<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number: 33-20323
Royal BodyCare, Inc.
--------------------
(Exact name of registrant as specified in its charter)
Nevada 91-2015186
------------------------ ----------
(State of Incorporation) (IRS Employer ID No.)
2301 Crown Court, Irving, Texas 75038
------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: 972-893-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Act of 1934 during the past
12 months and (2) has been subject to such filing requirements for the past 90
days.
X YES NO
--- ---
Shares of common stock, par value $0.001, outstanding at November 10, 2000:
13,916,294
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page Number
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of
Operations for the quarters ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Operations
for the nine months ended
September 30, 2000 and 1999 5
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosure about
Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security
Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 272,575 $ 208,225
Accounts receivable 605,960 542,191
Inventories 3,927,030 2,904,603
Deferred tax asset -- 248,981
Prepaids and other 173,958 75,465
------------- -------------
Total current assets 4,979,523 3,979,465
Property & equipment, net 2,632,133 2,185,617
Goodwill, net 2,393,923 2,516,945
Other assets 473,855 318,369
------------- -------------
$ 10,479,434 $ 9,000,396
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ 634,602 $ 671,806
Notes payable 347,419 108,071
Accounts payable 1,774,847 944,071
Accrued liabilities 1,924,742 2,059,495
Net liabilities of discontinued operations 100,000 212,386
------------- -------------
Total current liabilities 4,781,610 3,995,829
Long term debt, net of current portion 668,823 584,980
Deferred tax liability, non-current 31,535 31,535
Shareholders' equity:
Common stock, $0.001 par value;
50,000,000 shares authorized;
13,916,294 shares issued and
outstanding 13,916 13,916
Paid in capital 12,147,818 12,147,818
Accumulated deficit (7,183,864) (7,785,407)
Cumulative translation adjustment 19,596 11,725
------------- -------------
4,997,466 4,388,052
------------- -------------
$ 10,479,434 $ 9,000,396
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE> 4
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended September 30,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Sales $ 9,248,329 $ 8,374,371
Cost of goods sold 2,349,058 2,086,879
--------------- ---------------
Gross margin 6,899,271 6,287,492
Operating expenses
Distributor commissions 3,641,441 3,437,912
Selling, general and administrative 3,144,565 2,783,204
--------------- ---------------
Total operating expenses 6,786,006 6,221,116
--------------- ---------------
Income before income taxes 113,265 66,376
Provision for income taxes 38,000 30,966
--------------- ---------------
Income from continuing operations 75,265 35,410
Income (loss) from discontinued operations 74,386 (3,623)
--------------- ---------------
Net income $ 149,651 $ 31,787
=============== ===============
Income (loss) per share:
Income from continuing operations per share $ 0.01 $ --
Income from discontinued operations per share -- --
--------------- ---------------
Net income per share $ 0.01 $ --
=============== ===============
Weighted average common shares outstanding 13,916,294 13,862,205
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE> 5
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Sales $ 29,407,989 $ 24,966,037
Cost of goods sold 7,426,686 6,062,865
--------------- ---------------
Gross margin 21,981,303 18,903,172
Operating expenses
Distributor commissions 12,004,499 10,410,249
Selling, general and administrative 9,179,647 7,681,771
--------------- ---------------
Total operating expenses 21,184,146 18,092,020
--------------- ---------------
Income before income taxes 797,157 811,152
Provision for income taxes 270,000 380,966
--------------- ---------------
Income from continuing operations 527,157 430,186
Income from discontinued operations 74,386 137,576
--------------- ---------------
Net income $ 601,543 $ 567,762
=============== ===============
Income (loss) per share:
Income from continuing operations per share $ 0.04 $ 0.03
Income from discontinued operations per share -- 0.01
--------------- ---------------
Net income per share $ 0.04 $ 0.04
=============== ===============
Weighted average common shares outstanding 13,916,294 13,862,205
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE> 6
ROYAL BODYCARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) 601,543 567,762
Less income from discontinued operations $ (74,386) $ (137,576)
--------------- ---------------
Income (loss) from continuing operations 527,157 430,186
Adjustment for non-cash items:
Depreciation and amortization 502,801 335,545
Deferred income taxes 143,981 135,000
(Increase) decrease in accounts receivable (64,272) (153,408)
(Increase) decrease in inventory (1,052,643) (364,244)
(Increase) decrease in prepaids and other (100,438) 113,539
(Increase) decrease in other assets (155,486) (36,741)
Increase (decrease) in accounts payable
and accrued expenses 707,305 600,536
Increase (decrease) in notes payable 239,348 --
--------------- ---------------
Cash flows from continuing operations 747,753 1,060,413
Cash flows from discontinued operations 74,386 (60,104)
--------------- ---------------
Total cash provided by (used for) operating activities 822,139 1,000,309
--------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (695,498) (668,550)
--------------- ---------------
Total cash provided by (used for) investing activities (695,498) (668,550)
--------------- ---------------
Cash flows from financing activities:
Proceeds from long term debt 420,839 --
Payments of long term debt and capital leases (493,973) (355,182)
--------------- ---------------
Total cash provided by (used for) financing activities (73,134) (355,182)
--------------- ---------------
Effect of exchange rate changes on cash flows 10,843 (7,235)
--------------- ---------------
Net increase (decrease) in cash 64,350 (30,658)
Cash, beginning of period 208,225 382,409
--------------- ---------------
Cash, end of period $ 272,575 $ 351,751
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
-6-
<PAGE> 7
ROYAL BODYCARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the disclosures required by generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of our results for the interim
periods have been included. The Condensed Consolidated Balance Sheet as of
December 31, 1999 was derived from our audited financial statements included in
our Form 10-K for the year ended December 31, 1999. The accompanying financial
statements should be read in conjunction with our Form 10-K for the year ended
December 31, 1999.
NOTE 2 -BUSINESS HISTORY:
HISTORY - 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. On July 1, 1988, the Jason Ray Corporation
changed its name to Seven Oaks Farms, Ltd. 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.
In April 1997, Mighty Power USA, Inc. merged with GlobeNet Inc. This merger,
also a purchase under Accounting Principles Board Opinion 16, was accounted for
as a reverse merger with Mighty Power USA, Inc. being the survivor but GlobeNet
Inc. being treated as the acquirer. Mighty Power USA, Inc. then changed its name
to GlobeNet International I, Inc.
GlobeNet Inc. had been 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.
-7-
<PAGE> 8
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 affiliates of Mighty Power USA for $100,000 in notes payable.
GlobeNet International then purchased all the outstanding common stock of Great
Xpectations for an additional $100,000 note payable. These transactions were
also accounted for as purchases.
In June 1998, we announced our intention to spin-off Great Xpectations to our
shareholders. Because Great Xpectations was unable to adequately execute its
business plan and no longer had any meaningful assets, we subsequently decided
to discontinue this planned spin-off. Our 1998 financial statements and our
quarterly financial statements for the first three quarters of 1999 were
prepared as if the spin-off of Great Xpectations had been completed on June 30,
1998. We have restated these financial statements to reflect our decision to
discontinue the planned spin-off and discontinue Great Xpectations' operations.
Accordingly, our 1999 financial statements include the accounts of Great
Xpectations, resulting in a loss from discontinued operations of $4,000 and
income from discontinued operations of $138,000 for the three and nine-month
periods ended September 30, 1999, respectively.
OPERATIONS - We are engaged in the marketing of nutritional supplements and
personal care products through an international network of independent
distributors. We operate our business in the U.S. and Canada through the Royal
BodyCare USA, Inc. and Royal BodyCare Canada, Inc., respectively, and in other
countries through licensees. Our business represents the separate business
strategies and product lines of GlobeNet preceding the merger with Mighty Power
described above. The operations of Mighty Power and its affiliates prior to the
merger with GlobeNet were conducted by Great Xpectations after the merger. As
described above, these operations have been discontinued and are presented as
discontinued operations in the accompanying financial statements.
In 1995, we began entering into agreements to license the exclusive rights to
sell our products through third party licensees in various countries. Since
1995, we have entered into seven such agreements to market our products. Under
these agreements independent distributors in the licensed countries are
compensated according to the same compensation plan as that used for the
independent distributors in the U.S. and Canada.
NOTE 3 - INVENTORIES:
At September 30, 2000 and December 31, 1999, inventories consist of finished
goods, bulk products ready for packaging and packaging materials.
-8-
<PAGE> 9
NOTE 4 - PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Office equipment and
computer software $ 3,624,571 $ 2,900,850
Warehouse equipment 351,482 304,854
Automotive equipment 16,000 15,609
Leasehold improvements 163,698 106,525
------------------ -----------------
4,155,751 3,327,838
Less - accumulated depreciation (1,523,618) (1,142,221)
------------------ -----------------
$ 2,632,133 $ 2,185,617
================== =================
</TABLE>
In August 2000, we entered into a contract to purchase our corporate
headquarters facility located in Irving, Texas for $3,500,000. This contract is
subject to certain contingencies including the arrangement of suitable
financing. In connection with the execution of this contract, we advanced a
$105,000 refundable deposit to the seller.
NOTE 5 - GOODWILL:
Goodwill was recorded in connection with the acquisition of Pure Life
International Products, Inc. in 1992 and Light Force, Inc. ("Light Force") in
June 1996 as follows:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Light Force $ 2,378,727 $ 2,378,727
Pure Life 843,622 843,622
------------------ -----------------
3,222,349 3,222,349
Less - accumulated amortization (828,426) (705,404)
------------------ -----------------
$ 2,393,923 $ 2,516,945
================= =================
</TABLE>
NOTE 6 - ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Distributor Commissions $ 1,347,621 $ 1,496,558
Sales and other taxes 276,655 165,000
Interest 11,445 12,552
Other 289,021 385,385
------------------ -----------------
$ 1,924,742 $ 2,059,495
================= =================
</TABLE>
-9-
<PAGE> 10
NOTE 7 - LONG TERM DEBT:
Long term obligations consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Notes payable - banks $ 275,859 $ 146,736
Convertible notes payable 208,000 273,000
Debentures 25,000 25,000
Whigham settlement 183,486 380,248
Capital leases 611,080 431,802
------------------ ---------------
1,303,425 1,256,786
Less - current portion (634,602) (671,806)
------------------ ---------------
$ 668,823 $ 584,980
================== ===============
</TABLE>
Included in notes payable-banks are three notes assumed in connection with the
Light Force acquisition totaling $3,436 and $23,540 at September 30, 2000 and
December 31, 1999, 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.
Included in notes payable-banks are notes payable totaling $116,959 and $57,442
at September 30, 2000 and December 31, 1999, respectively for the purchase of
automobiles. These notes are payable through 2005, bear interest ranging from
4.9% to 9%, and are collateralized by the automobiles financed.
Included in notes payable-banks is an equipment repurchase note of $50,464 and
$65,754 at September 30, 2000 and December 31, 1999, respectively, due in
monthly payments of $2,146, including interest at 9%, through 2002.
Also included in notes payable-banks is a five-year note for $105,000 that bears
interest at 10%. This note is payable interest only for the first 90 days, with
monthly principal and interest payments due thereafter. Proceeds from this
borrowing were used to make a refundable deposit in connection with our contract
to purchase our headquarters facility located in Irving, Texas as described in
Note 4.
In 1997, we sold convertible notes aggregating $730,000. The notes bear interest
at 10% payable quarterly, and were originally due two years from the date of
issuance. The notes are convertible into our common stock at any time prior to
maturity at the option of the holder based on per share conversion price of
$1.32. As of September 30, 2000, we have repaid $274,000 and $248,000 has been
converted into 186,885 shares of our common stock. The remaining notes were
renewed at the option of the holder for periods of one year from the anniversary
of the original due date.
In 1994, we 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 his
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%.
-10-
<PAGE> 11
In 1999 we settled a claim by a former marketing consultant and distributor of
our products ("Whigham Settlement") by agreeing to pay $540,000 over a 54-month
period. The settlement was payable $100,000 in each October 1999, January 2000
and April 2000 and $5,000 per month beginning May 2000 through April 2004. The
settlement is without interest and has been discounted at 10%.
Certain purchases of equipment and software have been financed through capital
leases. Such leases have terms ending in 2004 and have various interest rates
approximating 15%.
NOTE 8 - SHAREHOLDERS' EQUITY:
In connection with private placements of its common stock in October 1997, June
1998 and July 1998, we issued to the purchasers five-year warrants to purchase
an aggregate of 1,216,931 shares of our unregistered common stock at an exercise
price of $2.00 per share. The investors also received certain registration
rights covering the private placement and warrant shares exercisable under
certain circumstances described in the stock purchase agreements.
In addition, we have granted, to employees and distributors, options to purchase
an additional 1,126,120 shares of unregistered common stock at exercise prices
ranging from $.50 to $2.40 through 2005. All options were issued at or above
market price at the time of issuance.
NOTE 9 - INCOME TAXES:
We file a consolidated tax return with our U.S. subsidiaries. Our Canadian
subsidiaries 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. As of December 31, 1999, we had a net operating loss carryforward
of approximately $657,000 available to offset future taxable income. The
carryforward will expire between the years 2013 and 2015. However, we expect a
significant portion of this carryforward in 2000.
NOTE 10 - CONTINGENCIES:
From time to time we are involved in various legal matters arising in the normal
course of business. In the opinion of management, all such matters that have
come to our attention are without merit and the outcome will not have a material
effect on our financial position.
-11-
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The statements, other than statements of historical facts included in this
quarterly report on Form 10-Q, including statements set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding our future financial positions, business strategy,
budgets, project cost, and plans and objectives for future operations 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 will prove to be
correct. However, we cannot assure you that such expectations will occur. Our
actual future performance could differ materially from such statements. Factors
or events 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 or an increased rate of attrition
of our distributors
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 by a single source
RESULTS OF OPERATIONS
Quarter Ended September 30, 2000 Compared with the Quarter Ended September 30,
1999
Our sales for the quarter ended September 30, 2000 were $9,248,000 compared with
sales for same quarter of the prior year of $8,374,000, an increase of $874,000
or 10%. In the third quarter of 2000, sales increased in all of our markets.
Sales in the United States, Canada and other international markets increased
$270,000, $431,000 and $173,000, respectively. The sales increase in the United
States resulted from continued growth in the United States distributor base that
began in late 1997. The increase in Canadian sales was primarily related to
increased sales in Eastern Canada. Prior to mid-1999, our Canadian 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 licensee in Sweden.
-12-
<PAGE> 13
Our cost of goods sold for the quarter ended September 30, 2000 was $2,349,000
compared with cost of goods sold in the same quarter of the prior year of
$2,087,000 an increase of $262,000 or 13%. This increase was primarily due to
the increased sales during this period over the same period in 1998. As a
percentage of sales, cost of goods sold was 25% in 1999 and 2000.
Our distributor commissions for the quarter ended September 30, 2000 were
$3,641,000 compared with distributor commissions in the same quarter of 1999 of
$3,438,000, an increase of $203,000 or 6%. As a percentage of sales, distributor
commissions in 2000 were 39% compared with 41% in 1999. This percentage decrease
resulted mainly from a re-structuring of our distributor compensation plan that
became fully effective June 1, 2000. We expect this percentage to increase over
time as distributors qualify for the highest commission levels in the plan. The
decrease in distributor commissions as a percentage of sales was also partially
attributable to the increase, as a percentage of total sales, of export sales to
our international licensees. We do not pay distributor commissions on the sales
of these products.
Our general and administrative expenses for the quarter ended September 30,
2000, were $3,145,000 compared with such expenses in the same quarter of 1999 of
$2,783,000, an increase of $362,000 or 13%. A significant portion of this
increase represented expenses we incurred to support the increase in our
distributor base in Eastern Canada and our new international licensees. As
percentage of sales, general and administrative expenses were 34% and 33% in
2000 and 1999, respectively.
Our income from continuing operations for the quarter ended September 30, 2000
was $75,000 compared with income from continuing operations in the same quarter
of the prior year of $35,000, an increase of $40,000 or 114%. This increase was
mainly the result of our decreased distributor commissions on a percentage
basis.
Discontinued operations represent the operations of Great Xpectations. Income
from discontinued operations for the third quarter ended September 30, 2000,
which amounted to $74,000, was attributable to the reversal of certain accruals.
These accruals were originally based on estimates that assumed Great
Xpectations' operations would continue. Since these operations have been
discontinued, it was determined that the accruals were no longer necessary. The
loss from discontinued operations was $4,000 for the quarter ended September 30,
1999.
Our net income for the quarter ended September 30, 2000 was $150,000, or $.01
per share, compared with net income in the comparable quarter of the prior year
of $32,000, an increase of $118,000 or 369%.
Nine Months Ended September 30, 2000 Compared with Nine Months Ended
September 30, 1999
Our sales for the nine months ended September 30, 2000 were $29,408,000 compared
with sales for same period of the prior year of $24,966,000, an increase of
$4,442,000 or 18%. In the first nine months of 2000, sales increased in all of
our markets. Sales in the United States, Canada and other international markets
increased $2,068,000, $1,777,000 and $597,000, respectively. The sales increase
in the United States resulted from continued growth in the United States
distributor base that began in late 1997. The increase in Canadian sales was
primarily related to increased sales in Eastern Canada. Prior to mid-1999, our
Canadian sales were heavily concentrated in Western Canada. However, during the
second quarter of 1999, we attracted a
-13-
<PAGE> 14
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 licensee in Sweden.
Our cost of goods sold for the nine months ended September 30, 2000 was
$7,427,000 compared with cost of goods sold in the same period of the prior year
of $6,063,000 an increase of $1,364,000 or 22%. As a percentage of sales, cost
of goods sold increased from 24% in 1999 to 25% in 2000. This increase resulted
mainly from the increase, as a percentage of total sales, of export sales to our
international licensees. Export sales to international licensees have a lower
gross margin since we do not pay the independent distributor commissions on the
sales of these products.
Our distributor commissions for the nine months ended September 30, 2000 were
$12,004,000 compared with distributor commissions in the same period of 1999 of
$10,410,000, an increase of $1,594,000 or 15%. As a percentage of sales,
distributor commissions decreased from 42% in 1999 to 41% in 2000. This
percentage decrease resulted mainly from a re-structuring of our distributor
compensation plan that became fully effective June 1, 2000. We expect this
percentage to increase over time as distributors qualify for the highest
commission levels in the plan. The decrease in distributor commissions as a
percentage of sales was also partially attributable to the increase in export
sales to our international licensees. As previously described, we do not pay
distributor commissions on the sales of these products.
Our general and administrative expenses for the nine months ended September 30,
2000, were $9,180,000 compared with such expenses in the same period of 1999 of
$7,682,000, an increase of $1,498,000 or 20%. This increase resulted primarily
from increased expenses associated with the growth of the distributor base in
the United States and Eastern Canada, and our new international licensees. As
percentage of sales, general and administrative expenses were 31% in 1999 and
2000.
Our income from continuing operations for the nine months ended September 30,
2000 was $527,000 compared with income from continuing operations in the same
period of the prior year of $430,000, an increase of $97,000. This increase was
the result of the factors previously described.
Discontinued operations represent the operations of Great Xpectations. Income
from discontinued operations for the nine months ended September 30, 2000, which
amounted to $74,000, was attributable to the reversal of certain accruals. These
accruals were originally based on estimates that assumed Great Xpectations'
operations would continue. Since these operations have been discontinued, it was
determined that the accruals were no longer necessary. Income from discontinued
operations for the nine months ended September 30, 1999 was $138,000. This
income resulted mainly from the reversal of certain liabilities recorded in
prior years that were settled for less than the original contractual commitment.
-14-
<PAGE> 15
Our net income for the nine months ended September 30, 2000 was $602,000, or
$.04 per share, compared with net income in the comparable quarter of the prior
year of $568,000 or $.04 per share, an increase of $34,000. This increase
resulted from the improvement in income from continuing operations, which was
mainly attributable to higher sales in 2000.
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.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2000, we had a net increase in cash of $64,000.
This increase in cash resulted primarily from net cash provided by operating
activities of $822,000, and $421,000 in net proceeds from borrowings, that was
partially offset by the net cash used to purchase property and equipment of
$695,000 and payments of long-term debt and capital leases of $494,000. The net
cash provided by operations was primarily the result of an increase in accounts
payable and accrued liabilities (mainly accounts payable and accrued distributor
commissions) of $707,000 that was partially offset by an increase in inventory
of $1,053,000. This increase in inventory was related to the sales increase we
experienced and the timing of the receipt of a large order of bulk product. We
expect inventory levels to decline during the fourth quarter.
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.
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 the remainder of 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.
-15-
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Not applicable
-16-
<PAGE> 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Currently, no legal proceedings are pending against or involve us that
in the opinion of management could have an adverse effect on our business,
financial condition or results of operations.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
A list of exhibits required by Item 601 of Regulation S-K and
filed as part of this report is set forth in the Exhibit
Index, which immediately precedes such exhibits.
(b) Reports on Form 8-K
None
-17-
<PAGE> 18
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Royal BodyCare, Inc.
------------------------------------------
Registrant
By: /s/ Clinton H. Howard
---------------------------------------
Its: President
DATE: November 10, 2000
Irving, Texas
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Real Estate Purchase Agreement
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
</TABLE>
