors. In connection with this merger the Company
changed its name to Mighty Power USA, Inc.
Effective April 1, 1997 the Company merged with GlobeNet Inc. (GNI), a Texas
corporation. In connection with this merger the Company changed its name to
GlobeNet International I, Inc.
Through its subsidiaries and licensees, GNI was engaged in the distribution of
personal and skin care products and nutritional supplements through a network of
independent distributors in the U.S., Canada, Sweden, Indonesia and Japan. GNI
conducted its U.S. operations through its wholly owned subsidiaries Royal
BodyCare, Inc. (RBC-US) and Arlington Laboratories, Inc. GNI conducted its
Canadian operations through wholly owned subsidiaries Royal BodyCare, Inc.
(Canada) (RBC-Canada) and Pure Life International Products, Inc. (Pure Life).
RBC-Canada and Pure Life are organized under the Canadian Business Corporation
Act. A subsidiary of the Company, Kalo Vita, Inc. (KV) filed for bankruptcy in
1994 shortly after its acquisition by GNI. The Company does not have control
of this entity; therefore it is not consolidated in these financial statements.
In addition to operations conducted by its subsidiaries, GNI also distributed
products through license arrangements with third parties in Sweden, Indonesia
and Japan.
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NOTE 3 - MERGER WITH GNI:
Effective April 1, 1997, the Company merged with GNI. Under the terms of the
merger agreements, the Company effected a reverse split of its common stock on
the basis of one share for every seven shares outstanding. GNI then exchanged
all of its outstanding common stock for 10,407,750 shares, or 86%, of the
Company's common stock. Of the shares that were transferred to the GNI,
7,866,323 shares were newly issued shares of the Company. The remaining
2,541,427 shares were transferred to GNI by certain shareholders of the
Company. In connection with this merger the Company changed its name to
GlobeNet International I, Inc.
This transaction, a purchase, was accounted for as a reverse merger with GNI
being the acquirer. Accordingly, GNI's historical financial statements are now
the Company's historical financial statements.
Concurrent with the merger, an affiliate of the Company, Great Xpectations
Marketing, Inc. (GXI), acquired all of the assets and liabilities of two other
affiliates of the Company, Health Thru Nature, Inc. (HTN) and Mighty Power USA,
L.C. (MPLC) for $100,000 in notes payable. The Company then purchased all of
the outstanding common stock of GXI for a $100,000 note payable.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the Mighty Power/GNI merger had occurred at the
beginning of periods presented, after including the impact of certain
adjustments including amortization of intangibles.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Sales $ 10,304,708 $ 8,852,083
Net income (loss) (442,222) 2,967
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results.
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Finished goods $ 1,222,382 $ 1,057,998
Packaging materials and other 543,005 171,674
------------------ -----------------
$ 1,765,387 $ 1,229,672
================== =================
</TABLE>
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<PAGE> 9
NOTE 5 - GOODWILL:
Goodwill was recorded as a result of several acquisitions made by the Company
(including certain pre merger acquisitions by GNI):
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Pure Life $ 843,622 $ 843,622
Light Force, Inc. (Light Force) 2,284,215 1,407,623
HTN 51,511 --
GXI 79,170 --
------------------ -----------------
3,258,518 2,251,245
Less - accumulated amortization (329,131) (241,442)
------------------ -----------------
$ 2,929,387 $ 2,009,803
================== =================
</TABLE>
Goodwill associated with the acquisition of Light Force increased during the
third quarter of 1997. This increase resulted from the issuance to the former
owner of Light Force 251,353 shares of the Company's common stock in accordance
with the terms of the acquisition agreement. The aggregate value of these
shares was $877,000.
Goodwill is amortized over 20 years and is reviewed for impairment on an annual
basis.
NOTE 6 - NOTES PAYABLE:
In connection with the Company's acquisition of certain affiliates described in
Note 3, the Company issued or assumed no interest notes payable aggregating
$200,000. These notes were paid in October 1997.
Also included in notes payable are short term borrowings under a line of credit
arrangement between RBC-Canada and a Canadian bank. The line of credit
arrangement is renewable on an annual basis and borrowings thereunder bear
interest at 10% per annum.
NOTE 7 - ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Distributor commissions $ 509,138 $ 386,263
Sales tax 226,137 30,164
Accrued payroll expenses 127,363 46,232
Accrued marketing expenses 86,837 12,964
Other 107,841 116,267
------------------ -----------------
$ 1,057,316 $ 591,890
================== =================
</TABLE>
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<PAGE> 10
NOTE 8 - LONG TERM DEBT:
Long term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Convertible notes $ 543,000 $ --
Note payable - former KV shareholder 250,000 250,000
Notes payable - banks 53,753 62,381
Notes payable 108,351 --
Debentures 25,000 50,000
Capital leases 89,091 69,023
------------------ -----------------
1,069,195 431,404
Less - current portion (59,091) (63,833)
------------------ -----------------
$ 1,010,104 $ 367,571
================== =================
</TABLE>
In the first and third quarters of 1997, GNI and the company, respectively sold
convertible notes to certain individuals, principally shareholders, foreign
affiliates and distributors. Aggregate proceeds from the sale of the notes was
755,000, including the exchange of a $25,000 debenture for a $25,000
convertible note as described below. The convertible notes bear interest at
10%, payable quarterly, and are due two years from the date of issuance. In
accordance with the terms of the merger agreements, these notes are convertible
into common stock of the Company at any time prior to maturity at the option of
the holder based on a per share conversion price of $1.32, adjusted for the
effect of the merger and reverse stock split. As of September 30, 1997,
$212,000 of these notes had been converted into 159,722 shares of the Company's
common stock.
In connection with the acquisition of KV in November 1994, the former owner of
KV advanced to RBC-US $250,000 under a one-year note which, in December 1995,
was converted to a four-year note payable interest only on a monthly basis
until its maturity in December 1999, at which time all principal and unpaid
interest is due. Interest accrues on this note at the rate of 12.5% per annum
and the note is personally guaranteed by the Company's president. As described
in Note 12, this note was forgiven in October 1997 in connection with the
purchase of unregistered common stock by the noteholder.
Included in notes payable - banks are two notes. One note is a five year bank
note assumed as part of the Light Force acquisition in June 1996. The interest
rate of this note is prime plus 3%. The second note is a note made in January
1995 by RBC-Canada whereby it borrowed funds for a three-year term payable in
monthly principal installments of $600, plus interest, with interest calculated
at prime plus 1.5%. Proceeds of this borrowing were used to purchase leasehold
improvements at RBC-Canada's office/warehouse facility in Vancouver, B.C.,
Canada.
In October 1995 the Company issued one year notes payable which were amended to
be three
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<PAGE> 11
year notes due October 31, 1999. These notes bear interest at 12% per annum,
payable quarterly.
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 is due upon maturity in 1998. Interest on the debentures is payable
monthly at a rate of 15% for one debenture and 10% for the other. The 15%
debenture was exchanged for a convertible note in the first quarter of 1997.
NOTE 9 - SHAREHOLDERS EQUITY:
In 1996, as adjusted for the effect of the merger and reverse stock split, GNI
sold 271,200 shares of common stock through a private placement offering at a
per share price of $1.11. The proceeds were used to pay accounts payable, to
repay a portion of the note to shareholder and for international expansion.
Following is a schedule of the restatement of shareholders' equity that
resulted from the reverse merger:
<TABLE>
<CAPTION>
Common Paid In Accumulated Cumulative Total
Stock Capital Deficit Translation Shareholders'
Adjustment Equity
-------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, Dec. 31,1996 $ 29,650 $ 170,650 $ (314,869) $ -- $ (114, 569)
Net Income -- -- 24,808 -- 24,808
-------- ----------- ----------- ----------- --------------
Balances, Mar. 31, 1997 29,650 170,650 (290,061) (89,761)
Reverse split of
common stock (25,414) 25,414 -- -- --
Reverse merger 7,866 9,017,784 (7,043,151) 674 1,983,173
-------- ----------- ----------- ----------- --------------
Balances, Mar. 31, 1997
(adjusted for the reverse
stock split and
reverse merger) 12,102 9,213,848 (7,333,212) 674 1,893,412
Conversion of
convertible notes 159 211,841 -- -- 212,000
Issuance of shares
in connection with
Light Force acquisition 251 876,342 -- -- 876,593
Net loss -- -- (466,307) -- (466,307)
Translation adjustment -- -- -- 91 91
-------- ----------- ----------- ----------- --------------
Balances, Sept. 30, 1997 $ 12,512 $10,302,031 $(7,799,519) $ 765 $ 2,515,789
======== =========== =========== =========== ==============
</TABLE>
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<PAGE> 12
Shareholders' equity balances at December 31, 1996 have been restated to
reflect the effect of the reverse stock split and reverse merger.
NOTE 10 - INCOME TAXES:
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". The Statement requires the use of an asset and
liability approach for the accounting and financial reporting of income taxes.
No deferred tax asset has been recognized for the Company's operating loss
carryforwards as there is no assurance that the Company will be able to
recognize the benefit in future periods.
The Company files a consolidated tax return with its subsidiaries. Deferred
income taxes are the result of temporary differences between the amount of
assets and liabilities recognized for financial reporting and tax purposes for
the Company's Canadian subsidiaries.
NOTE 11 - NON-CASH INVESTING AND FINANCING ACTIVITIES:
Following is a summary of assets and liabilities acquired in connection with
the Company's reverse merger with GNI and its acquisition of three affiliates
(described in Note 3) through the issuance of a total of $200,000 in notes
payable.
<TABLE>
<S> <C>
Cash $ 61,694
Accounts receivable 11,762
Inventory 110,153
Property and equipment 119,069
Distributor list and other 40,515
Goodwill 130,680
Accounts payable and accrued liabilities 255,284
Notes payable 200,000
Long term debt 108,351
</TABLE>
NOTE 12 - SUBSEQUENT EVENT:
In October 1997, the Company sold 1,000,000 unregistered shares of its common
stock to an investor for aggregate proceeds of $1,250,000. The proceeds were
comprised of $1,000,000 in cash and the forgiveness of a $250,000 note due to
the investor (see Note 8). In connection with the purchase, the investor
received five-year warrants to purchase 2,000,000 shares of unregistered common
stock of the Company at an exercise price of $2.00 per share. This investor
also received a demand registration covering the purchased shares and warrant
shares that may be exercised under certain circumstances described in the stock
purchase agreement.
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<PAGE> 13
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
BACKGROUND
As described in Notes 2 and 3 to the Condensed Consolidated Financial
Statements included elsewhere in the report, effective April 1, 1997 the
Company merged with GlobeNet Inc. (GNI), a Texas corporation. This transaction,
a purchase, was accounted for as a reverse merger with GNI being the
acquirer, although legally, the Company was the survivor. Because the
transaction was accounted for as a reverse merger, GNI's historical financial
statements are now the historical financial statements of the Company. In
connection with the merger, the Company's name was changed to GlobeNet
International I, Inc. (GNII).
GNI was a holding company that, through its subsidiaries and licensees, engaged
in the international distribution of personal care and skin care products and
nutritional supplements through a network of independent distributors (the RBC
operations). RBC's U.S. operations are conducted principally by Royal Bodycare,
Inc. (RBC-US) while RBC's Canadian operations are conducted principally by
Royal Bodycare, Inc. (Canada) (RBC-Canada). RBC also distributes its product
line through third party licensees in Sweden, Indonesia and Japan.
Concurrent with the merger, an affiliate of the Company, Great Xpectations
Marketing, Inc. (GXI) acquired all of the assets and liabilities of two other
affiliates. The Company then purchased all of the outstanding common stock of
GXI and transferred its pre merger operations to GXI (the GXI operations).
RESULTS OF OPERATIONS
Quarter Ended September 30, 1997 Compared with the Quarter Ended September
30, 1996
Sales for the quarter ended September 30, 1997 were $3,661,000 compared with
same quarter sales in the prior year of $2,340,000, an increase of $1,321,000
or 56%. This increase was attributable to the addition of GXI sales resulting
from the merger which amounted to $382,000 and an increase in RBC sales of
$939,000. The increase in RBC sales was mainly the result of growth in RBC's
independent distributor base in the U.S. and Canada, and the addition of KV's
distributor base to RBC's U.S. operations in October 1996. KV is a subsidiary
of the Company that was acquired in November 1994 and then filed bankruptcy
shortly thereafter. Prior to October 1996, sales generated by KV's distributors
and a proportionate amount of operating expenses were recorded as sales and
expenses of KV. Upon approval of a plan of liquidation for KV by the Court in
September 1996, the sales generated by KV's distributor base and related
expenses became part of RBC operations. Operations of KV as a separate company
are not consolidated in the Company's financial statements because the Company
did not have control of this entity.
Cost of goods sold for the quarter ended September 30, 1997 was $1,019,000
compared with same quarter cost of goods sold in the prior year of $685,000, an
increase of $334,000 or 49%. As a percentage of sales, cost of goods sold in
the third quarter of 1997 was 28% compared with 29% in the third quarter of
1996. The improvement in cost of goods sold as percentage of
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<PAGE> 14
sales in 1997 was due to the decline, as a percentage of total sales, of export
sales to RBC's licensees in the third quarter of 1997. Export sales have a
higher cost of goods sold as a percentage of sales since the Company does not
pay distributor commissions on these sales. In addition the Company realized
some improvement in gross margin due to increased volumes.
Distributor commissions for the quarter ended September 30, 1997 were
$1,365,000 compared with same quarter distributor commissions in the prior year
of $819,000, an increase of $546,000 or 67%. As a percentage of sales,
distributor commissions in the third quarter of 1997 were 37% compared with 35%
in the third quarter of 1996. The increase in distributor commissions as a
percentage of sales was mainly due to the decline, as a percentage of total
sales, of export sales to RBC's licensees in the third quarter of 1997. The
Company does not pay distributor commissions on export sales.
Selling, general and administrative expenses (S,G&A) for the quarter ended
September 30, 1997 were $1,547,000 compared with same quarter S,G&A in the
prior year of $843,000, an increase of $704,000 or 84%. As percentage of sales,
S,G&A in the third quarter of 1997 was 42% compared with 36% in the third
quarter of 1996. The increase in S,G&A was attributable to the addition of GXI
S,G&A resulting from the merger which amounted to $149,000 and an increase in
S,G&A related to RBC operations of $555,000. The increase in RBC S,G &A was due
to the addition of S,G&A expenses related to KV (as described above), increased
costs associated with the Company's annual distributor sales conference held in
July 1997, and costs associated with an intensive distributor recruiting
effort which began in the first quarter of 1997. The recruiting effort has
resulted in the addition of a significant number of new distributors to the
Company's active distributor base. The Company also incurred additional S,G&A
to upgrade internal systems and increase personnel to support the additional
distributors and related sales growth. The Company began to experience
increased sales in the second quarter from the addition of these new
distributors and expects this sales growth to continue in future periods.
Net loss for the quarter ended September 30, 1997 was $269,000, or $.02 per
share, compared with same quarter net loss in the prior year of $12,000, or
$.00 per share. The Company incurred a net loss in the third quarter of 1997
primarily due to the expenses incurred to attract new distributors and to set
up internal systems and staffing required to support anticipated sales growth.
The Company believes that these investments will result in an increase in sales
and earnings that will more than justify the expense.
Nine Months Ended September 30, 1997 Compared with the Nine Months Ended
September 30, 1996
Sales for the nine months ended September 30, 1997 were $9,894,000 compared
with sales in the same period of the prior year of $5,773,000, an increase of
$4,121,000 or 71%. This increase was attributable to the addition of GXI sales
resulting from the merger which amounted to $849,000 and an increase in RBC
sales of $3,272,000. The increase in RBC sales was mainly the result of (i)
U.S. sales associated with the acquisition of the operations of Light Force,
Inc. (Light Force) in June 1996, (ii) growth in RBC's independent distributor
base in the U.S. and Canada and (iii) the addition of KV's distributor base to
RBC's U.S. operations in October 1996, as described above.
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<PAGE> 15
'
Cost of goods sold for the nine months ended September 30, 1997 was $2,600,000
compared with cost of goods sold in the same period of the prior year of
$1,693,000, an increase of $907,000 or 54%. As a percentage of sales, cost of
goods sold in the first nine months of 1997 was 26% compared with 29% in the
first nine months of 1996. The improvement in cost of goods sold as percentage
of sales in 1997 was due to the decline in export sales to RBC's licensees in
the first nine months of 1997. Export sales have a higher cost of goods sold as
a percentage of sales since the Company does not pay distributor commissions on
these sales. In addition the Company realized some improvement in gross margin
due to increased volumes.
Distributor commissions for the nine months ended September 30, 1997 were
$3,622,000 compared with distributor commissions in the same period of the
prior year of $2,034,000, an increase of $1,588,000 or 78%. As a percentage of
sales, distributor commissions in the first nine months of 1997 were 37%
compared with 35% in the first nine months of 1996. The increase in distributor
commissions as a percentage of sales was mainly due to the decline, as a
percentage of total sales, in export sales to RBC's licensees in the first nine
months of 1997. The Company does not pay distributor commissions on these
sales.
Selling, general and administrative expenses (S,G&A) for the nine months ended
September 30, 1997 were $4,138,000 compared with S,G&A in the same period of the
prior year of $1,982,000, an increase of $2,156,000 or 109%. As a percentage of
sales, S,G&A in the first nine months of 1997 was 42% compared with 34% in the
first nine months of 1996. The increase in S,G&A was attributable to the
addition of GXI S,G&A resulting from the merger which amounted to $330,000 and
an increase in S,G&A related to RBC operations of $1,826,000. The increase in
RBC S,G&A was due to the addition of S,G&A expenses related to KV (as described
above), increased costs associated with the Company's annual distributor sales
conference held in July 1997, and costs associated with an intensive distributor
recruiting effort which began in the first quarter of 1997. The recruiting
effort resulted in the addition of a significant number of new distributors to
the Company's active distributor base. The Company also incurred additional
S,G&A to upgrade internal systems and increase personnel to support the
additional distributors and related sales growth. The Company began to
experience increased sales in the second quarter from the addition of these new
distributors and expects this sales growth to continue in future periods.
Net loss for the nine months ended September 30, 1997 was $466,000, or $.04 per
share, compared with net income in the same period of the prior year of
$46,000, or $.00 per share. The Company incurred a net loss in the first nine
months of 1997 primarily due to the expenses incurred to attract new
distributors and to set up internal systems and staffing required to support
anticipated sales growth. The Company believes that these investments will
result in an increase in sales and earnings that will more than justify the
expense.
There have been no economic events or changes that have effected the sales or
operating results of the Company and the Company is not aware of any economic
trends or uncertainties that the would have a material impact on future sales
or the operating results. The Company believes that it has purchased its
products at the best price available and that any price
-15-
<PAGE> 16
increases in the foreseeable future will be small. Any such price increases
would be passed through to the Company's customers. In addition, the Company
does not believe at this time that inflation will have a material impact on its
operating results.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, the Company had a net increase in cash of
$158,000. This increase in cash resulted primarily from net cash provided by
investing activities of $637,000 that was partially offset by the net cash used
by operations of $449,000. The net cash provided by investing activities came
from the Company's sale of 10%, two year convertible notes that raised $750,000
in the first nine months of 1997. The net cash used by operations was primarily
the result of cash used to fund the Company's $466,000 net loss and the
$429,000 increase in inventory. The Company increased its inventory to help
insure adequate product availability to supply sales growth.
Consistent with industry practice, most of the Company's sales are paid at the
time of order. Therefore, the Company's primary working capital need is to fund
the increases in inventory necessary to support sales growth. Because the
Company's sales are generated through independent distributors who do not
maintain a significant inventory, it is necessary for the Company to have
products on hand when the distributors place their orders. During periods of
sales growth, the Company must purchase the inventory in anticipation of sales
which creates the need for additional working capital.
The Company believes that it will be able to fund a moderate sales increase
through its operations. In addition, in October 1997, the Company received
$1,000,000 as a portion of the proceeds from the sale of 1,000,000 shares of
unregistered common stock to a private investor (see Note 12 in the
accompanying notes to Condensed Consolidated Financial Statements). Should
sales growth increase beyond the Company's ability to finance its growth
internally, the Company would seek outside sources of capital including bank
borrowings, other types of debt financing or an equity offering. There is no
assurance, however, that the Company would be able to obtain any additional
outside financing.
The Company has no plans or requirements for any significant capital
expenditures during the next twelve months. Other than those factors already
described, the Company is not aware of any trends or uncertainties that would
significantly effect its liquidity or capital resources in the future.
-16-
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company has continued to pursue an end to an outstanding legal
claim in which the Company is a defendant. The Company believes that the suit
is without merit and that the likelihood of any loss to the Company is remote.
In August 1997, a former distributor of the Company filed suit against
the Company, a subsidiary of the Company, Royal BodyCare, Inc., and the
Company's president, Clinton H. Howard, alleging breach of contract and fraud
among other claims. The former distributor is seeking actual damages plus
exemplary on punitive damages in excess of $2,000,000.
In September 1997, the Company filed a counter suit against the former
distributor. The Company believes that the claims of the former distributor are
without merit and that the outcome of this litigation will not have a material
impact on the financial condition or results of operations of the Company.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other information.
None
-17-
<PAGE> 18
Pursuant to the requirements 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.
Globenet International I, Inc.
Registrant
By: /s/ Clinton H. Howard
------------------------
Its: President
DATE: November 13, 1997
Dallas, Texas
-18-
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
Exhibit
Number Exhibit
- ------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 252,917
<SECURITIES> 0
<RECEIVABLES> 132,959
<ALLOWANCES> 0
<INVENTORY> 1,765,387
<CURRENT-ASSETS> 2,217,424
<PP&E> 636,294
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,952,453
<CURRENT-LIABILITIES> 2,426,560
<BONDS> 1,010,104
0
0
<COMMON> 12,512
<OTHER-SE> 2,502,512
<TOTAL-LIABILITY-AND-EQUITY> 5,952,453
<SALES> 9,893,919
<TOTAL-REVENUES> 9,893,919
<CGS> 2,599,944
<TOTAL-COSTS> 2,599,944
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (466,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (466,307)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (466,307)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
