<PAGE> 1
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended December 31, 1997
Commission File No. 33-20323
GLOBENET INTERNATIONAL I, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-2224643
-------- ----------
State of Incorporation (I.R.S. Employer Identification Number)
10575 Newkirk, #780, Dallas, Texas 75220
--------------------------------------------------
(Address of Principal Executive Offices)(zip code)
(972) 401-0052
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No (2) Yes X No
---- ---- ---- ----
On March 31, 1998, Registrant's common stock was sold for $0.812 per
share. As of such date, Registrant had outstanding 4,110,760 shares of common
stock which were held by non-affiliates. By reference to the sales price on
such date, the aggregate market value of the voting stock held by
non-affiliates of Registrant on March 31, 1998 was $3,337,987 (4,110,760 shares
times $0.812).
As of March 31, 1998, Registrant had outstanding 13,536,980 shares of
Common Stock.
<PAGE> 2
GlobeNet International I, Inc.
Form 10-K
Year Ended December 31, 1997
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ITEM 1 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 2 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 3 Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 4 Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . 4
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . 5
ITEM 6 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 7 Management's Discussion and Analysis of
Financial Condition and Results of Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 8 Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 10 Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 11 Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 12 Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . 13
ITEM 13 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
</TABLE>
i
<PAGE> 3
PART I
- --------------------------------------------------------------------------------
ITEM 1. BUSINESS
- --------------------------------------------------------------------------------
GENERAL.
Registrant is engaged in the marketing of over 200 nutritional
supplements and personal care products. Registrant's nutritional products
include herbs, vitamins and minerals. Personal care products include natural
skin, hair and body care products. Registrant operates its business through
two operating divisions: the Royal BodyCare ("RBC") Division and the Great
Xpectations ("GX") Division. The divisions represent the separate businesses,
business strategies and product lines of the constituent companies preceding
the GlobeNet Merger described below. Due to the unique marketing strategies,
product lines, and lines of distribution, Registrant has no present plans to
merge the operations of these divisions.
OPERATIONS
RBC Division. The RBC Division is engaged in the international
marketing and distribution of a line of nutritional supplements and personal
care products through a network of independent distributors. The line features
several proprietary ingredients including Flanagan Microclusters (TM), a
mineral catalyst that increases absorption of nutritional supplements and
Nanocolloidal Mineral Hydride, a nutritional form of hydrogen with antioxidant
and other beneficial properties. The RBC product line also features spirulina
as a main ingredient in its nutritional supplements and aloe vera as a main
ingredient in its skin and personal care products.
The RBC Division has approximately 50,000 members (as of April 1,
1998) in its independent distributor sales force. Approximately 30,000 of the
independent distributors are located in the United States; and approximately
20,000 are located in Canada. Registrant endeavors to attract independent
distributors who can effectively explain the RBC products, demonstrate their
uses, sell through direct marketing techniques, and sponsor other distributors.
(This marketing strategy is commonly referred to as multi-level or network
marketing).
The RBC Division compensates its distributors through a "Stair Step
Breakaway" program consistent with other industry recognized compensation
programs. Under the compensation program, the RBC Division pays sales
commissions and cash rebates to its distributors. These commissions and cash
rebates are based on the amount of purchases by the distributor and by his
sales group. Distributor compensation is paid monthly. Except for certain
meetings and promotional activities sponsored by Registrant, distributors are
responsible for all expenses incurred in operating their independent
distributorships.
GX Division. The GX Division is engaged in the marketing and
distribution of a line of approximately 17 products in the United States
through a network of independent distributors. The GX product line includes
nutritional supplements and automobile and home care products
The GX Division has approximately 2,500 members (as of April 1, 1998)
in its independent distributor sales force, all of which are located in the
United States. Similar to activities in the RBC Division, Registrant endeavors
to attract independent distributors who can effectively explain the GX
products, demonstrate their uses, sell through direct marketing techniques, and
sponsor other distributors. The GX Division also uses the marketing strategy
referred to as multi-level or network marketing.
The GX Division compensates its distributors through a "Binary"
program consistent with other industry recognized compensation programs. Under
the compensation program, the GX Division pays sales commissions to its
distributors based on the amount of purchases by the distributor and by his
sales group. Distributor compensation is paid weekly. Except for certain
meetings and promotional activities sponsored by Registrant, distributors are
responsible for all expenses incurred in operating their independent
distributorships.
<PAGE> 4
Overseas Distributors. Registrant has entered into Exclusive
Distributorship Agreements with four distributors (the "Overseas Distributors")
with respect to the distribution of the RBC products in Japan, the Republic of
Indonesia, Sweden, Norway, Denmark, Finland and Iceland, Switzerland and
Austria. Pursuant to these agreements, the Overseas Distributors are granted
exclusive rights to sell RBC products through office/warehouse facilities owned
and operated by third parties in the respective countries. Such Overseas
Distributors compensate the independent distributors in their respective
countries according to the same compensation plan as that used by the RBC
Division.
Quality Control. Registrant operates a quality control laboratory
through which Registrant performs tests on Registrant's products.
HISTORY.
GlobeNet Merger. Effective April 4, 1997 (April 1, 1997 for
accounting purposes), Mighty Power U.S.A., Inc., a Delaware corporation
("Mighty Power") merged (the "GlobeNet Merger") with GlobeNet Inc., a private
Texas corporation. In the merger, GlobeNet Inc. was merged into Mighty Power,
with Mighty Power being the surviving corporation and the shareholders of
GlobeNet Inc. being issued shares of the Common Stock of Mighty Power. (For
accounting purposes, the merger was accounted for as a reverse merger with
GlobeNet Inc. being the acquirer. Therefore GlobeNet Inc.'s historical
financial statements are now Registrant's historical financial statements.) In
connection with the GlobeNet Merger, Mighty Power changed its name to GlobeNet
International I, Inc.
Mighty Power U.S.A. Mighty Power was originally organized on February
12, 1988, as Jason Ray Corporation, a Delaware corporation, for the purpose of
distributing stock to its parent, Quasar-Tech, Inc. and combining with a
privately-held business. In April 1988, Jason Ray Corporation filed a
Registration Statement on Form S-1 with the Securities and Exchange Commission
for the purposes of effecting an initial public offering of its common stock,
par value $.001 per share (the "Common Stock"), under the Securities Act of
1933, as amended. Jason Ray Corporation changed its name to Seven Oaks Farms,
Ltd. on July 1, 1988. From approximately May 1991, until October 1995, Seven
Oaks Farms, Ltd. was a dormant entity, conducting no business activities.
Effective November 1, 1995, Seven Oaks Farms, Ltd. merged with Mighty Power,
Inc., an Oklahoma corporation. Seven Oaks Farms, Ltd. was the survivor of the
merger and changed its name to Mighty Power U.S.A., Inc.
GlobeNet Inc. GlobeNet Inc., a Texas corporation, was incorporated in
June 1995, to serve as a holding company for certain companies affiliated with
Mr. Clinton H. Howard. In July 1995, all of the outstanding capital stock of
these affiliated companies, was contributed to GlobeNet Inc. by Mr. Howard and
his immediate family in exchange for shares of the common stock of GlobeNet
Inc. The affiliated companies consisted of: Royal BodyCare, Inc., a Texas
corporation ("RBC-U.S."), Arlington Laboratories, Inc., a Texas corporation
("Arlington"), Royal BodyCare, Inc. (Canada), a Canadian corporation
("RBC-Canada"), Royal BodyCare S.A. de C.V., a Mexican corporation
("RBC-Mexico") and KaloVita, Inc., a Delaware corporation ("KV").
RBC-U.S. Royal BodyCare, Inc. was formed 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. The product line was expanded in 1992 to include
nutritional supplements as described below.
RBC-Canada. Royal BodyCare Inc. (Canada), was formed in 1992
to market in Canada through a network of independent distributors the
products then being marketed by RBC-U.S. Shortly after its formation
in 1992, RBC-Canada acquired all of the outstanding capital stock of
Pure Life International Products Inc. ("Pure Life"), then a 12-year
old company which distributed the Pure Life brand line of nutritional
products. After this acquisition, the Pure Life products were
introduced to the U.S. market through RBC-U.S. The Pure Life products
remain part of the RBC product line.
2
<PAGE> 5
Arlington. Arlington Laboratories, Inc. performed quality
control testing. The activities are currently performed by
Registrant, and Arlington is a dormant company.
RBC-Mexico. Royal BodyCare S.A. de C.V., a Mexican
corporation was formed in 1993 to market a limited number of
Registrant's nutritional, skin care and personal care products in
Mexico. In addition, RBC-Mexico also marketed a whey-based powder
similar to powdered milk which was used as a substitute milk in Mexico
for drinking and baking. Because a market for Registrant's products
did not grow to a break-even operating level, RBC-Mexico ceased its
operations in late 1995.
KV. KaloVita, Inc., a Delaware corporation was formed in 1994
and acquired by Mr. Howard in 1994 from Dr. M. G. Robertson for $1.00.
KV was a network marketing company with a product line and a
distributor compensation plan similar to RBC. KV had a distributor
mailing list in excess of 25,000, although many of the distributors
were inactive. At the time of the acquisition, KV was in extremely
poor financial condition having never made a profit and having
exhausted its working capital. In an effort to streamline the
operations, the decision was made to close KV's Virginia facility and
to move KV's operations to the RBC facilities in Dallas, Texas.
However, a creditor of KV believed that it was in its best interest to
file suit against KV prior to the operations being moved to Texas, and
the resulting liens prevented KV from fulfilling distributor orders.
The only way to overcome these liens and thereby give KV a chance to
preserve its distributor network was to file for protection under
Chapter 11 of the Bankruptcy Code. The bankruptcy petition was filed
November 22, 1994. A Liquidating Plan under Chapter 11 was approved
by the Court in 1996 and the case was closed in the first quarter of
1998. Concurrent with the closing of the bankruptcy proceedings KV
was dissolved.
Light Force, Inc. In June 1996, GlobeNet Inc. acquired
certain assets and the business operations of Light Force, Inc.
("Light Force"), a California-based network marketing company that
distributed a line of nutritional supplements featuring Flanagan
Microclusters (TM) and spirulina as main ingredients. The Light Force
distributor network was merged into the distributor network of the
GlobeNet. In 1997, GlobeNet Inc. entered into a license agreement
with Flanagan Technologies, Inc., an Arizona company ("Flan Tech")
whereby GlobeNet Inc. agreed to make Flanagan Microclusters (TM) its
lead product, and to promote such product and any other product made
available to GlobeNet by Dr. Patrick Flanagan and Dr. Gael Crystal
Flanagan. These obligations became obligations of Registrant as a
result of the GlobeNet merger.
NUMBER OF EMPLOYEES. Registrant, employees 112 persons, 8 of whom
are officers of Registrant. Of the 112 employees, 104 are employed in the RBC
Division and 8 are employed in the GX Division.
CAPITAL STOCK. Registrant has authorized 50 million shares of its
$0.001 par value Common Stock; and has authorized 20 million shares of its ten
cent ($0.10) par value Preferred Stock. As of March 31, 1998, Registrant had
issued and outstanding 13,536,980 shares of its Common Stock. Registrant does
not have outstanding any of its Preferred Stock.
In April 1997, as partial consideration for the license received from
Flan Tech, Registrant issued options for 226,000 shares of Registrant's Common
Stock to Patrick Flanagan and Gael Flanagan (113,000 shares each). Such
options are exercisable at any time within two years at a price of $1.11 per
share. In connection with such options, Registrant also contracted to register
a block of shares in an initial public offering as soon as possible.
In September 1997, Registrant granted options (to 28 of its United
States employees and to 19 of its Canadian employees) to purchase a total of
340,600 shares of Registrants Common Stock. These options become exercisable
25% each year, after an initial waiting period, at a price of $1.06 per share.
3
<PAGE> 6
Registrant has also granted options to an employee and certain
distributors to purchase a total of 247,200 shares of Registrant's Common Stock
at prices ranging from $1.11 to $2.40 per share. Such options expire from May
1999 through November 2002.
On October 27, 1997, Registrant issued its Stock Purchase Warrant to
Dr. M. G. Robertson (in connection with the concurrent purchase by Dr.
Robertson of 1 million shares at $1.25 per share) pursuant to which Registrant
agreed to issue an additional one million shares at any time on or prior to
October 27, 2002 at a price of $2.00 per share.
- --------------------------------------------------------------------------------
ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
Registrant does not own any real properties. Registrant maintains its
corporate offices at 10575 Newkirk, #780, Dallas, Texas. Registrant's quality
control laboratory and the RBC warehouse are operated from within the same
facilities. The divisional office and distribution facilities of Registrant's
GX division are situated in leased facilities located at 9202 Royal Lane,
Irving, Texas. Registrant also leases distribution facilities in Vancouver,
British Columbia and Toronto, Ontario.
- --------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The officers and directors certify that to the best of their
knowledge, neither Registrant nor any of its officers or directors are parties
to any material legal proceedings or litigation other than those listed below.
1. Jeffrey E. Levine, plaintiff v. Seven Oaks Farm Limited, a
domestic corporation, Seven Oaks Farms Limited Partnership, IA, and Stephen J.
Harper, individually, Cause No. 93-025315, 333rd Judicial District, Harris
County, Texas. This case brought for payment of legal fees in the amount of
$121,312.18, together with applicable interest and attorneys fees of
$40,433.29, was dismissed, as to Registrant, on July 15, 1997, without prejudice
to the refiling thereof.
2. Don Whigham and Whigham & Associates, Inc., plaintiffs vs.
Clinton H. Howard, Royal BodyCare, Inc. and GlobeNet International, Inc.,
defendants, in the County Court at Law No. 3, Dallas County, Texas, Cause No.
97-08040-C. On August 28, 1997, plaintiffs, former distributors of
Registrant's products, sued Registrant asserting causes of action for, inter
alia, breach of contract and fraud. Plaintiffs have not specified the amount
of actual damages, exemplary damages or statutory damages being sought.
Registrant has filed an answer denying all the material allegations of the
complaint and asserting counter-claims for breach of contract, negligence and
tortious interference with business relations. The parties are currently
engaged in discovery. Registrant has moved to compel arbitration. The motion
is set to be heard on Friday, April 10, 1998. This case is not currently set
for trial.
- --------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
- --------------------------------------------------------------------------------
No matters were submitted to the Shareholders of Registrant during the
last quarter of Fiscal 1997.
4
<PAGE> 7
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
Trading
The common stock of Registrant is listed on the Over-the-Counter
Bulletin Board published by the National Quotation Bureau, Inc. ("NQB"). The
following reflects the range of high and low bid information for each full
quarterly period for each of the past 2 fiscal years:
<TABLE>
<CAPTION>
QUARTER
ENDED 3/31/96(1) 6/30/96(1) 9/30/96(1) 12/31/96(1)
----- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
HIGHS None 7.875 0.6125 3.0625
LOWS None 5.25 0.4375 0.4375
QUARTER
ENDED 3/31/97(1) 6/30/97 9/30/97 12/31/97
----- ---------- ------- ------- --------
HIGH 2.625 7.875 3.00 2.00
LOWS 1.531 1.75 .875 .75
</TABLE>
- -------------------
(1) Adjusted to reflect Registrant's 7 to 1 reverse stock split in April 1997.
As of March 31, 1998, there were approximately 495 holders of
Registrant's Common Stock. Since its inception, Registrant has paid no
dividends on its stock; and Registrant does not anticipate that it will pay
dividends in the foreseeable future.
Private Placements.
In the first and third quarters of 1997, GlobeNet Inc. and the
Registrant, 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. 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 GlobeNet Merger Agreements,
these notes are convertible into Common Stock of the Registrant, 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 December 31, 1997, $217,000 of these notes had been converted into
163,498 shares of the Registrant's Common Stock.
In October 1997, Registrant sold 1,000,000 unregistered shares of its
Common Stock to Dr. M. G. Robertson, (the former owner of KV) 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 payable to Dr. Robertson. In connection
with the purchase, Dr. Robertson received five- year warrants to purchase
1,000,000 shares of unregistered Common Stock of the Registrant at an exercise
price of $2.00 per share. Dr. Robertson also received a demand registration
right covering the purchased shares and warrant shares that may be exercised
under certain circumstances described in the stock purchase agreement.
5
<PAGE> 8
- --------------------------------------------------------------------------------
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
The financial data included in the table shown below has been selected
by Registrant and has been derived from the financial statements for the
periods indicated. Consolidated balance sheets as of December 31, 1996 and
1995 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years ended December 31, 1996, have
been examined by J.S. Osborn, P.C., certified public accountants. The
consolidated balance sheet as of December 31, 1997 and the related statement of
operations, shareholders' equity and cash flows for the year ended December 31,
1997, have been examined by Osborne, Swalm, Thomas & Associates, PLLC (formerly
J.S. Osborn, P.C.), certified public accountants.
<TABLE>
<CAPTION>
Years Ended
December 31 1997 1996 1995 1994 1993
----------- ---- ---- ---- ---- ----
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Total Revenue $14,050,621 $8,638,875 $6,082,728 $7,594,161 $5,375,840(1)
Net Loss (686,881) (25,447) (905,477) (1,532,977) (3,148,751)(1)
BALANCE SHEET DATA:
Working Capital 513,008 (149,181) (331,066) (66,118)(1) 543,709(1)
Total assets 5,983,534 3,967,493 2,470,673 2,876,749 (1) 2,974,144(1)
Long term debt 818,131 367,571 339,953 329,879 (1) 87,830(1)
Shareholders' Equity 3,583,543 1,984,081 226,234 (434,478)(1) 1,478,330(1)
</TABLE>
- ----------------------
(1) Unaudited
6
<PAGE> 9
- --------------------------------------------------------------------------------
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, 1997, Registrant had a net increase
in cash of $72,000. This increase in cash resulted primarily from net cash
provided by investing activities of $1,318,000 that was partially offset by the
net cash used by operations of $1,212,000. The net cash provided by investing
activities came from (i) Registrant's sale of 10%, two year convertible notes
that raised $730,000 and (ii) the Registrant's private placement of one million
shares of common stock that provided cash of $1,000,000 ($947,000 net of
expenses). This cash was primarily used to fund Registrant's $687,000 net
loss, and a $404,000 increase in inventory. Registrant increased its inventory
to help insure adequate product availability to supply sales growth.
Consistent with industry practice, most of Registrant's sales are paid
at the time of order. Therefore, Registrant's primary working capital need is
to fund any increases in inventory needed to support sales growth. Since
Registrant's sales are generated through independent distributors who do not
maintain a significant inventory, it is necessary for Registrant to have
products on hand when the distributors place their orders. During periods of
sales growth, Registrant must purchase inventory in anticipation of sales,
thereby creating the need for additional working capital.
Registrant believes that it will be able to fund further moderate
sales increases through its operations. Should sales growth increase beyond
Registrant's ability to finance its growth internally, Registrant 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
Registrant would be able to obtain any additional outside financing.
Registrant has no plans or requirements for any significant capital
expenditures during the next twelve months. Other than those factors already
described, Registrant is not aware of any trends or uncertainties that would
significantly effect its liquidity or capital resources in the future.
Results of Operations - 1997 Compared with 1996.
Sales for the year ended December 31, 1997 were $14,051,000 compared
with sales for the prior year of $8,639,000, an increase of $5,412,000 or 63%.
This increase was attributable to the addition of sales of Great Xpectations
("GX") products resulting from the merger which amounted to $1,207,000 and an
increase in Royal BodyCare ("RBC") sales of $4,205,000. The increase in RBC
sales was mainly the result of growth in RBC's independent distributor base in
the U.S. and Canada. This growth was partially due to the merger of the Light
Force distributors into the Registrant's distributor base in June 1996.
Cost of goods sold for the year ended December 31, 1997 was $3,781,000
compared with cost of goods sold in the prior year of $2,538,000, an increase
of $1,243,000 or 49%. As a percentage of sales, cost of goods sold in 1997 was
27% compared with 29% in 1996. The improvement in cost of goods sold as
percentage of sales in 1997 was due to the decline, as a percentage of total
sales, of export sales to RBC's licensees in 1997. Export sales have a higher
cost of goods sold as a percentage of sales since Registrant does not pay
distributor commissions on these sales. In addition, Registrant realized some
improvement in gross margin due to increased volumes.
Distributor commissions for the year ended December 31, 1997 were
$5,248,000 compared with distributor commissions in 1996 of $3,026,000, an
increase of $2,222,000 or 73%. As a percentage of sales, distributor
commissions in 1997 were 37% compared with 35% in 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 1997.
Registrant does not pay distributor commissions on export sales.
7
<PAGE> 10
Interest expense for the year ended December 31, 1997 was $110,000,
compared with interest expense in 1996 of $56,000, an increase of $54,000 or
96%. This increase is attributable to the interest expense associated with the
$730,000 of 10%, two year convertible notes issued during 1997.
Depreciation and amortization for the year ended December 31, 1997 was
$307,000 compared with depreciation and amortization in 1996 of $188,000, an
increase of $119,000 or 63%. This increase was mainly due to depreciation
associated with property and equipment additions during 1996 and 1997 along
with an increase in goodwill amortization expense. Goodwill amortization
expense increased in 1997, since 1997 was the first full year of the
amortization of goodwill associated with the acquisition of Light Force.
General and administrative expenses ("G&A") for the year ended
December 31, 1997 were $5,278,000 compared with G&A in 1996 of $2,838,000, an
increase of $2,440,000 or 86%. As percentage of sales, G&A in 1997 was 38%
compared with 33% in 1996. The increase in G&A was attributable to the
addition of GX G&A resulting from the merger which amounted to $476,000 and an
increase in G&A related to RBC operations of $1,964,000. The increase in RBC
G&A was due to increased costs associated with Registrant's annual distributor
sales conference held in July 1997, and costs associated with an intensive
distributor recruiting and product marketing effort which began in the first
quarter of 1997. The recruiting and product marketing effort has resulted in
the addition of a significant number of new distributors to Registrant's active
distributor base. Registrant also incurred additional G&A to upgrade internal
systems and increase personnel to support the additional distributors and
related sales growth. Registrant 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 year ended December 31, 1997 was $687,000, compared
with a net loss in the prior year of $25,000. Registrant 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 anticipated sales
growth. Registrant believes that the sales growth that these investments are
generating will result in an increase in earnings that will more than justify
the expense.
There have been no economic events or changes that have affected the
sales or operating results of Registrant and Registrant is not aware of any
economic trends or uncertainties that would have a material impact on future
sales or the operating results. Registrant believes that it has purchased its
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 Registrant's customers. In addition, Registrant does not believe at
this time that inflation will have a material impact on its operating results.
Results of Operations - 1996 Compared with 1995.
Sales for the year ended December 31, 1996 were $8,639,000 compared
with sales for the prior year of $6,083,000, an increase of $2,556,000 or 42%.
The increase in RBC sales was mainly the result of growth in RBC's independent
distributor base in the U.S. and Canada due to the acquisition of Light Force
in June 1996, and an increase in export sales to RBC's licensees in 1996 of
$491,000 compared to 1995.
Cost of goods sold for the year ended December 31, 1996 was $2,538,000
compared with cost of goods sold in the prior year of $1,941,000, an increase
of $597,000 or 31%. As a percentage of sales, cost of goods sold in 1996 was
29% compared with 32% in 1995. The improvement in cost of goods sold as a
percentage of sales in 1996 was due mainly to the outsourcing of certain
product production activities beginning during the last half of 1995 that
significantly reduced production costs. In addition, Registrant realized some
improvement in gross margin due to increased volumes.
Distributor commissions for the year ended December 31, 1996 were
$3,026,000 compared with distributor commissions in 1995 of $2,235,000, an
increase of $791,000 or 35%. As a percentage of sales, distributor commissions
in 1996 were 35% compared with 37% in 1995. The decrease in distributor
8
<PAGE> 11
commissions as a percentage of sales was mainly due to the increase, as a
percentage of total sales, of export sales to RBC's licensees in 1996. The
Company does not pay distributor commissions on export sales.
Interest expense for the year ended December 31, 1996 was $56,000
compared with interest expense in 1995 of $64,000, a decrease of $8,000 or 13%.
This decrease was attributable to the expiration of certain capital lease
agreements in February 1996.
Depreciation and amortization for the year ended December 31, 1996 was
$188,000 compared with depreciation and amortization in 1995 of $162,000, an
increase of $26,000 or 16%. This increase was mainly due to depreciation
associated with property and equipment additions during 1996 and 1995.
G&A for the year ended December 31, 1996 were $2,838,000 compared with
G&A in 1995 of $2,596,000, an increase of $242,000 or 9%. As percentage of
sales, G&A in 1996 was 33% compared with 43% in 1995. G&A in 1995 included
certain one time charges of $494,000 related primarily to the closing of
RBC-Mexico. Excluding this charge, as a percentage of sales, G&A in 1995 was
35%. G&A expenses decreased in 1996 as a percentage of sales since certain G&A
expenses (such as management salaries and facilities expenses) did not increase
in proportion to the increase in sales.
Net loss for the year ended December 31, 1996 was $25,000, compared
with a net loss in the prior year of $905,000. This improvement was mainly due
to the increased gross profit generated by increased sales, combined with
limiting the increase in G&A expenses.
Forward Looking Statements
Important Considerations Related to Forward-Looking Statements. It
should be noted that this discussion contains forward looking statements which
are subject to substantial risks and uncertainties. There are a number of
factors which could cause actual results to differ materially from those
anticipated by statements made herein. Such factors include, but are not
limited to, changes in general economic conditions, the growth rate of the
market for Registrant's products and services, the timely availability and
market acceptance of these products and services, the effect of competitive
products and pricing, and the irregular pattern of revenues, as well as a
number of other risk factors which could effect the future performance of
Registrant.
- --------------------------------------------------------------------------------
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------
The financial statements of Registrant are set forth immediately
following the signature page of this Form 10- K. (See "Item 14. Exhibits,
Financial Statements Schedules, and Reports on Form 8-K" for index to Financial
Statements.)
- --------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTS ON FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
Registrant has had no disagreements with its certified public
accountants with respect to accounting practices or financial disclosure.
9
<PAGE> 12
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
The following table sets forth, as of March 31, 1998, the name, age,
and position of each Executive Officer and Director and the month in which such
Director or Officer began his term of office. (See footnotes for the month in
which such persons began their respective term of office with a constituent
company of the GlobeNet Merger.)
<TABLE>
<CAPTION>
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
---- --- -------- -------------
<S> <C> <C> <C>
Clinton H. Howard 69 Chairman of the Board & President April 1997(1)
Steven E. Brown 43 Director/Vice-President & Chief April 1997(1)
Financial Officer
Andrew V. Howard 40 Director/General Counsel/Vice April 1997(1)
President
Forrest E. Watson 63 Director April 1997(2)
R. Leon York 59 Director April 1997(2)
Gregory A. White 40 Chief Information Officer February 1998
Ken Sabot 52 Senior Vice President of Operations February 1998
</TABLE>
- ------------------------
(1) Director of GlobeNet since July 1995.
(2) Director of Mighty Power since November 1995.
TERM OF OFFICE.
Each director of Registrant serves for a term of one year, and
thereafter until his or her successor is elected at Registrant's annual
shareholder's meeting, and is qualified, subject to removal by Registrant's
shareholders. Each officer serves, at the pleasure of the Board of Directors,
for a term of one year.
FAMILY RELATIONSHIPS
Mr. Andrew V. Howard, a Vice President and General Counsel of
Registrant, is the son of Clinton H. Howard, President and Chairman of
Registrant.
BIOGRAPHICAL INFORMATION.
Set forth below is certain biographical information regarding each of
Registrant's Directors and Executive Officers.
Clinton H. Howard. Mr. Howard is the President and Chairman of the
Board of Registrant. Mr. Howard 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. Mr.
Howard founded
10
<PAGE> 13
American Biomedical Corporation ("ABC") in 1958, and built it into a chain of
40 medical testing laboratories. He took ABC public in 1969. In 1974, ABC was
merged with National Health Laboratories, then one of the nation's largest
medical laboratory chains. In 1974, Mr. Howard founded Carrington
Laboratories, Inc. ("Carrington") (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 RBC- U.S.
Steven E. Brown. Mr. Brown is Vice President and Chief Financial
Officer of Registrant and has held the same positions with RBC-U.S. since
joining RBC-U.S. in May 1994. Prior to joining RBC-U.S., Mr. Brown was the
Vice President, Finance and Chief Financial Officer of Carrington Laboratories,
Inc. ("Carrington") 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. Andrew V. Howard is Vice President and General
Counsel of Registrant and has held the same positions with RBC-U.S. since
joining RBC-U.S. 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
year. 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.
Forrest E. Watson Dr. Watson is the President of Registrant's GX
Division and as co-founder, served as Chief Executive Officer of Mighty Power
from June 1996, until Mighty Power's merger with GlobeNet in April 1997. Prior
to co- founding Mighty Power, Dr. Watson served as the Superintendent of
Schools in various Texas cities from 1965 until 1996. Dr. Watson's most recent
position as Superintendent of Schools was in the Keller School District where
he served in that capacity from 1993 until 1996.
R. Leon York Mr. York is the Executive Vice President of
Registrant's GX Division and, as co-founder, served as Mighty Power's President
from November 1995, until Mighty Power's merger with GlobeNet in April 1997.
Prior to co- founding Mighty Power, Mr. York had been retired. Mr. York
retired from Petrolon, Inc., the marketer of the automobile fuel additive
product Slick 50, in 1987. Mr. York joined Petrolon in 1978 and served as
President from 1984 until he retired in 1987.
Ken Sabot. Mr. Sabot became Senior Vice President of Operations of
the Registrant in February 1998. Prior to joining Registrant, 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.
Gregory A. White. Mr. White became Chief Information Officer in
February 1998. From 1984 to February 1998, Mr. White served as President of
two companies that he founded, Learning Path International, a computer systems
training company, and Azilan Solutions, a provider of computer systems and
support and strategic planning services emphasizing the use of state-of-the-art
information technology.
11
<PAGE> 14
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
Except as to the bankruptcy proceedings of KV under the direction of
Clinton H. Howard (as disclosed above under Item 1 Business), to the knowledge
of management, during the past five years, no present or former director,
executive officer, person nominated to become a director or an executive
officer of Registrant, promoter, or control person:
(1) filed a petition under the federal bankruptcy laws or
any state insolvency law, on or had a receiver, fiscal agent or
similar officer appointed by a court for the business or property of
such person, or any partnership in which he was a general partner at
or within two years before the time of such filing, or any corporation
or business association of which he was an executive officer at or
within two years before the time of such filing, or any corporation or
business association of which he was an executive officer at or within
two years before the time of such filing;
(2) was convicted in a criminal proceeding or named the
subject of a pending criminal proceeding (excluding traffic violation
and other minor offenses);
(3) was the subject of any order, judgment or decree, not
subsequently reversed, suspended, or vacated, or any court of
competent jurisdiction, permanently or temporarily enjoining him from
or otherwise limiting, the following activities: acting as a futures
commission merchant, introducing broker, commodity trading advisor,
commodity pool operator, floor broker, leveraged transaction merchant
associated person of any of the foregoing, or as an investment
advisor, underwriter, broker, or dealer in securities, or as an
affiliate person, director, or employee of any investment company, or
engaging in or continuing any conduct or practice in connection with
such activity; (ii) engaging in any type of business practice; or (ii)
engaging in any activity in connection with the purchase or sale of
any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities laws;
(4) was the subject of any order, judgment, or decree,
not subsequently reversed, suspended, or vacated, of any federal or
state authority barring, suspending, or otherwise limited for more
than 60 days the right of such person or engage in any activity
described above under this item, or to be associated with persons
engage in any such activity;
(5) was found by a court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission to have
violated any federal or state securities law, and the judgment in such
civil action or finding by the Securities and Exchange Commission has
not been subsequently reversed, suspended, or vacated; or
(6) was found by a court of competent jurisdiction in a
civil action or by the Commodity Futures Trading Commission to have
violated any federal commodities law, and the judgment in such civil
action or finding by the Commodity Futures Trading Commission has not
been subsequently reversed, suspended, or vacated.
- --------------------------------------------------------------------------------
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
EXECUTIVE COMPENSATION
The following compensation has been paid or accrued to the officers of
the Registrant:
12
<PAGE> 15
<TABLE>
<CAPTION>
Name Capacity 1997 1996 1995 1994
---- -------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Clinton H. Howard President $177,000 $ 11,000 $ 4,500 $11,500
Steven E. Brown Vice President and $105,000 $103,000 $ 90,400 $55,600(1)
Chief Financial
Officer
Andrew V. Howard Vice President $ 96,400 $ 86,200 $ 59,400(2) -0-
Marketing
Nelson R. Rogers Vice President $ 90,000 $ 90,000 $ 88,300(3) -0-
International
Forrest E. Watson Formerly Chief $ 60,000 $ 25,350 -0-(4) -0-
Executive Officer
R. Leon York Formerly President $ 30,000 $ 30,000 $5,000(4) -0-
</TABLE>
- ------------------
(1) Started May 1994
(2) Started March 1995
(3) Started January 1995
(4) Started November 1995
BONUSES AND DEFERRED COMPENSATION: None
COMPENSATION PURSUANT TO PLANS: None
PENSION TABLE: None
COMPENSATION See Cash Compensation and Stock Comp
EMPLOYMENT CONTRACTS AND
TERMINATION OF EMPLOYMENT AND
CHANGES IN CONTROL ARRANGEMENTS
There are no compensatory plans or arrangements, including payments to
be received from Registrant, 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 Registrant or its subsidiaries, or any change in
control of Registrant, or a change in the person's responsibilities following a
changing in control of Registrant.
- --------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP AND CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
The following tables set forth as of December 31, 1997, the address,
and the number of shares of Registrant's Common Stock, par value $0.001 per
share, held of record or beneficially by each person who
13
<PAGE> 16
held of record, or was known by Registrant to own beneficially, more than 5% of
the then 13,536,980 issued and outstanding shares of Registrant's Common Stock,
and the name and share holdings of each director and of all officers and
directors as a group:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
CLASS BENEFICIAL OWNER(1) AMOUNT % OF CLASS
----- ------------------- ------ ----------
<S> <C> <C> <C>
Common Clinton H. Howard 7,801,857(2) 57.6%
3917 Fox Glen Dr.
Irving, Texas 75062
Common Penny Slinger Hills, Trustee 1,607,412 11.9%
Hills 1988 Living Trust
910 Herman Gulch Road
Boulden Creek, CA 95006
Common Dr. M. G. Robertson 2,000,000(5) 13.8%
977 Centerville Turnpike
Virginia Beach, VA 23463
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
CLASS BENEFICIAL OWNER(1) AMOUNT % OF CLASS
----- ------------------- ------ ----------
<S> <C> <C> <C>
Common Clinton H. Howard 7,801,857(2) 56.6%
Common Steven E. Brown 22,600(3) 0.00(4)
Common Andrew V. Howard 16,951 0.00(4)
ALL OFFICERS, DIRECTORS & BENEFICIAL 7,841,408(3) 57.8%
PERSONS AS A GROUP (8 PERSONS)
</TABLE>
(1) All shares owned directly are owned beneficially and of record, and such
Shareholder has sole voting, investment, and dispositive power, unless
otherwise noted.
(2) Includes 115,265 shares owned of record by Mr. Howard's wife.
(3) Includes 22,600 shares which may be acquired through presently exercisable
stock options.
(4) Less than 1.0%
(5) Includes 1,000,000 shares which may be acquired through presently
exercisable warrants.
14
<PAGE> 17
- --------------------------------------------------------------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
TRANSACTIONS WITH AND INDEBTEDNESS OF MANAGEMENT AND OTHERS
As a part of a grant of stock options to employees of the Registrant
in September 1997, Registrant granted options to six officers and directors
totaling 67,000 shares. These options were 5-year options exercisable at $1.06
per share. The number of options granted to each employee, including officers
and directors was determined by a formula based on the length of service and
annual base salary.
In the merger of Mighty Power and GlobeNet, the Boards of Directors of
the respective companies agreed that, on a post-merger basis, Mighty Power
shareholders and GlobeNet shareholders should own 14% and 86% of the Registrant,
respectively. In connection with the merger transaction, on a post reverse
split basis, certain officers and directors of Mighty Power transferred all
shares beneficially owned by them, totaling 2,235,858 shares, to the GlobeNet
shareholders. In addition, an affiliate of Mighty Power and the Mighty Power
Employee & Associate Profit Sharing Trust transferred all shares owned by them,
totaling 305,571 shares, to the GlobeNet shareholders. Two officers and
directors of Registrant received an aggregate of 7,703,543 shares of Registrant
in connection with the merger as the proportionate number of shares due to them
based on their percentage ownership of GlobeNet.
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a)(1) FINANCIAL STATEMENTS. The following financial statements are
included in this report:
Title of Document
Independent Auditors Report of Osborn, Swalm, Thomas & Associates,
PLLC, Certified Public Accounts
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the Years December 31, 1997,
1996 and 1995.
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements
(A)(2) FINANCIAL STATEMENT SCHEDULES. None.
(A)(3) EXHIBITS. The following exhibits are included as part of this report:
15
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT NO. SEC REF. NO. TITLE OF DOCUMENT LOCATION
----------- ------------ ----------------- --------
Item 3 Articles of Incorporation and Bylaws
------ ------------------------------------
<S> <C> <C> <C>
3.01 3 Articles of Incorporation Incorporated by
Reference
3.02 3 Bylaws Incorporated by
Reference
Material Contracts None
27 Financial Data Schedule
-------------
</TABLE>
REPORTS ON FORM 8-K
Registrant filed no reports on Form 8-K during the last quarter of Fiscal
1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
GLOBENET INTERNATIONAL I, INC.,
a Delaware corporation
Date: April 14 , 1998.
------------------------- By: /s/ CLINTON H. HOWARD
-------------------------------------
Name: Clinton H. Howard
-----------------------------------
Title: President
----------------------------------
16
<PAGE> 19
Pursuant to the requirements to the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ CLINTON H. HOWARD Chairman of the Board of April 14, 1998
-------------------------- Directors and President ----------------
Clinton H. Howard
/s/ STEVEN E. BROWN Director, Vice President & April 14, 1998
-------------------------- Chief Financial Officer ----------------
Steven E. Brown
/s/ ANDREW V. HOWARD, J.D. Director, Vice President & April 14, 1998
-------------------------- General Counsel ----------------
Andrew V. Howard, J.D.
-------------------------- Director ----------------
Forrest E. Watson, Ph. D.
/s/ R. LEON YORK April 14, 1998
-------------------------- Director ----------------
R. Leon York
</TABLE>
17
<PAGE> 20
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Accountants' Report F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
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
<PAGE> 21
INDEPENDENT AUDITORS' REPORT
Board of Directors
GlobeNet International I, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of GlobeNet
International I, Inc. and subsidiaries as of December 31, 1997 and 1996, 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 GlobeNet
International I, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for the three year period ended
December 31, 1997, in conformity with generally accepted accounting principles.
OSBORN, SWALM, THOMAS & ASSOCIATES, PLLC
Dallas, Texas
March 31,1998
F-2
<PAGE> 22
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 166,392 $ 94,630
Accounts receivable, net of
allowance for doubtful accounts 119,685 27,030
Inventory 1,744,309 1,229,672
Prepaid expenses 64,482 63,560
------------ ------------
Total current assets 2,094,868 1,414,892
Property and equipment, net of depreciation 759,168 487,803
Goodwill, net of accumulated amortization 2,959,673 2,009,803
Other assets 169,825 54,995
------------ ------------
$ 5,983,534 $ 3,967,493
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 320,575 $ 843,151
Accrued expenses 1,116,632 591,890
Notes payable 67,199 65,199
Current portion of long-term debt 77,454 63,833
------------ ------------
Total current liabilities 1,581,860 1,564,073
------------ ------------
Long-term debt, net of current portion 818,131 367,571
------------ ------------
Note payable to shareholder -- 51,768
------------ ------------
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; 1997
13,536,980 shares; 1996 4,235,714 shares 13,537 4,236
Paid in capital 11,593,209 9,311,476
Accumulated deficit (8,020,093) (7,333,212)
Cumulative translation adjustment (3,110) 1,581
------------ ------------
3,583,543 1,984,081
------------ ------------
$ 5,983,534 $ 3,967,493
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 23
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Sales $ 14,050,621 $ 8,638,875 $ 6,082,728
Cost of sales 3,780,930 2,538,428 1,941,242
------------ ------------ ------------
Gross profit 10,269,691 6,100,447 4,141,486
------------ ------------ ------------
Operating expenses:
General and administrative 5,277,860 2,838,395 2,595,985
Distributor commissions 5,248,309 3,025,838 2,234,733
Interest 110,125 55,989 63,679
Depreciation and amortization 307,312 188,257 162,356
------------ ------------ ------------
Total operating expenses 10,943,606 6,108,479 5,056,753
------------ ------------ ------------
Loss from continuing operations (673,915) (8,032) (915,267)
Discontinued operations -- -- (18,553)
------------ ------------ ------------
Net loss before income taxes (673,915) (8,032) (896,714)
Income taxes 12,966 17,415 8,763
------------ ------------ ------------
Net loss $ (686,881) $ (25,447) $ (905,477)
============ ============ ============
Pro forma information (unaudited):
Net loss $ (649,107)
Income taxes 12,966
------------
Pro forma net losses $ (662,073)
============
Loss per share $ (0.053)
============
Weighted average shares outstanding 12,552,977
============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 24
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Accumulated Total
--------------------- Paid In Accumulated Translation Shareholders'
Shares Amount Capital Deficit Adjustment Equity
------ ------ ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994 3,571,429 $ 3,572 $ 9,116,840 $ (6,402,288) $ 11,110 2,729,234
Net Loss -- -- -- (905,477) -- (905,477)
Translation Adjustment -- -- -- -- (5,323) (5,323)
------------ ------------ ------------ ------------ ------------ ------------
Balances, December 31, 1995 3,571,429 3,572 9,116,840 (7,307,765) 5,787 1,818,434
Shares Issued for Commissions 664,285 664 194,636 -- -- 195,300
Net Loss -- -- -- (25,447) -- (25,447)
Translation Adjustment -- -- -- -- (4,206) (4,206)
------------ ------------ ------------ ------------ ------------ ------------
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
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 25
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flow from operating activities:
Net loss from operations $ (686,881) $ (25,447) $ (905,477)
Adjustments to reconcile loss to net cash
provided by (used for) operations:
Depreciation and amortization 307,312 201,224 167,760
Loss on sale of equipment 299 2,254 33,386
Deferred income taxes -- 3,437 2,738
Translation adjustments (4,691) (206) (195)
Change in assets and liabilities:
Accounts receivable (80,893) 833 (1,323)
Prepaid assets (922) (10,250) (4,800)
Inventory (404,484) (26,117) 102,992
Other assets (74,313) (36,031) 11,964
Accounts payable (550,230) 236,938 (396,972)
Accrued expenses 299,310 (295,449) 458,188
Notes payable (16,528) 14,423 39,632
----------- ----------- -----------
Cash provided by (used for) operating activities (1,212,021) 65,609 (492,107)
----------- ----------- -----------
Cash flow from investing activities:
Cash acquired by merger 61,694 -- --
Purchase of furniture, fixtures and equipment (110,969) (21,995) (26,800)
Proceeds from sale of equipment 15,288 183 130,367
----------- ----------- -----------
Cash provided by (used for) investing activities (33,987) (21,812) 103,567
----------- ----------- -----------
Cash flow from financing activities:
Net proceeds from private placement 947,442 287,500 702,560
Proceeds from long term debt 730,000 24,602 22,047
Payments of long-term debt (307,904) (85,337) (101,269)
Repayment to stockholders (51,768) (250,635) (257,404)
----------- ----------- -----------
Cash provided by (used for) financing activities 1,317,770 (23,870) 365,934
----------- ----------- -----------
Net increase (decrease) in cash 71,762 19,927 (22,606)
Cash, beginning of year 94,630 74,703 97,309
----------- ----------- -----------
Cash, end of year $ 166,392 $ 94,630 $ 74,703
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 26
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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 approximately May 1, 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. The Company then changed
its name to Mighty Power USA, Inc. ("Mighty Power").
Effective April 1, 1997, Mighty Power merged with GlobeNet Inc. (the "merger").
In connection with the merger the Company effected a one for seven reverse stock
split (all share figures have been adjusted to reflect this reverse split). The
Company then issued 7,886,415 new shares to the shareholders of GlobeNet Inc. in
exchange for 100% of the outstanding stock of GlobeNet Inc. In addition, under
the terms of the merger agreement, certain shareholders of the Company
transferred an additional 2,541,427 shares of common stock to the GlobeNet Inc.
shareholders. As a result, the shareholders of GlobeNet Inc. obtained 86% of the
then outstanding common stock of the Company. In connection with these
transactions, the registrant changed it name to GlobeNet International I, Inc.
("GNI").
The transaction, 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 the registrant, Great Xpectations
Marketing, Inc.("GXI"), acquired all the assets and liabilities of two other
affiliates of the registrant, Health Thru Nature, Inc. and Mighty Power USA L.
C. for $100,000 in notes payable. The registrant then purchased all the
outstanding common stock of GXI for an additional $100,000 note payable. These
transactions were also accounted for as purchases.
The following unaudited pro forma summary presents the consolidated results of
operations of the Company as if the April 1, 1997 transactions described above
had occurred at the beginning of 1996, after considering the impact of certain
adjustments including amortization of intangibles.
<TABLE>
<CAPTION>
Unaudited
----------------------------
1997 1996
<S> <C> <C>
Sales $14,439,727 $10,660,078
Net income (loss) (662,093) (294,270)
</TABLE>
The pro forma results are not necessarily indicative of what actually would have
occurred if the acquisitions had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
periods.
ORGANIZATION - The Company is engaged in the marketing of nutritional
supplements and personal care products. The Company operates its business
through two operating divisions: the Royal BodyCare Division and the Great
Xpectaions Division. The two divisions represent the separate business
strategies and product lines of the constituent companies preceding the merger
described above.
F-7
<PAGE> 27
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. ORGANIZATION AND HISTORY (CONTINUED):
GlobeNet Inc. 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 GlobeNet Inc. by Mr. Howard and his immediate family.
GNI's principle U. S. marketing operations are conducted through Royal BodyCare,
Inc. ("RBC-US"), formed by Mr. Howard in 1991. In 1991 Mr. Howard formed
Arlington Laboratories, Inc. ("Arlington"), for the purpose of operating a
facility to test the Company's products and perform certain private label
manufacturing activities. In 1992 Mr. Howard formed Royal BodyCare, Inc.
(Canada) (" 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. In 1993 Mr. Howard formed Royal BodyCare
S.A. de C.V. ("RBC-Mexico") to market nutritional and skin care products.
RBC-Mexico ceased operations in late 1995 due to revenue below expectations.
In 1995 the Company entered into separate agreements to license the exclusive
rights to sell its products in Indonesia and Sweden through office/warehouse
facilities owned and operated by third parties in the respective countries. In
1996 the Company entered into a similar arrangement with a third party licensee
to market the Company's products in Japan. 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 GNI, and its wholly owned subsidiaries; Royal BodyCare, Inc., Royal
BodyCare, Inc. (Canada), Pure Life International Products, Inc., Arlington
Laboratories, Inc., Royal BodyCare S.A. de C.V., and Great Xpectations
Marketing, Inc. (collectively the "Subsidiaries"). RBC-Canada and Pure Life are
organized under the Canadian Business Corporation Act. All significant
inter-company accounts and transactions have been eliminated. A subsidiary of
the Company, Kalo Vita, Inc. filed for bankruptcy in 1994. The Company does not
have control of this entity, therefore it is not consolidated in these financial
statements (see note 14).
The common stock of the subsidiaries (except GXI) was owned by Clinton H. Howard
and members of his family until July 1, 1995. On that date the common stock of
the subsidiaries was contributed to GlobeNet Inc. in exchange for shares of
common stock. The accompanying financial statements have been prepared as if the
subsidiaries had been contributed to GlobeNet Inc. on the respective dates of
their affiliation with Mr. Howard.
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.
F-8
<PAGE> 28
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVENTORIES - Inventories, consisting of finished goods held for resale, work-
in-process and raw materials are stated at the lower of cost of market.
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.
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.
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.
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.
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 is not presented since it would be anti-dilutive.
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 in
April 1997 the 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.
F-9
<PAGE> 29
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
3. INVENTORIES:
At December 31, inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Finished goods $1,480,085 $1,057,998
Packaging materials and other 264,224 171,674
---------- ----------
Total $1,744,309 $1,229,672
========== ==========
</TABLE>
4. PROPERTY AND EQUIPMENT:
At December 31, property and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Furniture and fixtures $ 369,838 $ 163,883
Warehouse equipment 159,896 266,169
Automotive equipment 8,880 9,562
Computer equipment and software 897,603 625,409
Leasehold improvements 38,619 16,630
----------- -----------
Total property and equipment 1,474,836 1,081,653
Less accumulated depreciation and amortization (715,668) (593,850)
----------- -----------
Net property and equipment $ 759,168 $ 487,803
=========== ===========
</TABLE>
F-10
<PAGE> 30
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
5. GOODWILL:
Goodwill was recorded as a result of the acquisition of Pure Life in April 1992,
Lightforce, in June 1996 and the merger in April 1997 as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Lightforce $ 2,284,215 $ 1,407,623
Pure Life 843,622 843,622
Mighty Power 220,442 --
----------- -----------
3,348,279 2,251,245
Accumulated amortization (388,606) (241,442)
----------- -----------
Net Goodwill $ 2,959,673 $ 2,009,803
=========== ===========
</TABLE>
6. ACCRUED EXPENSES:
At December 31, 1997 and 1996, accrued expenses consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Distributor commissions $ 570,962 $ 386,263
Sales and other taxes 230,278 30,164
Interest 38,191 2,089
Payroll 187,464 108,103
Other 89,737 65,271
---------- ----------
Total $1,116,632 $ 591,890
========== ==========
</TABLE>
7. NOTES PAYABLE:
At December 31, notes payable consist of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Demand note payable - bank bearing interest at 10% per annum $ 48,671 $ 65,199
Notes payable - related parties 16,328 --
Other 2,200 --
----------- -----------
$ 67,199 $ 65,199
=========== ===========
</TABLE>
F-11
<PAGE> 31
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. LONG-TERM DEBT:
At December 31, long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Note payable - former KV shareholder $ -- $ 250,000
Notes payable - banks 122,630 62,381
Notes Payable - related parties 92,023 --
Convertible notes payable 538,000 --
Debentures 25,000 50,000
Capital leases 117,932 69,023
--------- ---------
895,585 431,404
Less - current portion (77,454) (63,833)
--------- ---------
Total $ 818,131 $ 367,571
========= =========
</TABLE>
In connection with Mr. Howard's acquisition of KV in November 1994, the former
owner of KV advanced 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 accrued on this note at the rate of 12.5% per annum
and the note was personally guaranteed by Mr. Howard. The note was converted to
common stock in 1997 in connection with a private placement agreement.
Included in notes payable-banks is three notes assumed in connection with the
Lightforce acquisition totaling $103,958 at December 31, 1997, 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 (see Note 13).
Included in notes payable - banks 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.
Note payable - related party consists of a note payable to a director of the
company acquired as part of the merger with Mighty Power USA. The note has no
scheduled maturity date and bears interest at 12% per annum and is secured by
certain inventory, furniture and equipment and distributor base of GXI.
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, 1997 $217,000 of these notes have converted
into 163,498 shares of the Company's common stock.
In 1994, the 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. In 1997 the
10% Debenture holder exchanged their Debenture for a convertible note described
above.
F-12
<PAGE> 32
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
8. LONG-TERM DEBT (CONTINUED):
Certain purchases of telephone and computer equipment by RBC-US have been
financed through capital leases. Such leases have terms ending in 2002 and have
various interest rates approximating 15%.
Long-term debt payments payable in the next four years are as follows:
<TABLE>
<S> <C>
1998 $ 77,454
1999 631,397
2000 42,432
2001 20,553
2002 123,749
---------
$ 895,585
=========
</TABLE>
9. NOTE PAYABLE TO SHAREHOLDER:
The note payable to shareholder represented the net advances made to the Company
from time to time by Mr. Howard. These advances were used by the Company for
working capital. The advances were made without interest or stated terms of
repayment. The balance due to Mr. Howard was repaid in 1997.
10. CAPITAL TRANSACTIONS:
PRIVATE PLACEMENT - 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 (see note 8). 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.
OPTIONS - In addition to the options described above, issued in connection with
the private placement, the Company has granted options to purchase an additional
783,800 shares of common stock at exercise prices ranging from $1.06 to $2.40
through 2002. All options were issued at or above market price at the time of
issuance.
11. COMMITMENT:
The Company leases its office and warehouse space and certain equipment using
operating leases for various periods to 2001. Basic annual rents for each of the
next four years are as follows:
<TABLE>
<S> <C>
1998 $ 102,200
1999 100,740
2000 100,010
2001 4,380
</TABLE>
F-13
<PAGE> 33
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
12. INCOME TAXES:
Deferred tax assets resulting from net operating loss carry-forwards have not
been recorded as there is doubt about the Company's ability to use them during
the carry-forward period. Therefore such deferred tax assets have been fully
offset by a valuation allowance.
Until July 1995, RBC-US, Arlington and KV qualified under IRS regulations as
Subchapter S corporations. As such, all of their net operating losses prior to
July 1995 were passed through to their shareholders for inclusion in the
respective tax returns of such shareholders. Therefore the Company has no net
operating loss carry forwards for periods prior to July 1995 available to offset
future taxable income.
13. LIGHTFORCE ACQUISITION:
In June 1996 the Company acquired certain assets and assumed certain liabilities
of Lightforce, Inc. (Lightforce), a network marketing company which distributed
a line of nutritional products, for GlobeNet, Inc. 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 calls for additional shares of common stock to be paid
based on sales to the Lightforce distributors. Additional common stock, valued
at market price but in no event less than $2.50 per share, will be 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 1997 the company issued 251,353 shares of
the Company's common stock, valued at $876,592, under this provision.
In addition, the agreement specified that the seller will receive a 5%
commission on all sales of Lightforce products. This commission amounted to
$117,605 and $57,240 in 1997 and 1996 , respectively.
14. KV BANKRUPTCY:
On November 22, 1994, as a result of a lien filed related to an outstanding
payable, KV filed a petition for reorganization under Chapter 11 of the
bankruptcy code. In September 1996 a plan of liquidation was approved and became
effective for KV. In the first quarter of 1998 the case was closed and KV was
dissolved. Until approval of the plan of liquidation, KV was operated under a
Management Agreement with RBC-US, which provided, among other things, that
RBC-US operate KV in exchange for KV's payment of a pro-rata share (based on the
relative sales volumes of the two companies) of the expenses incurred to support
the operations of RBC-US and KV.
15. 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 will
not have a material effect on the financial position of the Company.
F-14
<PAGE> 34
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. SEC REF. NO. TITLE OF DOCUMENT LOCATION
----------- ------------ ----------------- --------
Item 3 Articles of Incorporation and Bylaws
------ ------------------------------------
<S> <C> <C> <C>
3.01 3 Articles of Incorporation Incorporated by
Reference
3.02 3 Bylaws Incorporated by
Reference
Material Contracts None
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 166,392
<SECURITIES> 0
<RECEIVABLES> 119,685
<ALLOWANCES> 0
<INVENTORY> 1,744,309
<CURRENT-ASSETS> 2,094,868
<PP&E> 1,474,836
<DEPRECIATION> 715,668
<TOTAL-ASSETS> 5,983,534
<CURRENT-LIABILITIES> 1,581,860
<BONDS> 818,131
0
0
<COMMON> 13,537
<OTHER-SE> 3,573,116
<TOTAL-LIABILITY-AND-EQUITY> 5,983,534
<SALES> 14,050,621
<TOTAL-REVENUES> 14,050,621
<CGS> 3,780,930
<TOTAL-COSTS> 3,780,930
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 110,125
<INCOME-PRETAX> (673,915)
<INCOME-TAX> 12,966
<INCOME-CONTINUING> (686,881)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (686,881)
<EPS-PRIMARY> (.054)
<EPS-DILUTED> 0
</TABLE>
