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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.: 33-20323
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ROYAL BODYCARE, INC.
(Exact name of registrant as specified in its charter)
NEVADA 91-2015186
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2301 CROWN COURT
IRVING, TEXAS 75038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 972-893-4000
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
On February 29, 2000, the closing price at which Registrant's common
stock sold was $.88 per share. At such date, 6,308,298 shares of Registrant's
Common Stock were held by non-affiliates. Based upon the price at such date, the
aggregate market value of Registrant's voting stock held by non-affiliates on
that date was $5,551,302 (6,308,298 shares time $.88 per share).
As of February 29, 2000, 13,916,294 shares of the registrant's Common
Stock were outstanding.
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FORWARD LOOKING STATEMENTS
The statements, other than statements of historical facts included in
this report are forward-looking statements. Forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may",
"will", "expect", "intend", "estimate", "anticipate" or "believe". We believe
that the expectations reflected in such forward-looking statements are accurate.
However, we cannot assure you that such expectations will occur. Our actual
future performance could differ materially from such statement. Factors that
could cause or contribute to such differences include, but are not limited to:
o general economic conditions
o general market acceptance of our products and distribution methods
o introduction of competitive products
o pricing of competitive products
o regulatory actions effecting the market of our products and distribution
methods
o reduction in demand for our products or the rate at which new distributors
are recruited to join us
o the discontinuance or reduction of the production of Flanagan
Microclusters(R) and Nanocolloidal Hydride, essential ingredients in
certain of our products and which are produced at a single manufacturing
facility
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ROYAL BODYCARE, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I .........................................................................................................1
Item 1. Business...............................................................................1
Item 2. Properties.............................................................................6
Item 3. Legal Proceedings......................................................................6
Item 4. Submission of Matters to a Vote of Securities Holders..................................7
PART II .........................................................................................................8
Item 5. Market for the Company's Common Equity and Related Stockholder Matters.................8
Item 6. Selected Financial Data................................................................8
Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................9
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.............................12
Item 8. Financial Statements and Supplemental Data............................................12
Item 9. Changes in and Disagreements with Accounts on Financial Disclosure....................12
PART III ........................................................................................................13
Item 10. Directors and Executive Officers ............................................13
Item 11. Executive Compensation.......................................................15
Item 12. Security Ownership and Certain Beneficial Owners and Management.......................15
Item 13. Certain Relationships and Related Transactions...............................17
PART IV ........................................................................................................18
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................18
SIGNATURES.......................................................................................................20
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL/HISTORY
We are a Nevada corporation engaged in marketing the following products
through a worldwide network of independent distributors:
o herbal formulas o fitness and weight management
programs
o vitamins
o hair and skin products
o minerals
o environmentally-friendly
o antioxidants household cleaners
Our principal offices are located at 2301 Crown Court, Irving, Texas
75038. We can be reached by phone at 972-893-4000, by fax at 972- 893-4111 and
by e-mail at [email protected]. Our Chief Executive Officer is Clinton
H. Howard and our Chief Financial Officer is Steven E. Brown, and both of them
can be reached at our principal offices.
In October 1999, we changed our name from GlobeNet International I,
Inc. to Royal BodyCare, Inc. In conjunction with the name change, we also
redomesticated to the State of Nevada.
Our history, and that of our predecessors, is as follows: In February
1988, the Jason Ray Corporation was organized under Delaware law for the purpose
of combining with other businesses. In April 1988, the Jason Ray Corporation
filed an initial public offering registration statement on Form S-1 with the
Securities and Exchange Commission. The Jason Ray Corporation changed its name
to Seven Oaks Farms, Ltd. on July 1, 1988. From May 1991 until October 1995,
Seven Oaks Farms was a dormant entity, conducting no business activities.
Effective November 1, 1995, Seven Oaks Farms merged with Mighty Power, Inc., a
privately held Oklahoma corporation. The merger, a purchase under Accounting
Principles Board Opinion 16, was accounted for as a reverse merger with Seven
Oaks Farms being the survivor but Mighty Power being treated as the acquirer.
Seven Oaks Farms then changed its name to Mighty Power USA, Inc. Mighty Power
USA, Inc. merged with GlobeNet Inc. in 1997.
GlobeNet Inc. was incorporated in June 1995, to serve as a holding
company for affiliated corporations owned or controlled by Clinton Howard. In
July, 1995, Mr. Howard and members of his immediate family contributed the stock
of these affiliated corporations to GlobeNet in exchange for shares of its
stock. The affiliated corporations acquired by GlobeNet in this manner were
Royal BodyCare, Inc., a Texas corporation, Royal BodyCare, Inc., a Canadian
corporation, Royal BodyCare S.A. de C.V., a Mexican corporation, Arlington
Laboratories, Inc., a Texas corporation, and KaloVita, Inc., a Delaware
corporation.
Mr. Howard formed Royal BodyCare, Inc., a Texas corporation, in 1991 to
market a line of aloe vera based personal care products and an aloe drink in the
United States through a multi-level network of independent distributors. Its
product line was expanded in 1992 to also include nutritional supplements.
Mr. Howard formed Royal BodyCare, Inc., a Canadian corporation, in 1992
to market through a network of independent distributors in Canada the same line
of products being marketed domestically by the Texas-incorporated Royal
BodyCare, Inc. Shortly after its formation, the Canadian-incorporated Royal
BodyCare acquired Pure Life International Products Inc., then a 12-year old
company which distributed its Pure Life brand of nutritional products in Canada.
After this acquisition, the Pure Life line of products was introduced into the
domestic market through the Texas-incorporated Royal BodyCare, Inc.
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Both the Texas and Canadian-incorporated Royal BodyCare companies are
part of our on-going operations that we conduct. Their product lines,
distributor networks and sales are continuing to increase. The other three
affiliated corporations acquired by GlobeNet, however, have discontinued
operations. Royal BodyCare S.A. de C.V., which was formed in 1993 to market
through a network of independent distributors in Mexico a limited number of our
nutritional, skin care and personal care products, discontinued operations in
1995, when it could not reach a break-even operating level. KaloVita, Inc.,
which was a direct marketing company with a product line and a 25,000-member
distributor network similar to ours, was acquired by Mr. Howard in 1994 from Dr.
M. G. Robertson for nominal consideration at a time when KaloVita was in
extremely poor financial condition having never shown a profit and having
exhausted its working capital. Efforts to streamline their operations by closing
its Virginia facility and moving it to Dallas, Texas were not successful due to
aggressive action by its creditors, and KaloVita, Inc. was forced into filing
for protection under Chapter 11 of the Bankruptcy Code in November of 1994. A
liquidating plan was approved by the bankruptcy court in 1996 and the case was
closed in 1998, with KaloVita being dissolved. We have absorbed and merged into
us the quality control testing and laboratory operations formerly performed by
Arlington Lab. Arlington Lab discontinued operations in 1995.
Light Force, Inc., a non-affiliated California corporation, was
acquired by GlobeNet in June, 1996. Light Force distributed a line of
nutritional supplements featuring Flanagan Microclusters(R) and with spirulina
as the main ingredient. The Light Force distributor network was merged into
GlobeNet's distributor network. GlobeNet entered into an exclusive world-wide
license agreement to make Flanagan Microclusters(R) its leading line of products
and to promote such products and others made available to GlobeNet by Dr.
Patrick Flanagan.
Effective April 1, 1997, Mighty Power USA, Inc., now at this time a
corporation whose stock was publicly traded on the NASDAQ Bulletin Board, merged
with GlobeNet. In connection with the merger, Mighty Power USA effected a
one-for-seven reverse stock split. All share figures in this report have been
adjusted to reflect this reverse split. Mighty Power USA then issued 7,886,415
new shares to the shareholders of GlobeNet in exchange for 100% of the
outstanding stock of GlobeNet. In addition, under the terms of the merger
agreement, certain shareholders of Mighty Power USA transferred an additional
2,541,427 shares of common stock to the GlobeNet shareholders. As a result, the
shareholders of GlobeNet obtained 86% of the then outstanding common stock of
Mighty Power USA. In connection with these transactions, Mighty Power USA
changed its name to GlobeNet International I, Inc. The merger, a purchase under
Accounting Principles Board Opinion 16, has been accounted for as a reverse
merger with GlobeNet being the acquirer. Therefore, GlobeNet's historical
financial statements are now our historical financial statements.
Concurrent with the merger of Mighty Power USA and GlobeNet, an
affiliate of Mighty Power USA, Great Xpectations Marketing, Inc., acquired all
the assets and liabilities of two other affiliates of Mighty Power USA for
$100,000 in notes payable. Great Xpectations is a direct marketer of nutritional
supplements, automobile and household products and services. We then purchased
all the outstanding common stock of Great Xpectations for an additional $100,000
note payable. These transactions were also accounted for as a purchase. In June,
1998, we announced our intention to spin off Great Xpectations to our
shareholders. Great Xpectations was unable to adequately execute its business
plan and does not currently have any meaningful assets. As a result, we have
decided to discontinue the planned spin-off of Great Xpectations. Our 1998
financial statements were prepared as if the spinoff of Great Xpectations had
been completed on June 30, 1998. We have now restated our 1998 financial
statements to reflect our decision to discontinue the spin-off and discontinue
Great Xpectations' operations.
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As mentioned above, in October 1999, we changed our name from GlobeNet
International I, Inc. to Royal BodyCare, Inc. In conjunction with the name
change, we also redomesticated to the State of Nevada.
PLANT AND EQUIPMENT
Our line of products that we market are purchased from unaffiliated
manufacturers and suppliers according to our specifications. The production of
these products can be obtained from a number of sources at competitive prices,
but some of the ingredients, most notably Flanagan Microclusters(R), including
the silica hydride form, are subject to license agreements specifying the source
and price for such ingredients. Accordingly, we do not have or need any plant or
manufacturing facilities, machinery or equipment. Other than normal office
furniture and computer equipment, the only other property or equipment that we
own or use is laboratory equipment owned and maintained for internal quality
control testing of our products and distribution of our products to our
independent distributors.
EMPLOYEES
We currently have 138 employees, of whom 7 are executive officers or
management employees, 15 are department heads, 24 are warehouse employees, 53
are in customer service or order entry, 6 are in financial or accounting and the
remaining are clerical or administrative. We do not foresee any significant
increase being necessary for our workforce in 2000. None of our employees are
represented by labor unions, and we have not experienced work stoppages or other
labor strife with our employees.
DISTRIBUTOR NETWORK
Our two Royal BodyCare companies had approximately 132,000 independent
distributors at December 31, 1999, of whom approximately 112,000 are located in
the United States and 20,000 are located in Canada. We recruit people who can
effectively explain our line of products, demonstrate their uses and
applications and effectively utilize our direct marketing techniques to sell our
products and sponsor other distributors. This type of direct marketing strategy
is commonly referred to as multi-level or network marketing. We compensate our
distributors through a "Stair Step" program consistent with other industry
recognized compensation programs. Under this compensation program we pay sales
commissions and cash rebates to our distributors. These commissions and cash
rebates are based on the amount of purchases by the distributor and his/her
sales group. Distributor compensation is paid monthly. Except for sales meetings
and certain promotional activities that we sponsor, our distributors are
responsible for all expenses incurred by them in their sales programs.
We use the Internet to support our marketing efforts and enhance
communication with our distributors. Presently though our web site distributors
can obtain information about us and our products, and other current information
such as new product announcements and descriptions of product specials and other
sales promotions. Also through our web site, we provide our distributors the
ability to enroll new distributors and to place orders. To help our distributors
better manage their businesses, we are currently testing an interface that will
allow our distributors to obtain information related to their sales groups
directly from our database through the Internet.
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OVERSEAS DISTRIBUTORS
We have entered into exclusive license agreements with seven overseas
licensee groups for marketing the our line of products in the following nations:
o Japan o Finland o Thailand
o The Republic of Indonesia o Iceland o Australia
o Sweden o Switzerland o New Zealand
o Norway o Austria o South Korea
o Denmark
Pursuant to these agreements these overseas licensees, which are
unaffiliated third parties, are granted exclusive rights to sell our products in
their respective territories through office/warehouse facilities. The
independent distributors in these territories are compensated upon the same
compensation plan as that used by us for our distributors in the United States
and Canada.
PRODUCTS
We currently market a line of over 200 nutritional supplements and
personal care products, including herbs, vitamins and minerals, as well as
natural skin, hair and body care products. All of our products are marketed
under our Royal BodyCare trade name. We procure these products from unaffiliated
manufacturers and suppliers and have them made or processed according to our
specifications or formulas. Our line of products features several proprietary
ingredients including Flanagan Microclusters(R), a mineral catalyst that
increases absorption of nutritional supplements, and Nanocolloidal Mineral
Hydride, a nutritional form of hydrogen that is an antioxidant and has other
beneficial properties. Because these ingredients are proprietary to Dr. Patrick
Flanagan it is unlikely that we would be able to find an alternative supplier of
these ingredients. Our product line also features spirulina as a main ingredient
in nutritional supplements and aloe vera as a main ingredient in our skin and
personal care products. We maintain quality control of our products by our
in-house laboratory facilities and operations.
INDUSTRY/COMPETITORS
We are in a highly competitive industry both domestically and
internationally. We compete against companies that sell heavily advertised
products through retail stores as well as other network marketing companies.
Many of our competitors are significantly larger than we are and have far
greater financial resources. We compete with other network marketing companies
close to our size such as Envion, Reliv International and Nutrition for Life. We
also compete with much larger companies such as Amway, Nu Skin and Herbalife. At
a consumer level, we compete with large health food chains such as GNC, small
independently-owned health food stores, as well as drug stores, department
stores and supermarkets that sell nutritional supplements and personal care
products.
We offer a wide selection of products with a reputation for high
quality. Our leading products incorporate proprietary ingredients or have unique
formulations such that they are not available though other outlets. We believe
that our products possess features and provide benefits that are desired by
consumers looking for natural health products. We place a high degree of
emphasis on new product development to insure our product line remains current
with developing trends in our industry and new scientific evidence. We generally
do not attempt to compete based on price, although price is a consideration.
Prices are justified through product quality and benefits and, to the extent
possible, the proprietary ingredients and unique formulations.
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CAPITAL STOCK
We have authorized 50 million shares of common stock. As of February
29, 2000, we had issued and outstanding 13,916,294 shares of common stock.
REPORTS TO SECURITY HOLDERS
We are subject to the continuous disclosure requirements of the
Securities and Exchange Commission because we have had previous offerings
registered pursuant to Section 15(d) of the Securities Act of 1933, as amended.
Due to the fact that we are a Section 15(d) company, we are not required to
distribute an annual report to our shareholders. However, all of our filings
with the Securities and Exchange Commission are available on-line for all
shareholders to access. In addition, we distribute quarterly news releases to
our shareholders as well as a year-end news release that includes operating
results from our audited financial statements.
INVENTORY REQUIREMENTS, BACKLOGS
Our independent distributors do not maintain large inventories of our
products. They depend on us to maintain our inventory at a level that will allow
us to fill their orders and the orders of their customers as they are placed. We
generally ship orders within 48 hours after we receive them so there is no
significant backlog of orders.
RESEARCH AND DEVELOPMENT
We have contracted with scientists at universities, medical colleges,
and private research organizations to conduct a series of studies over the past
few years to evaluate the safety and functions of our dietary supplements,
primarily Microhydrin(R). Prior to acquiring Light Force in 1996, Light Force
contracted for more than one million dollars in research studies conducted at
Harvard Medical school on the product Phycotene(R).
TRADEMARKS, PATENTS OR OTHER INTELLECTUAL PROPERTY
We own trademarks on the name Royal BodyCare(R) and the names of
certain key products such as Microhydrin(R). Through an agreement with Dr.
Patrick Flanagan, we have exclusive marketing rights to Flanagan
Microclusters(R), a mineral catalyst that increases absorption of nutritional
supplements, and Nanocolloidal Mineral Hydride, a nutritional form of hydrogen
with antioxidant and other beneficial properties. These substances are produced
through proprietary technology developed and owned by its inventor, Dr. Patrick
Flanagan. Nanocolloidal Mineral Hydride is the principal ingredient in our
leading product, Microhydrin(R).
GOVERNMENTAL REGULATIONS
One or more of the following agencies regulates the formulation,
labeling and advertising of our products: the Food and Drug Administration, the
Federal Trade Commission, the Consumer Product Safety Commission and various
agencies of the states and foreign countries into which our products are shipped
or sold. In addition, our distribution and sales program is, like that of other
companies operating in interstate commerce, subject to the jurisdiction of the
Federal Trade Commission and a number of other federal agencies. Various state
agencies regulate our multi-level distribution activities.
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ITEM 2. PROPERTIES
We do not own any real properties. We rent an office-warehouse building
of approximately 119,000 square feet at an increasing annual rental of $328,000
for the first year and $417,000 for the last year under a 10-year lease expiring
2008. We also lease distribution facilities in Vancouver, British Columbia and
Toronto, Ontario for our sales operations in Canada at an aggregate annual
rental of $112,000.
ITEM 3. LEGAL PROCEEDINGS
We, as a corporation, nor any of our officers or directors are parties
to any material legal proceedings or litigation other than as set forth below:
NO. DV98-5504-C; NATERRA INTERNATIONAL, INC., v. ROYAL BODYCARE, INC., and
ARLINGTON LABORATORIES, INC.
On July 17, 1998, Plaintiff, a former manufacturer of Royal BodyCare
products, sued us and Arlington Laboratories asserting causes of action for
breach of contract and suit on sworn account. Although the amount of damages
claimed were unspecified, discovery revealed that Plaintiff was attempting to
effectively set aside a sale of equipment that they claimed was defective, which
equipment at one time had been used by us in our manufacturing process. Total
damages claimed, together with attorney's fees, exceeded $150,000.00. The
parties attended a court ordered mediation in late 1999, which mediation
resulted in a settlement of all claims. Under the terms of the settlement, we
agreed to pay Plaintiff the sum of $90,000.00 and take the referenced equipment
back. We were thus able to recoup at least the salvage value of the equipment
or, to the extent any of it remained useful, to resell without warranty. By
Order dated January 3, 2000, all claims in the lawsuit were dismissed with
prejudice to their refiling.
NO. 97-08040-C; DON WHIGHAM and WHIGHAM & ASSOCIATES, INC. v. CLINTON H. HOWARD,
ROYAL BODYCARE, INC. and INTERNATIONAL, INC.
On August 28, 1997, Plaintiffs, former distributors of our products,
sued Defendants asserting causes of action for, among other things, breach of
contract and fraud in connection with a special marketing arrangement with us as
network marketing experts and distributors. Defendants filed an answer denying
all the material allegations of Plaintiffs' petition and asserting
counter-claims for breach of contract, negligence and tortious interference with
business relations. In October 1999, the parties agreed to settle this
litigation. By Order dated November 8, 1999, all matters in controversy were
resolved by an Order of Dismissal with Prejudice, of all claims and
counterclaims. In the settlement, we agreed to pay the sum of $300,000.00 in
quarterly installments beginning October 29, 1999 and ending April 26, 2000. In
addition, we agreed to the payment of $5,000.00 per month for 48 months
beginning May 26, 2000. The amount in controversy asserted by Plaintiff in the
case exceeded $3 million. We have made the first two quarterly installments.
NO. 3:99-CV-0686; ROYAL BODYCARE JAPAN, DUDLEY A. OLSEN AND DUANE ENGHOLM v.
ROYAL BODYCARE, INC. and CLINTON HOWARD
On December 14, 1999, the parties reached an agreement in principal to
settle all claims and controversies. Under the terms of the settlement, we
agreed to pay the sum of $10,000.00 and to reinstate a particular distributor
plan for company distributors and related parties who performed sales services
on our behalf in Japan. That settlement has not been consummated, as the
Plaintiffs in that case have now discharged their attorneys. The case has been
administratively closed by the Court and it is uncertain whether the Court will
permit a reopening of the case or whether it will simply be considered to be
effectively dismissed.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On August 18, 1999, in accordance with the Delaware General Corporation
Law, by a consent of a majority of the stockholders of Globnet International I,
Inc., our predecessor company, we approved the redomestication of our company
from Delaware to Nevada and the change of our name.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the Nasdaq over-the-counter Bulletin
Board published by the National Quotation Bureau, Inc. The following reflects
the range of high and low bid quotes for each calendar quarter during each of
the past two years as adjusted for the 1 for 7 reverse stock split in April,
1997:
<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>
<TABLE>
<CAPTION>
QUARTER
ENDED 3/31/99 6/30/99 9/30/99 12/31/99
- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C>
HIGH 2.375 1.625 1.34375 1.03125
LOW .875 .9375 .75 .6875
</TABLE>
As of March 5, 2000 there were approximately 436 holders of our common
stock. Since our inception, we have paid no dividends on our stock. We do not
anticipate that we will pay dividends in the foreseeable future.
SALES OF UNREGISTERED SECURITIES
During the last year we have sold our securities in offerings which
have not been registered for sale with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, or any state securities
commissioner as set forth below.
These transactions were exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended. During the second quarter of 1999, two
of our distributors advanced us a total of $40,000 under short-term note
agreements. In the fourth quarter of 1999, these distributors exchanged these
notes for 53,332 shares of our common stock.
These convertible notes, and the shares of our common stock issued upon
conversion of these notes, are subject to certain restrictions upon the sale or
transfer thereof which are denoted prominently upon the certificates of these
securities as required by the applicable federal and state securities laws. We
have further instructed our transfer agent to not transfer these securities in
the absence of registration or satisfactory evidence that the transfer would be
in compliance with the applicable securities laws pertaining thereto. Exemption
from registration of the sale of these securities under the applicable federal
and state securities laws is claimed by us under Section 4(2) of the Federal
Securities Act of 1933 as a transaction by an issuer which does not involve a
public offering and comparable limited offering exemptions under the state
securities laws.
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the table shown below has been selected
by us and has been derived from the financial statements for the periods
indicated. The consolidated balance sheets as of December 31, 1999 and 1998 and
the related statements of operations, shareholders' equity and cash flows for
each of the three years ended December 31, 1999, 1998 and 1997 have been
examined by Swalm, Thomas & Associates, PLLC, formerly Osborn, Swalm, Thomas &
Associates, PLLC.
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
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1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total Revenue $ 34,194,445 $ 27,188,800 $ 12,843,287 $ 8,638,875 $ 6,082,728
Income (loss) from
continuing operations 130,697 511,270 (614,578) (25,441) (805,477)
Net Income (Loss) 268,273 (33,587) (686,881) (25,447) (905,477)
BALANCE SHEET DATA:
Cash and cash equivalents 208,225 382,409 10,405 94,630 74,703
Working Capital (Deficit) (16,364) 454,954 763,722 (149,181) (331,066)
Total Assets 9,000,396 8,207,633 5,608,426 3,967,493 2,470,673
Long Term Debt 1,256,786 1,004,927 803,561 367,571 339,953
Shareholders' Equity 4,388,052 4,061,602 3,583,543 1,984,081 226,234
</TABLE>
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES; MATERIAL CHANGES IN FINANCIAL CONDITION
During the year ended December 31, 1999, we had a net decrease in cash
of $174,000. This decrease in cash resulted from net cash used by investing
activities that was not fully offset by net cash provided by operating
activities and financing activities. The net cash provided by financing
activities came mainly from borrowing proceeds of $168,000 and our sale of
53,332 shares of unregistered common stock that provided cash of $40,000. The
net cash used by investing activities was primarily related to the purchase of
computer software and related hardware. During 1999 we began the development of
a computer system that would provide us with an upgraded software platform. Our
new software platform was designed to support continued growth in our
distributor base and enhance our Internet capabilities. We began using portions
of the new computer system in January 2000.
Consistent with industry practice, most of our sales are paid at the
time of order. Therefore, our primary working capital need is to fund increases
in inventory required to support sales growth. Since our sales are generated
through independent distributors who do not maintain a significant inventory, it
is necessary for us to have products on hand when the distributors place their
orders. During periods of sales growth we must purchase inventory in
anticipation of sales, thereby creating the need for additional working capital.
Inventory increased $236,000 during 1999 due to our growth.
We believe that we will be able to fund further moderate sales
increases through our operations. Should sales growth increase beyond our
ability to finance our growth internally, we will again seek outside sources of
capital including bank borrowings, other types of debt financing, or an equity
offering. There is no assurance, however, that we would be able to obtain any
additional outside financing.
During 2000, we will require additional capital to complete the upgrade
of the software used to manage our distributor network. We plan to finance the
completion of these upgrades through cash flow from operations and existing
credit lines. We have no plans or requirements for any other significant capital
expenditures during the next twelve months.
Other than those factors already described, we are not aware of any
trends or uncertainties that would significantly effect our liquidity or capital
resources in the future.
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RESULTS OF OPERATIONS - 1999 COMPARED WITH 1998
Our sales for the year ended December 31, 1999 were $34,194,000
compared with sales for the prior year of $27,189,000, an increase of $7,005,000
or 26%. In 1999, sales increased in all of our markets. Sales in the United
States, Canada and other international markets increased $5,080,000, $1,365,000
and $560,000, respectively. The sales increase in the United States resulted
from the rapid growth in the United States distributor base that began in late
1997 and continued into the third quarter of 1998. Since the third quarter of
1998, the United States distributor base has grown but at a much lower rate. The
increase in Canadian sales was primarily related to increased sales in Eastern
Canada. Prior to 1999, our sales were heavily concentrated in Western Canada.
However, during the second quarter of 1999, we attracted a distributor group in
Eastern Canada that continues to grow rapidly. The increase in sales in our
other international markets related to the initiation of operations by our
licensees in Austria, Australia and Russia, and increased sales by our licensees
in Sweden, Indonesia and Japan.
Our cost of goods sold for the year ended December 31, 1999 was
$8,749,000 compared with cost of goods sold in the prior year of $7,100,000, an
increase of $1,649,000 or 23%. As a percentage of sales, cost of goods sold in
1999 and 1998 was 26%.
Our general and administrative expenses for the year ended December 31,
1999, were $10,376,000 compared with such expenses in 1998 of $8,081,000, an
increase of $2,295,000 or 28%. As percentage of sales, general and
administrative expenses were 30% in 1999 and 1998. A significant portion of this
increase represented expenses we incurred in the settlement of three lawsuits.
Settlement and legal expenses associated with these lawsuits totaled
approximately $650,000. Excluding these expenses, our general and administrative
expenses for 1999 were $9,726,000 or 28% of sales. The remainder of the increase
in general and administrative expenses from 1998 to 1999 was related to
increases in personnel and other expenses required to support the increases in
our distributor base.
Our distributor commissions for the year ended December 31, 1999 were
$14,250,000 compared with distributor commissions in 1998 of $11,057,000, an
increase of $3,193,000 or 29%. As a percentage of sales, distributor commissions
in 1999 were 42% compared with 41% in 1998. The increase in distributor
commissions as a percentage of sales was primarily attributable to an increase
in the percentage of our distributors who qualified to receive maximum
commission percentages under our distributor compensation plan.
Our interest expense did not change significantly from 1998 to 1999,
increasing from $96,000 in 1998 to $116,000 in 1999.
Depreciation and amortization for the year ended December 31, 1999 was
$456,000 compared with depreciation and amortization in 1998 of $348,000, an
increase of $108,000 or 31%. This increase was mainly due to depreciation
associated with the capital investments that we made during 1998 and 1999. These
capital investments were necessary to install distribution systems and
technology systems that we needed to support our distributor base and stay
competitive with other companies in our industry.
Our income from continuing operations for the year ended December 31,
1999 was $131,000 compared with income from continuing operations in the prior
year of $511,000, a decrease of $380,000. This decrease was the result of the
expenses we incurred to settle the three lawsuits as previously described.
Discontinued operations represent the operations of Great Xpectations.
Income from discontinued operations was $138,000 for the year ended December 31,
1999 compared with a loss of $545,000 in 1998. The 1998 loss was mainly the
result of expenses incurred by Great Xpectations in the last six months of 1998
to streamline its operations in an attempt to become profitable. Income in 1999
mainly resulted from the
10
<PAGE> 14
reversal of certain liabilities recorded in prior years that were settled for
less than the original contractual commitment.
Our net income for the year ended December 31, 1999 was $268,000, or
$.02 per share, compared with a net loss in the prior year of $34,000, an
improvement of $302,000. This improvement was the result of the factors
described above.
There have been no economic events or changes that have affected our
sales or operating results and we are not aware of any economic trends or
uncertainties that would have a material impact on our future sales or operating
results. We believe that we have purchased our products at the best price
available and that any price increases in the foreseeable future will be small.
Any such price increases would be passed through to our customers. In addition,
we do not believe at this time that inflation will have a material impact on our
operating results.
RESULTS OF OPERATIONS - 1998 COMPARED WITH 1997
Our sales for the year ended December 31, 1998 were $27,189,000
compared with our sales for the prior year of $12,843,000, an increase of
$14,346,000 or 112%. The increase in our sales was mainly the result of growth
in our independent distributor base in the U.S. This growth in the distributor
base was mainly attributable to a successful direct mail campaign that centered
on our leading product, Microhydrin(R). Microhydrin(R) is an antioxidant product
that we introduced in September 1997. It currently accounts for approximately
33% of our sales.
Our cost of goods sold for the year ended December 31, 1998 was
$7,100,000 compared with our cost of goods sold in the prior year of $3,593,000,
an increase of $3,507,000 or 98%. As a percentage of our sales, cost of goods
sold in 1998 was 26% compared with 28% in 1997. The improvement in the
percentage of cost of goods sold in 1998 was mainly attributable to the change
in product sales mix. Microhydrin(R) has a lower cost of goods sold percentage
than the average of our other products. In addition, we realized some
improvement in gross margin due to increased volumes.
Our general and administrative expenses for the year ended December 31,
1998 were $8,081,000 compared with such expenses in 1997 of $4,802,000, an
increase of $3,279,000 or 68%. As percentage of our sales, general and
administrative expenses in 1998 was 30% compared with 37% in 1997. The increase
in general and administrative expenses was due to increases in personnel and
other expenses required to support the additional distributors who joined us
during 1998 and related sales growth.
Distributor commissions for the year ended December 31, 1998 were
$11,057,000 compared with distributor commissions in 1997 of $4,692,000, an
increase of $6,365,000 or 136%. As a percentage of sales, distributor
commissions in 1998 were 41% compared with 37% in 1997. The increase in our
distributor commissions as a percentage of sales was primarily attributable to
the change in product sales mix. A higher percentage of commission is paid on
Microhydrin(R) than the average of our other products. The increase in
distributor commissions in 1998 was also due to an increase in the percentage of
our distributors who qualified to receive maximum commission percentages under
the distributor compensation plan.
Our interest expense did not change significantly from 1997 to 1998,
increasing from $92,000 in 1997 to $96,000 in 1998.
Depreciation and amortization for the year ended December 31, 1998 was
$348,000 compared with depreciation and amortization in 1997 of $267,000, an
increase of $81,000 or 30%. This increase was mainly due to depreciation
associated with property and equipment additions during 1997 and 1998 along with
an increase in goodwill amortization expense. Our goodwill amortization expense
increased in 1998 due to the
11
<PAGE> 15
amortization of additional goodwill recorded in 1997 and 1998 in connection with
the issuance of shares of our common stock pursuant to the Light Force
acquisition agreement.
Our income from continuing operations for the year ended December 31,
1998 was $511,000, compared with a loss from continuing operations in the prior
year of $615,000, an improvement of $1,126,000. This improvement is the result
of the increased gross profit generated from the sales growth that occurred
during 1998. We incurred a net loss in 1997 primarily due to the expenses
incurred to attract new distributors and to set up internal systems and staffing
required to support our anticipated sales growth.
Discontinued operations represent the operations of Great Xpectations.
These operations are classified as discontinued because we announced plans in
June 1998 to spin off Great Xpectations to our shareholders.
Our net loss for the year ended December 31, 1998 was $34,000, or $.01
per share, compared with a net loss in the prior year of $687,000, an
improvement of $631,000. This improvement was the result of the factors
described above.
There have been no economic events or changes that have affected our
sales or operating results and we are not aware of any economic trends or
uncertainties that would have a material impact on our future sales or operating
results. We believe that we have purchased our products at the best price
available and that any price increases in the foreseeable future will be small.
Any such price increases would be passed through to our customers. In addition,
we do not believe at this time that inflation will have a material impact on our
operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The financial statements and supplementary data are listed in the Index
to Financial Statements appearing on Page F-1 and the Financial Schedule
appearing on Page S-2 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON FINANCIAL DISCLOSURE
We have had no disagreements with our certified public accountants with
respect to accounting practices or financial disclosure.
12
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth, as of March 7, 2000, the name, age, and
position of each of our Executive Officers and Directors and the month in which
such Director or Officer began his term of office.
<TABLE>
<CAPTION>
DIRECTOR OR
NAME AGE POSITION OFFICER SINCE
- ---- --- -------- -------------
<S> <C> <C> <C>
Clinton H. Howard 71 Chairman of the Board, May 1991
President and CEO
Steven E. Brown 44 Director, Vice President- May 1994
Chief Financial Officer
Andrew V. Howard 41 Director, Vice President-
Corporate Counsel March 1995
Frank Franasiak, M.D. 52 Director July 1998
Kenneth Sabot 53 Senior Vice President-Operations February 1998
Richard Howard 49 Vice President-Sales and Marketing December 1999
Nelson J. Rogers 53 Vice President-International November 1994
</TABLE>
TERM OF OFFICE
Each of our directors serves for a term of one year, and thereafter
until his or her successor is elected at our annual shareholder's meeting, and
is qualified, subject to removal by our shareholders. Each officer serves, at
the pleasure of our Board of Directors, for a term of one year.
FAMILY RELATIONSHIPS
Katherine M. Howard, our Secretary, is the wife of Clinton H. Howard,
our Chairman, President and Chief Executive Officer. Mr. Andrew V. Howard, a
Director and Vice President-Corporate Counsel, is the son of Clinton H. Howard.
BIOGRAPHICAL INFORMATION
Set forth below is certain biographical information regarding each of
our Directors and Executive Officers.
CLINTON H. HOWARD. Mr. Clinton Howard is our Chairman of the Board,
President and Chief Executive Officer. He graduated from Rice University with a
BA degree and from Southwestern Medical School with an MA degree, after which he
studied graduate business courses at S.M.U. and the University of Dallas and
medical arts courses at Johns Hopkins Medical School. Mr. Howard founded
American Biomedical Corporation in 1958, and built it into a chain of 40 medical
testing laboratories. He took American Biomedical public in 1969. In 1974,
American Biomedical was merged with National Health Laboratories, then one of
the nation's largest medical laboratory chains. In 1974, Mr. Howard founded
Carrington Laboratories, Inc.,
13
<PAGE> 17
originally named Avacare, Inc., a personal care products, direct sales marketing
firm. In 1981, he established a research division which isolated an active
medicinal compound in aloe vera, acemannan. He then sold the skin care business
and converted Carrington to a pharmaceutical company. Mr. Howard retired from
Carrington in 1990. The following year he founded Royal BodyCare.
STEVEN E. BROWN. Mr. Steven Brown is a Director and Vice
President-Chief Financial Officer and has held the same positions since joining
us in May 1994. Prior to joining us, Mr. Brown was the Vice President, Finance
and Chief Financial Officer of Carrington Laboratories, Inc. from 1980 through
April 1994. Mr. Brown was treasurer of Carrington from 1982 through 1994 and
served as a director from 1981 until August 1987. Mr. Brown is a Certified
Public Accountant and was previously associated with the international
accounting firm of Arthur Andersen & Co. from 1977 to 1980.
ANDREW V. HOWARD. Mr. Andrew Howard is a Director and Vice
President-Corporate Counsel and has held these positions since joining us in
March 1995. He is a son of Clinton Howard. Prior to completing his academic
training in February 1995, he worked as a salesman and sales manager for various
companies and, earlier, he worked full time as an independent distributor of
health care products and nutritional supplements, building his own organization
which grew to revenue levels of over $400,000 per month. He graduated with a
bachelors degree from the University of Dallas, and earned an MBA at Regent
University in Virginia where he subsequently completed law school, earning a JD
degree. He passed the Texas Bar exam in early 1995 and is presently a licensed
attorney in the State of Texas.
FRANK FRANASIAK, M.D. Dr. Frank Franasiak became a director in July
1998. He is a physician and runs his own practice in Virginia. Dr. Franasiak
earned his BA degree in Chemistry in 1974, and earned his M.D. in 1977, both
from State University of New York at Buffalo, New York.
KENNETH SABOT. Mr. Kenneth Sabot became the Senior Vice President of
Operations in February 1998. Prior to joining us, Mr. Sabot was the
Vice-President-Operations of To Life! L.L.C., a start up network marketing
company, from August 1996 until February 1998. Prior to joining To Life, he was
employed by Light Force, Inc. from 1981 through January 1996. Mr. Sabot joined
Light Force as the Controller in 1981 and served as Chief Operating Officer from
1986 until leaving Light Force in January 1996. Mr. Sabot became a Certified
Public Accountant in 1969.
RICHARD HOWARD. Mr. Richard Howard recently joined us in December 1999,
as Vice President-Sales & Marketing. He has more than twenty years of experience
in the network marketing industry, including serving as a top executive at a
$200 million network marketing company.
NELSON J. ROGERS. Mr. Nelson Rogers joined us as Vice
President-International in November 1994, when we acquired KaloVita. There he
was Chief Operating Officer and Vice President of Marketing. Prior to that
position, Mr. Rogers had, since 1969, been affiliated with firms in the direct
sales and network marketing industry, including Avon and Nature's Sunshine
Products as well as private concerns, WeCare and Watkins. His past international
experience includes opening and responsibility for 25 foreign markets worldwide
as well as two overseas assignments living in the Philippines and Venezuela,
while with Avon.
14
<PAGE> 18
ITEM 11. EXECUTIVE COMPENSATION
<TABLE>
<CAPTION>
NAME CAPACITY 1999 1998 1997
- ---- -------- ---- ---- ----
<S> <C> <C> <C> <C>
Clinton H. Howard(1) President,
Chief Executive Officer $267,000 $253,000 $177,000
Steven E. Brown Vice President, $170,570 $170,200 $105,000
Chief Financial Officer
Andrew V. Howard(2) Vice President, $226,993 $207,300 $96,400
Corporate Counsel
Kenneth L. Sabot Senior Vice President, $140,523 $101,700 -0-
Operations
Nelson J. Rogers Vice President, $124,505(3) $101,800 $90,000
International
</TABLE>
- --------------------
(1) Clinton Howard has use of a company car with an aggregate incremental cost
to us of $10,000. The company also pays his country club dues of $1,100.
(2) Andrew Howard has use of a company car with an aggregate incremental cost
to us of $10,000.
(3) Includes a 1999 bonus of $22,705
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGES IN CONTROL
ARRANGEMENTS
There are no compensatory plans or arrangements, including payments to
be received from us, with respect to any person named in cash compensation set
out above which would in any way result in payments to any such person because
of his resignation, retirement, or other termination of such person's employment
by us or our subsidiaries, or any change in control of us, or a change in the
person's responsibilities following a changing in control of us.
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables set forth as of December 31, 1999, the address,
and the number of shares of our common stock held of record or beneficially by
each person who held of record, or was known by us to own beneficially, more
than 5% of the then 13,916,294 issued and outstanding shares of our Common
Stock, and the name and share holdings of each director and of all officers and
directors as a group. As a result of us not being registered under Section 12(g)
of the Securities Exchange Act of 1934, beneficial owners of more than 5% are
not required to file Schedule 13Gs with the Securities and Exchange Commission.
Therefore, there may be additional persons who are beneficial owners of more
than 5% of whom we do not have knowledge.
15
<PAGE> 19
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------------------
CLASS BENEFICIAL OWNER AMOUNT % OF CLASS
- ----- ---------------- ------ ----------
<S> <C> <C> <C>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Common Clinton H. Howard 7,765,188(1) 54.6%
3917 Fox Glen Drive
Irving, Texas 75062
Common Penny Slinger Hills 1,231,003 8.8%
Hills 1998 Living Trust
910 Herman Gulch Road
Boulder Creek, California 95006
Common Dr. M. G. Robertson 2,000,000(2) 13.4%
977 Centerville Turnpike
Virginia Beach, Virginia 23463
Common My Garden, L.P. 7,100,000 51.0%
3917 Fox Glen Drive
Irving, Texas 75062
SECURITY OWNERSHIP OF MANAGEMENT
Common Clinton H. Howard 7,765,188(1) 54.6%
Common Steven E. Brown 31,100(3) *%
Common Andrew V. Howard 16,951(4) *%
Common Kenneth Sabot 2,500(3) *%
Common Nelson J. Rogers 4,000(3) *%
ALL OFFICERS, DIRECTORS & BENEFICIAL
PERSONS AS A GROUP (7 PERSONS) 8,105,453(5) 56.2%
</TABLE>
- -------------------
* less than 1%
(1) Includes 317,000 shares that may be acquired by presently exercisable
common stock options; includes 7,100,000 shares held by a limited
partnership, My Garden, L.P., the general partners of which are The Clinton
H. Howard Family Trust and The Katherine M. Howard Family Trust and also
includes 2,799 shares owned of record by Mr. Howard's wife. Mr. Clinton H.
Howard disclaims beneficial ownership of these shares except to the extent
of his pecuniary interest.
(2) Includes 1,000,000 shares that may be acquired by presently exercisable
common stock warrants.
(3) Represents shares that may be acquired by presently exercisable common
stock options.
(4) Held in the name of The Andrew Vincent Howard 1992 Trust.
(5) Includes 497,457 shares that may be acquired by presently exercisable
common stock options and the shares referred to in footnote (1).
16
<PAGE> 20
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH AND INDEBTEDNESS OF MANAGEMENT AND OTHERS
From time to time we have advanced money to Mr. Clinton Howard.
Currently the outstanding balance of this account payable is $90,526 and is
accruing a rate of interest at 6% per year and is payable before December 31,
2002.
17
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS. The following financial statements are filed as part
of this 10-K
Title of Document
Independent Auditors Report of Swalm, Thomas & Associates, PLLC, Certified
Public Accounts
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Operations for the Years December 31, 1999, 1998
and 1997.
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997.
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES. None.
(a)(3) EXHIBITS. The following exhibits are included as part of this report:
Ex. No. Description
3.1 Articles of Incorporation
3.2 By-Laws
4.1 Specimen copy of Certificate for Common Stock
4.2 Specimen copy of 10% Convertible Notes issued in 1997 (1)
4.3 The 1998 Stock Option Plan for our Directors, Employees and
Consultants (1)
4.4 Stock Purchase Agreement dated 10/27/97 with Dr. M. G.
Robertson (1)
10.1 10 year Lease Agreement as of 8/1/98 with CIIF Associates L.P.
for office/warehouse (1)
10.2 Exclusive License Agreement with Flanagan Technologies for its
Microclusters (1)
10.3 Form of Member Agreement and Policies with Distributors (1)
10.4 Form of Indemnification Agreement
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
- -------------
(1) Incorporated by reference to the Annual Report on Form 10-K-1A filed 5/7/99
18
<PAGE> 22
(b) FINANCIAL DATA SCHEDULE
(c) REPORTS ON FORM 8-K
We filed no reports on Form 8-K during the last quarter of Fiscal 1999.
19
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ROYAL BODYCARE, INC.,
a Nevada corporation
/s/ CLINTON H. HOWARD
Date: April 24, 2000 ------------------------------------------
Clinton H. Howard, Chief Executive Officer
/s/ STEVEN E. BROWN
-----------------------------------------
Date: April 24, 2000 Steven E. Brown, Chief Financial Officer
SIGNATURES
Pursuant to the requirements to the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ CLINTON H. HOWARD
- ---------------------------------------- Chairman of the Board of
Clinton H. Howard Directors, President and
Chief Executive Officer April 24, 2000
/s/ STEVEN E. BROWN
- ---------------------------------------- Director, Vice President-
Steven E. Brown Chief Financial Officer April 24, 2000
/s/ ANDREW V. HOWARD
- ---------------------------------------- Director, Vice President-
Andrew V. Howard Corporate Counsel April 24, 2000
/s/ FRANK FRANASIAK
- ---------------------------------------- Director April 24, 2000
Frank Franasiak, M.D.
</TABLE>
20
<PAGE> 24
ROYAL BODYCARE, INC. AND SUBSIDIARIES
December 31, 1999
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Accountants' Report F-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7
</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> 25
INDEPENDENT AUDITORS' REPORT
Board of Directors
Royal BodyCare, Inc. and Subsidiaries
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Royal BodyCare,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the three year period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements and schedules. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for
our opinions.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Royal BodyCare,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the three year period ended December 31,
1999, in conformity with generally accepted accounting principles.
As discussed in Note 12 to the financial statements, the Company reversed the
planned spin-off of Great Xpectations Marketing, Inc. The 1998 financial
statements were restated to consolidate Great Xpectations Marketing, Inc. for
the full year.
SWALM, THOMAS & ASSOCIATES, PLLC
April 14, 2000
Plano, Texas
F-2
<PAGE> 26
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 208,225 $ 382,409
Accounts receivable, net of allowance for doubtful accounts 542,191 439,501
Inventory 2,904,603 2,668,407
Deferred tax asset 248,981 404,905
Prepaid expenses 75,465 138,201
------------ ------------
Total Current Assets 3,979,465 4,033,423
PROPERTY AND EQUIPMENT, net of accumulated depreciation 2,185,617 1,275,508
GOODWILL, net of accumulated amortization 2,516,945 2,680,974
OTHER ASSETS 318,369 217,728
------------ ------------
$ 9,000,396 $ 8,207,633
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, trade $ 944,071 $ 852,888
Accrued expenses 2,059,495 1,667,944
Current portion of long-term debt 671,806 494,145
Notes payable 108,071 51,589
Net liabilities of discontinued operation 212,386 511,903
------------ ------------
Total Current Liabilities 3,995,829 3,578,469
------------ ------------
DEFERRED TAX LIABILITY, NON-CURRENT 31,535 56,780
------------ ------------
LONG-TERM DEBT, NET OF CURRENT PORTION 584,980 510,782
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value; authorized
20,000,000 shares; none outstanding -- --
Common stock, $.001 par value; authorized
50,000,000 shares; outstanding; 1999
13,916,294 shares; 1997 13,862,205 shares 13,916 13,862
Paid in capital 12,147,818 12,106,872
Accumulated deficit (7,785,407) (8,053,680)
Cumulative translation adjustment 11,725 (5,452)
------------ ------------
4,388,052 4,061,602
------------ ------------
$ 9,000,396 $ 8,207,633
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 27
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 34,194,445 $ 27,188,800 $ 12,843,287
Cost of sales 8,748,559 7,099,770 3,592,921
------------ ------------ ------------
Gross profit 25,445,886 20,089,030 9,250,366
------------ ------------ ------------
Operating expenses:
General and administrative 10,376,112 8,081,478 4,801,597
Distributor commissions 14,249,788 11,056,714 4,691,995
Interest 116,393 95,992 91,511
Depreciation and amortization 455,517 347,630 266,875
------------ ------------ ------------
Total operating expenses 25,197,810 19,581,814 9,851,978
------------ ------------ ------------
Income (loss) from continuing operations
before income taxes 248,076 507,216 (601,612)
------------ ------------ ------------
Income taxes (benefit):
Current income taxes 57,571 36,938 12,966
Deferred income taxes (benefit) 59,808 (40,992) --
------------ ------------ ------------
117,379 (4,054) 12,966
------------ ------------ ------------
Income (loss) from continuing operations 130,697 511,270 (614,578)
------------ ------------ ------------
Income (loss) from discontinued operations 137,576 (544,857) (72,303)
------------ ------------ ------------
Net Income (loss) $ 268,273 $ (33,587) $ (686,881)
============ ============ ============
Pro forma information (unaudited):
Net loss continuing operations $ (614,578)
Net loss discontinued operation (62,777)
------------
Pro forma net loss $ (677,355)
============
Basic and Diluted earnings (loss) per share:
Income from continuing operations $ 0.009 $ 0.038 $ (0.049)
Loss from discontinued operation 0.010 (0.045) (0.005)
------------ ------------ ------------
Earnings (loss) per share $ 0.019 $ (0.007) $ (0.054)
============ ============ ============
Weighted average shares outstanding 13,893,883 13,699,163 12,552,977
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 28
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Accumulated Total
----------------------------- Paid In Accumulated Translation Shareholders'
Shares Amount Capital Deficit Adjustment Equity
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 4,235,714 $ 4,236 $ 9,311,476 $ (7,333,212) $ 1,581 $ 1,984,081
Reverse Merger 7,886,415 7,887 (7,887) -- -- --
Conversion of Notes Payable 163,498 163 216,837 -- -- 217,000
Lightforce Earn-out Shares 251,353 251 876,341 -- -- 876,592
Private Placement 1,000,000 1,000 1,196,442 -- -- 1,197,442
Net Loss -- -- -- (686,881) -- (686,881)
Translation Adjustment -- -- -- -- (4,691) (4,691)
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 1997 13,536,980 13,537 11,593,209 (8,020,093) (3,110) 3,583,543
Conversion of Notes Payable 22,619 22 29,978 -- -- 30,000
Lightforce Earn-out Shares 47,157 47 94,465 -- -- 94,512
Private Placement 255,449 256 389,220 -- -- 389,476
Net loss -- -- -- (33,587) -- (33,587)
Translation Adjustment -- -- -- -- (2,342) (2,342)
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 1998 13,862,205 13,862 12,106,872 (8,053,680) (5,452) 4,061,602
Conversion of Notes Payable 757 1 999 -- -- 1,000
Shares purchased 53,332 53 39,947 -- -- 40,000
Net Income -- -- -- 268,273 -- 268,273
Translation Adjustment -- -- -- -- 17,177 17,177
------------- ------------- ------------- ------------- ------------- -------------
Balances, December 31, 1999 13,916,294 $ 13,916 $ 12,147,818 $ (7,785,407) $ 11,725 $ 4,388,052
============= ============= ============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 29
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss) from operations $ 268,273 $ (33,587) $ (686,881)
Less (income) loss from discontinued operation (137,576) 544,857 72,303
----------- ----------- -----------
Net income (loss) from continuing operations 130,697 511,270 (614,578)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) continuing operations:
Depreciation and amortization 468,124 347,630 266,875
Lawsuit settlement 480,249 -- --
Loss on sale of equipment -- -- 299
Deferred income taxes (31,263) (40,993) --
Translation adjustments 17,177 (2,342) (4,691)
Change in assets and liabilities:
Accounts receivable (102,690) (335,486) (76,985)
Prepaid assets 62,737 (73,720) (922)
Inventory (236,197) (1,059,142) (379,593)
Other assets (100,640) (81,329) (81,405)
Accounts payable 91,183 547,415 (520,322)
Accrued expenses 391,554 750,766 257,929
Notes payable -- 2,917 (16,528)
----------- ----------- -----------
Cash provided by (used for) continuing operations 1,170,931 566,986 (1,169,921)
Cash provided by (used for) discontinued operations -- 2,244 (236,393)
----------- ----------- -----------
Cash provided by (used for) operating activities 1,170,931 569,230 (1,406,314)
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Investing activities of discontinued operation -- (19,914) (6,516)
Purchase of furniture, fixtures and equipment (998,999) (473,334) (104,453)
Proceeds from sale of equipment -- -- 15,288
----------- ----------- -----------
Cash provided by (used for) investing activities (998,999) (493,248) (95,681)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Net proceeds from sale of stock 40,000 389,476 1,197,442
Proceeds from long term debt and notes payable 167,500 -- 730,000
Payments of long-term debt and notes payable (553,616) (93,454) (357,904)
Financing activities of discontinued operation -- -- (100,000)
Repayment to stockholders -- -- (51,768)
----------- ----------- -----------
Cash provided by (used for) financing activities (346,116) 296,022 1,417,770
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (174,184) 372,004 (84,225)
CASH, BEGINNING OF YEAR 382,409 10,405 94,630
----------- ----------- -----------
CASH, END OF YEAR $ 208,225 $ 382,409 $ 10,405
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 30
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. ORGANIZATION AND HISTORY
HISTORY - The Company was organized February 12, 1988 as Jason Ray
Corporation ("JRC") for the purpose of combining with other businesses. In
April 1988, JRC filed an initial public offering registration statement on
Form S-1 with the Securities and Exchange Commission ("SEC"). JRC changed
its name to Seven Oaks Farms, Ltd. ("Seven Oaks") on July 1, 1998. From May
1991 until October 1995 Seven Oaks was a dormant entity, conducting no
business activities. Effective November 1, 1995 Seven Oaks merged with
Mighty Power, Inc. ("MPI"). The merger, a purchase under Accounting
Principles Board Opinion 16, was accounted for as a reverse merger with MPI
being the acquirer. Seven Oaks then changed its name to Mighty Power USA,
Inc. ("Mighty Power").
Effective April 1, 1997, Mighty Power merged with GlobeNet Inc. (GlobeNet)
(the "Merger"). In connection with the Merger Mighty Power effected a one
for seven reverse stock split (all share figures have been adjusted to
reflect this reverse split). Mighty Power then issued 7,886,415 new shares
to the shareholders of GlobeNet in exchange for 100% of the outstanding
stock of GlobeNet. In addition, under the terms of the Merger agreement,
certain shareholders of Mighty Power transferred an additional 2,541,427
shares of common stock to the GlobeNet shareholders. As a result, the
shareholders of GlobeNet obtained 86% of the then outstanding common stock
of the Mighty Power. In connection with these transactions, Mighty Power
changed it name to GlobeNet International I, Inc. ("GNI").
The Merger, a purchase under Accounting Principles Board Opinion 16, has
been accounted for as a reverse merger with GlobeNet Inc. being the
acquirer. Therefore, GlobeNet Inc.'s historical financial statements are
now the Company's historical financial statements.
Concurrent with the Merger, an affiliate of Mighty Power, Great Xpectations
Marketing, Inc.("GXI"), acquired all the assets and liabilities of two
other affiliates, (Health Thru Nature, Inc. and Mighty Power USA L.C.) for
$100,000 in notes payable. GNI then purchased all the outstanding common
stock of GXI for an additional $100,000 note payable. These transactions
were also accounted for as purchases.
In October, 1999 the Company changed its name to Royal BodyCare, Inc.
("RBCI") in order to be more easily identified with its products.
ORGANIZATION - The Company is engaged in the marketing of nutritional
supplements and personal care products. The Company operates its business
through the Royal BodyCare Division, which represents the separate business
strategies and product lines of RBCI preceding the merger described above.
The operations conducted by Mighty Power and its affiliates prior to the
merger are conducted by GXI and are classified in the accompanying
consolidated financial statements as discontinued operations (See Note 12).
RBCI was incorporated in Texas in June 1995 by Clinton H. Howard, to serve
as a holding company for certain companies affiliated with Mr. Howard. In
July 1995, all of the outstanding capital stock of these affiliated
companies was contributed to RBCI by Mr. Howard and his immediate family.
RBCI's principle U. S. marketing operations are conducted through Royal
BodyCare USA, Inc. ("RBC- US"), formed by Mr. Howard in 1991. In 1992 Mr.
Howard formed Royal BodyCare Canada, Inc. (" RBC-Canada") to market
products in Canada through a network of independent distributors. RBC-
Canada owns all of the outstanding stock of Pure Life International
Products, Inc.("Pure Life") which it purchased in 1992. Pure Life has been
in business since 1982.
F-7
<PAGE> 31
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
1. ORGANIZATION AND HISTORY (CONTINUED)
In 1995, the Company began entering into agreements to license the
exclusive rights to sell its products internationally through third parties
licensees in the respective countries. Since 1995, the Company entered into
seven such arrangements to market the Company's products. Under these
agreements distributors in these countries are compensated according to the
same compensation plan as that is used for the RBC Division independent
distributors.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of RBCI, and its wholly owned subsidiaries; Royal BodyCare
USA, Inc., Royal BodyCare Canada, Inc., and Pure Life International
Products, Inc., (collectively the "Company"). RBC-Canada and Pure Life are
organized under the Canadian Business Corporation Act. All significant
inter-company accounts and transactions have been eliminated.
TRANSLATION OF FOREIGN CURRENCIES - All current assets and liabilities of
foreign subsidiaries were translated into U. S. dollars at the exchange
rate in effect at the balance sheet date. Long-term assets and equity were
translated at historical exchange rates. Revenue and expense accounts were
translated at weighted average exchange rates. Translation gains and losses
are reflected as a separate component of shareholders' equity.
REVENUE RECOGNITION - The Company sells its products through a network of
independent distributors. The Company recognizes revenue upon sale to its
distributors and records an allowance for sales returns.
INVENTORIES - Inventories, consisting of finished goods held for resale,
work-in-process, raw materials and packaging materials are stated at the
lower of cost of market. Inventories at December 31, 1999 and 1998 consist
of finished goods and packaging materials.
CASH EQUIVALENTS - For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation and amortization are being provided over the estimated useful
lives of the related assets, principally on the straight-line and declining
balance methods, ranging from three to seven years.
The Company reviews its property and other noncurrent assets for impairment
when changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment is measured as the amount by which the
carrying amount of the asset exceeds the fair market value of the asset
less disposal costs.
GOODWILL - Goodwill represents the excess cost over fair value of assets
acquired and is being amortized using the straight line method over 20
years. The carrying value of goodwill is periodically reviewed by the
Company for impairment based on expected future undiscounted operating cash
flows of the related business unit. If it is determined that impairment has
occurred, any excess will be charged to operations.
F-8
<PAGE> 32
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES - The Company has adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109
requires an asset and liability approach to financial accounting for income
taxes. In the event differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities result in deferred
tax assets, SFAS 109 requires an evaluation of the probability of being
able to realize the future benefits indicated by such assets. A valuation
allowance is provided for a portion or all of the deferred tax assets when
there is an uncertainty regarding the Company's ability to recognize the
benefits of the assets in future years.
RBCI files a consolidated tax return with its U.S. subsidiaries. RBC-Canada
and Pure Life file a consolidated Canadian tax return. Deferred income
taxes are the result of net operating loss carry-forwards expected to be
fully utilized in the near future and other temporary differences.
EARNINGS (LOSS) PER SHARE - Earnings (loss) per share (EPS) are calculated
in accordance with Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings per Share", which was adopted in 1997 for all years
presented. Basic EPS is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted EPS does not apply to the Company due to the
absence of dilutive potential common shares.
SEC Staff Accounting Bulletin Number 1B.2 "Pro Forma Financial Statements
and Earnings per Share" ("SAB 1B.2"), requires pro forma statement of
operations information and earnings per share when historical financial
statements are not indicative of ongoing activity. As a result of the
Company's reverse merger with Mighty Power in April 1997 the consolidated
Statement of Operations does not reflect the complete historical earnings
(losses) of the combined entities. Therefore, unaudited pro forma
information has been presented on the bottom of the consolidated Statement
of Operations which reflects the Company's earnings (losses) and earnings
per share as if the merger had occurred at the beginning of 1997. As
required by SAB 1B.2 pro forma earnings per share has only been presented
for 1997.
CREDIT RISK - The Company's trade accounts receivable arise in the normal
course of business and primarily relate to sales of its products to its
distributor network throughout the United States, Canada and its overseas
licensees. Such receivables are unsecured. The company performs ongoing
credit evaluations of the entities from whom such accounts are receivable.
The Company places its cash investments in high credit quality institutions
and limits the amount of credit exposure to any one institution.
ACCOUNTING ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
FINANCIAL INSTRUMENTS - The carrying value of cash and cash equivalents,
accounts receivable and payable, accrued liabilities and notes payable
approximate fair value due to the short-term maturities of these assets and
liabilities. Fair value of long-term debt is estimated based on interest
rates for the same or similar debt offered to the Company having the same
or similar maturities and collateral requirements.
SEGMENT INFORMATION - The Company operates through its two separately
managed segments: Royal BodyCare US/Canada and Great Xpectations Marketing,
Inc.
F-9
<PAGE> 33
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME - Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130), requires that total
comprehensive income be reported in the financial statements. For the years
ended December 31, 1998, 1997 and 1996, the Company's comprehensive income
(loss) was equal to its net income (loss) and the Company does not have
income meeting the definition of other comprehensive income.
3. INVENTORIES
At December 31, 1999 and 1998, inventories consist of finished goods, bulk
products ready for packaging and packaging materials.
4. PROPERTY AND EQUIPMENT
At December 31, property and equipment consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Furniture and fixtures $ 2,900,850 $ 1,779,941
Warehouse equipment 304,854 236,950
Automotive equipment 15,609 9,562
Leasehold improvements 106,525 87,181
-------------- --------------
Total property and equipment 3,327,838 2,113,634
Less accumulated depreciation and amortization (1,142,221) (838,126)
-------------- --------------
Net property and equipment $ 2,185,617 $ 1,275,508
============== ==============
</TABLE>
5. GOODWILL
Goodwill was recorded as a result of the acquisition of Pure Life in April
1992 and Lightforce (see note 13) in June 1996 as follows:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Lightforce $ 2,378,727 $ 2,378,727
Pure Life 843,622 843,622
-------------- --------------
3,222,349 3,222,349
Accumulated amortization (705,404) (541,375)
-------------- --------------
Net goodwill $ 2,516,945 $ 2,680,974
============== ==============
</TABLE>
F-10
<PAGE> 34
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
6. ACCRUED EXPENSES
At December 31 accrued expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Distributor commissions $ 1,496,558 $ 1,307,337
Sales and other taxes 165,000 150,215
Interest 12,552 10,956
Other 385,385 199,436
-------------- --------------
Total $ 2,059,495 $ 1,667,944
============== ==============
</TABLE>
7. NOTES PAYABLE
At December 31, notes payable consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Line of Credit ($100,000 maximum) - bank
Prime plus 3.25% $ 100,000 $ -
Demand note payable - bank
bearing interest at 10% per annum - 42,491
Other 8,071 9,098
-------------- --------------
Total $ 108,071 $ 51,589
============== ==============
</TABLE>
8. LONG-TERM OBLIGATIONS
At December 31, long-term obligations consists of the following:
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
Notes payable - banks $ 146,736 $ 69,356
Convertible notes payable 273,000 508,000
Debentures 25,000 25,000
Whigham settlement 380,248 -
Capital leases 431,802 402,571
-------------- --------------
1,256,786 1,004,927
Less - current portion (671,806) (494,145)
-------------- --------------
Total $ 584,980 $ 510,782
============== ==============
</TABLE>
Included in notes payable - banks are three notes assumed in connection
with the Lightforce acquisition totaling $23,540 and $65,095 at December
31, 1999 and 1998, respectively, bearing interest at prime plus 5%, due in
monthly payments aggregating $3,311 plus interest through November 2000.
One note was assumed at the time of the acquisition and two additional
notes were assumed in 1997 in lieu of cash payment for commissions payable.
F-11
<PAGE> 35
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
8. LONG-TERM OBLIGATIONS (CONTINUED)
Included in notes payable - banks are three notes payable totaling $57,442
and $41,822 at December 31, 1999 and 1998, respectively for the purchase of
automotive equipment. These notes are payable through 2002, bear interest
ranging from 4.9% to 18%, and are collateralized by the automobiles
financed.
Also included in notes payable - banks is an equipment repurchase note of
$65,754 at December 31, 1999, payable $2,146 a month, including interest at
9%, through 2002.
In 1997, the Company sold convertible debentures aggregating $730,000. The
notes bear interest at 10% payable quarterly, and are due two years from
the date of issuance. The notes are convertible into common stock of the
Company at any time prior to maturity at the option of the holder based on
per share conversion price of $1.32. As of December 31, 1999 $209,000 has
been repaid and $248,000 has been converted into 186,885 shares of the
Company's common stock.
In 1994, RBC-US sold two debentures in the amount of $25,000 each, the
proceeds of which were used for working capital. The principal portion of
these debentures was due upon maturity in 1998. In 1997 the 10% Debenture
holder exchanged their Debenture for a convertible note described above. In
1998, the holder of the other debenture extended the due date by four
years. Interest on the debenture is payable monthly at a rate of 15%.
In 1999 the Company settled a claim by a former marketing consultant and
distributor of Company products ("Whigham" Settlement) by agreeing to pay
$540,000 over a 54 month period. The settlement is payable $100,000 in
January and April, 2000 and $5,000 a month beginning May, 2000 through
April, 2004. The settlement is without interest and has been discounted at
10%.
Certain purchases of equipment by RBC-US have been financed through capital
leases. Such leases have terms ending in 2004 and have various interest
rates approximating 15%.
Long-term obligation payments payable in the next five years are as
follows:
<TABLE>
<CAPTION>
DEBT CAPITAL LEASES
-------------- ---------------
<S> <C> <C>
2000 $ 550,637 177,830
2001 89,561 172,362
2002 110,180 112,496
2003 55,016 42,716
2004 19,590 8,883
-------------- ---------------
$ 824,984 514,287
==============
Less amount representing interest 82,485
---------------
$ 431,802
===============
</TABLE>
9 . CAPITAL TRANSACTIONS
PRIVATE PLACEMENT - In 1999, the Company sold 53,332 shares of common stock
to two distributors for $40,000. The proceeds of this stock placement was
used to purchase a new product line.
F-12
<PAGE> 36
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
9. CAPITAL TRANSACTIONS (CONTINUED)
In 1998, the Company sold 255,440 shares of unregistered common stock at
prices ranging from $1.35 to $1.66 per share. In addition, Company granted
warrants to purchase 216,932 shares of common stock, exercisable through
October 2003 at an exercise price of $2.00 per share. The offering raised
$389,476.
In 1997, the Company sold 1,000,000 shares of unregistered common stock
through a private placement offering at a per share price of $1.25. The
offering raised $947,442 in cash (net of offering costs) and included the
conversion of a $250,000 note payable due the investor. In addition, the
investor received a five-year warrant to purchase 1,000,000 shares of
unregistered common stock of the Company at an exercise price of $2.00 per
share. The investor also received a demand registration right covering the
private placement and warrant shares exercisable under certain
circumstances covered in the stock purchase agreement. In 1996, the Company
sold 120,000 shares of common stock in a private placement that raised
$287,500.
OPTIONS - In addition to the warrants described above, issued in connection
with private placements, the Company has granted, to employees and
distributors, options to purchase an additional 1,113,120 shares of common
stock at exercise prices ranging from $0.73 to $2.40, expiring at various
dates through 2003. All options were issued at or above market price at the
time of issuance.
<TABLE>
<S> <C> <C>
Balance December 31, 1996 22,600 $1.11
Granted 768,600 $1.06 - $2.40
Exercised --
Expired (6,000) $1.06
-------------
Balance December 31, 1997 785,200 $1.03 - $2.40
Granted 653,200 $0.73 - $2.00
Exercised --
Expired (8,000) $1.06
-------------
Balance December 31, 1998 1,430,400 $0.73 - $2.40
Granted 207,720 $0.77 - $1.54
Exercised --
Expired (525,000) $1.06 - $1.33
-------------
Balance December 31, 1999 1,113,120 $0.73 - $2.40
=============
</TABLE>
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary timing
differences between the carrying amounts of assets and liabilities
reflected on the financial statements and the amounts used for income tax
purposes. The tax effects of temporary differences and net operating loss
carryforwards that give rise to significant portions of the deferred tax
assets recognized at December 31, 1999 and 1998 are presented below:
F-13
<PAGE> 37
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
10. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets (liabilities):
Lawsuit settlement $ 129,285 $ --
Depreciation (117,980) (28,220)
Amortization (42,840) (28,560)
Allowance for doubtful accounts receivable 25,500 8,500
Federal deferred tax benefit arising
from net operating loss carry-forwards 223,481 396,405
Less valuation allowance -- --
--------- ---------
Net deferred tax asset $ 217,446 $ 348,125
========= =========
</TABLE>
The Company has a loss carryforward of approximately $657,000 that may be
offset against future taxable income. The carryforward will expire between
the years 2013 and 2015.
Income tax expense (benefit) for continuing operations consists of the
following:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
Current
Federal $ 2,000 $ --
Foreign 55,571 36,938
Deferred
Federal 59,808 (40,992)
Foreign -- --
--------- ---------
Income tax expense (benefit) - continuing operations 117,379 (4,054)
========= =========
</TABLE>
The following table presents the principal reasons for the difference
between the Company's effective tax rates and the United States federal
statutory income tax rates of 34%.
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
--------- ---------
<S> <C> <C>
U.S. federal statutory income tax rate 34% 34%
Federal income tax expense at statutory rate 84,686 172,453
Non-deductible expenses 146,285 8,500
Depreciation and amortization differences (103,837) (56,780)
Tax benefit of NOL carryforward (65,326) (165,165)
Foreign income taxes 55,571 36,938
--------- ---------
Income tax expense (benefit) $ 117,379 $ (4,054)
========= =========
Effective income tax rate 47% (1)%
========= =========
</TABLE>
F-14
<PAGE> 38
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
11. LEASE COMMITMENT
The Company leases its office and warehouse space and certain equipment
using operating leases for various periods through 2008. Basic annual rents
for each of the next five years and thereafter are as follows:
<TABLE>
<S> <C>
2000 $445,571
2001 465,380
2002 486,457
2003 480,221
2004 479,932
Thereafter 1,663,908
</TABLE>
12. DISCONTINUED OPERATION
In June 1998, RBCI announced its intention to separate GXI from its network
marketing business through a spin-off to its shareholders ("the
Distribution"). The Company's Board of Directors voted to approve, in
principal, the Distribution subject to other approvals and consents and
satisfactory implementation of the arrangements for the Distribution. The
Company accounted for the Distribution effective June 30, 1998, as a
special dividend to its stockholders.
In July 1998, management control of GXI was transferred to the new Board of
Directors of GXI. In late 1998 and early 1999 GXI, with RBCI assistance,
proceed with its efforts to register the shares of GXI with the Securities
and Exchange Commission ("SEC"). During this time GXI became in default on
certain notes payable held by an officer of GXI. The notes were
collateralized by all the outstanding common stock of GX Marketing, Inc.
("GXM") a subsidiary of GXI. All operating assets of GXI were held by GXM.
Effective September 30, 1999, the note holder foreclosed on the note and
took possession of GXM common stock and GXI's operating assets. As a
result, the SEC registration process was halted and, the spin-off reversed
and the remaining operations of GXI closed.
The decision to reverse the spin-off results in a change in reporting
entity for 1998, since GXI was not consolidated beyond June 30, 1998 in the
previously issued financial statements. Therefore, the 1998 financial
statements included in this report have been restated to include the
accounts of GXI for all of 1998, increasing net loss from discontinued
operations by $468,461.
GXI has been accounted for as a discontinued operation in these
consolidated financial statements. Accordingly, the revenues, expenses,
assets and liabilities, and cash flows of GXI have been excluded from their
respective captions in the Consolidated Balance Sheets, Consolidated
Statements of Operations and Consolidated Statements of Cash Flows. These
items have been reported as "Net assets of discontinued operation", "Loss
from discontinued operation", "Net cash flows from discontinued operation"
and "Investing and Financing activities of discontinued operation" for all
years presented.
F-15
<PAGE> 39
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998 and 1997
13. LIGHTFORCE ACQUISITION
In June 1996 the Company acquired certain assets and assumed certain
liabilities of Lightforce, Inc. ("Lightforce") for 600,000 shares of
Company common stock valued at $1,500,000. In connection with the
acquisition the Company received inventory and fixed assets and agreed to
assume certain trade accounts payable, notes payable and commissions
payable.
The purchase agreement called for additional shares of common stock to be
paid, for the first two years, based on sales to the Lightforce
distributors. Additional common stock, valued at market price share, was
paid equal to 25% of sales generated by the Lightforce distributor network
during the first year after the purchase; and 25% of incremental sales
above the first year generated during the second year. In 1998 and 1997 the
company issued 47,160 and 251,353 shares, respectively, of the Company's
common stock, valued at $876,592 and $94,512 under this provision.
In addition, the agreement specified that the seller will receive a
lifetime 5% commission on all sales of Lightforce products. This commission
amounted to $151,799, $153,641 and $117,605 in 1999, 1998 and 1997,
respectively.
14. CONTINGENCIES
From time to time the Company is involved in various legal matters arising
in the normal course of business. In the opinion of Management, such
matters are without merit and the outcome will not have a material effect
on the financial position of the Company.
15. NON-CASH INVESTING AND FINANCING ACTIVITIES
The Company had the following non-cash investing and financing activities:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -------------
<S> <C> <C> <C>
Conversion of debt into common stock $ 1,000 $ 30,000 $ 217,000
Lightforce purchase with common stock - 94,512 876,592
Fixed assets purchases by notes or capital leases 215,206 324,821 217,062
</TABLE>
F-16
<PAGE> 40
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Articles of Incorporation
3.2 By-Laws
4.1 Specimen copy of Certificate for Common Stock
10.4 Form of Indemnification Agreement
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 3.1
[STAMP]
ARTICLES OF INCORPORATION
OF
ROYAL BODYCARE, INC.
I, the person hereinafter named as incorporator, for the purpose of
associating to establish a corporation, under the provisions and subject to the
requirements of Title 7, Chapter 78 of Nevada Revised Statues, and the acts
amendatory thereof, and hereinafter sometimes referred to as the General
Corporation Law of the State of Nevada (the "Nevada Act"), do hereby adopt and
make the following Articles of Incorporation:
FIRST: The name of the corporation (hereinafter called the "corporation")
is Royal BodyCare, Inc.
SECOND: The name of the corporation's resident agent in the State of
Nevada is CSC Services of Nevada, Inc., and the street address of the said
resident agent where process may be served on the corporation is 502 East John
Street, Carson City, Nevada 89706. The mailing address and the street address
of said resident agent are identical.
THIRD: The nature of the business of the corporation and the objects or
the purposes to be transacted, promoted, or carried on by it are to engage in
any lawful act or activity for which corporations may be organized under the
Nevada Act.
FOURTH: The total authorized capital stock of the corporation is
50,000,000 shares, all of which are of a par value of $.001 each. All of said
shares are of one class and are designated as Common Stock.
FIFTH: The governing board of the corporation shall be styled as a "Board
of Directors", and any member of said Board shall be styled as a "Director".
The number of members constituting the first Board of Directors of
the corporation is four (4); and the name and the post office box or street
address, either residence or business, of each of said members are as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Clinton H. Howard 2301 Crown Court
Irving, Texas 75038
Steven E. Brown 2301 Crown Court
Irving, Texas 75038
</TABLE>
ARTICLES OF INCORPORATION - Page 1
<PAGE> 2
<TABLE>
<S> <C>
Andrew V. Howard 2301 Crown Court
Irving, Texas 75038
Frank Franasiak, M.D. 521 Woodards Ford Road
Chesapeake, Virginia 23322
</TABLE>
The number of directors of the corporation may be increased or
decreased in the manner provided in the Bylaws of the corporation; provided,
that the number of directors shall never be less than one (1). In the interim
between elections of directors by stockholders entitled to vote, all vacancies,
including vacancies caused by an increase in the number of directors and
including vacancies resulting from the removal of directors by the stockholders
entitled to vote which are not filled by said stockholders, may be filled by
the remaining directors, though less than a quorum.
SIXTH: The capital stock, after the amount of the subscription price, or
par value, has been paid in, shall not be subject to assessment to pay the
debts of the corporation.
SEVENTH: The name and the post office box or street address, either
residence or business, of the incorporator signing these Articles of
Incorporation is as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
---- -------
<S> <C>
Clinton H. Howard 2301 Crown Court
Irving, Texas 75038
</TABLE>
EIGHTH: The corporation shall have perpetual existence.
NINTH: The personal liability of the directors of the corporation is
hereby eliminated to the fullest extent permitted by the Nevada Act, as the
same may be amended and supplemented.
TENTH: The corporation shall, to the fullest extent permitted by the Nevada
Act, as the same may be amended and supplemented, indemnify any and all persons
whom it shall have power to indemnify under said Nevada Act from and against
any and all of the expenses, liabilities, or other matters referred to in or
covered by the Nevada Act, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any Bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to
a person who has ceased to be a director, officer , employee, or agent and
shall inure to the benefit of the heirs, executors, and administrators of such
a person.
ELEVENTH: The corporation reserves the right to amend, alter, change or
repeal any provision contained in these Articles of Incorporation in the manner
now or hereafter
ARTICLES OF INCORPORATION - Page 2
<PAGE> 3
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
TWELFTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized, subject to the Bylaws,
if any, adopted by the stockholders, to make, alter or amend the Bylaws of the
corporation.
THIRTEENTH: Meetings of stockholders may be held outside of the State of
Nevada at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
IN WITNESS WHEREOF, I do hereby execute these Articles of Incorporation on
this 27th day of September, 1999.
/s/ CLINTON H. HOWARD
----------------------------------
Clinton H. Howard, Incorporator
THE STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned authority, a Notary Public in and for the State
of Texas, on this day personally appeared Clinton H. Howard, known to me to be
the person whose name is subscribed to the foregoing instrument, and
acknowledged to me that he executed the same freely and voluntarily and for the
uses, purposes and consideration expressed therein.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this 27th day of September, 1999.
/s/ SHARON R. CLAXTON
----------------------------------
Notary Public, State of Texas
[NOTARY SEAL]
ARTICLE OF INCORPORATION - Page 3
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
ROYAL BODYCARE, INC.
Adopted as of October 5, 1999
<PAGE> 2
BYLAWS
OF
ROYAL BODYCARE, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 OFFICES 1
SECTION 1.1 REGISTERED OFFICE/RESIDENT AGENT 1
SECTION 1.2 OTHER OFFICES 1
ARTICLE 2 MEETINGS OF STOCKHOLDERS 1
SECTION 2.1 PLACE OF MEETINGS 1
SECTION 2.2 ANNUAL MEETING 1
SECTION 2.3 SPECIAL MEETINGS 1
SECTION 2.4 NOTICE 1
SECTION 2.5 VOTING LIST 2
SECTION 2.6 QUORUM 2
SECTION 2.7 REQUIRED VOTE; WITHDRAWAL OF QUORUM 2
SECTION 2.8 METHOD OF VOTING; PROXIES 2
SECTION 2.9 RECORD DATE 3
SECTION 2.10 ACTION WITHOUT MEETING 4
SECTION 2.11 INSPECTORS OF ELECTIONS 4
ARTICLE 3 DIRECTORS 4
SECTION 3.1 MANAGEMENT 4
SECTION 3.2 NUMBER; ELECTION 4
SECTION 3.3 CHANGE IN NUMBER 5
SECTION 3.4 REMOVAL 5
SECTION 3.5 VACANCIES AND NEWLY CREATED DIRECTORSHIPS 5
SECTION 3.6 ELECTION OF DIRECTORS; CUMULATIVE VOTING PROHIBITED 5
SECTION 3.7 PLACE OF MEETINGS 5
SECTION 3.8 ANNUAL MEETINGS 5
SECTION 3.9 REGULAR MEETINGS 5
SECTION 3.10 SPECIAL MEETINGS 5
SECTION 3.11 QUORUM 6
SECTION 3.12 ACTION WITHOUT MEETING; TELEPHONE MEETINGS 6
SECTION 3.13 COMPENSATION 6
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C> <C>
ARTICLE 4 COMMITTEES 6
SECTION 4.1 DESIGNATION 6
SECTION 4.2 NUMBER; QUALIFICATION; TERM 6
SECTION 4.3 AUTHORITY 6
SECTION 4.4 COMMITTEE CHANGES; REMOVAL 7
SECTION 4.5 ALTERNATE MEMBERS OF COMMITTEES 7
SECTION 4.6 REGULAR MEETINGS 7
SECTION 4.7 SPECIAL MEETINGS 7
SECTION 4.8 QUORUM; MAJORITY VOTE 7
SECTION 4.9 MINUTES 7
SECTION 4.10 COMPENSATION 7
SECTION 4.11 RESPONSIBILITY 7
ARTICLE 5 NOTICES 8
SECTION 5.1 METHOD 8
SECTION 5.2 WAIVER 8
SECTION 5.3 EXCEPTION TO NOTICE REQUIREMENT 8
ARTICLE 6 OFFICERS 8
SECTION 6.1 OFFICERS 8
SECTION 6.2 ELECTION 9
SECTION 6.3 COMPENSATION 9
SECTION 6.4 REMOVAL AND VACANCIES 9
SECTION 6.6 CHIEF EXECUTIVE OFFICER 9
SECTION 6.7 PRESIDENT 9
SECTION 6.8 VICE PRESIDENTS 10
SECTION 6.9 SECRETARY 10
SECTION 6.10 ASSISTANT SECRETARIES 10
SECTION 6.11 TREASURER 10
SECTION 6.12 ASSISTANT TREASURERS 10
SECTION 6.13 OTHER OFFICERS 10
SECTION 6.14 OFFICER'S BOND 10
ARTICLE 7 CERTIFICATES REPRESENTING SHARES 11
SECTION 7.1 CERTIFICATES 11
SECTION 7.2 LEGENDS 11
SECTION 7.3 LOST CERTIFICATES 11
SECTION 7.4 TRANSFER OF SHARES 11
SECTION 7.5 REGISTERED STOCKHOLDERS 11
</TABLE>
-ii-
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C> <C>
ARTICLE 8 GENERAL PROVISIONS 12
SECTION 8.1 DIVIDENDS 12
SECTION 8.2 RESERVES 12
SECTION 8.3 CHECKS 12
SECTION 8.4 FISCAL YEAR 12
SECTION 8.5 SEAL 12
SECTION 8.6 INDEMNIFICATION 12
SECTION 8.7 TRANSACTIONS WITH DIRECTORS AND OFFICERS 12
SECTION 8.8 AMENDMENTS 13
SECTION 8.9 TABLE OF CONTENTS; HEADINGS 13
</TABLE>
-iii-
<PAGE> 5
BYLAWS
OF
ROYAL BODYCARE, INC.
ARTICLE 1
OFFICES
SECTION 1.1 REGISTERED OFFICE/RESIDENT AGENT. The registered office of
Royal BodyCare, Inc. (the "CORPORATION") shall be at 502 East John Street,
Carson City, Nevada 89706 or at such other place as may be set forth in the
appropriate filing with the Secretary of State of the State of Nevada. The name
of the resident agent is CSC Services of Nevada, Inc. or such other name set
forth in the appropriate filing with the Secretary of State of the State of
Nevada.
SECTION 1.2 OTHER OFFICES. The Corporation may also have offices at
such other places, both within and without the State of Nevada, as the Board of
Directors may from time to time determine or the business of the Corporation
may require. The principal office of the Corporation shall be in Irving, Texas.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
SECTION 2.1 PLACE OF MEETINGS. Meetings of stockholders for all
purposes shall be held in Irving, Texas or at such other place as shall be
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
SECTION 2.2 ANNUAL MEETING. An annual meeting of stockholders of the
Corporation shall be held on such date and at such time and such place as shall
be designated by the Board of Directors. At such meeting, the stockholders
entitled to vote thereat shall elect by a plurality vote directors and transact
such other business as may properly be brought before the meeting.
SECTION 2.3 SPECIAL MEETINGS. Special meetings of the stockholders,
for any purpose or purposes, unless otherwise prescribed by statute, the
Articles of Incorporation or these Bylaws, may be called by the Chairman of the
Board, Chief Executive Officer, President or the Board of Directors. Business
transacted at all special meetings shall be confined to the purposes stated in
the notice of the meeting.
SECTION 2.4 NOTICE. Written or printed notice stating the place, date,
and hour of each meeting of the stockholders and the purpose or purposes for
which the meeting is called, shall be given not less than ten (10) nor more
than sixty (60) days before the date of the meeting, either personally or by
mail, by or at the direction of the President, the Secretary, or the officer(s)
calling the meeting, to each stockholder of record entitled to vote at such
meeting. Such notice shall be
1
<PAGE> 6
signed by the President, a Vice President, the Secretary, an Assistant
Secretary or any other officer designated by the Board of Directors. If such
notice is to be sent by mail, it shall be directed to such stockholder at his
address as it appears on the records of the Corporation, unless he shall have
filed with the Secretary of the Corporation a written request that notices to
him be mailed to some other address, in which case it shall be directed to him
at such other address. Notice of any meeting of stockholders shall not be
required to be given to any stockholder who shall attend such meeting in person
or by proxy and shall not, at the beginning of such meeting, object to the
transaction of any business because the meeting is not lawfully called or
convened, or who shall, either before or after the meeting, submit a signed
waiver of notice, in person or by proxy.
SECTION 2.5 VOTING LIST. Unless contrary provisions are contained in
the articles of incorporation, the directors may prescribe a period not
exceeding sixty (60) days before any meeting of the stockholders during which
no transfer of stock on the books of the corporation may be made, or may fix a
day not more than sixty (60) days before each meeting of stockholders as the
day as of which stockholders entitled to notice of and to vote at such meetings
must be determined. Only stockholders of record on that day are entitled to
notice or to vote at such meeting.
SECTION 2.6 QUORUM. The holders of a majority of the outstanding
shares entitled to vote on a matter, present in person or represented by proxy,
shall constitute a quorum at any meeting of stockholders, except as otherwise
provided by statute, the Articles of Incorporation or these Bylaws. If a quorum
shall not be present at any meeting of stockholders, the stockholders entitled
to vote thereat who are present, in person or by proxy, or, if no stockholder
entitled to vote is present, any officer of the Corporation, may adjourn the
meeting from time to time until a quorum shall be present. When a meeting is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place are announced at the meeting at which the
adjournment is taken. At any adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
original meeting had a quorum been present; provided that, if the adjournment
is for more than thirty (30) days or if after the adjournment a new record date
is fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the adjourned meeting.
SECTION 2.7 REQUIRED VOTE; WITHDRAWAL OF QUORUM. When a quorum is
present at any meeting, action by the stockholders is approved if the number of
votes cast in favor of the action exceeds the number of votes cast in
opposition to the action, unless the question is one on which, by express
provision of statute, the Articles of Incorporation or these Bylaws, a
different vote is required, in which case such express provision shall govern
and control the decision of the question. The stockholders present at a duly
constituted meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
SECTION 2.8 METHOD OF VOTING; PROXIES. (a) Each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to
a vote at a meeting of stockholders, except to the extent that the voting
rights of the shares of any class or classes are limited, denied, increased or
decreased by the Articles of Incorporation or these Bylaws.
2
<PAGE> 7
(b) Each stockholder entitled to vote at a meeting of stockholders or
to express consent or dissent to corporate action in writing without a meeting
may authorize another person or persons to act for him by proxy, but no such
proxy shall be voted or acted upon after the expiration of six (6) months from
the date of its creation, unless it is coupled with an interest, or unless the
stockholder specifies in it the length of time for which it is to continue in
force, which may not exceed seven (7) years from the date of its creation. A
duly executed proxy shall be irrevocable if it states that it is irrevocable
and if, and only as long as, it is coupled with an interest sufficient in law
to support an irrevocable power. Each proxy shall be filed with the Secretary
of the Corporation prior to or at the time of the meeting.
(c) Without limiting the manner in which a stockholder may authorize
another person or persons to act for him as proxy pursuant to subsection (b) of
this section, the following shall constitute a valid means by which a
stockholder may grant such authority:
(i) A stockholder may execute a writing authorizing another
person or persons to act for him as proxy. The proxy may be limited to
action on designated matters. Execution may be accomplished by the
stockholder or by an authorized officer, director, employee or agent
of the stockholder signing such writing or causing such stockholder's
signature to be affixed to such writing by any reasonable means
including, but not limited to, by facsimile signature.
(ii) A stockholder may authorize another person or persons to
act for him as proxy by transmitting or authorizing the transmission
of a telegram, cablegram, or other means of electronic transmission to
the person who will be the holder of the proxy or to a proxy
solicitation firm, proxy support service organization or like agent
duly authorized by the person who will be the holder of the proxy to
receive such transmission, provided that any such telegram, cablegram
or other means of electronic transmission must either set forth or be
submitted with information from which it can be determined that the
telegram, cablegram or other electronic transmission was authorized by
the stockholder. If it is determined that such telegrams, cablegrams
or other electronic transmissions are valid, the inspectors or, if
there are no inspectors, such other persons making that determination
shall specify the information upon which they relied.
(d) Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to subsection (c)
of this section may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
SECTION 2.9 RECORD DATE. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a
record date, which shall not be more than sixty (60) days before the date of
such meeting. Only stockholders of record on that day are entitled to notice or
to vote at such meeting.
3
<PAGE> 8
SECTION 2.10 ACTION WITHOUT MEETING. Any action required or permitted
to be taken at a meeting of the stockholders of the Corporation may be taken
without a meeting if a written consent thereto is signed by stockholders
holding at least a majority of the voting power, except that if a different
proportion of voting power is required for such an action at a meeting, then
that proportion of written consents is required. Such consent or consents shall
be delivered to the Corporation at its registered office in Nevada, its
principal place of business, or an officer or agent of the Corporation having
custody of the book in which proceedings of stockholders' meetings are
recorded. Such delivery shall be by hand or by certified or registered mail,
return receipt requested.
SECTION 2.11 INSPECTORS OF ELECTIONS. The Board of Directors may, in
advance of any meeting of stockholders, appoint one or more inspectors to act
at such meeting or any adjournment thereof. If any of the inspectors so
appointed shall fail to appear or act, the chairman of the meeting shall, or if
inspectors shall not have been appointed, the chairman of the meeting may,
appoint one or more inspectors. Each inspector, before entering upon the
discharge of such inspector's duties, shall take and sign an oath faithfully to
execute the duties of inspector at such meeting with strict impartiality and
according to the best of such inspector's ability. The inspectors shall
determine the number of shares of capital stock of the Corporation outstanding
and the voting power of each, the number of shares represented at the meeting,
the existence of a quorum, and the validity and effect of proxies and shall
receive votes, ballots, or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots, or consents, determine the results, and do such acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting, the inspectors shall make a report in
writing of any challenge, request, or matter determined by them and shall
execute a certificate of any fact found by them. No director or candidate for
the office of director shall act as an inspector of an election of directors.
Inspectors need not be stockholders.
ARTICLE 3
DIRECTORS
SECTION 3.1 MANAGEMENT. The business and affairs of the Corporation
shall be managed by its Board of Directors who may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by statute,
the Articles of Incorporation or these Bylaws directed or required to be
exercised or done by the stockholders. The Board of Directors shall keep
regular minutes of its proceedings.
SECTION 3.2 NUMBER; ELECTION. The Board of Directors shall consist of
no less than one (1) director and no more than fifteen (15) directors who need
not be stockholders or residents of the State of Nevada. Initially, the number
of directors constituting the entire Board of Directors shall be four (4). The
directors shall be elected at the annual meeting of the stockholders, except as
hereinafter provided, and each director elected shall hold office until his
successor is elected and qualified or until his earlier resignation or removal.
4
<PAGE> 9
SECTION 3.3 CHANGE IN NUMBER. The number of directors may be increased
or decreased from time to time by resolution adopted by the unanimous vote of
the Board of Directors, but no decrease shall have the effect of shortening the
term of any incumbent director.
SECTION 3.4 REMOVAL. Any director may be removed, with or without
cause, at any annual or special meeting of stockholders, by the affirmative
vote of the holders of two-thirds of the shares represented in person or by
proxy at such meeting and entitled to vote for the election of such director,
if notice of the intention to act upon such matters shall have been given in
the notice calling such meeting.
SECTION 3.5 VACANCIES AND NEWLY CREATED DIRECTORSHIPS. Vacancies and
newly-created directorships resulting from any increase in the authorized
number of directors may be filled by a majority of the directors then in
office, although less than a quorum, or by a sole remaining director. Each
director so chosen shall hold office until the next annual meeting of
stockholders and until his successor is elected and qualified or until his
earlier resignation or removal. If at any time there are no directors in
office, an election of directors may be held in the manner provided by statute.
Except as otherwise provided in these Bylaws, when one or more directors shall
resign from the Board of Directors, effective at a future date, a majority of
the directors then in office, including those who have so resigned, shall have
the power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective, and each director
so chosen shall hold office as provided in these Bylaws with respect to the
filling of other vacancies.
SECTION 3.6 ELECTION OF DIRECTORS; CUMULATIVE VOTING PROHIBITED. At
every election of directors, each stockholder shall have the right to vote in
person or by proxy the number of voting shares owned by him for as many persons
as there are directors to be elected and for whose election he has a right to
vote. Cumulative voting shall be prohibited.
SECTION 3.7 PLACE OF MEETINGS. The directors of the Corporation may
hold their meetings, both regular and special, either within or without the
State of Nevada.
SECTION 3.8 ANNUAL MEETINGS. The first meeting of each newly elected
Board shall be held without further notice immediately following the annual
meeting of stockholders, and at the same place, unless by unanimous consent of
the directors then elected and serving, such time or place shall be changed.
SECTION 3.9 REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held every month on such day and at such time and place as
shall from time to time be determined by the Board of Directors.
SECTION 3.10 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman of the Board on one (1) day's notice to
each director, either personally or by mail or by telegram. Special meetings
may be called in like manner and on like notice on the written request of any
one of the directors. Except as may be otherwise expressly provided by statute,
the
5
<PAGE> 10
Articles of Incorporation or these Bylaws, neither the business to be
transacted at, nor the purpose of, any special meeting need be specified in a
notice or waiver of notice.
SECTION 3.11 QUORUM. At all meetings of the Board of Directors, the
presence of a majority of the directors shall be necessary and sufficient to
constitute a quorum for the transaction of business, and the vote of a majority
of the directors present at any meeting at which a quorum is present shall be
the act of the Board of Directors, except as may be otherwise specifically
provided by statute, or the Articles of Incorporation or these Bylaws. If a
quorum shall not be present at any meeting of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
SECTION 3.12 ACTION WITHOUT MEETING; TELEPHONE MEETINGS. Any action
required or permitted to be taken at a meeting of the Board of Directors or of
any committee thereof may be taken without a meeting if, before or after the
action, a written consent thereto is signed by all the members of the Board of
Directors or of the committee. Such consent shall have the same force and
effect as a unanimous vote at a meeting. Subject to applicable notice
provisions and unless otherwise restricted by the Articles of Incorporation,
members of the Board of Directors, or any committee designated by the Board of
Directors, may participate in and hold a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in such
meeting shall constitute presence in person at such meeting, except where a
person's participation is for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
SECTION 3.13 COMPENSATION. Unless otherwise provided for by a
resolution adopted by the Board of Directors, directors, as such, shall not
receive any compensation for their services.
ARTICLE 4
COMMITTEES
SECTION 4.1 DESIGNATION. The Board of Directors may, by resolution,
designate one or more committees.
SECTION 4.2 NUMBER; QUALIFICATION; TERM. Each committee shall consist
of one or more directors appointed by resolution. The number of committee
members may be increased or decreased from time to time by resolution adopted
by the Board of Directors. Each committee member shall serve as such until the
earliest of (i) the expiration of his term as director, (ii) his death or
resignation as a committee member or as a director, or (iii) his removal as a
committee member or as a director.
SECTION 4.3 AUTHORITY. Each committee, to the extent expressly
provided in the resolution of the Board of Directors establishing such
committee, shall have and may exercise all of the authority of the Board of
Directors in the management of the business and affairs of the Corporation
except to the extent expressly restricted by statute, the Articles of
Incorporation or these Bylaws.
6
<PAGE> 11
SECTION 4.4 COMMITTEE CHANGES; REMOVAL. The Board of Directors shall
have the power at any time to fill vacancies in, to change the membership of,
and to discharge any committee. The Board of Directors may remove any committee
member, at any time, with or without cause.
SECTION 4.5 ALTERNATE MEMBERS OF COMMITTEES. The Board of Directors
may designate one or more directors as alternate members of any committee. Any
such alternate member may replace any absent or disqualified member at any
meeting of the committee.
SECTION 4.6 REGULAR MEETINGS. Regular meetings of any committee may be
held without notice at such time and place as may be designated from time to
time by the committee and communicated to all members thereof.
SECTION 4.7 SPECIAL MEETINGS. Special meetings of any committee may be
held whenever called by any committee member. The committee member calling any
special meeting shall cause notice of such special meeting, including therein
the time and place of such special meeting, to be given to each committee
member at least one (1) day before such special meeting. Neither the business
to be transacted at, nor the purpose of, any special meeting of any committee
need be specified in the notice or waiver of notice of any special meeting.
SECTION 4.8 QUORUM; MAJORITY VOTE. At meetings of any committee, a
majority of the number of members designated by the Board of Directors shall
constitute a quorum for the transaction of business. If a quorum is not present
at a meeting of any committee, a majority of the members present may adjourn
the meeting from time to time, without notice other than an announcement at the
meeting, until a quorum is present. The act of a majority of the members
present at any meeting at which a quorum is in attendance shall be the act of a
committee, unless the act of a greater number is required by law, the Articles
of Incorporation or these Bylaws.
SECTION 4.9 MINUTES. Each committee shall cause minutes of its
proceedings to be prepared and shall report the same to the Board of Directors
upon the request of the Board of Directors. The minutes of the proceedings of
each committee shall be delivered to the Secretary of the Corporation for
placement in the minute books of the Corporation.
SECTION 4.10 COMPENSATION. Unless otherwise provided for by a
resolution adopted by the Board of Directors, committee members will not
receive any compensation for attending any committee meetings or a stated
salary.
SECTION 4.11 RESPONSIBILITY. The designation of any committee and the
delegation of authority to it shall not operate to relieve the Board of
Directors or any director of any responsibility imposed upon it or such
director by law.
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ARTICLE 5
NOTICES
SECTION 5.1 METHOD. Whenever by statute, the Articles of
Incorporation, or these Bylaws, notice is required to be given to any committee
member, director, or stockholder and no provision is made as to how such notice
shall be given, personal notice shall not be required, and any such notice may
be given (a) in writing, by mail, postage prepaid, addressed to such committee
member, director, or stockholder at his address as it appears on the books or
(in the case of a stockholder) the stock transfer records of the Corporation,
or (b) by any other method permitted by law (including but not limited to
overnight courier service, telegram, telex, or telefax). Any notice required or
permitted to be given by mail shall be deemed to be given when deposited in the
United States mail as aforesaid. Any notice required or permitted to be given
by overnight courier service shall be deemed to be given at the time delivered
to such service with all charges prepaid and addressed as aforesaid. Any notice
required or permitted to be given by telegram, telex, or telefax shall be
deemed to be delivered and given at the time transmitted with all charges
prepaid and addressed as aforesaid.
SECTION 5.2 WAIVER. Whenever any notice is required to be given to any
stockholder, director, or committee member of the Corporation by statute, the
Articles of Incorporation or these Bylaws, a written waiver thereof, signed by
the person or persons entitled to such notice, whether before or after the time
stated therein, shall be equivalent to notice. Attendance of a stockholder,
director, or committee member at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends for the express purpose of
objecting at the beginning of the meeting to the transaction of any business on
the ground that the meeting is not lawfully called or convened.
SECTION 5.3 EXCEPTION TO NOTICE REQUIREMENT. The giving of any notice
required under any provision of the Nevada General Corporation Law, the
Articles of Incorporation or these Bylaws shall not be required to be given to
any stockholder to whom (i) notice of two consecutive annual meetings, and all
notices of meetings or of the taking of action by written consent without a
meeting to such stockholder during the period between such two consecutive
annual meetings, or (ii) all, and at least two, payments (if sent by first
class mail) of dividends or interest on securities during a twelve-month
period, have been mailed addressed to such person at his address as shown on
the records of the Corporation and have been returned undeliverable. If any
such stockholder shall deliver to the Corporation a written notice setting
forth his then current address, the requirement that notice be given to such
stockholder shall be reinstated.
ARTICLE 6
OFFICERS
SECTION 6.1 OFFICERS. The officers of the Corporation shall be elected
by the directors and shall be a Chairman of the Board, Chief Executive Officer,
President, one or more Vice Presidents (who shall rank in such order and who
shall have such additional titles or designations, such as "Executive,"
"Senior," "First," or "Second," as may be determined from time to time by the
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<PAGE> 13
Board of Directors), a Secretary and a Treasurer. The Board of Directors may
also choose one or more Assistant Secretaries and Assistant Treasurers. Any two
or more offices may be held by the same person except that the President and
Secretary shall not be the same person.
SECTION 6.2 ELECTION. The Board of Directors at its first meeting
after each annual meeting of stockholders shall elect the officers of the
Corporation, none of whom need be a member of the Board of Directors, a
stockholder or a resident of the State of Nevada. The Board of Directors may
appoint such other officers and agents as it shall deem necessary, who shall be
appointed for such terms and shall exercise such powers and perform such duties
as shall be determined from time to time by the Board of Directors.
SECTION 6.3 COMPENSATION. The compensation of all officers and agents
of the Corporation shall be fixed by the Board of Directors.
SECTION 6.4 REMOVAL AND VACANCIES. Each officer of the Corporation
shall hold office until his successor is elected and qualified or until his
earlier resignation or removal. Any officer or agent elected or appointed by
the Board of Directors may be removed either for or without cause by a majority
of the directors represented at a meeting of the Board of Directors at which a
quorum is represented, whenever in the judgment of the Board of Directors the
best interests of the Corporation will be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. If the office of any officer becomes vacant for any reason, the
vacancy may be filled by the Board of Directors.
SECTION 6.5 CHAIRMAN OF THE BOARD. The Board of Directors shall
designate one of their members as Chairman. The Chairman of the Board shall
have such powers and duties as may be designated by the Board of Directors.
SECTION 6.6 CHIEF EXECUTIVE OFFICER. The Board of Directors shall
designate a Chief Executive Officer of the Corporation. Unless designated to
the Chairman of the Board or otherwise delegated by the Board of Directors, the
Chief Executive Officer shall preside at all meetings of the shareholders and
the Board of Directors, and shall have such other powers and duties as usually
pertain to such office or as may be delegated by the Board of Directors. Unless
the Board of Directors shall otherwise delegate such duties, the Chief
Executive Officer shall be ex-officio a member of all standing committees,
shall have general powers of oversight, supervision and management of the
business and affairs of the Corporation, and shall see that all orders and
resolutions of the Board of Directors are carried into effect. He shall execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed, and except where the signing and executing thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the Corporation.
SECTION 6.7 PRESIDENT. The President shall have such powers and duties
as usually pertain to such office, except as the same may be modified by the
Board of Directors, and shall serve under the general direction of the Chief
Executive Officer, as the Chief Operations Officer of the
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<PAGE> 14
Company. In the absence or disability of the Chief Executive Officer, the
President shall perform the duties and exercise the powers of the Chief
Executive Officer.
SECTION 6.8 VICE PRESIDENTS. The Vice Presidents, in the order of
their seniority, unless otherwise determined by the Board of Directors or the
Chief Executive Officer, shall, in the absence or disability of the President,
perform the duties and exercise the powers of the President. They shall perform
such other duties and have such other powers as the Chief Executive Officer,
Chairman of the Board, President or Board of Directors shall prescribe.
SECTION 6.9 SECRETARY. The Secretary shall attend all sessions of the
Board of Directors and all meetings of the stockholders and record all votes
and the minutes of all proceedings in a book to be kept for that purpose and
shall perform like duties for any committee when required. Except as otherwise
provided herein, the Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Chief Executive
Officer, Chairman of the Board, President or Board of Directors, under whose
supervision he shall be. He shall keep in safe custody the seal of the
Corporation and, when authorized by the Board of Directors, affix the same to
any instrument requiring it, and, when so affixed, it shall be attested by his
signature or by the signature of the Treasurer or an Assistant Secretary.
SECTION 6.10 ASSISTANT SECRETARIES. Each Assistant Secretary shall
have only such powers and perform only such duties as the Board of Directors
may from time to time prescribe.
SECTION 6.11 TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements of the Corporation and shall deposit all monies and
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. He shall disburse
the funds of the Corporation as may be ordered by the Board of Directors,
taking proper vouchers for such disbursements, and shall render to the
President and directors, at the regular meetings of the Board of Directors, or
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the Corporation, and shall perform such other
duties as the Board of Directors may prescribe.
SECTION 6.12 ASSISTANT TREASURERS. Each Assistant Treasurer shall have
only such powers and perform only such duties as the Board of Directors may
from time to time prescribe.
SECTION 6.13 OTHER OFFICERS. The Board of Directors may appoint such
other officers and agents as it shall deem necessary, including without
limitation, a Chief Financial Officer, who shall be appointed for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board of Directors.
SECTION 6.14 OFFICER'S BOND. If required by the Board of Directors,
any officer so required shall give the Corporation a bond (which shall be
renewed as the Board may require) in such sum and with such surety or sureties
as shall be satisfactory to the Board of Directors for the faithful
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<PAGE> 15
performance of the duties of his office and for the restoration to the
Corporation, in case of his death, resignation, retirement or removal from
office, of any and all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
Corporation.
ARTICLE 7
CERTIFICATES REPRESENTING SHARES
SECTION 7.1 CERTIFICATES. Unless the Corporation has provided in its
articles of incorporation or in its bylaws for the issuance of uncertificated
shares of some or all of the shares of any or all of its classes or series of
stock, every stockholder is entitled to have a certificate, signed by officers
or agents designated by the Corporation for the purpose, certifying the number
of shares owned by the stockholder in the Corporation. Any or all of the
signatures on a certificate may be facsimile. However, if the Corporation uses
facsimile signatures of its officers and agents on its stock certificates, it
cannot act as registrar of its own stock, but its transfer agent and registrar
may be identical if the institution acting in those dual capacities countersigns
or otherwise authenticates any stock certificates in both capacities.
SECTION 7.2 LEGENDS. The Board of Directors shall have the power and
authority to provide that certificates representing shares of stock shall bear
such legends, including, without limitation, such legends as the Board of
Directors deems appropriate to assure that the Corporation does not become
liable for violations of federal or state securities laws or other applicable
law.
SECTION 7.3 LOST CERTIFICATES. The Corporation may issue a new
certificate representing shares in place of any certificate theretofore issued
by the Corporation, alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate to
be lost, stolen or destroyed. The Board of Directors, in its discretion and as
a condition precedent to the issuance thereof, may require the owner of such
lost, stolen or destroyed certificate, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such form, in such sum, and with such surety or sureties
as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen
or destroyed.
SECTION 7.4 TRANSFER OF SHARES. Shares of stock shall be transferable
only on the books of the Corporation by the holder thereof in person or by his
duly authorized attorney. Upon surrender to the Corporation or the transfer
agent of the Corporation of a certificate representing shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation or the transfer agent of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 7.5 REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof, and, accordingly, shall not be bound to recognize any equitable
or other claim or interest in such share or shares on the part
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<PAGE> 16
of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by law.
ARTICLE 8
GENERAL PROVISIONS
SECTION 8.1 DIVIDENDS. The directors, subject to any restrictions
contained in the Articles of Incorporation, may declare dividends upon the
shares of the Corporation's capital stock. Dividends may be paid in cash, in
property, or in shares of the Corporation, subject to the provisions of the
Nevada General Corporation Law and the Articles of Incorporation.
SECTION 8.2 RESERVES. By resolution of the Board of Directors, the
directors may set apart out of any of the funds of the Corporation such reserve
or reserves as the directors from time to time, in their discretion, think
proper to provide for contingencies, or to equalize dividends, or to repair or
maintain any property of the Corporation, or for such other purposes as the
directors shall think beneficial to the Corporation, and the directors may
modify or abolish any such reserve in the manner in which it was created.
SECTION 8.3 CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
SECTION 8.4 FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
SECTION 8.5 SEAL. The corporate seal shall have inscribed thereon the
name of the Corporation. Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
SECTION 8.6 INDEMNIFICATION. The Corporation shall indemnify its
directors and officers and may indemnify its employees and agents to the
fullest extent permitted by the Nevada General Corporation Law and the Articles
of Incorporation.
SECTION 8.7 TRANSACTIONS WITH DIRECTORS AND OFFICERS. No contract or
other transaction between the Corporation and any other corporation and no
other act of the Corporation shall, in the absence of fraud, be invalidated or
in any way affected by the fact that any of the directors of the Corporation
are pecuniarily or otherwise interested in such contract, transaction or other
act, or are directors or officers of such other corporation. Any director of
the Corporation, individually, or any firm or corporation of which any such
director may be a member, may be a party to, or may be pecuniarily or otherwise
interested in, any contract or transaction of the Corporation; provided,
however, that the fact that the director, individually, or the firm or
corporation is so interested shall be disclosed or shall have been known to the
Board of Directors or a majority of such members thereof as shall be present at
any annual meeting or at any special meeting, called for that purpose, of the
Board of Directors at which action upon any contract or transaction shall be
taken. Any
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<PAGE> 17
director of the Corporation who is so interested may be counted in determining
the existence of a quorum at any such annual or special meeting of the Board of
Directors which authorizes such contract or transaction, and may vote thereat
to authorize such contract or transaction with like force and effect as if he
were not such director or officer of such other corporation or not so
interested. Every director of the Corporation is hereby relieved from any
disability which might otherwise prevent him from carrying out transactions
with or contracting with the Corporation for the benefit of himself or any
firm, corporation, trust or organization in which or with which he may be in
anywise interested or connected.
SECTION 8.8 AMENDMENTS. These Bylaws may be altered, amended, or
repealed or new bylaws may be adopted by the stockholders or by the Board of
Directors at any regular meeting of the stockholders or the Board of Directors,
at any special meeting of the stockholders or the Board of Directors if notice
of such alteration, amendment, repeal, or adoption of new bylaws be contained
in the notice of such special meeting, or by written consent of the Board of
Directors or the stockholders without a meeting.
SECTION 8.9 TABLE OF CONTENTS; HEADINGS. The Table of Contents and
headings used in these Bylaws have been inserted for convenience only and do
not constitute matters to be construed in interpretation.
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<PAGE> 18
CERTIFICATE BY SECRETARY
The undersigned, being the secretary of the Corporation, hereby
certifies that the foregoing Bylaws were duly adopted by the Board of Directors
of the Corporation effective on October 5, 1999.
IN WITNESS WHEREOF, I have signed this certification as of the ______
day of March, 2000.
/s/
------------------------------
Katherine M. Howard, Secretary
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<PAGE> 1
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
CUSIP NO. 780103 10 7
NUMBER SHARES
[LOGO]
ROYAL BODYCARE
50,000,000 AUTHORIZED SHARES $0.001 PAR VALUE NON-ASSESSABLE
THIS CERTIFIES THAT is the
registered holder of Shares
ROYAL BODYCARE, INC.
transferable only on the books of the Corporation by the holder hereof in person
or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunder
affixed
Date:
/s/ KATHERINE M. HOWARD /s/ CLINTON H. HOWARD
Secretary President
[SEAL]
<PAGE> 2
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM-as tenants in common UNIF GIFT MIN ACT- ______ Custodian _________
TEN ENT-as tenants by the entireties (Cust) (Minor)
JT TEN-as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_______________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ________
______________________________________________________________________
NOTICE: SIGNATURE MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE
OF THIS CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED
BY A BANK, BROKER OR ANY OTHER ELIGIBLE GUARANTOR INSTITUTION
THAT IS AUTHORIZED TO DO SO UNDER THE SECURITIES TRANSFER
AGENTS MEDALLION PROGRAM (STAMP) UNDER RULES PROMULGATED BY
THE U.S. SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 1
EXHIBIT 10.4
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is made and entered into as of the ____
day of ______________, 2000, by and between Royal BodyCare, Inc., a Nevada
corporation (the "COMPANY"), and ______________________ (the "INDEMNITEE").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the interpretation of ambiguous statutes, regulations and
bylaws regarding indemnification of directors and officers may be too uncertain
to provide such directors and officers with adequate notice of the legal,
financial and other risks to which they may be exposed by virtue of their
service as such; and
WHEREAS, damages sought against directors and officers in shareholder
or similar litigation by class action plaintiffs may be substantial, and the
costs of defending such actions and of judgments in favor of plaintiffs or of
settlement therewith may be prohibitive for individual directors and officers,
without regard to the merits of a particular action and without regard to the
culpability of, or the receipt of improper personal benefit by, any named
director or officer to the detriment of the corporation; and
WHEREAS, the issues in controversy in such litigation usually relate to
the knowledge, motives and intent of the director or officer, who may be the
only person with firsthand knowledge of essential facts or exculpating
circumstances who is qualified to testify in such person's defense regarding
matters of such a subjective nature, and the long period of time which may
elapse before final disposition of such litigation may impose undue hardship and
burden on a director or officer or on such person's estate in launching and
maintaining a proper and adequate defense for a director or officer or for such
person's estate against claims for damages; and
WHEREAS, the Company is organized under the General Corporation Law of
the State of Nevada of the Nevada Revised Statutes (the "NRS") and Sections
78.7502, 78.751 and 78.752 of the NRS empower corporations to indemnify and
advance expenses to a person serving as a director, officer, employee or agent
of a corporation and to persons serving at the request of the corporation as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan,
and, as Section 78.751(3)(a) further provides, that the indemnification and
advancement of expenses provided by, or granted pursuant to, said sections "does
not exclude any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under the articles of incorporation or
any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, for either an action in his official capacity or an action in another
capacity while holding his office, except that indemnification, unless ordered
pursuant to NRS 78.7502 or for the advancement of expenses made pursuant to
subsection 2, may not be made to or on behalf of any director or officer if a
final adjudication establishes that his acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law and was material to the
cause of action."; and
WHEREAS, the Board of the Company have concluded that it is reasonable
and prudent for the Company contractually to obligate itself to indemnify in a
reasonable and adequate manner the Indemnitee and to assume for itself maximum
liability for expenses and damages in connection with claims lodged against the
Indemnitee for such person's decisions and actions as a director, officer,
employee or agent of the Company and its subsidiaries.
NOW, THEREFORE, in consideration of the foregoing, and of other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by each of the parties hereto, the parties agree as follows:
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<PAGE> 2
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth below:
A. "AGREEMENT" means this Indemnification Agreement, as it may be
amended from time to time.
B. "ARTICLES OF INCORPORATION" means the Articles of Incorporation of
the Company (as it may be amended or amended and restated from time to time).
C. "BOARD" means the Board of Directors of the Company.
D. "CHANGE IN CONTROL" is defined as:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act of 1934) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the total voting
power represented by the Company's then outstanding voting securities;
or
(b) A change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the
directors are Incumbent Directors.
(c) The consummation of a merger or consolidation of the Company
with any other corporation other than a merger or consolidation which
would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting
power represented by the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation; or
(d) The consummation of the sale or disposition by the Company of
all or substantially all of the Company's assets.
E. "COMPANY" has the meaning set forth in the introductory paragraph of
this Agreement.
F. "CORPORATE STATUS" means the status of a person who is or was a
director, officer, employee or agent of the Company, or is or was a member of
any committee of the Board, and the status of a person who is or was serving at
the request of the Company as a director, officer, partner (including service as
a general partner of any limited partnership), member, trustee, employee, or
agent of another foreign or domestic corporation, partnership, limited liability
company, joint venture, trust, other incorporated or unincorporated entity or
enterprise or employee benefit plan. For the purposes of this Agreement, any
person serving as a director, officer, partner, member, trustee, employee, or
agent of any subsidiary of the Company or any employee benefit plan of the
Company or any of its subsidiaries shall be deemed to be so serving at the
request of the Company, and no corporate or other action shall be or be deemed
to be required to evidence any such request.
G. "DISINTERESTED DIRECTOR" means a director of the Company who is not
a party to the Proceeding in respect of which indemnification is being sought by
the Indemnitee.
H. "EXCHANGE ACT" means the Securities and Exchange Act of 1934, as
amended from time to time.
2
<PAGE> 3
I. "EXPENSES" means any and all expenses actually and reasonably
incurred directly or indirectly in connection with a Proceeding, including,
without limitation, all attorneys' fees, retainers, court costs, transcript
costs, fees of experts, investigation fees and expenses, accounting and witness
fees, travel expenses, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service fees and all other disbursements or expenses
of the types customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating or being or preparing to be a
witness in a Proceeding.
J. "GOOD FAITH" means, when used with reference to an act or omission
of the Indemnitee, an act or omission other than (i) an act or omission
committed in bad faith and in a manner the Indemnitee believed to be opposed to
the best interests of the Company; (ii) an act or omission that was the result
of intentional misconduct involving active or deliberate dishonesty; (iii) an
act or omission from which the Indemnitee actually received an improper personal
benefit in money, property or services; or (iv) in the case of a criminal
Proceeding, an act or omission which involves a knowing violation of law.
K. "INCUMBENT DIRECTORS" means directors who either (i) are directors
of the Company as of the date hereof, or (ii) are elected, or nominated for
election, to the Board with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or termination (but shall not
include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company).
L. "INDEMNIFICATION ARRANGEMENT" has the meaning set forth in SECTION
10.1.
M. "INDEMNITEE" has the meaning set forth in the introductory paragraph
of this Agreement.
N. "LIABILITIES" means liabilities of any type whatsoever, including,
without limitation, any judgments, fines, excise taxes and penalties under the
Employee Retirement Income Security Act of 1974, as amended (or any successor
statute or act), penalties and amounts paid in settlement (including all
interest, assessments and other charges paid or payable in connection with or in
respect of such judgments, fines, penalties or amounts paid in settlement)
actually and reasonably incurred directly or indirectly in connection with the
investigation, defense, settlement or appeal of any Proceeding or any claim,
issue or matter therein.
O. "NRS" has the meaning set forth in the recitals of this Agreement.
P. "PROCEEDING" means any threatened, pending or completed action,
suit, proceeding, arbitration, alternate dispute resolution mechanism,
investigation, administrative hearing or any other actual, threatened or
completed proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal or appeals therefrom, and any inquiry or investigation
that could lead to any of the foregoing.
Q. "TRUST" has the meaning set forth in ARTICLE IX.
R. "TRUSTEE" has the meaning set forth in ARTICLE IX.
S. "UNDERTAKING" has the meaning set forth in ARTICLE IV.
T. "VOTING SECURITIES" means any securities of the Company that are
entitled to vote generally in the election of directors.
3
<PAGE> 4
ARTICLE II
TERM OF AGREEMENT
This Agreement shall continue until, and terminate upon the later to
occur of (i) the death of the Indemnitee; or (ii) the final termination of all
Proceedings (including possible Proceedings) in respect of which the Indemnitee
is granted rights of indemnification or advancement of Expenses hereunder and of
any Proceeding commenced by the Indemnitee regarding the interpretation or
enforcement of this Agreement. This Agreement shall govern the indemnification
rights of the Indemnitee for all Liabilities and Expenses in connection with any
Proceeding instituted or commenced on or after the date hereof notwithstanding
that any alleged act or omission of the Indemnitee occurred prior to the date
hereof.
ARTICLE III
NOTICE OF PROCEEDINGS; DEFENSE OF CLAIMS
SECTION 3.1 NOTICE OF PROCEEDINGS. The Indemnitee will notify the
Company promptly in writing upon being served with any summons, citation,
subpoena, complaint, indictment, information or other document relating to any
Proceeding or matter which may be subject to indemnification or advancement of
Expenses covered hereunder, but the Indemnitee's failure to so notify the
Company shall not relieve the Company from any liability to the Indemnitee under
this Agreement.
SECTION 3.2 DEFENSE OF CLAIMS. The Company will be entitled to
participate, at the expense of the Company, in any Proceeding of which the
Company has notice. The Company jointly with any other indemnifying party
similarly notified of any Proceeding will be entitled to assume the defense of
the Indemnitee therein, with counsel reasonably satisfactory to the Indemnitee;
provided, however, that the Company shall not be entitled to assume the defense
of the Indemnitee in any Proceeding if there has been a Change in Control or if
the Indemnitee has reasonably concluded that there may be a conflict of interest
between the Company and the Indemnitee with respect to such Proceeding. The
Company will not be liable to the Indemnitee under this Agreement for any
Expenses incurred by the Indemnitee in connection with the defense of any
Proceeding, other than reasonable costs of investigation or as otherwise
provided below, after notice from the Company to the Indemnitee of its election
to assume the defense of the Indemnitee therein. The Indemnitee shall have the
right to employ his or her own counsel in any such Proceeding, but the fees and
expenses of such counsel incurred after notice from the Company of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Company; (ii) the Indemnitee shall have reasonably concluded that counsel
employed by the Company may not adequately represent the Indemnitee and shall
have so informed the Company; or (iii) the Company shall not in fact have
employed counsel to assume the defense of the Indemnitee in such Proceeding or
such counsel shall not, in fact, have assumed such defense or such counsel shall
not be acting, in connection therewith, with reasonable diligence; and in each
such case the fees and expenses of the Indemnitee's counsel shall be advanced by
the Company.
SECTION 3.3 SETTLEMENT OF CLAIMS. The Company shall not settle any
Proceeding in any manner which would impose any Liability, penalty or limitation
on the Indemnitee, or cause the Indemnitee to become subject to or bound by any
injunction, order, judgment or decree, without the written consent of the
Indemnitee, which consent shall not be unreasonably withheld or delayed. The
Company shall not be liable to indemnify the Indemnitee under this Agreement or
otherwise for any amounts paid in settlement of any Proceeding effected by the
Indemnitee without the Company's written consent, which consent shall not be
unreasonably withheld or delayed.
ARTICLE IV
INDEMNIFICATION
SECTION 4.1 IN GENERAL. Upon the terms and subject to the conditions
set forth in this Agreement, the Company shall hold harmless and indemnify the
Indemnitee against any and all Liabilities and Expenses
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actually incurred by or for the Indemnitee in connection with any Proceeding
(whether the Indemnitee is or becomes a party, a witness or otherwise is a
participant in any role) to the fullest extent required or permitted by
applicable law in effect on the date hereof and to such greater extent as
applicable law may hereafter from time to time require or permit. To the extent
that the Indemnitee has at any time heretofore served or at any time hereafter
serves as a director, officer, employee, partner, trustee or agent of, for, or
on behalf of any subsidiary of the Company, the Company expressly agrees and
acknowledges that Indemnitee was or is serving in each such capacity at the
request of the Company.
SECTION 4.2 PROCEEDING OTHER THAN A PROCEEDING BY OR IN THE RIGHT OF
THE COMPANY. Without limiting the generality of SECTION 4.1, if the Indemnitee
was or is a party or is threatened to be made a party to any Proceeding (whether
the Indemnitee is or becomes a party, a witness or otherwise is a participant in
any role) (other than a Proceeding by or in the right of the Company) by reason
of the Indemnitee's Corporate Status, or by reason of any alleged act or
omission by the Indemnitee in any such capacity, the Company shall, subject to
the limitations set forth in SECTION 4.6 below, hold harmless and indemnify the
Indemnitee against any and all Liabilities and Expenses of the Indemnitee in
connection with the Proceeding if the Indemnitee acted in Good Faith.
SECTION 4.3 PROCEEDING BY OR IN THE RIGHT OF THE COMPANY. Without
limiting the generality of SECTION 4.1, if the Indemnitee was or is a party or
is threatened to be made a party to any Proceeding (whether the Indemnitee is or
becomes a party, a witness or otherwise is a participant in any role) by or in
the right of the Company to procure a judgment in its favor by reason of the
Indemnitee's Corporate Status, or by reason of any alleged act or omission by
the Indemnitee in any such capacity, the Company shall, subject to the
limitations set forth in SECTION 4.6 below, hold harmless and indemnify the
Indemnitee against any and all Expenses of the Indemnitee in connection with the
Proceeding if the Indemnitee acted in Good Faith; except that no indemnification
under this SECTION 4.3 shall be made in respect of any claim, issue or matter as
to which the Indemnitee shall have been finally adjudged, pursuant to a judgment
or other adjudication which is final and has become nonappealable, to be liable
to the Company, unless a court of appropriate jurisdiction (including, but not
limited to, the court in which such Proceeding was brought) shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the Indemnitee is fairly and reasonably entitled to
indemnification for such Expenses which such court shall deem proper.
SECTION 4.4 INDEMNIFICATION OF A PARTY WHO IS WHOLLY OR PARTLY
SUCCESSFUL. Notwithstanding any other provision of this Agreement, to the extent
that the Indemnitee is or has been successful on the merits or otherwise in
defense of any Proceeding, the Indemnitee shall be indemnified by the Company to
the maximum extent consistent with law against all Expenses of the Indemnitee in
connection therewith. If the Indemnitee is not wholly successful in such
Proceeding but is or has been successful on the merits or otherwise in defense
of one or more but less than all claims, issues or matters in such Proceeding,
the Company shall hold harmless and indemnify the Indemnitee to the maximum
extent consistent with law against all Expenses of the Indemnitee in connection
with each successfully resolved claim, issue or matter in such Proceeding.
Resolution of a claim, issue or matter by dismissal, with or without prejudice,
shall be deemed a successful result as to such claim, issue or matter.
SECTION 4.5 INDEMNIFICATION FOR EXPENSES OF WITNESS. Notwithstanding
any other provision of this Agreement, to the extent that the Indemnitee, by
reason of the Indemnitee's Corporate Status, has prepared to serve or has served
as a witness in any Proceeding, or has participated in discovery proceedings or
other trial preparation, the Indemnitee shall be held harmless and indemnified
against all Expenses of the Indemnitee in connection therewith.
SECTION 4.6 SPECIFIC LIMITATIONS ON INDEMNIFICATION. In addition to the
other limitations set forth in this ARTICLE IV, and notwithstanding anything in
this Agreement to the contrary, the Company shall not be
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obligated under this Agreement to make any payment to the Indemnitee for
indemnification of Liabilities or Expenses, or both, in connection with any
Proceeding:
1. To the extent that payment of any of the Liabilities or
Expenses of the Indemnitee is actually made to the Indemnitee under
any insurance policy or is made on behalf of the Indemnitee by or on
behalf of the Company otherwise than pursuant to this Agreement; or
2. For an accounting of profits made from the purchase or sale by
the Indemnitee of securities of the Company within the meaning of
section 16(b) of the Securities Exchange Act of 1934, as amended, or
similar provisions of any federal, state or local statute or
regulation.
ARTICLE V
ADVANCEMENT OF EXPENSES
Notwithstanding any provision to the contrary in ARTICLE VI hereof, the
Company shall pay or reimburse all Expenses of the Indemnitee incurred by or for
the Indemnitee in connection with any Proceeding in advance of the final
disposition of such Proceeding, provided that the Company receives an
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined by a court of competent jurisdiction that the
Indemnitee is not entitled to be indemnified by the Company under applicable law
(the "UNDERTAKING"). The Undertaking shall reasonably evidence the Expenses
incurred by or for the Indemnitee. The Company shall pay all such Expenses
within five (5) business days after the receipt by the Company of the
Undertaking. The Undertaking shall be unsecured and interest free, and shall be
made and accepted by the Company without reference to the Indemnitee's financial
ability to make repayment.
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ARTICLE VI
PROCEDURE FOR PAYMENT;
DETERMINATION OF RIGHT TO INDEMNIFICATION
SECTION 6.1 PROCEDURE FOR PAYMENT. To obtain indemnification for
Liabilities under this Agreement, and to obtain indemnification for Expenses not
paid in advance of the final disposition of any Proceeding pursuant to ARTICLE
V, the Indemnitee shall submit to the Company a written request for payment,
including with such request such documentation as is reasonably available to the
Indemnitee and reasonably necessary to determine whether, and to what extent,
the Indemnitee is entitled to indemnification and payment hereunder. The
Secretary of the Company, or such other person as shall be designated by the
Board of Directors, promptly upon receipt of a request for indemnification shall
advise the Board of Directors, in writing, of such request. Any indemnification
payment due hereunder shall be paid by the Company no later than five (5)
business days following the determination, pursuant to this ARTICLE VI, that
such indemnification payment is proper hereunder.
SECTION 6.2 NO DETERMINATION NECESSARY WHEN THE INDEMNITEE WAS
SUCCESSFUL. To the extent the Indemnitee is or has been successful on the merits
or otherwise in defense of any Proceeding, or in defense of any claim, issue or
matter therein, the Company shall indemnify the Indemnitee against Expenses of
the Indemnitee in connection with any such Proceeding or any claim, issue or
matter therein as provided in SECTION 4.4.
SECTION 6.3 DETERMINATION OF GOOD FAITH ACT OR OMISSION. In the event
that SECTION 6.2 is inapplicable with respect to any Proceeding, or any claim,
issue or matter therein, the Company shall hold harmless and indemnify the
Indemnitee as provided herein unless the Company shall prove by clear and
convincing evidence to a forum listed in SECTION 6.4 that the Indemnitee did not
act in Good Faith.
SECTION 6.4 FORUM FOR DETERMINATION. In the event that SECTION 6.2 is
inapplicable with respect to any Proceeding, or any claim, issue or matter
therein, or unless ordered by a court, or unless the Company has advanced
Expenses, then any such discretionary indemnification may be made by the Company
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. Such determination must be made:
1. By the stockholders;
2. By the Board of Directors by majority vote of a quorum
consisting of Disinterested Directors;
3. If a majority vote of a quorum consisting of Disinterested
Directors so orders, by independent legal counsel in a written
opinion; or
4. If a majority vote of a quorum consisting of Disinterested
Directors cannot be obtained, by independent legal counsel in a
written opinion.
As soon as practicable, and in no event later than thirty (30) days
after written notice of the Indemnitee's choice of forum pursuant to this
SECTION 6.4, the Company shall, at the expense of the Company, submit to the
selected forum, in such manner as the Indemnitee or the Indemnitee's counsel may
reasonably request, its claim that the Indemnitee is not entitled to
indemnification, and the Company shall act in the utmost good faith to assure
the Indemnitee a complete opportunity to defend against such claim. The fees and
expenses of the selected forum in connection with making the determination
contemplated hereunder shall be paid by the Company. If the Company shall fail
to submit the matter to the selected forum within thirty (30) days after the
Indemnitee's written notice, or if the forum so empowered to make the
determination shall have failed to make the requested
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determination within thirty (30) days after the matter has been submitted to it
by the Company, the requisite determination that the Indemnitee has the right to
indemnification hereunder shall be deemed to have been made by a majority vote
of the Directors who are Disinterested Directors, even though less than a
quorum.
SECTION 6.5 RIGHT TO APPEAL. Notwithstanding a determination by any
forum listed in SECTION 6.4 that the Indemnitee is not entitled to
indemnification with respect to a specific Proceeding, or any claim, issue or
matter therein, the Indemnitee shall have the right to apply to the court in
which that Proceeding is or was pending, or to any other court of competent
jurisdiction, for the purpose of enforcing the Indemnitee's right to
indemnification pursuant to this Agreement. Such enforcement action shall
consider the Indemnitee's entitlement to indemnification de novo, and the
Indemnitee shall not be prejudiced by reason of a prior determination that the
Indemnitee is not entitled to indemnification. The Company shall be precluded
from asserting that the procedures and presumptions of this Agreement are not
valid, binding and enforceable. The Company further agrees to stipulate in any
such judicial proceeding that the Company is bound by all the provisions of this
Agreement and is precluded from making any assertion to the contrary.
SECTION 6.6 RIGHT TO SEEK JUDICIAL DETERMINATION. Notwithstanding any
other provision of this Agreement to the contrary, at any time after sixty (60)
days after a request for indemnification has been made to the Company (or upon
earlier receipt of written notice that a request for indemnification has been
rejected or the expiration of time within which any such payment must be made
hereunder) and before the third (3rd) anniversary of the making of such
indemnification request, the Indemnitee may petition a court of competent
jurisdiction, whether or not such court has jurisdiction over, or is the forum
in which is pending, the Proceeding, to determine whether the Indemnitee is
entitled to indemnification hereunder, and such court thereupon shall have the
exclusive authority to make such determination, unless and until such court
dismisses or otherwise terminates the Indemnitee's action without having made
such determination. The court, as petitioned, shall make an independent
determination of whether the Indemnitee is entitled to indemnification
hereunder, without regard to any prior determination in any other forum as
provided hereby.
SECTION 6.7 EXPENSES UNDER THIS AGREEMENT. Notwithstanding any other
provision in this Agreement to the contrary, the Company shall indemnify the
Indemnitee against all Expenses incurred by the Indemnitee in connection with
any hearing, action, suit or proceeding under this ARTICLE VI involving the
Indemnitee and against all Expenses incurred by the Indemnitee in connection
with any other hearing, action, suit or proceeding between the Company and the
Indemnitee involving the interpretation or enforcement of the rights of the
Indemnitee under this Agreement, even if it is finally determined that the
Indemnitee is not entitled to indemnification in whole or in part hereunder.
ARTICLE VII
PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS
SECTION 7.1 BURDEN OF PROOF. In making a determination with respect to
entitlement to indemnification hereunder, the person, persons, entity or
entities making such determination shall presume that the Indemnitee is entitled
to indemnification under this Agreement and the Company shall have the burden of
proof to overcome that presumption.
SECTION 7.2 STANDARDS FOR DETERMINING IF EXPENSES REASONABLY INCURRED.
It is a purpose of this Agreement to induce the most highly qualified
individuals to accept positions of responsibility with the Company and, in so
doing, to serve as directors, officers, employees and agents of the Company.
Accordingly, the Company desires to provide the Indemnitee with the highest
quality professional services available if the Indemnitee becomes a party to or
is otherwise involved in a Proceeding because of the Indemnitee's Corporate
Status without the Indemnitee's incurring any personal Expense in connection
therewith. The Company therefore agrees that the Indemnitee may retain
attorneys, accountants, investment bankers, and other professionals and
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experts anywhere within the United States to represent the Indemnitee in any
Proceeding in the United States, that the Indemnitee may retain attorneys,
accountants, investment bankers, and other professionals without regard to
location if the Proceeding is not in the United States, and that the Company
will not deny any request for indemnification hereunder on the basis that the
Expenses of any such attorneys, accountants, investment bankers, or other
professionals and experts are not or have not been reasonably incurred because
of the location of any such attorneys, accountants, investment bankers, or other
professionals and experts. The Company further agrees that, for the purpose of
determining if an Expense for professional services, including, without
limitation, fees of attorneys, accountants, investment bankers, and other
professionals and experts, is or has been reasonably incurred, or for the
purpose of determining the reasonableness of any such Expense, the standard to
be used shall be the highest rates per hour or fees charged by attorneys
specializing in the defense of individuals in Proceedings similar to the
Proceeding to which the Indemnitee is a party or otherwise involved in the city
or cities in which such attorneys are located, and the highest rates per hour or
fees charged by accountants, investment bankers, and other professionals and
experts assisting or participating in the defense of individuals in Proceedings
similar to the Proceeding to which the Indemnitee is a party or otherwise
involved in the city or cities in which such accountants, investment bankers,
and other professionals and experts are located. In addition to the foregoing,
the Company has determined that it is in the Company's best interests that any
director, officer, employee or agent of Company who is involved in any
Proceeding because of such person's Corporate Status maintain to the greatest
extent possible the confidentiality of matters pertaining to such Proceeding,
and that such person's participation in such Proceeding be on conditions as
similar as reasonably possible to conditions as if such person were
participating in the city of such person's personal residence. Due to the
continuing deterioration in commercial travel conditions, however, it is
increasingly more difficult to achieve this result, and, accordingly, the
Company desires to provide the Indemnitee with travel arrangements that come
most closely to achieving this result. The Company therefore agrees that, for
the purpose of determining whether any Expense hereunder for travel related
items is or has been reasonably incurred, or for the purpose of determining the
reasonableness of any such Expense, the standards to be used shall be the
non-stop first class airfare between destinations and the daily non-discounted
room rates charged by the highest rated hotel in the destination city. Any
Expense actually incurred for or on behalf of the Indemnitee by any firm
providing professional services, including, without limitation, attorneys,
accountants, investment bankers, and other professionals and experts, to the
Indemnitee in any Proceeding shall be deemed to be reasonably incurred and
reasonable. In determining whether any other Expense is or has been reasonably
incurred, or whether any such other Expense is reasonable, the standard to be
used shall be commensurate with the foregoing. In the event the Company
determines not to indemnify the Indemnitee hereunder for any Expense on the
basis that any such Expense was or has not been reasonably incurred, the Company
agrees that it must prove by clear and convincing evidence that the professional
or other services rendered for and on behalf of the Indemnitee, or the goods or
services received by or provided for or on behalf of the Indemnitee, provided
(i) no value whatsoever, and (ii) bore no reasonable relationship whatsoever, to
the defense of the Indemnitee in the Proceeding. In the event the Company
determines not to indemnify the Indemnitee hereunder for any Expense on the
basis that any such Expense is or was not reasonable, the Company agrees that it
must prove by clear and convincing evidence that the challenged Expense is so
grossly in excess of the fair market value for the same or similar Expense as to
be manifestly unfair.
SECTION 7.3 EFFECT OF OTHER PROCEEDINGS. The termination of any
Proceeding or of any claim, issue or matter therein, by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the Indemnitee did not act in
Good Faith.
SECTION 7.4 RELIANCE AS SAFE HARBOR. For purposes of any determination
of whether any act or omission of the Indemnitee was done or made in Good Faith,
each act or omission of the Indemnitee shall be deemed to be in Good Faith if
the Indemnitee's act or omission is based on the records or books of accounts of
the Company, including financial statements, or on information supplied to the
Indemnitee by the officers of the Company in the course of their duties, or on
the advice of legal counsel for the Company, or on information or records given
or reports made to the Company by an independent certified public accountant or
by an appraiser or other expert selected with reasonable care by the Company.
The provisions of this SECTION 7.4 shall not be
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deemed to be exclusive or to limit in any way the other circumstances in which
the Indemnitee may be deemed to have met the applicable standard of conduct set
forth in this Agreement or under applicable law.
SECTION 7.5 ACTIONS OF OTHERS. The knowledge and/or actions, or failure
to act, of any other director, officer, agent or employee of the Company shall
not be imputed to the Indemnitee for purposes of determining the right to
indemnification under this Agreement.
ARTICLE VIII
INSURANCE; OTHER INDEMNIFICATION ARRANGEMENTS
SECTION 8.1 INSURANCE. In the event that the Company maintains
officers' and directors' or similar liability insurance to protect itself and
any director or officer of the Company against any expense, liability or loss,
such insurance shall cover the Indemnitee to at least the same degree as each
other director and/or officer of the Company.
SECTION 8.2 OTHER ARRANGEMENTS. The Articles of Incorporation and
Bylaws of the Company and the NRS permit the Company to purchase and maintain
insurance on behalf of the Indemnitee against any Liability asserted against or
incurred by him or any Expenses incurred by him or on his behalf in connection
with actions taken or omissions by the Indemnitee in his Corporate Status,
whether or not the Company would have the power to indemnify the Indemnitee
under this Agreement or under the NRS, as they may be in effect from time to
time. The purchase of any such insurance shall in no way affect or limit the
rights and obligations of the Indemnitee and the Company hereunder, except as
expressly provided herein, and the execution and delivery of this Agreement by
the Indemnitee and the Company shall in no way affect or limit the rights and
obligations of such parties under or with respect to any other such
Indemnification Arrangement.
ARTICLE IX
OBLIGATIONS OF THE COMPANY UPON A CHANGE IN CONTROL
In the event of a Change in Control, upon written request of the
Indemnitee the Company shall establish a trust for the benefit of the Indemnitee
hereunder (a "TRUST") and from time to time, upon written request from the
Indemnitee, shall fund the Trust in an amount sufficient to satisfy all amounts
that may from time to time be payable to the Indemnitee hereunder as
indemnification for Liabilities or Expenses (including those that are required
to be paid in advance hereunder). The amount or amounts to be deposited in the
Trust shall be determined by legal counsel selected by the Indemnitee and
approved by the Company, which approval shall not be unreasonably withheld. The
terms of the Trust shall provide that (i) the Trust shall not be dissolved or
the principal thereof invaded without the written consent of the Indemnitee;
(ii) the trustee of the Trust (the "TRUSTEE") shall be selected by the
Indemnitee; (iii) the Trustee shall make advances to the Indemnitee for Expenses
within five (5) business days following receipt of a written request therefor
and the Undertaking; (iv) the Company shall continue to fund the Trust from time
to time in accordance with its funding obligations hereunder; (v) the Trustee
promptly shall pay to the Indemnitee all amounts as to which indemnification is
due under this Agreement; (vi) unless the Indemnitee agrees otherwise in
writing, the Trust for the Indemnitee shall be kept separate from any other
trust established for any other person to whom indemnification might be due by
the Company; and (vii) all unexpended funds in the Trust shall revert to the
Company upon final, nonappealable determination by a court of competent
jurisdiction that the Indemnitee has been indemnified to the full extent
required under this Agreement.
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ARTICLE X
NON-EXCLUSIVITY, SUBROGATION AND MISCELLANEOUS
SECTION 10.1 NON-EXCLUSIVITY. The rights of the Indemnitee hereunder
shall not be deemed exclusive of any other rights to which the Indemnitee may at
any time be entitled under any provision of law, the Articles of Incorporation,
the Bylaws of the Company, as the same may be in effect from time to time, any
other agreement, a vote of stockholders of the Company or a resolution of
directors of the Company or otherwise (each an "INDEMNIFICATION ARRANGEMENT"),
and to the extent that during the term of this Agreement the rights of the
then-existing directors and officers of the Company are more favorable to such
directors or officers than the rights currently provided to the Indemnitee under
this Agreement, the Indemnitee shall be entitled to the full benefits of such
more favorable rights. No amendment, alteration, rescission or replacement of
this Agreement or any provision hereof which would in any way limit the benefits
and protections afforded to an Indemnitee hereby shall be effective as to such
Indemnitee with respect to any act or omission by such Indemnitee in the
Indemnitee's Corporate Status prior to such amendment, alteration, rescission or
replacement.
SECTION 10.2 SUBROGATION. In the event of any payment under this
Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of the Indemnitee, who shall execute all documents
required and take all action necessary to secure such rights, including
execution of such documents as are necessary to enable the Company to bring suit
to enforce such rights.
SECTION 10.3 NOTICES. All notices, requests, consents and other
communications herein (except as stated in the last sentence of this SECTION
10.3) shall be in writing and shall be mailed by first class or certified mail,
postage prepaid, sent by a nationally recognized overnight delivery service, or
personally delivered, as follows:
(a) If to the Company:
Royal BodyCare, Inc.
2301 Crown Court
Irving, Texas 75038
Attn: Clinton Howard, President
with a copy which shall not constitute notice to:
Winstead Sechrest & Minick, P.C.
1201 Elm Street
5400 Renaissance Tower
Dallas, Texas 75270
Attn: D. Forrest Brumbaugh, Esq.
(b) If to the Indemnitee at the address shown in the address shown in
the Indemnitee's signature below.
or such other addresses as each of the parties hereto may provide from time to
time in writing to the other parties. For purposes of computing the time periods
set forth herein, the date of mailing shall be deemed to be the delivery date.
SECTION 10.4 GOVERNING LAW. The parties agree that this Agreement shall
be governed by, construed and enforced in accordance with, the substantive laws
of the State of Nevada, without regard to the principles of choice of laws
thereof.
SECTION 10.5 CONSOLIDATION, MERGER OR SALE OF ASSETS. The Company shall
not consolidate with or merge into any other corporation, partnership, limited
liability company or other entity or convey or transfer
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its properties and assets substantially as an entirety to any individual,
corporation, partnership, limited liability company or other entity, unless (i)
the entity formed by such consolidation or into which the Company is merged or
the individual or entity who or which acquires by conveyance or transfer the
properties and assets of the Company substantially as an entirety (in either
case, a "SUCCESSOR") shall be a citizen of or entity organized under the laws of
the United States of America, or any state thereof or the District of Columbia,
and shall by written agreement executed and delivered to the Indemnitee, in
form, scope and substance satisfactory to the Indemnitee and the Indemnitee's
legal counsel, expressly assume and agree to be bound by and to perform this
Agreement in the same manner and to the same extent as the Company would be
required to perform absent such consolidation, merger, conveyance or transfer,
and (ii) the Indemnitee shall have received an opinion, in form, scope and
substance satisfactory to the Indemnitee and the Indemnitee's legal counsel,
from counsel acceptable to the Indemnitee, that such written agreement to assume
and be bound by and perform this Agreement has been duly authorized by all
requisite actions, has been duly executed and delivered by the Successor and is
enforceable against the Successor (except to the extent enforceability may be
limited by bankruptcy or similar laws, general principles of equity or the
federal securities laws).
SECTION 10.6 BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their heirs, executors,
administrators, legal representatives, successors and permitted assigns. This
Agreement cannot be assigned by the Company, either directly or indirectly, by
purchase, merger, consolidation or otherwise, without the express written
consent of the Indemnitee unless the Company shall have received, prior to such
assignment, from any successor or assignee (whether direct or indirect, by
purchase, merger, consolidation or otherwise) a written agreement, in form,
scope and substance reasonably satisfactory to the Indemnitee, expressly to
assume and agree to be bound by and to perform this Agreement in the same manner
and to the same extent as the Company would be required to perform absent such
succession or assignment.
SECTION 10.7 SEVERABILITY. If any provision of this Agreement is held
invalid or unenforceable by any court of competent jurisdiction, the other
provisions of this Agreement will remain in full force and effect. Any provision
of this Agreement held invalid or unenforceable only in part or degree will
remain in full force and effect to the extent not held invalid or unenforceable.
It is the express intention and agreement of the Company and the Indemnitee that
any court of competent jurisdiction that interprets or enforces this Agreement
have full power and authority to reform any provision of this Agreement to
modify the invalid or unenforceable provision to achieve the parties' intent to
provide the Indemnitee with indemnification for Liabilities and Expenses to the
maximum extent permitted by applicable law.
SECTION 10.8 WAIVER. No termination, cancellation, modification,
amendment, deletion, addition or other change in this Agreement, or any
provision hereof, or waiver of any right or remedy herein, shall be effective
for any purpose unless specifically set forth in a writing signed by the party
or parties to be bound thereby. The waiver of any right or remedy with respect
to any occurrence on one occasion shall not be deemed a waiver of such right or
remedy with respect to such occurrence on any other occasion.
SECTION 10.9 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement and understanding among the parties hereto in reference to the subject
matter hereof; provided, however, that the parties acknowledge and agree that
the NRS and the Articles of Incorporation and Bylaws of the Company and each of
its subsidiaries contain provisions on the subject matter hereof and that this
Agreement is not intended to, and does not, limit the rights or obligations of
the parties hereto pursuant to the NRS or such instruments, or under any other
contract, agreement, insurance policy or other instrument or document heretofore
or hereafter existing which provides to the Indemnitee any right of
indemnification or reimbursement of any nature whatsoever.
SECTION 10.10 TITLES. The titles to the articles and sections of this
Agreement are inserted for convenience of reference only and should not be
deemed a part hereof or affect the construction or interpretation of any
provisions hereof.
12
<PAGE> 13
SECTION 10.11 PRONOUNS AND PLURALS. Whenever the context may require,
any pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
SECTION 10.12 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together constitute one agreement binding on all the parties hereto.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ROYAL BODYCARE, INC.
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
INDEMNITEE
-------------------------------------
[Name]
[Address]
14
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0
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<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<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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