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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended December 31, 1998
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)
2301 Crown Court, Irving, Texas 75038
(Address of Principal Executive Offices-zip code)
(972) 893-4000
(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 December 31, 1998, the closing price at which Registrant's common
stock sold was $1.125 per share. At such date, 4,852,605 shares of Registrant's
Common Stock were held by non-affiliates. Based upon the price at such date, the
aggregate market value of Registrant's voting stock held by non-affiliates on
that date was $5,459,181 (4,852,605 shares times $1.125 per share).
As of December 31, 1998, Registrant had outstanding 13,862,205 shares
of Common Stock.
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GLOBENET INTERNATIONAL I, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ITEM 1 BUSINESS
ITEM 2 PROPERTIES
ITEM 3 LEGAL PROCEEDINGS
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
ITEM 6 SELECTED FINANCIAL DATA
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS
ITEM 11 EXECUTIVE COMPENSATION
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
</TABLE>
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PART I
ITEM 1. BUSINESS
REGISTRANT. GlobeNet International I, Inc., the Registrant herein, is a Delaware
corporation, whose principal offices are located at 2301 Crown Court, Irving,
Texas 75038. It can be reached by phone at (972) 893-4000, by fax at (972)
893-4111 and by e-mail at [email protected]. Its Chief Executive Officer
is Clinton H. Howard and its Chief Financial Officer is Steven E. Brown, and
both of them can be reached at Registrant's principal offices.
HISTORY. Registrant's predecessor, GlobeNet Inc., was incorporated in June, 1995
as a Texas corporation under the Texas Business Corporation Act by Clinton H.
Howard of Irving, Texas to serve as a holding company for affiliated
corporations owned or controlled by him. In July, 1995 Mr. Howard and members of
his immediate family contributed the stock of these affiliated corporations to
GlobeNet Inc. in exchange for shares of its stock. The affiliated corporations
acquired by GlobeNet Inc. in this manner were Royal BodyCare, Inc., a Texas
corporation ("RBC-U.S."), Royal BodyCare, Inc., a Canadian corporation
("RBC-Canada"), Royal BodyCare S.A. de C.V., a Mexican corporation
("RBC-Mexico") Arlington Laboratories, Inc., a Texas corporation ("Arlington
Lab") and KaloVita, Inc., a Delaware corporation ("KV").
RBC-U.S. was formed by Mr. Howard in 1991 to market a line of aloe vera
based personal care products and an aloe drink in the United States through a
multi-level network of independent distributors. Its product line was expanded
in 1992 to also include nutritional supplements.
RBC-CANADA was formed by Mr. Howard in 1992 to market through a network
of independent distributors in Canada the same line of products being marketed
domestically by RBC- U.S. Shortly after its formation, RBC-Canada acquired Pure
Life International Products Inc., then a 12-year old company which distributed
its Pure Life brand of nutritional products in Canada. After this acquisition,
the Pure Life line of products was introduced into the domestic market through
RBC-U.S.
Both of these RBC companies, U. S. and Canada, are on-going operations conducted
by Registrant and their product lines, distributor networks and sales are
continuing to increase. The other three affiliated corporations acquired by
GlobeNet, however, have discontinued operations. RBC-Mexico, which was formed in
1993 to market through a network of independent distributors in Mexico a limited
number of Registrant's nutritional, skin care and personal care products,
discontinued operations in 1995, when it could not reach a break-even operating
level. KV, which was a direct marketing company with a product line and a
25,000-member distributor network similar to RBC-U.S., was acquired by Mr.
Howard in 1994 from Dr. M. G. Robertson for a nominal consideration at a time
when KV was in extremely poor financial condition having never shown a profit
and having exhausted its working capital. Efforts to streamline KV's operations
by closing its Virginia facility and moving it to Dallas, Texas were not
successful due to aggressive action by its creditors, and KV was forced into
filing for protection under Chapter 11 of the Bankruptcy Code in November, 1994.
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A Liquidating Plan was approved by the Court in 1996 and the case was closed in
1998, with KV being dissolved. The quality control testing and laboratory
operations formerly performed by Arlington Lab have been merged into and
absorbed by the Registrant and Arlington Lab discontinued operations in 1995.
LIGHT FORCE, INC., a non-affiliated California corporation, was acquired by
GlobeNet in June, 1996. Light Force distributed a line of nutritional
supplements featuring Flanagan Microclusters(R), including the silica hydride
form, and spirulina as the main ingredients. The Light Force distributor network
was merged into GlobeNet's distributor network. GlobeNet entered into an
exclusive world-wide license agreement to make Flanagan Microclusters(R) its
leading line of products and to promote such products and others made available
to GlobeNet by Dr. Patrick Flanagan.
In April, 1997 GlobeNet merged with MIGHTY POWER U.S.A., INC., a corporation
whose stock was publicly traded on the NASDAQ Bulletin Board. This was a
"reverse" merger with Mighty Power being the survivor, but GlobeNet treated as
the acquirer. Mighty Power then changed its name to GlobeNet International I,
Inc. As a result of this reverse merger, GlobeNet's historical financial
statements are now Registrant's historical financial statements. Mighty Power
was originally incorporated in February, 1988 as Jason Ray Corporation under
Delaware law, which filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission in April, 1988 for a public offering of its
stock. Jason Ray Corporation changed its name to Seven Oaks Farms, Ltd. in July,
1988, and it became dormant from May, 1991 until October, 1995 with no business
being conducted by it during that period. In November, 1995, Seven Oaks merged
with Mighty Power, Inc., a privately held Oklahoma corporation, and changed its
name to Mighty Power U.S.A., Inc. This was also a reverse merger with Seven Oaks
being the survivor, but with Mighty Power as the larger corporation being
treated as the acquirer.
In June, 1998 Registrant announced its intention to distribute as a dividend to
its shareholders all of the outstanding stock of its wholly-owned subsidiary,
GREAT XPECTATIONS, INC. Great Xpectations was acquired by GlobeNet as part of
its merger with Mighty Power, and it is also a direct marketer of nutritional
supplements, automobile and household products and services. The distribution of
these shares as a dividend is in the process of being registered by Great
Xpectations with the Securities and Exchange Commission on Form SB-2.
PLANT AND EQUIPMENT. The RBC line of products marketed by Registrant are
purchased by it from unaffiliated manufacturers and suppliers according to
Registrant's specifications. The production of these products can be obtained
from a number of sources at competitive prices, but some of the ingredients,
most notably Flanagan Microclusters(R), including the silica hydride form, are
subject to license agreements specifying the source and price for such
ingredients. Registrant accordingly does not have or need any plant or
manufacturing facilities, machinery or equipment. Other than normal office
furniture and computer equipment, the only other property or equipment owned or
used by Registrant is laboratory equipment owned and maintained by it for
internal quality control testing of its RBC products.
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EMPLOYEES. Registrant currently has 125 employees, of whom 7 are executive
officers or management employees, 15 are department heads, 27 are warehouse
employees, 35 are in customer service or order entry, 5 are in financial or
accounting and the remaining are clerical or administrative. Registrant does not
foresee any significant increase being necessary for its workforce in 1999. None
of Registrant's employees are represented by labor unions, and it has not
experienced work stoppages or other labor strife with its employees.
DISTRIBUTOR NETWORK. The two RBC companies had approximately 95,000 independent
distributors at December 31, 1998 of whom approximately 80,000 are located in
the United States and 15,000 in Canada. Registrant recruits persons who can
effectively explain the RBC line of products, demonstrate their uses and
applications and effectively utilize Registrant's direct marketing techniques to
sell its products and sponsor other distributors. This type of direct marketing
strategy is commonly referred to as multi-level or network marketing. Registrant
compensates its distributors through a "Stair Step Breakaway" program consistent
with other industry recognized compensation programs. Under this compensation
program, the Registrant 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 his/her sales group. Distributor compensation
is paid monthly. Except for sales meetings and certain promotional activities
sponsored by Registrant, its distributors are responsible for all expenses
incurred by them in their sales programs.
OVERSEAS DISTRIBUTORS. Registrant has entered into exclusive sales agreements
with seven overseas distributor groups for marketing the RBC line of products in
Japan; the Republic of Indonesia; Sweden, Norway, Denmark, Finland and Iceland;
Switzerland and Austria; Thailand; Australia and New Zealand; and South Korea.
Pursuant to these agreements, these overseas distributors are granted exclusive
rights to sell RBC products in their respective territories through
office/warehouse facilities of unaffiliated third parties. These overseas
distributors are compensated upon the same compensation plan as that used by
Registrant for its RBC distributors in the U. S. and Canada.
PRODUCTS. Registrant is currently marketing a line of over 200 nutritional
supplements and personal care products, including herbs, vitamins and minerals,
as well as natural skin, hair and body care products. All of Registrant's
products are marketed under its Royal Body Care trade name. These products are
procured by Registrant from unaffiliated manufacturers and suppliers and are
made or processed according to Registrant's specifications or formulas.
Registrant's line of RBC products features several proprietary ingredients
including Flanagan Microclusters(R), a mineral catalyst that increases
absorption of nutritional supplements, and Nanocolloidal Mineral Hydride, a
nutritional form of hydrogen 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. Quality control of its products is maintained by
Registrant's in-house laboratory facilities and operations.
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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, 1999, Registrant had issued and
outstanding 13,862,205 shares of its Common Stock. Registrant does not have
outstanding any of its Preferred Stock.
ITEM 2. PROPERTIES
Registrant does not own any real properties. It rents an office-warehouse
building of approximately 119,000 square feet at an increasing annual rental of
$328,000 for the first year and $417,000 for the last year under a 10-year lease
expiring 2008. Registrant also leases distribution facilities in Vancouver,
British Columbia and Toronto, Ontario for its sales operations in Canada at an
aggregate annual rental of $112,000.
ITEM 3. LEGAL PROCEEDINGS
Neither Registrant nor any of its officers or directors are parties to any
material legal proceedings or litigation other than as set forth below.
Don Whigham, et al., Plaintiffs vs. Clinton H. Howard, Royal BodyCare, Inc. and
GlobeNet International, Inc., Defendants, in 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 Defendants asserting causes of
action for, inter alia, breach of contract and fraud in connection with their
dealings with Registrant as distributors. Plaintiffs have not specified the
amount of actual damages, exemplary damages or other damages sought by them in
this action. Defendants have filed an answer denying all the material
allegations of Plaintiffs' petition and asserting counter-claims for breach of
contract, negligence and tortuous interference with business relations. The
parties are currently engaged in discovery. This case is not currently set for
trial.
Naterra International Inc., Plaintiff, vs. Royal BodyCare, Inc. and Arlington
Laboratories, Inc., Defendants, in the 68th Judicial District Court, 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, and no trial date has been set.
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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.
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 Deceptive Trade Practices Act and seek actual and compensatory damages of
$2,868,000 and punitive damages of $10,000,000. RBC-US and Mr. Howard will seek
to have this federal case held in abeyance while the prior state case involving
the same facts and issues proceeds to trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to the shareholders of Registrant during calendar year
1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Common Stock of Registrant is traded on the NASDAQ over-the-counter Bulletin
Board published by the National Quotation Bureau, Inc. The following reflects
the range of high and low bid quotes for each calendar quarter during each of
the past two years as adjusted for the 1 for 7 reverse stock split in April,
1997:
<TABLE>
<CAPTION>
QUARTER
ENDED 3/31/97 6/30/97 9/30/97 12/31/97
- ----- ------- ------- ------- --------
<S> <C> <C> <C> <C>
HIGH 2.625 7.875 3.00 2.00
LOW 1.531 1.75 .875 .75
</TABLE>
<TABLE>
<CAPTION>
QUARTER
ENDED 3/31/98 6/30/98 9/30/98 12/31/98
- ----- ------- ------- ------- --------
<S> <C> <C> <C> <C>
HIGH 1.672 4.125 1.875 1.1875
LOW .562 .625 .75 .75
</TABLE>
As of April 9, 1999, there were approximately 452 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.
SALES OF UNREGISTERED SECURITIES. In the past three calendar years, Registrant
has sold its securities in offerings which have not been registered for sale
with the Securities and Exchange Commission or any state securities commissioner
as set forth below.
In the first and third quarters of 1997, Registrant sold convertible notes to 33
purchasers consisting of its 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. These notes are convertible at the option of the holder into
Common Stock of the Registrant at any time prior to maturity, based upon a
conversion price of $1.32 per share, as adjusted for the 1 for 7 reverse stock
split in April,1997 . As of March 31, 1999 $247,000 of these notes had been
converted into 186,128 shares of the Registrant's Common Stock, and $140,000
aggregate
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principal amount of these convertible notes had been retired by cash payment at
that date. These convertible notes, and the shares of Registrant's Common Stock
issued upon conversion of these notes, are subject to certain restrictions upon
the sale or transfer thereof which are denoted prominently upon the certificates
of these securities as required by the applicable federal and state securities
laws. Registrant has further instructed its Transfer Agent to not transfer these
securities in the absence of registration or satisfactory evidence that the
transfer would be in compliance with the applicable securities laws pertaining
thereto. Exemption from registration of the sale of these securities under the
applicable federal and state securities laws is claimed by Registrant under
Section 4(2) of the federal Securities Act of 1933 as a transaction by an issuer
which does not involve a public offering and comparable limited offering
exemptions under the state securities laws.
In October 1997, Registrant sold 1,000,000 shares of its Common Stock to Dr. M.
G. Robertson, the former owner of KV, for aggregate proceeds of $1,250,000,
$250,000 of which was paid by his forgiveness of Registrant's note payable to
him in that amount. Dr. Robertson also received in connection with this
transaction, five-year warrants to purchase 1,000,000 shares of Common Stock of
the Registrant at an exercise price of $2.00 per share. The sale or transfer of
these securities is likewise restricted in a similar manner as the securities
referred to above. Registrant agreed upon certain terms and conditions as
provided in the purchase agreement to file at the request of Dr. Robertson an
appropriate form of registration statement for the sale of these securities with
the Securities and Exchange Commission. Exemption from registration for this
transaction is also claimed under the same exemptions as set forth above for a
non-public offering under federal law and a limited offering under state law.
During the second and third quarters of 1998, Registrant sold 255,449 shares of
its Common Stock to four investors for aggregate proceeds of $389,000. In
connection therewith, Registrant also issued five-year warrants to two of these
investors to purchase 216,931 shares of its Common Stock at an exercise price of
$2.00 per share. These securities are restricted as to the sale or transfer
thereof in the same manner as provided above for the first transaction involving
convertible notes, and exemption from registration of these shares and purchase
warrants is likewise claimed under the same federal and state laws as set forth
above.
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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, 1998 and 1997 and the related statements of operations,
shareholders' equity and cash flows for each of the two years ended December 31,
1998 and 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 1998 1997 1996 1995 1994
- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenue $ 27,188,800 $ 12,843,287 $ 8,638,875 $ 6,082,728 $ 7,594,161
Net Income (Loss) 434,874 (686,881) (25,447) (905,477) (1,532,977)
BALANCE SHEET DATA:
Working Capital 583,121 763,722 (149,181) (331,066) (66,118)(1)
Total Assets 7,923,897 5,608,426 3,967,493 2,470,673 2,876,749 (1)
Long Term Debt 1,004,927 803,561 367,571 339,953 329,879 (1)
Shareholders' Equity 4,246,549 3,583,543 1,984,081 226,234 (434,478)(1)
</TABLE>
- ----------------------
(1) Unaudited
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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, 1998, Registrant had a net increase in cash
of $372,000. This increase in cash resulted from net cash provided by operating
activities and financing activities of $569,000 and $296,000, respectively,
which was partially offset by the net cash used by investing activities of
$493,000. The net cash provided by financing activities came from Registrant's
sale of 255,449 shares of unregistered common stock that provided cash of
$389,000. The net cash used by investing activities was primarily related to the
purchase of furniture, fixtures and equipment. The additional in furniture,
fixtures and equipment was required to support the Registrant's growth during
1998.
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
increases in inventory required 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. Inventory increased $1,059,000 during
1998 due to the growth experienced by Registrant.
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.
During 1999, Registrant will require additional capital to fund its planned
upgrade of the software used to manage its distributor network. These upgrades
will provide Registrant 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. The Company plans to finance these
upgrades through cash flow from operations and existing credit lines. Registrant
has no plans or requirements for any other 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.
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RESULTS OF OPERATIONS - 1998 COMPARED WITH 1997.
Sales for the year ended December 31, 1998 were $27,189,000 compared with sales
for the prior year of $12,843,000, an increase of $14,346,000 or 112%. 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 that centered on the
Registrant's leading product, Microhydrin(R). Microhydrin(R) is an antioxidant
product that was introduced by Registrant in September 1997. It currently
accounts for approximately 33% of Registrant's sales.
Cost of goods sold for the year ended December 31, 1998 was $7,100,000 compared
with cost of goods sold in the prior year of $3,593,000, an increase of
$3,507,000 or 98%. As a percentage of sales, cost of goods sold in 1998 was 26%
compared with 28% in 1997. The improvement in the percentage of cost of goods
sold in 1998 was mainly attributable to the change in product sales mix.
Microhydrin(R) has a lower cost of goods sold percentage than the average of the
Company's other products. In addition, Registrant realized some improvement in
gross margin due to increased volumes.
General and administrative expenses ("G&A") for the year ended December 31, 1998
were $8,081,000 compared with G&A in 1997 of $4,802,000, an increase of
$3,279,000 or 68%. As percentage of sales, G&A in 1998 was 30% compared with 37%
in 1997. The increase in G&A was due to increases in personnel and other
expenses required to support the additional distributors who joined the Company
during 1998 and related sales growth.
Distributor commissions for the year ended December 31, 1998 were $11,057,000
compared with distributor commissions in 1997 of $4,692,000, an increase of
$6,365,000 or 136%. As a percentage of sales, distributor commissions in 1998
were 41% compared with 37% in 1997. The increase in 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.
Interest expense did not change significantly from 1997 to 1998, increasing from
$92,000 in 1997 to $96,000 in 1998.
Depreciation and amortization for the year ended December 31, 1998 was $348,000
compared with depreciation and amortization in 1997 of $267,000, an increase of
$81,000 or 30%. This increase was mainly due to depreciation associated with
property and equipment additions during 1997 and 1998 along with an increase in
goodwill amortization expense. Goodwill amortization expense increased in 1998
due to the amortization of additional goodwill recorded in 1997 and 1998 in
connection with the issuance of shares of the Company's common stock pursuant to
the Light Force acquisition agreement.
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Discontinued operations represent the operations of Great Xpectations. These
operations are classified as discontinued because Registrant announced plans in
June 1998 to spin off Great Xpectations to its shareholders.
Net income for the year ended December 31, 1998 was $435,000, or $.03 per share,
compared with a net loss in the prior year of $686,000, an improvement of
$1,134,000. This improvement is the result of the increased gross profit
generated from the sales growth that occurred during 1998. 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.
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 - 1997 COMPARED WITH 1996.
Sales for the year ended December 31, 1997 were $12,843,000 compared with sales
for the prior year of $8,639,000, an increase of $4,204,000 or 49%. This
increase in 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 $3,593,000 compared
with cost of goods sold in the prior year of $2,538,000, an increase of
$1,055,000 or 42%. As a percentage of sales, cost of goods sold in 1997 was 28%
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.
General and administrative expenses ("G&A") for the year ended December 31, 1997
were $4,802,000 compared with G&A in 1996 of $2,838,000, an increase of
$1,963,000 or 69%. As percentage of sales, G&A in 1997 was 37% compared with 33%
in 1996. The increase in 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 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.
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Distributor commissions for the year ended December 31, 1997 were $4,692,000
compared with distributor commissions in 1996 of $3,026,000, an increase of
$1,666,000 or 55%. 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.
Interest expense for the year ended December 31, 1997 was $92,000, compared with
interest expense in 1996 of $56,000, an increase of $36,000 or 63%. This
increase is attributable to the interest expense associated with $730,000 of
10%, two-year convertible notes issued during 1997.
Depreciation and amortization for the year ended December 31, 1997 was $267,000
compared with depreciation and amortization in 1996 of $188,000, an increase of
$79,000 or 42%. 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.
Discontinued operations represent the operations of Great Xpectations. These
operations are classified as discontinued because Registrant announced plans in
June 1998 to spin off Great Xpectations to its shareholders.
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.
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 an
initial 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
14
<PAGE> 15
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.
Efforts are currently underway to verify Y2K compliance of the Company's major
service providers.
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 unanticipated expenses to remedy any
problems. The Company is currently evaluating what contingency plans, if any,
may need to be made in the event the Company or third-party providers with whom
the Company does business experience Y2K 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. These 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.)
15
<PAGE> 16
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.
16
<PAGE> 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of March 31, 1999, 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 70 Chairman of the Board & April 1997(1)
President
Steven E. Brown 44 Director/Vice President & April 1997(1)
Chief Financial Officer
Andrew V. Howard 41 Director/General Counsel/ April 1997(1)
Vice President
Forrest E. Watson 64 Director April 1997(1)
Ken Sabot 53 Senior Vice President of February 1998
Operations
Frank Franasiak 52 Director July 1998
Nelson J. Rogers 53 Vice President - International April 1997
</TABLE>
- ----------
(1) Director of GlobeNet since July 1995.
(2) Director of Mighty Power since November 1995.
17
<PAGE> 18
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 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.
18
<PAGE> 19
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.
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.
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);
19
<PAGE> 20
(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.
20
<PAGE> 21
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
NAME CAPACITY 1998 1997 1996 1995 1994
---- -------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Clinton H. Howard President $ 253,000 $ 177,000 $ 11,000 $ 4,500 $ 11,500
Steven E. Brown Vice President and $ 170,200 $ 105,000 $ 103,000 $ 90,400(1) $ 55,600
Chief Financial Officer
Andrew V. Howard Vice President $ 207,300 $ 96,400 $ 86,200 $ 59,400(2) -0-
Marketing
Nelson R. Rogers Vice President $ 101,800 $ 90,000 $ 90,000 $ 88,300(3) -0-
International
Kenneth L. Sabot Senior Vice President $ 101,700(4) -0- -0- -0- -0-
Operations
Forrest E. Watson Formerly Chief $ 46,500 $ 60,000 $ 25,350 -0-(5) -0-
Executive Officer
</TABLE>
- ----------
(1) Started May 1994
(2) Started March 1995
(3) Started January 1995
(4) Started February 1998
(5) Started November 1995
21
<PAGE> 22
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following tables set forth as of December 31, 1998, 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 held of record, or was known by
Registrant to own beneficially, more than 5% of the then 13,862,205 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, 1998
------------------------------------------
CLASS BENEFICIAL OWNER(1) AMOUNT % OF CLASS
- ----- ------------------- ------ ----------
<S> <C> <C> <C>
Common Clinton H. Howard 7,754,289(2) 54.7%
3917 Fox Glen Drive
Irving, Texas 75062
Common Penny Slinger Hills 1,404,003 10.1%
Hills 1998 Living Trust
910 Herman Gulch Road
Boulder Creek, California 95006
Common Dr. M. G. Robertson 2,000,000(3) 13.5%
977 Centerville Turnpike
Virginia Beach, Virginia 23463
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
------------------------------------------
CLASS BENEFICIAL OWNER(1) AMOUNT % OF CLASS
- ----- ------------------- ------ ----------
<S> <C> <C> <C>
Common Clinton H. Howard 7,754,289(2) 54.7%
Common Steven E. Brown 25,600(4) 0.0(5)
Common Andrew V. Howard 18,451(6) 0.0(5)
ALL OFFICERS, DIRECTORS & BENEFICIAL
PERSONS AS A GROUP (7 PERSONS) 8,088,804(7) 56.4%
</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 308,500 shares that may be acquired through presently exercisable
stock options and 115,265 shares owned of record by Mr. Howard's wife.
(3) Includes 1,000,000 shares that may be acquired through presently
exercisable warrants.
(4) Includes 25,600 shares that may be acquired through presently acquired
stock options.
22
<PAGE> 23
(5) Less that 1.0%.
(6) Includes 1,500 shares that may be acquired through presently exercisable
stock options.
(7) Includes 483,207 shares that may be acquired through presently exercisable
stock options and warrants.
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 ARRANGMENTS
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 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.
23
<PAGE> 24
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, 1998 and 1997.
Consolidated Statements of Operations for the Years December 31, 1998,
1997 and 1996.
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES. None.
24
<PAGE> 25
(a)(3) EXHIBITS. The following exhibits are included as part of this report:
Ex. No. Description
3.1 Registrant's Articles of Incorporation (1)
3.2 Registrant's By-Laws (1)
4.1 Specimen copy of Certificate for Registrant's Common
Stock (1)
4.2 Specimen copy of Registrant's 10% Convertible Notes
issued in 1997 (2)
4.3 Registrant's 1998 Stock Option Plan for its Directors,
Employees and Consultants (2)
4.4 Stock Purchase Agreement dated 10/27/97 with
Dr. M. G. Robertson (2)
10.1 10 year Lease Agreement as of 8/1/98 with CIIF Associates
L.P. for office/warehouse (2)
10.2 Exclusive License Agreement with Flanagan Technologies
for its Microclusters (2)
10.3 Form of Registrant's Member Agreement and Policies with
its Distributors (2)
23.1 Consent of Auditor (2)
27 Financial Data Schedule
- ----------
(1) Incorporated by reference to Registrant's Form 8-K for Mighty Power Merger
4/1/97
(2) To be filed by amendment
FINANCIAL DATA SCHEDULE
REPORTS ON FORM 8-K
Registrant filed no reports on Form 8-K during the last quarter of
Fiscal 1998.
25
<PAGE> 26
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, 1999. By: /S/ CLINTON H. HOWARD
------------------------------------
Name: Clinton H. Howard
Title: President
26
<PAGE> 27
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
Clinton H. Howard Directors and President April 14, 1998
/s/ STEVEN E. BROWN
--------------------------------- Director, Vice President &
Steven E. Brown Chief Financial Officer April 14, 1998
/s/ ANDREW V. HOWARD, J.D.
--------------------------------- Director, Vice President &
Andrew V. Howard, J.D. General Counsel April 14, 1998
--------------------------------- Director
Forrest E. Watson, Ph.D. ---------------------
--------------------------------- Director
Frank Franasiak ---------------------
</TABLE>
27
<PAGE> 28
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Accountants' Report F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 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> 29
INDEPENDENT ACCOUNTANTS' 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, 1998 and 1997, 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, 1998 and 1997 and the
results of their operations and their cash flows for the three year period ended
December 31, 1998, in conformity with generally accepted accounting principles.
OSBORN, SWALM, THOMAS & ASSOCIATES, PLLC
Plano, Texas
March 31, 1998
F-2
<PAGE> 30
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash $ 382,409 $ 10,405
Accounts receivable, net of
allowance for doubtful accounts 439,501 104,015
Inventory 2,668,407 1,609,265
Net assets of discontinued operation -- 274,331
Deferred tax asset 121,169 --
Prepaid expenses 138,201 64,482
------------ ------------
Total current assets 3,749,687 2,062,498
Property and equipment, net of accumulated depreciation 1,275,508 662,028
Goodwill, net of accumulated amortization 2,680,974 2,747,500
Other assets 217,728 136,400
------------ ------------
$ 7,923,897 $ 5,608,426
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 852,888 $ 322,829
Accrued expenses 1,667,944 849,822
Current portion of long-term debt 494,145 77,454
Notes payable 51,589 48,671
Payable - related parties 100,000 -
------------ ------------
Total current liabilities 3,166,566 1,298,776
------------ ------------
Long-term debt, net of current portion 510,782 726,107
------------ ------------
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; 1998
13,862,205 shares; 1997 13,536,980 shares 13,862 13,537
Paid in capital 12,106,872 11,593,209
Accumulated deficit (7,868,733) (8,020,093)
Cumulative translation adjustment (5,452) (3,110)
------------ ------------
4,246,549 3,583,543
------------ ------------
$ 7,923,897 $ 5,608,426
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 31
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Sales $ 27,188,800 $ 12,843,287 $ 8,638,875
Cost of sales 7,099,770 3,592,921 2,538,428
------------ ------------ ------------
Gross profit 20,089,030 9,250,366 6,100,447
------------ ------------ ------------
Operating expenses:
General and administrative 8,081,478 4,801,597 2,838,395
Distributor commissions 11,056,714 4,691,995 3,025,838
Interest 95,992 91,511 55,989
Depreciation and amortization 347,630 266,875 188,257
------------ ------------ ------------
Total operating expenses 19,581,814 9,851,978 6,108,479
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 507,216 (601,612) (8,032)
------------ ------------ ------------
Income taxes(benefit):
Current income taxes 36,938 12,966 17,415
Deferred income taxes (benefit) (49,269) -- --
------------ ------------ ------------
(12,331) 12,966 17,415
------------ ------------ ------------
Income (loss) from continuing operations 519,547 (614,578) (25,447)
Loss from discontinued operation (84,673) (72,303) --
------------ ------------ ------------
Net Income (loss) $ 434,874 $ (686,881) $ (25,447)
============ ============ ============
Pro forma information (unaudited):
Net loss continuing operations $ (614,578)
Net loss discontinued operation (62,777)
------------
Pro forma net loss $ (677,355)
============
Basic and Diluted earnings (loss) per share:
Income from continuing operations $ 0.038 $ (0.049)
Loss from discontinued operation (0.006) (0.005)
------------ ------------
Earnings (loss) per share $ .0032 $ (0.0054)
------------ ------------
Weighted average shares outstanding 13,699,163 12,552,977
============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 32
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock
------------------------------ Paid In
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
Balances, December 31, 1995 3,515,714 $ 3,516 $ 7,524,696
Private Placement 120,000 120 287,380
Lightforce Acquisition 600,000 600 1,499,400
Net Loss -- -- --
Translation Adjustment -- -- --
------------ ------------ ------------
Balances, December 31, 1996 4,235,714 4,236 9,311,476
Reverse Merger 7,886,415 7,887 (7,887)
Conversion of Notes Payable 163,498 163 216,837
Lightforce Earn-out Shares 251,353 251 876,341
Private Placement 1,000,000 1,000 1,196,442
Net Loss -- -- --
Translation Adjustment -- -- --
------------ ------------ ------------
Balances, December 31, 1997 13,536,980 13,537 11,593,209
Conversion of Notes Payable 22,619 22 29,978
Lightforce Earn-out Shares 47,157 47 94,465
Private Placement 255,449 256 389,220
Great Xpectations spin-off -- -- --
Net Income -- -- --
Translation Adjustment -- -- --
------------ ------------ ------------
Balances, December 31, 1998 13,862,205 $ 13,862 $ 12,106,872
============ ============ ============
<CAPTION>
Accumulated Total
Accumulated Translation Shareholders'
Deficit Adjustment Equity
------------ ------------ ------------
<S> <C> <C> <C>
Balances, December 31, 1995 $ (7,307,765) $ 5,787 $ 226,234
Private Placement -- -- 287,500
Lightforce Acquisition -- -- 1,500,000
Net Loss (25,447) -- (25,447)
Translation Adjustment -- (4,206) (4,206)
------------ ------------ ------------
Balances, December 31, 1996 (7,333,212) 1,581 1,984,081
Reverse Merger -- -- --
Conversion of Notes Payable -- -- 217,000
Lightforce Earn-out Shares -- -- 876,592
Private Placement -- -- 1,197,442
Net Loss (686,881) -- (686,881)
Translation Adjustment -- (4,691) (4,691)
------------ ------------ ------------
Balances, December 31, 1997 (8,020,093) (3,110) 3,583,543
Conversion of Notes Payable -- -- 30,000
Lightforce Earn-out Shares -- -- 94,512
Private Placement -- -- 389,476
Great Xpectations spin-off (283,514) -- (283,514)
Net Income 434,874 -- 434,874
Translation Adjustment -- (2,342) (2,342)
------------ ------------ ------------
Balances, December 31, 1998 $ (7,868,733) $ (5,452) $ 4,246,549
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 33
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) from operations $ 434,874 $ (686,881) $ (25,447)
Add loss from discontinued operation 84,673 72,303 --
----------- ----------- -----------
Net income (loss) from continuing operations 519,547 (614,578) (25,447)
Adjustments to reconcile net income (loss) to net
cash provided by (used for)
continuing operations:
Depreciation and amortization 347,630 266,875 201,224
Loss on sale of equipment -- 299 2,254
Deferred income taxes (240,727) -- 3,437
Translation adjustments (2,342) (4,691) (206)
Change in assets and liabilities:
Accounts receivable (335,486) (76,985) 833
Prepaid assets (73,720) (922) (10,250)
Inventory (1,059,142) (379,593) (26,117)
Other assets (81,329) (81,405) (36,031)
Accounts payable 547,415 (520,322) 236,938
Accrued expenses 750,766 257,929 (295,449)
Notes payable 2,918 (16,528) 14,423
----------- ----------- -----------
Cash provided by (used for) continuing operations 375,530 (1,169,921) 65,609
Cash provided by (used for) discontinued operation 193,700 (236,393) --
----------- ----------- -----------
Cash provided by (used for) operating activities 569,230 (1,406,314) 65,609
----------- ----------- -----------
Cash flow from investing activities:
Investing activities of discontinued operation (19,914) (6,516) --
Purchase of furniture, fixtures and equipment (473,334) (104,453) (21,995)
Proceeds from sale of equipment -- 15,288 183
----------- ----------- -----------
Cash provided by (used for) investing activities (493,248) (95,681) (21,812)
----------- ----------- -----------
Cash flow from financing activities:
Net proceeds from private placement 389,476 1,197,442 287,500
Proceeds from long term debt -- 730,000 24,602
Payments of long-term debt (93,454) (357,904) (85,337)
Financing activities of discontinued operation -- (100,000) --
Repayment to stockholders -- (51,768) (250,635)
----------- ----------- -----------
Cash provided by (used for) financing activities 296,022 1,417,770 (23,870)
----------- ----------- -----------
Net increase (decrease) in cash 372,004 (84,225) 19,927
Cash, beginning of year 10,405 94,630 74,703
----------- ----------- -----------
Cash, end of year $ 382,409 $ 10,405 $ 94,630
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 34
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND HISTORY:
HISTORY - The Company was organized February 12, 1988 as Jason Ray Corporation
("JRC") for the purpose of combining with other businesses. In April 1988, JRC
filed an initial public offering registration statement on Form S-1 with the
Securities and Exchange Commission ("SEC"). JRC changed its name to Seven Oaks
Farms, Ltd. ("Seven Oaks") on July 1, 1998. From May 1991 until October 1995
Seven Oaks was a dormant entity, conducting no business activities. Effective
November 1, 1995 Seven Oaks merged with Mighty Power, Inc. ("MPI") The merger, a
purchase under Accounting Principles Board Opinion 16, was accounted for as a
reverse merger with MPI being the acquirer. Seven Oaks then changed its name to
Mighty Power USA, Inc.
("Mighty Power").
Effective April 1, 1997, Mighty Power merged with GlobeNet Inc. (GlobeNet) (the
"Merger"). In connection with the Merger Mighty Power effected a one for seven
reverse stock split (all share figures have been adjusted to reflect this
reverse split). Mighty Power then issued 7,886,415 new shares to the
shareholders of GlobeNet in exchange for 100% of the outstanding stock of
GlobeNet. In addition, under the terms of the Merger agreement, certain
shareholders of Mighty Power transferred an additional 2,541,427 shares of
common stock to the GlobeNet shareholders. As a result, the shareholders of
GlobeNet obtained 86% of the then outstanding common stock of the Mighty Power.
In connection with these transactions, Mighty Power changed it name to GlobeNet
International I, Inc. ("GNI").
The Merger, a purchase under Accounting Principles Board Opinion 16, has been
accounted for as a reverse merger with GlobeNet Inc. being the acquirer.
Therefore, GlobeNet Inc.'s historical financial statements are now the Company's
historical financial statements.
Concurrent with the Merger, an affiliate of Mighty Power, Great Xpectations
Marketing, Inc.("GXI"), acquired all the assets and liabilities of two other
affiliates, (Health Thru Nature, Inc. and Mighty Power USA L. C.) for $100,000
in notes payable. GNI then purchased all the outstanding common stock of GXI for
an additional $100,000 note payable. These transactions were also accounted for
as purchases.
ORGANIZATION - The Company is engaged in the marketing of nutritional
supplements and personal care products. The Company operates its business
through the Royal BodyCare Division, which represents the separate business
strategies and product lines of GlobeNet Inc. preceding the merger described
above. The operations conducted by Mighty Power and its affiliates prior to the
merger are presently conducted by GXI and are classified in the accompanying
consolidated financial statements as discontinued operations (See Note 3).
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 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.
F-7
<PAGE> 35
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND HISTORY (CONTINUED):
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 entered into five similar arrangements with 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 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), and Pure Life International Products, Inc.,
(collectively the "Company"). RBC-Canada and Pure Life are organized under the
Canadian Business Corporation Act. All significant inter-company accounts and
transactions have been eliminated. A subsidiary of the Company, Kalo Vita, Inc.
filed for bankruptcy in 1994 and was dissolved in 1998. The Company did not have
control of this entity, therefore it is not consolidated in these financial
statements (see note 14).
The common stock of the subsidiaries 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.
INVENTORIES - Inventories, consisting of finished goods held for resale, work-
in-process , raw materials and packaging materials are stated at the lower of
cost of market.
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.
F-8
<PAGE> 36
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES - The Company has adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 requires
an asset and liability approach to financial accounting for income taxes. In the
event differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities result in deferred tax assets, SFAS 109
requires an evaluation of the probability of being able to realize the future
benefits indicated by such assets. A valuation allowance is provided for a
portion or all of the deferred tax assets when there is an uncertainty regarding
the Company's ability to recognize the benefits of the assets in future years.
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.
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 does not apply to the Company due to the absence of dilutive potential
common shares.
SEC Staff Accounting Bulletin Number 1B.2 "Pro Forma Financial Statements and
Earnings per Share" ("SAB 1B.2"), requires pro forma statement of operations
information and earnings per share when historical financial statements are not
indicative of ongoing activity. As a result of the Company's reverse merger with
Mighty Power in April 1997 the consolidated Statement of Operations does not
reflect the complete historical earnings (losses) of the combined entities.
Therefore, unaudited pro forma information has been presented on the bottom of
the consolidated Statement of Operations which reflects the Company's earnings
(losses) and earnings per share as if the merger had occurred at the beginning
of 1997. As required by SAB 1B.2 pro forma earnings per share has only been
presented for 1997.
CREDIT RISK - The Company's trade accounts receivable arise in the normal course
of business and primarily relate to sales of its products to its distributor
network throughout the United States, Canada and its overseas licensees. Such
receivables are unsecured. The company performs ongoing credit evaluations of
the entities from whom such accounts are receivable. The Company places its cash
investments in high credit quality institutions and limits the amount of credit
exposure to any one institution.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
F-9
<PAGE> 37
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), requires that total comprehensive
income be reported in the financial statements. For the years ended December 31,
1998, 1997 and 1996, the Company's comprehensive income (loss) was equal to its
net income (loss) and the Company does not have income meeting the definition of
other comprehensive income.
3. SPIN-OFF OF GREAT XPECTATIONS MARKETING, INC:
In June 1998, GNI announced its intention to separate GXI from its network
marketing business through a spin-off to its shareholders ("the Distribution").
The Company's Board of Directors voted to approve, in principal, the
Distribution subject to other approvals and consents and satisfactory
implementation of the arrangements for the Distribution. The Company consummated
the Distribution effective June 30, 1998, through a special dividend to its
stockholders of one share of GXI common stock for each two shares of Company
common stock. The Company and GXI are currently in process of registering the
distributed shares for trading with the Securities and Exchange Commission.
GXI has been accounted for as a discontinued operation in these consolidated
financial statements. Accordingly, the revenues, expenses, assets and
liabilities, and cash flows of GXI have been excluded from their respective
captions in the Consolidated Balance Sheets, Consolidated Statements of
Operations and Consolidated Statements of Cash Flows. These items have been
reported as "Net assets of discontinued operation", "Loss from discontinued
operation", "Net cash flows from discontinued operation" and "Investing and
Financing activities of discontinued operation" for all years presented.
In connection with the spin-off, GXI's balance due to GNI for inter-company
transactions of $ 416,922 has been forgiven by GNI and included in the cost of
the spin-off presented on the Consolidated Statement of Equity.
Summarized financial information for the discontinued operation from merger
(April 1, 1997) thru spin-off (June 30, 1998) is set forth below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net sales $ 719,945 $ 1,207,334
Loss before income taxes 156,573 69,332
Net loss 84,673 69,332
Current assets $ 406,701
Current liabilities 635,345
Total assets 663,044
Total liabilities 388,713
Net assets of discontinued operation $ 274,331
</TABLE>
F-10
<PAGE> 38
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
4. INVENTORIES:
<TABLE>
<CAPTION>
At December 31, inventories consist of the following: 1998 1997
<S> <C> <C>
Finished goods $ 1,577,022 $ 1,345,041
Packaging materials and other 1,091,385 264,224
----------- -----------
Total $ 2,668,407 $ 1,609,265
=========== ===========
</TABLE>
5. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
At December 31, property and equipment consist of the following: 1998 1997
<S> <C> <C>
Furniture and fixtures $ 1,779,941 $ 1,094,014
Warehouse equipment 236,950 219,784
Automotive equipment 9,562 9,562
Leasehold improvements 87,181 25,891
----------- -----------
Total property and equipment 2,113,634 1,349,251
Less accumulated depreciation and amortization (838,126) (687,223)
----------- -----------
Net property and equipment $ 1,275,508 $ 662,028
=========== ===========
</TABLE>
6. GOODWILL:
Goodwill was recorded as a result of the acquisition of Pure Life in April 1992
and Lightforce in June 1996 as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Lightforce $ 2,378,727 $ 2,284,217
Pure Life 843,622 843,622
----------- -----------
3,222,349 3,127,839
Accumulated amortization (541,375) (380,339)
----------- -----------
Net goodwill $ 2,680,974 $ 2,747,500
=========== ===========
</TABLE>
F-11
<PAGE> 39
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
7. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
At December 31 accrued expenses consist of the following: 1998 1997
<S> <C> <C>
Distributor commissions $ 1,307,337 $ 664,721
Sales and other taxes 150,215 50,000
Interest 10,956 5,005
Other 199,436 130,096
----------- -----------
Total $ 1,667,944 $ 849,822
=========== ===========
8. NOTES PAYABLE:
At December 31, notes payable consist of the following: 1998 1997
Demand note payable - bank
bearing interest at 10% per annum. $ 42,491 $ 48,671
Other 9,098 --
----------- -----------
$ 51,589 $ 48,671
=========== ===========
</TABLE>
9. LONG-TERM DEBT:
<TABLE>
<CAPTION>
At December 31, long-term debt consists of the following: 1998 1997
<S> <C> <C>
Notes payable - banks $ 69,356 $ 112,593
Convertible notes payable 508,000 538,000
Debentures 25,000 25,000
Capital leases 402,571 127,968
----------- ---------
1,004,927 803,561
Less - current portion (494,145) (77,454)
----------- ---------
Total $ 510,782 $ 726,107
=========== =========
</TABLE>
Included in notes payable - banks is three notes assumed in connection with the
Lightforce acquisition totaling $66,095 and $103,958 at December 31, 1998 and
1997, respectively, bearing interest at prime plus 5%, due in monthly payments
aggregating $3,311 plus interest through November 2000. One note was assumed at
the time of the acquisition and two additional notes were assumed in 1997 in
lieu of cash payment for commissions payable (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.
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, 1998 $247,000 of these notes have been
converted into 186,128 shares of the Company's common stock. As of the date of
this report debentures aggregating $188,000 have elected to extend the due date
by one year.
F-12
<PAGE> 40
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
In 1994, RBC-US sold two debentures in the amount of $25,000 each, the proceeds
of which were used for working capital. The principal portion of these
debentures was due upon maturity in 1998. In 1997 the 10% Debenture holder
exchanged their Debenture for a convertible note described above. In 1998, the
holder of the other debenture extended the due date by five years. Interest on
the debenture is payable monthly at a rate of 15%.
9. LONG-TERM DEBT (CONTINUED):
Certain purchases of equipment by RBC-US have been financed through capital
leases. Such leases have terms ending in 2003 and have various interest rates
approximating 15%.
Long-term debt payments payable in the next four years are as follows:
<TABLE>
<S> <C>
1999 $ 494,145
2000 300,717
2001 105,831
2002 75,429
2003 28,805
Thereafter --
-----------
$ 1,004,927
===========
</TABLE>
10. CAPITAL TRANSACTIONS:
PRIVATE PLACEMENT - In 1998, the Company sold 255,440 shares of unregistered
common stock at prices ranging from $1.35 to $1.66 per share. In addition,
Company granted warrants to purchase 216,932 shares of common stock, exercisable
through October 2003 at an exercise price of $2.00 per share. The offering
raised $389,476.
In 1997, the Company sold 1,000,000 shares of unregistered common stock through
a private placement offering at a per share price of $1.25. The offering raised
$947,442 in cash (net of offering costs) and included the conversion of a
$250,000 note payable due the investor. In addition, the investor received a
five-year warrant to purchase 1,000,000 shares of unregistered common stock of
the Company at an exercise price of $2.00 per share. The investor also received
a demand registration right covering the private placement and warrant shares
exercisable under certain circumstances covered in the stock purchase agreement.
In 1996, the Company sold 120,000 shares of common stock in a private placement
that raised $287,500.
OPTIONS - In addition to the warrants described above, issued in connection with
private placements, the Company has granted, to employees and distributors,
options to purchase an additional 1,430,400 shares of common stock at exercise
prices ranging from $.812 to $2.40, expiring at various dates through 2003. All
options were issued at or above market price at the time of issuance.
F-13
<PAGE> 41
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11. COMMITMENT:
The Company leases its office and warehouse space and certain equipment using
operating leases for various periods through 2008. Basic annual rents for each
of the next five years and thereafter are as follows:
<TABLE>
<S> <C>
1999 $ 451,446
2000 430,173
2001 371,924
2002 395,853
2003 389,983
Thereafter 2,080,892
</TABLE>
12. INCOME TAXES:
Current deferred tax assets of $ 121,169 are the result of net operating losses
incurred in 1997 and expected to be used to reduce taxes in 1999. Until July
1995, RBC-US 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 600,000 shares of Company common stock
valued at $1,500,000. In connection with the acquisition the Company received
inventory and fixed assets and agreed to assume certain trade accounts payable,
notes payable and commissions payable.
The purchase agreement called for additional shares of common stock to be paid
based on sales to the Lightforce distributors. Additional common stock, valued
at market price share, was paid equal to 25% of sales generated by the
Lightforce distributor network during the first year after the purchase; and 25%
of incremental sales above the first year generated during the second year. In
1998 and 1997 the company issued 47,160 and 251,353 shares, respectively, of the
Company's common stock, valued at $876,592 and $94,512 under this provision.
In addition, the agreement specified that the seller will receive a 5%
commission on all sales of Lightforce products. This commission amounted to
$153,641 and $117,605 in 1998 and 1997, 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.
F-14
<PAGE> 42
GLOBENET INTERNATIONAL I, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. CONTINGENCIES:
From time to time the Company is involved in various legal matters arising in
the normal course of business. Included in such matters is an action brought by
former distributors of Company products, asserting breach of contract and
seeking in excess of $2,000,000 and an action by a former manufacturer of
company products also asserting breach of contract without specifying amount of
damages sought. In the opinion of Management, such matters are without merit and
the outcome will not have a material effect on the financial position of the
Company.
16. NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company had the following non-cash investing and financing activities
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Conversion of debt into common stock $ 30,000 $ 217,000 $ --
Lightforce purchase with common stock 94,512 876,592 1,500,000
Fixed asset purchases by notes payable 324,821 217,062 91,410
GXI Spin-off dividend 283,513 --
</TABLE>
17. YEAR 2000 ISSUE
The Year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
Year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect the Company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, of
other third parties, will be fully resolved.
F-15
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Ex. No. Description
------- -----------
<S> <C>
3.1 Registrant's Articles of Incorporation (1)
3.2 Registrant's By-Laws (1)
4.1 Specimen copy of Certificate for Registrant's Common
Stock (1)
4.2 Specimen copy of Registrant's 10% Convertible Notes
issued in 1997 (2)
4.3 Registrant's 1998 Stock Option Plan for its Directors,
Employees and Consultants (2)
4.4 Stock Purchase Agreement dated 10/27/97 with
Dr. M. G. Robertson (2)
10.1 10 year Lease Agreement as of 8/1/98 with CIIF Associates
L.P. for office/warehouse (2)
10.2 Exclusive License Agreement with Flanagan Technologies
for its Microclusters (2)
10.3 Form of Registrant's Member Agreement and Policies with
its Distributors (2)
23.1 Consent of Auditor (2)
27 Financial Data Schedule
</TABLE>
- -------------------
(1) Incorporated by reference to Registrant's Form 8-K for Mighty Power Merger
4/1/97
(2) To be filed by amendment
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 382,409
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<RECEIVABLES> 439,501
<ALLOWANCES> 0
<INVENTORY> 2,668,407
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<PP&E> 2,113,634
<DEPRECIATION> 838,126
<TOTAL-ASSETS> 7,923,897
<CURRENT-LIABILITIES> 3,166,566
<BONDS> 510,782
0
0
<COMMON> 13,862
<OTHER-SE> 4,232,687
<TOTAL-LIABILITY-AND-EQUITY> 7,923,897
<SALES> 27,188,800
<TOTAL-REVENUES> 27,188,800
<CGS> 7,099,770
<TOTAL-COSTS> 7,099,770
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 95,992
<INCOME-PRETAX> 507,216
<INCOME-TAX> (12,331)
<INCOME-CONTINUING> 519,547
<DISCONTINUED> (84,673)
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
