<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, 1999
Commission file number: 33-20323
Royal BodyCare, Inc.
(formerly GlobeNet International I, Inc.)
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Nevada 75-2224643
------------------------ ---------------------
(State of Incorporation) (IRS Employer ID No.)
2301 Crown Court, Irving, Texas 75038
---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 972-893-4000
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.
X YES NO
----- -----
Shares of common stock outstanding at September 30, 1999:
13,862,205
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of
Operations for the quarters ended September 30,
1999 and 1998 4
Condensed Consolidated Statements of
Operations for the nine months ended September 30,
1999 and 1998 5
Condensed Consolidated Statements of
Cash Flows for the nine months ended September 30,
1999 and 1998 6
Notes to Condensed Consolidated Financial
Statements 7-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12-16
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 Information 18
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ROYAL BODYCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 351,751 $ 382,409
Accounts receivable 593,253 439,501
Inventories 3,060,939 2,668,407
Deferred tax asset 121,169 121,169
Prepaids and other 147,735 138,201
------------ ------------
Total current assets 4,274,847 3,749,687
Property & equipment, net 1,911,410 1,275,508
Goodwill, net 2,557,952 2,680,974
Other assets 254,470 217,728
------------ ------------
$ 8,998,679 $ 7,923,897
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 467,658 $ 494,145
Notes payable 8,294 51,589
Accounts payable 1,094,218 852,888
Accrued liabilities 2,206,454 1,667,944
Payable - related parties 100,000 100,000
------------ ------------
Total current liabilities 3,876,624 3,166,566
Long term debt, net of current portion 357,984 510,782
Shareholders' equity:
Common stock, $0.001 par value;
50,000,000 shares authorized;
13,862,205 and 13,862,205 shares
issued and outstanding, respectively 13,862 13,862
Paid in capital 12,106,870 12,106,872
Accumulated deficit (7,363,651) (7,868,733)
Cumulative translation adjustment 6,990 (5,452)
------------ ------------
4,764,071 4,246,549
------------ ------------
$ 8,998,679 $ 7,923,897
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE> 4
ROYAL BODYCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended September 30,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales $ 8,374,371 $ 7,769,623
Cost of goods sold 2,086,879 1,992,221
------------ ------------
Gross margin 6,287,492 5,777,402
Operating expenses
Distributor commissions 3,437,912 3,224,915
Selling, general and administrative 2,874,274 2,307,757
------------ ------------
Total operating expenses 6,312,186 5,532,672
------------ ------------
Income (loss) before income taxes (24,694) 244,730
Provision (benefit) for income taxes (7,000) --
------------ ------------
Income (loss) from continuing operations (17,694) 244,730
(Loss) from discontinued operations -- --
------------ ------------
Net income (loss) $ (17,694) $ 244,730
============ ============
Income (loss) per share:
Income (loss) from continuing operations per share $ -- $ 0.02
Income (loss) from discontinued operations per share -- --
------------ ------------
Net income (loss) per share $ -- $ 0.02
============ ============
Weighted average common shares outstanding 13,862,205 13,806,580
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE> 5
ROYAL BODYCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales $ 24,966,037 $ 19,069,494
Cost of goods sold 6,062,865 4,938,820
------------ ------------
Gross margin 18,903,172 14,130,674
Operating expenses
Distributor commissions 10,410,249 7,636,167
Selling, general and administrative 7,772,841 6,248,702
------------ ------------
Total operating expenses 18,183,090 13,884,869
------------ ------------
Income (loss) before income taxes 720,082 245,805
Provision for income taxes 215,000 --
------------ ------------
Income (loss) from continuing operations 505,082 245,805
(Loss) from discontinued operations -- (149,283)
------------ ------------
Net income (loss) $ 505,082 $ 96,522
============ ============
Income (loss) per share:
Income (loss) from continuing operations per share $ 0.04 $ 0.02
Income (loss) from discontinued operations per share -- (0.01)
------------ ------------
Net income (loss) per share $ 0.04 $ 0.01
============ ============
Weighted average common shares outstanding 13,862,205 13,565,188
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE> 6
ROYAL BODYCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) 505,082 96,522
Add loss from discontinued operations $ -- $ 149,283
-------------- --------------
Income (loss) from continuing operations 505,082 245,805
Adjustment for non-cash items:
Depreciation and amortization 335,545 252,477
(Increase) decrease in accounts receivable (153,408) (243,449)
(Increase) decrease in inventory (364,244) (905,348)
(Increase) decrease in prepaids and other 113,539 (96,793)
(Increase) decrease in other assets (36,741) 71,815
Increase (decrease) in accounts payable
and accrued expenses 600,536 1,398,307
Increase (decrease) in notes payable -- (47,307)
-------------- --------------
Cash flows from continuing operations 1,000,309 675,507
Cash flows from discontinued operations -- (312,518)
-------------- --------------
Total cash provided by (used for) operating activities 1,000,309 362,989
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (668,550) (312,533)
Investing activities of discontinued operations -- 39,034
-------------- --------------
Total cash provided by (used for) investing activities (668,550) (273,499)
-------------- --------------
Cash flows from financing activities:
Proceeds from private placement -- 389,475
Payments of long term debt and capital leases (355,182) (59,961)
-------------- --------------
Total cash provided by (used for) financing activities (355,182) 329,514
-------------- --------------
Effect of exchange rate changes on cash flows (7,235) (483)
-------------- --------------
Net increase (decrease) in cash (30,658) 418,521
Cash, beginning of period 382,409 10,405
-------------- --------------
Cash, end of period $ 351,751 $ 428,926
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE> 7
ROYAL BODYCARE, 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,
1998.
NOTE 2 - CHANGE OF NAME:
In October 1999, the Company changed its name from GlobeNet International I,
Inc. to Royal BodyCare, Inc. In conjunction with the name change, the Company
also redomesticated to the State of Nevada.
NOTE 3 -BUSINESS 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, 1988. From May 1991 until October 1995
Seven Oaks was a dormant entity, conducting no business activities. Effective
November 1, 1995 Seven Oaks merged with Mighty Power, Inc. ("MPI"). The merger,
a purchase under Accounting Principles Board Opinion 16, was accounted for as a
reverse merger with MPI being the acquirer. Seven Oaks then changed its name to
Mighty Power USA, Inc. ("Mighty Power").
Effective April 1, 1997, Mighty Power merged with GlobeNet Inc. ("Globenet")
(the "Merger"). In connection with the Merger, Mighty Power effected a one for
seven reverse stock split (all share figures have been adjusted to reflect this
reverse split). Mighty Power then issued 7,886,415 new shares to the
shareholders of GlobeNet in exchange for 100% of the outstanding stock of
GlobeNet. In addition, under the terms of the Merger agreement, certain
shareholders of Mighty Power transferred an additional 2,541,427 shares of
common stock to the GlobeNet shareholders. As a result, the shareholders of
GlobeNet obtained 86% of the then outstanding common stock of Mighty Power. In
connection with these transactions, Mighty Power changed its name to GlobeNet
International I, Inc. ("GNI"). As described above, the Company changed its name
to Royal BodyCare, Inc. ("RBC") in October 1999.
The Merger, a purchase under Accounting Principles Board Opinion 16, has been
accounted for as a reverse merger with GlobeNet being the acquirer. Therefore,
GlobeNet's historical financial statements are now the Company's historical
financial statements.
-7-
<PAGE> 8
Concurrent with the Merger, an affiliate of Mighty Power, Great Xpectations
Marketing, Inc.("GXI"), acquired all the assets and liabilities of two other
affiliates of Mighty Power for $100,000 in notes payable. The Company then
purchased all the outstanding common stock of GXI for an additional $100,000
note payable. These transactions were also accounted for as purchases.
OPERATIONS - The Company is engaged in the marketing of nutritional supplements
and personal care products. The Company operates its business through the Royal
BodyCare Division, which represents the separate business strategies and product
lines of GlobeNet preceding the Merger described above. The operations conducted
by Mighty Power and its affiliates prior to the Merger are presently conducted
by GXI. As described in Note 4, in June 1998, the Company announced plans to
spin off GXI to the Company's shareholders. As a result, the operations of GXI
are classified in the accompanying financial statements as discontinued
operations.
GlobeNet 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 by Mr. Howard and his immediate family.
RBC's principle U.S. marketing operations are conducted through Royal BodyCare
USA, Inc. ("RBC-US"), formed by Mr. Howard in 1991. In 1992 Mr. Howard formed
Royal BodyCare, 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 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.
Since 1995, the Company has entered into seven similar arrangements with a third
party licensees to market the Company's products internationally. Under these
agreements distributors in these countries are compensated according to the same
compensation plan as that is used for the Royal BodyCare Division independent
distributors.
NOTE 4 - GXI SPIN-OFF:
In June 1998, the Company announced plans to spin off GXI to the Company's
shareholders. The spin-off was accomplished through the issuance of one share of
GXI for each two shares of the Company to shareholders of record of the Company
as of June 5, 1998. For accounting purposes, this spin-off was effective at the
close of business on June 30, 1998. The Company is in process of registering the
GXI shares for trading with the SEC. The Company has classified the operations
of GXI as discontinued operations in the accompanying financial statements.
-8-
<PAGE> 9
NOTE 5 - EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share ("EPS") are calculated in accordance with Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"). Basic
EPS is computed by dividing income (loss) 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 or not represent a
material change.
NOTE 6 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Finished goods $ 1,688,262 $ 1,577,022
Packaging materials and other 1,372,677 1,091,385
------------------ -----------------
$ 3,060,939 $ 2,668,407
================== =================
</TABLE>
NOTE 7 - PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Furniture and fixtures $ 2,592,527 $ 1,789,503
Warehouse equipment 268,315 236,950
Leasehold improvements 102,837 87,181
------------------ -----------------
2,963,679 2,113,634
Less - accumulated depreciation (1,052,269) (838,126)
------------------ -----------------
$ 1,911,410 $ 1,275,508
================== =================
</TABLE>
NOTE 8 - GOODWILL:
Goodwill was recorded in connection with the acquisition of Pure Life in 1992
and Light Force, Inc. ("Light Force") in June 1996 as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Pure Life $ 843,622 $ 843,622
Light Force 2,378,727 2,378,727
------------------ -----------------
3,222,349 3,222,349
Less - accumulated amortization (664,397) (541,375)
------------------ -----------------
$ 2,557,952 $ 2,680,974
================== =================
</TABLE>
Goodwill is amortized over 20 years and is reviewed for impairment on an annual
basis.
-9-
<PAGE> 10
NOTE 9 - ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Distributor commissions $ 1,378,773 $ 1,307,337
Sales and other taxes 464,275 150,215
Salaries 204,929 118,287
Interest 9,090 10,956
Other 149,387 81,149
------------------ -----------------
$ 2,206,454 $ 1,667,944
================== =================
</TABLE>
NOTE 10 - LONG TERM DEBT:
Long term debt consists of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Notes payable - banks $ 66,031 $ 69,356
Convertible notes payable 274,000 508,000
Debentures 25,000 25,000
Capital leases 460,611 402,571
------------------ -----------------
825,642 1,004,927
Less - current portion (467,658) (494,145)
------------------ -----------------
$ 357,984 $ 510,782
================== =================
</TABLE>
Included in notes payable-banks are three notes assumed in connection with the
acquisition of Light Force in June 1996. These notes bear interest at prime plus
5% and are 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 a cash payment for commissions
payable.
In 1997, the Company sold convertible notes 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 a per share conversion
price of $1.32. As of September 30, 1999, $247,000 of these notes had been
converted into shares of the Company's common stock and $234,000 had been
repaid. The maturity dates for notes aggregating $249,000 were extended one year
from the original maturity under the same terms as the original notes.
In 1994, RBC-US sold a $25,000 debenture, the proceeds of which were used for
working capital. The principal portion of this debenture is due upon maturity in
2002. Interest on the debenture is payable monthly at a rate of 15%.
Certain purchases of telephone, computer and other equipment by RBC-US have been
financed through capital leases. Such leases have terms ending in 2003 and have
various interest rates approximating 15%.
-10-
<PAGE> 11
NOTE 11 - SHAREHOLDERS' EQUITY:
In connection with private placements of its common stock in October 1997, June
1998 and July 1998, the Company issued to the purchasers five-year warrants to
purchase an aggregate of 1,216,931 shares of unregistered common stock of the
Company at an exercise price of $2.00 per share. The investors also received
certain registration rights covering the private placement and warrant shares
exercisable under certain circumstances described in the stock purchase
agreements.
In addition, the Company has granted, to employees and distributors, options to
purchase an additional 1,430,400 shares of common stock at exercise prices
ranging from $.812 to $2.40 through 2003. All options were issued at or above
market price at the time of issuance.
NOTE 12 - INCOME TAXES:
The Company has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". This statement requires the use of an asset and
liability approach for the accounting and financial reporting of income taxes.
The Company files a consolidated tax return with its subsidiaries. Deferred
income taxes are the result of net operating loss carry forwards expected to be
fully utilized in 1999.
NOTE 13 - SUBSEQUENT EVENT:
During October 1999, the Company entered into an agreement with a former
distributor to settle certain litigation that existed between the parties. Under
terms of this settlement the Company agreed to make payments to the former
distributor aggregating approximately $480,000. The charge for this settlement
will be recorded in the fourth quarter of 1999.
In conjunction with this litigation, the Company has asserted a claim against
the attorneys that it initially engaged to represent it in this matter, alleging
certain acts of negligence. No benefit related to this claim has been recorded
in the Company's financial statements.
-11-
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended September 30, 1999 Compared with the Quarter Ended September 30,
1998
Sales for the quarter ended September 30, 1999 were $8,374,000 compared with
same quarter sales in the prior year of $7,770,000, an increase of $604,000 or
8%. The increase in sales was mainly the result of growth in RBC's independent
distributor base in international markets. Sales of RBC-Canada increased
$332,000 or 34%, as a result of growth in the distributor base in eastern
Canada. Sales in other international markets increased $167,000 or 127% mainly
as a result of sales related to new markets including Russia, Australia and
Austria.
Cost of goods sold for the quarter ended September 30, 1999 was $2,087,000
compared with same quarter cost of goods sold in the prior year of $1,992,000,
an increase of $95,000 or 5%. As a percentage of sales, cost of goods sold
improved slightly to 25% in the third quarter of 1999 from 26% in the third
quarter of 1998.
Distributor commissions for the quarter ended September 30, 1999 were $3,438,000
compared with same quarter distributor commissions in the prior year of
$3,225,000, an increase of $213,000 or 7%. As a percentage of sales, distributor
commissions in the third quarter of 1999 improved slightly to 41% compared with
42% in the third quarter of 1998.
Selling, general and administrative expenses ("S,G&A") for the quarter ended
September 30, 1999 were $2,874,000 compared with same quarter S,G&A in the prior
year of $2,308,000, an increase of $566,000 or 25%. As percentage of sales,
S,G&A in the third quarter of 1999 was 34% compared with 30% in the third
quarter of 1998. Several factors contributed to this increase. The Company
incurred increased personnel and facilities costs related to growth in the
Company's distributor base experienced during the past year. The Company also
incurred increased costs related to its international distributor conference
held in July 1999 and increased legal expenses in connection with litigation to
which the Company is a party.
The net loss for the quarter ended September 30, 1999 was $18,000, or $.00 per
share, compared with a same quarter net income in the prior year of $245,000, or
$.02 per share. The Company recorded a benefit for income taxes of $7,000 in the
quarter ended September 30, 1999 related to the loss. The third quarter loss was
due to increased S,G&A expenses described above. The Company is currently
evaluating ways to reduce S,G&A in future periods.
Nine Months Ended September 30, 1999 Compared with the Nine Months Ended
September 30, 1998
Sales for the nine months ended September 30, 1999 were $24,966,000 compared
with same period sales in the prior year of $19,069,000, an increase of
$5,897,000 or 31%. The increase in RBC sales was mainly the result of growth in
RBC's independent distributor base in the U.S. This growth in the distributor
base was mainly attributable to a successful direct mail campaign conducted
mainly during the fourth quarter of 1997 and the first two quarters of
-12-
<PAGE> 13
1998 that centered on the Company's leading product, Microhydrin(R).
Microhydrin(R) is an antioxidant product that was introduced by the Company in
September 1997. It currently accounts for approximately 33% of the Company's
sales.
Cost of goods sold for the nine months ended September 30, 1999 was $6,063,000
compared with same period cost of goods sold in the prior year of $4,939,000, an
increase of $1,124,000 or 23%. As a percentage of sales, cost of goods sold was
24% in the first nine months of 1999 compared with 26% in the first nine months
of 1998. The improvement in the percentage of cost of goods sold was mainly
attributable to the change in product sales mix. Microhydrin(R) has a lower cost
of goods sold percentage than the average of the Company's other products. In
addition, the Company realized some improvement in gross margin due to increased
volumes.
Distributor commissions for the nine months ended September 30, 1999 were
$10,410,000 compared with same period distributor commissions in the prior year
of $7,636,000, an increase of $2,774,000 or 36%. As a percentage of sales,
distributor commissions in the first nine months of 1999 were 42% compared with
40% in the first nine months of 1998. The increase in distributor commissions as
a percentage of sales was primarily attributable to the change in product sales
mix. A higher percentage of commission is paid on Microhydrin(R) than the
average of the Company's other products. The increase in distributor commissions
in 1998 was also due to an increase in the percentage of the Company's
distributors who qualified to receive maximum commission percentages under the
distributor compensation plan.
Selling, general and administrative expenses ("S,G&A") for the nine months ended
September 30, 1999 were $7,773,000 compared with same period S,G&A in the prior
year of $6,249,000, an increase of $1,524,000 or 24%. As percentage of sales,
S,G&A in the first nine months of 1999 was 31% compared with 33% in the first
nine months of 1998. The increase in G&A was primarily due to increases in
personnel and other expenses required to support the additional distributors who
have joined the Company and related sales growth. Also contributing to the
increase were increased legal expenses during 1999.
Income from continuing operations for the nine months ended September 30, 1999
was $505,000, or $.04 per share, compared with a same period income from
continuing operations in the prior year of $246,000, or $.02 per share. The
Company recorded a provision for income taxes of $215,000 in the nine months
ended September 30, 1999 since its net operating loss carry forwards are
expected to be fully utilized during 1999.
Discontinued operations represent the operations of GXI. The loss from
discontinued operations for the period ended September 30, 1998 was $149,000, or
$.01 per share. This represents the operating activities of GXI from January
1998 through the effective date of the spin off which was the close of business
on June 30, 1998. This loss was attributable to a decline in GXI's distributor
base.
Net income for the nine months ended September 30, 1999 was $505,000, or $.04
per share, compared with same period net income in the prior year of $97,000, or
$.01 per share. This improvement was due to the factors described above.
-13-
<PAGE> 14
During October 1999, the Company entered into an agreement with a former
distributor to settle certain litigation that existed between the parties. Under
terms of this settlement the Company agreed to make payments to the former
distributor aggregating approximately $480,000. The charge for this settlement
will be recorded in the fourth quarter of 1999.
In conjunction with this litigation, the Company has asserted a claim against
the attorneys that it initially engaged to represent it in this matter, alleging
certain acts of negligence. No benefit related to this claim has been recorded
in the Company's financial statements.
Other than as described above, there have been no economic events or changes
that have materially effected the sales or operating results of the Company and
the Company is not aware of any economic trends or uncertainties that would have
a material impact on future sales or operating results. The Company 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 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 1999, the Company had a net decrease in cash of
$31,000. This decrease in cash resulted primarily from net cash provided by
operating activities of $1,000,000 that was offset by the net cash used by
investing and financing activities of $669,000 and $355,000, respectively. The
net cash used by investing activities represented purchases by the Company of
property and equipment. These purchases were related primarily to the upgrade of
the software used to manage its distributor network. This upgrade will provide
the Company with increased capacity to manage the growth of its distributor
network and enhance its capabilities to provide customer service and market its
products to its distributors. Cash used by financing activities represented
payment of long term debt, principally the repayment of convertible notes as
described in Note 10 to the Condensed Consolidated Financial Statements.
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 further moderate sales
increases through its operations. Should sales growth increase beyond the
Company's ability to finance its growth internally, the Company 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 the
Company would be able to obtain any additional outside financing. The Company
presently has available to it $400,000 in credit lines of which less than
$10,000 was utilized as of September 30, 1999.
-14-
<PAGE> 15
During the quarter of 1999, the Company will require additional capital to
complete the upgrade of the software used to manage its distributor network
described above. The Company plans to finance the remainder of this upgrade
through cash flow from operations and existing credit lines. The Company has no
plans or requirements for any other significant capital expenditures during the
next twelve months.
The litigation settlement agreement described above provides for payment of the
settlement amount over a period of 4-1/2 years. The Company expects that its
present cash resources plus cash flow from future operations will be adequate to
fund these payments as they become due.
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.
YEAR 2000
In an effort to ensure the Company's information systems as well as all other
systems are Year 2000 ("Y2K") compliant, the Company is actively engaged in
assessing and correcting any potential problems. During 1998, the Company formed
a committee to review all systems and correct any potential problems. After a
review of all internal systems, the Company has determined that all significant
systems are currently Y2K compliant.
The Company anticipates that risks related to its information and
non-information systems will be mitigated by current efforts being made in
conjunction with ongoing testing and review of its systems. However, the primary
Y2K risk to the Company's operation is potential service disruption from
third-party providers. These services include but are not limited to providers
that supply telephone, electrical, banking, shipping and raw materials for the
Company's manufacturing operations. Any disruption of these critical services
would hinder the Company's ability to receive, process and ship orders. In the
event of a temporary disruption in the supply of raw materials, the Company
believes it currently maintains an adequate supply of finished goods and raw
material inventories to sustain manufacturing and distribution of finished
product until alternative sources become available. Although in the past, the
Company has been able to locate alternative sources, there can be no assurance
the Company will be successful in locating such sources in the future. The
Company also believes that a temporary disruption of communication services
would seriously impact the Company's ability to receive and process orders. The
Company has obtained representations from it major service providers and vendors
that are or will by Y2K compliant before the end of 1999.
Notwithstanding the foregoing, there can be no assurance that the Company will
not experience operational difficulties as a result of Y2K issues, either
arising out of internal operations or caused by third-party service providers,
which individually or collectively could have an adverse impact on business
operations and require the Company to incur anticipated expenses to remedy any
problems.
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
-15-
<PAGE> 16
limited to, changes in general economic conditions, the growth rate of the
market for the Company's products and services, the timely availability and
market acceptance of these products and services, and the effect of competitive
products and pricing, as well as a number of other risk factors which could
effect the future performance of the Company.
-16-
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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. In
October 1999, the parties agreed to settle this litigation as described in Note
13 to the financial statements included elsewhere in this report.
Naterra International, Inc., plaintiff, vs. Royal BodyCare, Inc.,
defendant, in the 68th Judicial District Court of Dallas County, Texas, Cause
No. 98-5504. On July 17, 1998 Plaintiff, a former manufacturer of RBC products,
sued RBC-US and Arlington Laboratories asserting causes of action for breach of
contract and suit on sworn account without specifying the amount of damages
sought. Defendants have answered denying all of the material allegations by
Plaintiff, and RBC-US has asserted affirmative defenses, as well as filing a
counterclaim against Plaintiff for breach of contract, negligence and breach of
warranties. The parties are currently engaged in discovery. The trial date is
currently set for December 7, 1999.
Royal BodyCare, Inc., Plaintiff, vs. Royal BodyCare Japan, Defendant,
in the 193rd District Court, Dallas County, Texas, Cause No. 99-02016. On March
24, 1999, RBC-US filed suit against Royal BodyCare Japan, a former licensee of
the RBC line of products in Japan, asserting causes of action for breach of
contract and suit on sworn account. On July 23, 1999, this suit was consolidated
with the suit filed in federal court described below.
Royal BodyCare Japan, Dudley A. Olsen and Duane Engholm, Plaintiffs,
vs. Royal BodyCare, Inc. and Clinton Howard, Defendants, U. S. District Court
for the Northern District of Texas, Dallas Division, Cause No. 3:99-CV-0686. On
March 29, 1999, Plaintiffs filed an action in federal court against RBC-US and
Mr. Howard based upon essentially the same issues asserted by RBC-US against RBC
Japan in state court case. Plaintiffs in this federal case alleged causes of
action for breach of contract, fraud, misrepresentation and violations of the
Texas the Texas Deceptive Trade Practices Act and seek actual and compensatory
damages of $2,868,000 and punitive damages of $10,000,000.
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
-17-
<PAGE> 18
Item 5. Other Information.
None
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.
Royal BodyCare, Inc.
------------------------
Registrant
By: /s/ Clinton H. Howard
------------------------------
Its: President
DATE: November 15, 1999
Irving, Texas
-18-
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 351,751
<SECURITIES> 0
<RECEIVABLES> 593,253
<ALLOWANCES> 0
<INVENTORY> 3,060,939
<CURRENT-ASSETS> 4,274,847
<PP&E> 2,963,679
<DEPRECIATION> 1,052,269
<TOTAL-ASSETS> 8,998,679
<CURRENT-LIABILITIES> 3,876,624
<BONDS> 357,984
0
0
<COMMON> 13,862
<OTHER-SE> 4,750,209
<TOTAL-LIABILITY-AND-EQUITY> 8,998,679
<SALES> 24,966,037
<TOTAL-REVENUES> 24,966,037
<CGS> 6,062,865
<TOTAL-COSTS> 6,062,865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 720,082
<INCOME-TAX> 215,000
<INCOME-CONTINUING> 505,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 505,082
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
