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1999
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[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
Commission File No. 000-24657
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2508900
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 S. Royal Lane, Suite 200 75019
Coppell, Texas (Zip Code)
(Address of Principal Executive
Offices)
Registrant's Telephone Number, including Area Code: (972) 471-7400
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Title of Class
Common Stock, Par Value $0.0001 Per Share
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.
The aggregate market value of the 7,699,236 shares of registrant's voting
stock held by non-affiliates of the registrant was $36,094,018, based on the
closing price of the registrant's common stock on the Nasdaq National Market
on March 24, 2000 of $4.688 per share.
The number of shares outstanding of the registrant's sole class of common
stock, par value $0.0001 per share, as of March 24, 2000, the latest
practicable date, was 24,939,293.
Documents Incorporated by Reference
None.
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TABLE OF CONTENTS
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Part I
Item 1. Business......................................................... 1
General................................................................ 1
Industry Overview...................................................... 2
Operating Strengths.................................................... 3
Growth Strategy........................................................ 4
Products and Product Development....................................... 5
Product Distribution System............................................ 7
Information Technology and Systems..................................... 10
Production and Distribution............................................ 11
Government Regulations................................................. 12
Competition............................................................ 16
Employees.............................................................. 17
Item 2. Properties....................................................... 17
Item 3. Legal Proceedings................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 18
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters................................................................. 19
Item 6. Selected Financial Data.......................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 21
Overview............................................................... 21
Results of Operations.................................................. 24
Year ended December 31, 1999 compared with the Year ended December 31,
1998.................................................................. 24
Year ended December 31, 1998 compared with the Year ended December 31,
1997.................................................................. 26
Seasonality and Selected Quarterly Statements of Income................ 28
Liquidity and Capital Resources........................................ 29
Year 2000.............................................................. 31
Impact of Inflation.................................................... 31
Subsequent Event....................................................... 32
Recent Financial Accounting Standards Board Statements................. 32
Forward-Looking Statements............................................. 32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 33
Item 8. Financial Statements and Supplementary Data...................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 33
Part III
Item 10. Directors and Executive Officers of the Registrant.............. 34
Directors and Executive Officers....................................... 34
Classes of our Board of Directors...................................... 37
Committees of the Board of Directors................................... 37
Director Compensation.................................................. 37
Section 16(a) Beneficial Ownership Reporting Compliance................ 37
Item 11. Executive Compensation.......................................... 39
Stock Option Grants in Last Fiscal Year................................ 39
Stock Options exercised in Last Fiscal Year............................ 40
Executive Employment Agreements........................................ 40
Management Bonus Plan.................................................. 40
Compensation Committee Interlocks and Insider Participation............ 40
Executive Compensation Report of the Board of Directors................ 40
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Page
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1999 Chief Executive Officer Compensation............................... 41
Stock Option Plans...................................................... 42
401(k) Plan............................................................. 43
Performance Graph....................................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and Management... 45
Item 13. Certain Relationships and Related Transactions................... 46
Loans to Officers....................................................... 46
Loans to Agritech Labs, Inc............................................. 46
Commission Agreement, Consulting Fee and Receivable from Related
Parties................................................................ 46
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 47
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PART I
Item 1. Business
General
Mannatech, Incorporated, a Texas corporation, develops and sells proprietary
nutritional supplements and topical products through a network marketing
system. We sell our products in the United States, Canada, Australia and the
United Kingdom through a network of approximately 269,000 active associates as
of March 9, 2000 compared to approximately 237,000 active associates as of
February 28, 1999. An "active" associate is one who has purchased products
within the last 12 months. We plan to expand into Japan in the summer of 2000,
while continuing to assess the potential and risks of expansion into other
foreign markets.
Since beginning operations in November 1993, we have achieved year-to-year
growth in net sales, from approximately $8.4 million in 1994 to approximately
$179.7 million in 1999. The net increase is primarily due to our introduction
of new products and expansion into other geographical markets through three of
our wholly-owned subsidiaries, which are currently operating. The subsidiaries
are as follows:
. Mannatech Australia Pty Limited was formed in April 1998 and began
operations in Australia on October 1, 1998 as a limited service
provider.
. Mannatech Ltd. was formed in April 1999 and began operations in the
United Kingdom on November 15, 1999 as a limited service provider.
. Internet Health Group, Inc., a Texas corporation, was formed in May 1999
and began operations on December 20, 1999 marketing its proprietary
products, specially developed nutritional supplements and sports
nutrition products over the Internet, through its website at
www.clickwell.com.
On February 12, 1999, we completed our initial public offering. In the
initial public offering, we and certain selling shareholders sold an aggregate
of 3,056,016 shares of our common stock, par value $0.0001 per share, at a
price of $8.00 per share. Of the total number of shares sold in the initial
public offering, 1,500,000 were sold by Mannatech yielding net proceeds to
Mannatech of approximately $9.2 million. The remaining 1,556,016 shares of
common stock were sold by certain shareholders of Mannatech. The net proceeds
to the selling shareholders were approximately $12.0 million. Since the
initial public offering, our common stock has traded on the Nasdaq National
Market under the symbol "MTEX."
We are principally engaged in a single business segment, the development and
distribution of nutritional supplements and topical products. Information for
each of our most recent three fiscal years, with respect to the amounts of
revenues from sales, operating profit and identifiable assets of this segment
is set forth under Item 6 of this report on page 20.
We pursue a two-fold business strategy:
. to develop a proprietary line of nutritional supplements having both
health benefits and mass appeal to a general population demanding non-
toxic healthcare alternatives; and
. to provide an appealing framework for persons interested in our products
to establish a direct sales business.
To date, we have focused our development efforts primarily in the area of
carbohydrate technology, creating a proprietary ingredient, Ambrotose(R)
complex, which combines certain naturally occurring sugars required to support
optimal cell-to-cell communication. We have also focused on developing
products based on scientific advances in the emerging field of phytochemistry.
This field has identified certain naturally occurring components of various
plants, known as "phytochemicals," which, while not essential to sustain life,
are believed fundamental for optimal health.
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Ambrotose(R) complex is the cornerstone of our proprietary product lines.
These products are designed to support various systems and functions of the
human body, including:
. the cell-to-cell communication system;
. the immune system;
. the endocrine system;
. the intestinal system; and
. the dermal system.
We also market products designed to aid in sports performance and
nutritional support.
Our products are marketed exclusively through a network marketing system. We
believe that the network marketing system is well-suited to our products,
which emphasize health and nutrition, because network marketing allows in-
person product education not available through traditional marketing
techniques. The network marketing system appeals to a broad cross-section of
people, particularly those seeking to supplement family income, start a home-
based business or pursue employment opportunities other than conventional,
full-time employment.
Our principal executive offices are located at 600 S. Royal Lane, Suite 200,
Coppell, Texas 75019, our telephone number is (972) 471-7400 and our website
address is www.mannatech-inc.com. Unless the context otherwise requires, the
term "Company," "our" or "we," as used in this report shall mean Mannatech,
Incorporated and its subsidiaries, collectively.
Industry Overview
The nutritional supplements industry includes manufacturers and distributors
of products that are generally intended to enhance the body's performance and
well being. Nutritional supplements include:
. vitamins;
. minerals;
. dietary supplements;
. herbs;
. botanicals; and
. compounds derived from the above.
The nutritional supplements industry has experienced substantial growth
since the adoption of the Dietary Supplement Health and Education Act of 1994.
This act has allowed vendors of dietary supplements to educate consumers
regarding the effects of certain ingredients. According to the Nutrition
Business Journal Annual Industry Overview, 1997 dietary supplement sales in
the United States increased by 13% over 1996 and totaled approximately $12.6
billion. With respect to the United Kingdom, the October/November 1998
Nutrition Business Journal noted that 1997 European dietary supplement sales
were approximately $11.9 billion, of which 12% was derived from sales in the
nutrition industry. Further, with respect to our planned expansion into Japan,
the October/November 1998 Nutrition Business Journal noted that Japanese
dietary supplements sales were approximately $6.4 billion in 1997, of which
54% was derived from sales in the nutrition industry. We believe the growth in
the nutritional supplement market is driven by several factors, including:
. the general public's heightened awareness and understanding of the
connection between diet and health;
. the aging population, particularly the baby-boomer generation, which is
more likely to consume nutritional supplements;
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. product introductions in response to new scientific research; and
. a nationwide trend toward preventive medicine.
Nutritional supplements are sold primarily through:
. mass market retailers, including mass merchandisers, drug stores,
supermarkets and discount stores;
. health food stores;
. mail order companies; and
. direct sales organizations.
In the past decade, direct selling has grown as a means to distribute
products due to advancements in technology and communications. Network
marketing is a type of direct selling that has also grown significantly in
recent years. According to the "Survey of Attitudes toward Direct Selling,"
prepared by Wirthlin Worldwide, food, nutrition and wellness products are
among the three categories experiencing the greatest gains in the direct
selling industry since 1976. According to this survey, approximately 50% of
the American public have purchased products or services from a direct selling
company at some point in their lifetime. In addition, approximately 40% of
adult Americans have expressed an interest in direct selling as a method of
buying products and services. Further and estimated 23% of those who have
never purchased products and services from direct selling companies are
interested in direct selling. We believe we are positioned to capitalize on
the trends of growth in direct sales and demand for nutritional supplement
products.
Operating Strengths
We attribute much of our success to our two-fold business strategy, which
is:
. to develop a line of nutritional supplements having both health benefits
and mass appeal to the increasing number of people who are becoming more
health conscious; and
. to provide an opportunity for people interested in our products to
establish a direct sales business.
We believe this business strategy will enable us to continue our growth by
capitalizing on the following strengths:
Proprietary Products. We offer an innovative line of products based upon our
proprietary, patent-pending research. We believe that the discovery and
development of products containing certain carbohydrates necessary to optimum
health represents an expanding business opportunity for us. We recognized the
nutritional need for the eight known monosaccharides in supporting optimal
health and developed and filed a patent application on a compound containing
these monosaccharides called Ambrotose(R) complex. We believe that maintaining
a proprietary line of products containing this compound is important for two
reasons: (A) it is a marketing factor that differentiates us from our
competitors; and (B) the limited availability helps to drive demand and
enables premium pricing.
Research and Development. We believe that our experienced personnel and
research and development facilities built in 1998 will allow us to develop and
market additional new proprietary products. Our research and development
efforts are led by two scientists with an aggregate of over 35 years of
experience designing products based on carbohydrate technology. Our
technologically advanced laboratory is equipped with gas and liquid
chromatographs and mass spectrometers, which will be used to:
. maintain quality standards;
. support our research and development commitment in the area of new
herbal complexes; and
. support our development of both new and existing products.
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To complement our in-house staff and facilities, we have sought, and will
continue to seek, strategic alliances with several large manufacturers of
nutritional supplements. These companies work with us to create, develop and
manufacture our proprietary products. We also work with other smaller
companies to identify and develop new innovative products.
Associate Support Philosophy. We are committed to providing the highest
level of support services to our associates. We believe that we meet the needs
of, and build loyalty with, our associates through our highly personalized and
responsive customer service. We sponsor four to six associate events
throughout the year to provide education and motivation for thousands of
associates. These events offer information, aid in business development and
are a venue for associates to interact with our leading distributors and
researchers.
Flexible Operating Strategy. Flexibility is a key part of our existing and
ongoing success. We outsource our production and form strategic alliances to
minimize capital expenditure where practicable. We believe we can enter
international markets in an efficient and cost-effective manner by using the
expertise and resources of our strategic allies in the areas of distribution
and logistics, call center operations, product registration and export
requirements. Information technology also plays an essential role in our
operating expansion into new markets. By developing this operating strategy,
we believe we can reduce the operational problems typically encountered by
network marketing companies.
Experience and Depth of our Management Team. Our management team consists of
experienced individuals drawn from a variety of backgrounds and having
expertise in various fields, including:
. product research and development;
. marketing;
. direct sales;
. legal and compliance;
. information technology; and
. product distribution.
All principal managers have substantial business experience, most with
larger businesses. These managers are able to bring the perspective of
traditional business to our network marketing system. Our management team's
goal is to provide a sound, systematic and reliable framework within which
each associate can fit his or her personal style of conducting business.
Growth Strategy
Our primary growth strategy is to:
. increase associate product sales;
. continue to expand operations in existing markets;
. expand into newly identified markets; and
. continue to evaluate expansion into additional foreign markets.
We believe that our future growth will be based on the following factors:
Introduce New Products. Since our inception, we have and currently intend to
continue to introduce new products each year. We expect each new product to
contain one or more proprietary components and to complement existing
products.
Attract and Retain New Associates and Enhance Associate Productivity. Since
we began operations, we have enjoyed significant growth in the number of
associates by focusing on our operating strengths and creating
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a business climate that recognizes associates for their achievements. We plan
to continue to introduce new associate achievement levels in part to encourage
greater retention, motivation and productivity. In addition, we will continue
to modify our associate events and recognition programs to encourage retention
and growth in the number of associates. No one associate accounts for more
than 10% of our total sales.
Enter New Markets. We believe that potential for growth exists in
international markets based upon our experience over the past year and reports
from our competitors. In April 1996, we began selling to associates in Canada.
In October 1998, we opened our Australian headquarters in St. Leonards,
Australia. In November 1999, we opened our United Kingdom headquarters in
Basingstoke, Hampshire. We are also planning to open our Japanese headquarters
in Tokyo, Japan during the summer of 2000. We will continue to research the
potential of other foreign markets. By employing our flexible operating
strategy in the international sector, we believe we will be able to enter new
markets in a cost-effective and efficient manner. We will base our decision to
expand into new markets on (A) size of the market, (B) anticipated demand and
(C) ease of entry.
Products and Product Development
We market a line of quality, proprietary products, including twenty-six
different nutritional products and three topical products. We believe our
focused product line contributes to efficient distribution and inventory
management. We also offer a variety of sales aids, including enrollment and
renewal packs, brochures, videotapes and even develop a personalized website
for our associates. These sales aids accounted for approximately 24.7%, 18.9%
and 17.6% of our net sales in 1997, 1998 and 1999, respectively.
We believe that the discovery and use of certain carbohydrates offers
significant potential for nutritional benefits. Healthy bodies, comprised of
many sophisticated components working together, must have an accurate internal
communication to function at an optimal level. In its most basic form, this
communication occurs at the cellular level and is referred to by molecular
biologists as cell-to-cell communication. To maintain a healthy body, cells
must "talk" to other cells. Scientists have learned that certain molecules
found on the surface of all cells, called "glycoproteins,' play an essential
role in all cell-to-cell communication. The name "glycoprotein" is derived
from the molecules' composition: sugar, known as "glyco," and protein. The
body's need for these carbohydrates is important because up to 85% of
glycoproteins are composed of specific monosaccharides that we believe are
necessary to support optimal health.
Harper's Biochemistry, a leading biochemistry reference source, lists eight
monosaccharides commonly found in human glycoproteins, which are important to
the healthy functioning of cell-to-cell communications in the human body.
These monosaccharides are:
. fucose;
. galactose;
. glucose;
. mannose;
. N-acetylgalactosamine;
. N-acetylglucosamine;
. N-acetylneuraminic acid; and
. xylose.
From the universe of approximately 200 monosaccharides found in nature, our
proprietary ingredient, Ambrotose(R) complex, is designed to provide
monosaccharides, which are necessary for optimal cell-to-cell communication.
Our overall product strategy is to develop proprietary nutritional
supplements that capitalize on existing and emerging scientific knowledge and
the growing worldwide interest in alternative healthcare and optimal health.
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We focus on bringing new proprietary and, where possible, patentable products
to market that can be developed into new product lines, while expanding our
existing product lines. We incurred research and development costs related to
specific clinical studies, quality assurance programs and new product
development of approximately $381,000, $391,000 and $438,000 in 1997, 1998 and
1999, respectively. We also incurred research and development costs related to
designing new products, enhancing existing products, Food and Drug
Administration compliance studies, general supplies, internal salaries and
consulting fees of approximately $3,008,000, $3,365,000 and $3,623,000 in
1997, 1998 and 1999, respectively.
The following chart lists our products, and the body systems targeted by
each, as of December 31, 1999:
Cell-to-Cell Immune Endocrine Intestinal Dermal Sports Nutritional
Communication System System System System Performance Needs
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Ambroderm............... X
Ambrostart(TM).......... X X X
Ambrotose(R)............ X
Bulk Ambrotose(R)....... X
Bulk Em.Pact(TM) ....... X
Em.Pact(TM) ............ X
Emprizone(R) ........... X
Firm.................... X
GlycoLEAN(TM)
Accelerator............ X X X
GlycoLEAN(TM) Catalyst.. X X X
GlycoLEAN(TM) Fiber
Full................... X X X
GlycoLEAN(TM) Manager... X X X
GlycoSLIM(TM) Drink..... X X X
Man.Aloe(R)............. X
MannaBAR(TM)
Carbohydrate Formula... X X X
MannaBAR(TM) Protein
Formula................ X X X
MannaBAR(TM) Apple-
Yogurt Crunch.......... X X X
Manna-C(TM) ............ X
MannaCleanse(TM) ....... X
Mannatonin.............. X
MVP(TM) ................ X
Bulk Phyt.Aloe(R) ...... X
Phyt.Aloe(R) ........... X
Phyto.Bears(R) ......... X
Plus.................... X
Profile 1............... X
Profile 2............... X
Profile 3............... X
Sport with
Ambrotose(R) .......... X
We introduced the following new products in 1999:
. Bulk Ambrotose in a 75-gram canister;
. A new flavor of the MannaBAR(TM), vanilla-coated yogurt apple crunch.
Like the other MannaBARs, this bar still contains the equivalent of the
recommended minimum daily supply of Ambrotose(R) complex, Phyt.Aloe(R)
and Plus; and
. GlycoLEAN(TM) Lean Body System, a complete lifestyle system for fighting
fat composed of five unique products to help achieve and manage weight.
The five products are GlycoLEAN(TM) Accelerator, GlycoLEAN(TM) Catalyst,
GlycoLEAN(TM) Fiber Full, GlycoLEAN(TM) Manager and GlycoSLIM(TM) Drink
mix (three flavors--chocolate, vanilla or strawberry).
In addition, we plan to release additional products as new nutritional
compounds or areas of consumer demand are identified. All new products are
expected to contain our proprietary components. Our product launches typically
occur at our corporate events. We will base our selection of products
developed on:
. the marketability and proprietary nature of the product;
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. regulatory considerations;
. the availability of ingredients; and
. the existence of data supporting claims of functionality.
To support, validate and monitor the proprietary nature of our products, our
research and development department conducts appropriate research both before
and after product launches and continuously throughout the year by taking
samples directly from shipments received from our manufacturers.
The following chart indicates the year we introduced our products:
Year Products Introduced
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1994 Man.Aloe(R), Plus, MVP(TM), Sport, Ambroderm, Phyt.Aloe(R), Firm
1995 Phyto.Bears(R), Em.Pact(TM), Emprizone(R)
1996 Ambrotose(R), Mannatonin, Profile 1, 2 and 3, Sport with Ambrotose(R)
1997 Bulk Ambrotose(R), Bulk Em.Pact(TM), MannaCleanse(TM)
1998 MannaBAR(TM) Carbohydrate Formula, MannaBAR(TM) Protein Formula, Manna-
C(TM), Ambrostart(TM), Bulk Phyt.Aloe(R)
1999 MannaBAR(TM) Vanilla Apple-Yogurt, GlycoLEAN(TM) Accelerator,
GlycoLEAN(TM) Catalyst, GlycoLEAN(TM) Fiber Full, GlycoLEAN(TM) Manager
and GlycoSLIM(TM) Drink mix (three flavors--chocolate, vanilla and
strawberry)
Product Distribution System
Overview. The foundation of our sales philosophy and distribution system is
network marketing. We believe network marketing systems is an effective
vehicle to distribute our products for the following reasons:
. it is easier to explain the benefits of our products in a person-to-
person, educational setting;
. it is more direct and personal than television and print advertisements;
. direct sales allow potential consumers to actually test our products;
. there is greater impact on the consumer from associate and consumer
testimonials;
. it assists in building a base of potential consumers for additional
products;
. associates can provide higher levels of customer service and attention
by following up on sales to ensure proper product usage and customer
satisfaction; and
. associates' contact with customers generates repeat purchases.
We encourage, but do not require, associates to use our products, nor do we
require a person to be an associate in order to purchase our products. We
believe our network marketing system is particularly attractive to prospective
associates for the following reasons:
. the potential for supplemental income;
. no requirement to purchase inventory;
. no need to collect money from customers;
. very little paperwork involved in our sales process; and
. a flexible work schedule.
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We suggest associates enroll new associates with whom the associates have
relationships; family members; friends; business associates; neighbors; or
otherwise. We believe that associates will be more likely to remain with us if
they are enrolled by someone with whom they have an ongoing relationship.
Associates pay for products prior to shipment. We carry no accounts
receivable from our associates, except for minor amounts owed to us for check
returns or other exceptions. Associates generally pay for products by credit
card; however, a small portion of orders are paid in cash or with money orders
and checks. Associates may automatically order products on a continuous basis
and receive a discount. Automatic orders accounted for approximately 36.9%,
44.9% and 47.1% of net sales for the years ended December 31, 1997, 1998 and
1999, respectively.
Advances in communications, including telecommunications and the Internet,
and the increasing use of videotape players, fax machines and personal
computers have enhanced the effectiveness of direct selling as a distribution
channel in the past decade. We produce high-quality video and audio tapes for
use in product education, demonstrations and sponsoring sessions. In March
2000, we substantially completed our science-based website,
www.GlycoScience.com that allows users to search for science-based information
about various nutritional supplements, some of which are found in our
products. We believe that these sales aids play an important role in the
success of associate efforts. We are committed to using current and future
technological advances to enhance the effectiveness of the direct selling
efforts of our associates.
Associate Development. We believe the key contributing factors to our long-
term growth and success are the recruitment of new associates and retention of
existing associates. We are active in the development of associates, including
in the areas of recruitment, support, motivation and compensation.
We primarily rely on existing associates to enroll new associates. The
enrollment of new associates creates multiple levels in the network marketing
structure. These new associates are referred to as "downline" or "sponsored"
associates. Associates can purchase products directly from us at wholesale
prices and can sponsor other associates in order to build a network of
associates and product users.
We also rely heavily on existing associates to train new associates. Our
Master Associate training course, an advanced training program for associates,
was developed using both the expertise of experienced corporate trainers and
the experience of seasoned associates. While we provide brochures, magazines
and other sales materials, advanced training is specially designed to provide
systematic and uniform training to associates about us and our products,
compensation plan, and methods of doing business.
The needs of our associates are a priority and we believe that providing a
high level of support for our associates' efforts has been and will continue
to be important to our success. We provide a large number of support services
tailored to the needs of our associates, including:
. motivational meetings;
. educational and informative conference calls;
. automated fax services;
. an efficient ordering and distribution system;
. personalized customer service via telephone, Internet and e-mail;
. 24-hour, seven days per week access to information through touch-tone
phones and the Internet;
. a liberal product return policy;
. a current database of each associates' downline information;
. business development materials that we believe will increase product
sales and recruitment; and
. an innovative website database, www.GlycoScience.com that was
substantially completed in March 2000 and designed to provide a user
with the ability to search and provide science-based information about
nutritional supplements, some of which are included in our products.
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We currently recognize associate performance with four levels of associate
leadership achievement:
. Regional;
. National;
. Executive; and
. Presidential.
The level of associate leadership is based upon the associates' downline
growth and commissionable sales. Commissionable sales are sales of products
with assigned product point volume. Generally, sales aids are not assigned any
product point volume. Each leadership level provides the opportunity for
compensation, excluding the generation bonus discussed below, ranging from 15%
of commissionable sales at the Regional director level to 9% of commissionable
sales at the Presidential level. In addition, associates are eligible for a
"generation bonus," which is an additional achievement level specially
designed to motivate sales and downline growth. The additional achievement
levels are available to the associates once the associate has achieved
Presidential leadership status. The associate can then achieve four levels of
Presidential status:
. Bronze;
. Silver;
. Gold; and
. Platinum.
Each of these achievement levels provides associates with the opportunity
for additional compensation. We intend to continue to expand our program for
associate recognition as necessary in the future to reward increased levels of
performance and to further motivate our associates.
Associate Compensation. Our plan combines the aspects of two widely used
multilevel marketing compensation plan concepts. Our plan pays commissions
based on (A) a percentage of the associate's commissionable sales; and (B) the
attainment of certain associate leadership levels. These elements of our
compensation plan are similar to other multilevel marketing compensation
plans. In addition, our associates, at their discretion, determine their
resale price of products purchased from us at the wholesale price. Our
compensation plan pays the associate as follows:
. A bonus or commission for qualified associates ranging in amounts from
$20.00 to $180.00 earned based on downline growth and commissionable
product sales.
. Associates who have completed advanced training and are at the all star
level can receive $25.00 for each eligible associate they train.
. Bonuses or commissions ranging in amounts from $10.00 to $200.00 are
also earned on products included in starter or renewal packs sold.
. The "fast start" bonus, ranging in amount from $100.00 to $500.00, is
paid if a new associate obtains Regional or National level within three
months of initially signing up as an associate.
. The "car incentive" bonus, ranging in amounts from $200.00 up to
$700.00, is paid to associates, who have achieved certain sales levels
and who have increased their product sales by 10% from the previous
year's sales volume.
. Various other bonus programs were also introduced during the year
allowing, among other things, our associates to earn various trips
including trips to our newly-opened international corporate offices.
Our compensation plan attempts to compensate both associates in the early
stages of building their business as well as associates with more established
organizations by rewarding associates for breadth as well as depth in their
downline organizations.
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Based upon our knowledge of other industry-related network marketing
compensation plans, we believe that our compensation plan is among the most
financially rewarding plans offered in the industry. Historically, commissions
as a percentage of net sales have been 41.0%, 40.4% and 40.9% for 1997, 1998
and 1999, respectively.
We do not employ the compensation plan described above outside of the United
States and Canada. In the international sector, we use a similar plan with
regard to commissionable product sales, but each plan is tailored to fit the
laws and considerations governing compensation of associates in each country.
We have integrated our international compensation plan across all markets in
which our products are, or will be, sold, thereby allowing associates to
receive commissions for global product sales, rather than merely local product
sales. We refer to this as our "global seamless downline structure" and we
hope it will continue to allow our associates to build global networks by
creating downlines in our expanding international markets. Associates will not
be required to establish new downlines or requalify for higher levels of
commissions within each new country in which they begin to operate. Our
international compensation plan is designed to pay approximately the same
percentage compensation as in the United States and Canada. We believe our
international compensation plan has and will continue to stimulate both
product sales and the development of width and breadth in downline
organizations.
Management of Associates. We take an active role in the management of our
associates. Many multilevel marketing companies encounter difficulties with
regulatory authorities due to lack of oversight of associate activities. Any
oversight process is complicated because our associates are independent
contractors and not legally employees of Mannatech. However, we seek to
restrict the statements and conduct of associates regarding our business by
contractually binding associates to abide by our associate policies and
procedures. Each associate receives a copy of the policies and procedures that
must be followed in order to maintain the associate's status with us.
Associates are expressly forbidden from making any representation as to the
possible earnings of any associate, other than through statements of Mannatech
indicating the range of actual earnings by all associates. We also monitor
associate websites for content on a regular and continuing basis. In March
1999, we introduced Mannapages(TM), a personal Internet website program
established for our associates, whereby for a $49.00 fee, we produce an
Internet website for the associate. Mannapages(TM) assists us not only in
monitoring associate websites on a regular basis, but also helps to increase
associates' sales efforts. We currently anticipate that we will replace all
associate websites with Mannapages(TM) by the end of 2000.
We have established, and enforced as much as possible, a compliance program
for disciplining associates who do not comply with our policies and
procedures. We have developed formal steps for proceeding if a complaint is
filed against an associate. Our primary goal is to educate the associate to
ensure that he or she understands the policy or procedure in question and will
follow all of our policies and procedures in the future. Also, our compliance
and legal departments, in cooperation with other departments, regularly
evaluate associate conduct and the need for new and revised policy making. We
believe our compliance program reflects positively on us, helps in the
maintenance of associate ethics and aids in our recruiting activities.
Product Return Policy. Our product return policy provides that retail
customers may return the unused portion of any product to the selling
associate and receive a full cash refund. Any associate who provides a refund
to a customer is reimbursed with product by us if they provide proper
documentation and ship us the remainder of the product. Our product return
policy for associates is to refund 90% of the wholesale cost for any returned,
unopened, restockable products and any up-to-date corporate literature that is
in good, usable condition. Historically, product returns have not been
significant. Returns as a percentage of net sales were 1.5%, 1.7% and 1.0% in
1997, 1998 and 1999, respectively.
Information Technology and Systems
We believe that maintaining sophisticated and reliable transaction
processing systems is essential to our long-term success. Our systems are
designed to:
. reduce the time required to supply an associate or customer with our
products;
. provide detailed and customized billing information;
10
. respond quickly to associate needs and information requests;
. provide detailed and accurate information concerning qualification and
downline activity;
. provide detailed reports of commissions paid to the associate;
. support our customer service department; and
. monitor, analyze and report financial and operating trends.
During 2000, we expect to spend approximately $8.6 million on information
technology operations and development activities, of which approximately, $3.6
million will be for capital expenditures. These expenditures relate to
providing new technology advances to continue to meet the above needs and
expand transaction-processing systems to accommodate our expected
international growth. We believe that our significant investment in software,
hardware and personnel will enable us to:
. respond rapidly to our business needs for information technology
assessment and development;
. manage international growth and our seamless downline structure; and
. reduce expenses as a percentage of net sales.
Our suppliers of computer hardware are Dell Computer Corporation, Hewlett-
Packard Company, Compaq Computer Corporation, and Digital Equipment
Corporation. Digital Equipment Corporation's hardware systems are linked to
provide a high level of availability for critical business applications. We
believe the global presence of these suppliers will be an important factor in
supporting our continuing expansion plans.
Our financial software was upgraded at the end of 1996 with the acquisition
of a sophisticated financial system capable of operating on several platforms.
We also purchased a report writing system, which interfaces with our financial
systems. In the summer of 1999, we upgraded our current financial software to
a Microsoft Windows-based platform. These systems, used together, enable us to
track and analyze financial information and operations, as well as create and
produce custom reports.
Production and Distribution
All of our products are manufactured by outside contractors, providing us
with the production capacity necessary to respond to fluctuations in sales and
limiting our investment in capital equipment. We believe that we currently
have in place the manufacturers necessary to meet our inventory requirements
over the next several years, including continuing expansion into foreign
markets. Nonetheless, we continue to identify new quality-driven manufacturers
to supply the products necessary for our success. We also seek to save money
by periodically reviewing pricing considerations and by requiring competitive
bids from various manufacturers meeting our quality and performance
requirements.
We currently acquire our ingredients solely from superior suppliers of such
ingredients. We have also identified dependable alternative sources for all of
our ingredients except Manapol(R) and arabinogalactan, which are components of
Ambrotose(R) complex. With these alternative sources, we could produce or
replace these ingredients if we cannot purchase ingredients from our current
suppliers. In January 2000, we signed a new supply agreement with our
exclusive supplier of Manapol(R). The supply agreement will require us to buy
a minimum monthly volume at an agreed-upon price through August 2002. We
eventually plan to bring the blending of all proprietary formulas in-house,
further protecting the confidential nature and quality standards of our
proprietary formulations.
In January 1998, our Texas distribution operation relocated to our $1.3
million, 75,000 square foot leased warehouse facility in Coppell, Texas. The
facility includes an automated system capable of processing 18,000 orders per
day. This system has enhanced our productivity and supported sales volume
growth. The distribution facility contains a warehouse, distribution offices
and an ingredient mixing area that is currently not being
11
utilized. We also have contract distribution facilities in Canada, Australia,
the United Kingdom and Roanoke, Texas. For further information on these
contract facilities see "Properties" on page 17.
Government Regulations
To regulation of our direct selling activities, we are also controlled by a
large number of laws, governmental regulations, administrative determinations,
court decisions and similar legal requirements at the federal, state and local
levels in both our United States and foreign markets. These regulations
address, among other things:
. our network marketing system;
. transfer pricing and similar regulations affecting the amount of foreign
taxes and customs duties we pay;
. taxation of associates, requiring us to collect taxes and maintain
appropriate records;
. how we make, package, label, distribute, import, sell and store our
products;
. what we put in our products;
. what we claim our products do for the human body;
. how we advertise; and
. the degree in which we are liable for associates' claims about our
products.
Products. The following governmental agencies regulate some aspect of our
business or our products:
. the Food and Drug Administration;
. the Federal Trade Commission;
. the Consumer Product Safety Commission;
. the Department of Agriculture;
. the Environmental Protection Agency;
. the Postal Service; and
. various agencies of the states, localities and foreign countries in
which our products are manufactured, distributed and sold.
The Food and Drug Administration regulates the formulation, manufacture,
packaging, storage, labeling, promotion, distribution and sale of the foods,
dietary supplements and over-the-counter drugs distributed by us. Food and
Drug Administration regulations require both our suppliers and us to meet good
manufacturing practice regulations for the preparation, packing and storage of
our products. The Food and Drug Administration has published a Notice of
Advanced Rule Making for good manufacturing practices for dietary supplements.
The Food and Drug Administration has also issued a final rule on January 6,
2000. The rule is called "Statements made for Dietary Supplements Concerning
the Effect of the Product on the Structure or Function of the Body." We
believe this final rule will not adversely effect us as we believe we are
already in compliance with this rule.
The Dietary Supplement Health and Education Act of 1994 revised the
provisions of the Federal Food, Drug and Cosmetic Act concerning the
composition and labeling of dietary supplements. We believe this act is
generally favorable to the dietary supplement industry. The legislation
creates a new class, by statute, of "dietary supplements." This new class
includes vitamins, minerals, herbs, amino acids and other dietary substances
for human use to supplement the diet. This legislation grandfathers, with
certain limitations, dietary ingredients that were on the market before
October 15, 1994. A dietary supplement, which contains a dietary ingredient
that was not on the market before October 15, 1994, must provide evidence
establishing that the supplement is reasonably
12
expected to be safe. Manufacturers of dietary supplements which make a
"statement of nutritional support," thereby describing certain types of
product performance characteristics, must:
. have evidence that the statement is truthful and not misleading;
. make a disclaimer in the statement itself; and
. notify the Food and Drug Administration of the statement no later than
30 days after the statement is first made.
The majority of the products that we market are classified as dietary
supplements under the Federal Food, Drug and Cosmetic Act. In September 1997,
the Food and Drug Administration issued regulations governing the labeling and
marketing of dietary supplement products. These regulations cover:
. the identification of dietary supplements and their nutrition and
ingredient labeling;
. the wording used for claims about nutrients, health claims and
statements of nutritional support;
. labeling requirements for dietary supplements for which "high potency"
and "anti-oxidant" claims are made;
. notification procedures for statements on dietary supplements; and
. premarket notification procedures for new dietary ingredients in dietary
supplements.
The notification procedures became effective in October 1997. The new
labeling requirements became effective on March 23, 1999; however, we had
already revised our product labels as necessary to reflect the new
requirements. We believe we comply with these requirements. In addition, we
are required to continue our ongoing program of providing evidence for our
product performance claims, and notify the Food and Drug Administration of
certain types of performance claims made for our products. Our substantiation
program involves compiling and reviewing the scientific literature pertinent
to the ingredients contained in our products.
In certain markets, including the United States, claims made with respect to
dietary supplements, personal care or any of our other products may change the
regulatory status of our products. For example, in the United States, the Food
and Drug Administration could possibly take the position that claims made for
some of our products make those products new drugs requiring preliminary
approval. The Food and Drug Administration could also place those products
within the scope of a Food and Drug Administration over-the-counter drug
monograph. Over-the-counter monographs dictate permissible ingredients,
appropriate labeling language and require the marketer or supplier of the
products to register and file annual drug listing information with the Food
and Drug Administration. Emprizone(R) is the only product we sell that is
labeled as an over-the-counter monograph drug. If the Food and Drug
Administration asserts that our product claims cause them to be considered new
drugs or fall within the scope of over-the-counter monographs, we would be
required to either file a new drug application, comply with the applicable
monographs or change the claims made in connection with our products.
Additionally, dietary supplements are subject to the Nutrition, Labeling and
Education Act, which regulates health claims, ingredient labeling and nutrient
content claims characterizing the level of a nutrient in a product. This act
prohibits the use of any health claim for dietary supplements unless the
health claim is supported by significant scientific agreement and is pre-
approved by the Food and Drug Administration.
We may be required to obtain an approval, license or certification from a
foreign country's ministry of health or comparable agency prior to entering a
new foreign market. We work with local authorities in order to obtain the
requisite approvals, license or certification before entering a foreign
market. The approval process generally requires us to present each of our
products and product ingredients to appropriate regulators and, in some
instances, arrange for testing of our products by local technicians for
ingredient analysis. Such approvals may be conditioned on reformulation of our
products or may be unavailable with respect to certain of our products or
13
certain ingredients contained in our products. We must also comply with
product labeling and packaging regulations that are different from country to
country. In markets where a formal approval license or certification is not
required, we will rely upon the advice of local counsel, in each country, to
help us ensure we comply with the law.
The Federal Trade Commission regulates the marketing practices and
advertising of all our products. In the past several years, the Federal Trade
Commission instituted enforcement actions against several dietary supplement
companies for false and misleading marketing practices and advertising of
certain products. These enforcement actions have resulted in consent decrees
and monetary payments by the companies involved. The Federal Trade Commission
has increased its review of the use of the type of testimonials we use in our
business. The Federal Trade Commission requires reasonable evidence proving
product claims at the time that such claims are first made. The failure to
have this evidence when product claims are first made violates the Federal
Trade Commission Act. Although the Federal Trade Commission has never
threatened an enforcement action against us for the advertising of our
products, there can be no assurance that the Federal Trade Commission will not
question our advertising or other operations in the future.
We cannot predict the content of any future laws, regulations,
interpretations or applications. We also cannot predict the future impact of
the different governmental regulations; however, any or all of such
requirements could be a burden and costly, to us. Future regulations could,
however:
. require us to change the way we conduct business;
. require us to change the contents of our products;
. make us keep additional records;
. make us increase the available documentation of the properties of our
products; or
. make us increase or use different labeling and scientific proof of
product ingredients, safety or usefulness.
Network Marketing System. Our network marketing system, which includes our
compensation plan, is controlled by a number of federal and state statutes and
regulations, and is administered by the Federal Trade Commission and various
state authorities. The legal requirements controlling network marketing
organizations are in part directed to make certain that product sales are
ultimately made to consumers. In addition, achievement within these
organizations must be based on sales of products rather than compensation from
the recruitment of additional associates, investments in the organizations or
other non-retail sales related criteria. For instance, various markets limit
how much associates may earn from commission on sales of associates who were
not directly sponsored by the associate. We have and will continue to obtain
regulatory approval of our network marketing system in jurisdictions that
require such approval. If regulatory approval is not required, we will rely on
the advice of counsel to ensure our regulatory compliance.
We signed a consent decree in February 1997 as a result of negotiation with
the Attorney General of the State of Michigan where we agreed to monitor
product purchases by our associates in Michigan. The purpose of the monitoring
is to identify and correct any instances of coerced sales. To continue
monitoring we also conduct random audits, of associates in Michigan, for
evidence of stockpiling. To date, we have found no evidence of coerced sales
or stockpiling by our associates in Michigan. Further, our associate policies
and procedures are designed to provide no incentive or reward to an associate
for engaging in such activities. Recently, we were contacted by the Michigan
Attorney General's office and asked to provide data maintained under the
consent decree, because of the contents contained in the Associates' self-
generated literature. We were also asked to tell them what measures we are
taking to address the associate's conduct, and what measures we would
implement in order to prevent future associate conduct in violation of the
consent decree. We believe we have complied with this request.
In Canada, our network marketing system is regulated by both national and
provincial law. Under Canada's Federal Competition Act, we must make sure that
any representations relating to associate compensation made
14
to prospective associates constitute fair, reasonable and timely disclosure
and that they meet other legal requirements of the Federal Competition Act.
Our compensation plan has been reviewed and a positive opinion was received
from the appropriate Canadian authorities. All Canadian provinces and
territories other than Ontario have legislation requiring that we register or
license as a direct seller within that province. Licensing is designed to
maintain the standards of the direct selling industry and to protect the
consumer. Some provinces require that both Mannatech and our associates be
licensed. We believe we hold the required provincial or territorial direct
sellers' licenses.
In Australia, our network marketing system is subject to both federal and
state regulation. Our compensation plan in Australia is designed to meet state
requirements and the requirements of Australia's Trade Practices Act. Our
business and trade practices and our associates are regulated by state law and
the Trade Practices Act. Claims and representations relating to our products
are regulated by both the Trade Practices Act and Australia's Therapeutic
Goods Act.
In the United Kingdom, our network marketing system is subject to national
regulations. Our compensation plan in the United Kingdom is designed to meet
national requirements, the requirements of the Fair Trading Act of 1973 and
the Trading Schemes Regulations 1997. Our business and trade practices and our
associates are regulated by the Direct Selling Association Code of Business
Conduct and the U.K. Codes of Advertising and Sales Promotion. Claims and
representations relating to our products are regulated by the Trading
Standards Office.
Other Regulations. We are also subject to a variety of other regulations in
various foreign markets, including:
. social security assessments and taxes;
. value added taxes;
. goods and services taxes;
. sales taxes;
. customs duties;
. employee/independent contractor regulations;
. employment and severance pay requirements;
. import/export regulations; and
. antitrust laws.
For example, in many markets we are restricted in the amounts and types of
rules and termination criteria that we can contractually impose on our
associates. If we do not comply with these restrictions, we may be required to
pay social security or other tax or tax-type assessments on behalf of our
associates and we may incur severance obligations to terminate the associate.
In some countries, we may be subject to such taxes or payment requirements in
any event.
In some countries, including the United States, we may also be governed by
regulations concerning the activities of our associates. In some countries, we
are, or regulators may find that we are responsible for our associates'
conduct. Regulators may request or require that we take steps to make certain
that our associates comply with these regulations. The types of conduct
governed by regulations include, in part:
. claims made about our products;
. promises or claims of income by us or our associates; and
. sales of products in markets where the products have not been approved,
licensed or legally allowed for sale.
15
In some markets, including the United States, improper product claims by our
associates could cause our products to be reviewed or re-reviewed by
regulatory authorities. This kind of review could result in our products being
classified or placed into another category with stricter regulations or
requiring labeling changes.
Compliance Procedures. To comply with the many regulations that apply to our
business, we have developed formal compliance measures, including our
associate disciplinary procedures and internal policies for compliance with
Food and Drug Administration and Federal Trade Commission rules and
regulations.
We conduct research into applicable foreign laws and regulations before
entering any new international market. We also continue to research laws
governing associate conduct and revise or alter our business system,
compensation plans, associate requirements and other materials and programs as
required by laws and regulations in each market. We attempt to educate
associates about acceptable business conduct in each market through our
policies, procedures, manuals, seminars and other training materials and
programs. We are able to perform only limited monitoring procedures to make
certain that our associates comply with existing policies, procedures and
regulations, and that they do not distribute our products in countries where
we have not commenced operations. We cannot promise that all our associates
comply with all existing policies, procedures and regulations.
Competition
The nutritional supplements industry is large and intensely competitive. We
compete directly with companies that manufacture and market nutritional
products in each of our product lines, including:
. Rexall Showcase International;
. Rexall Sundown, Inc.;
. Solgar Vitamin and Herb Company, Inc.;
. Nu Skin Enterprises, Inc.;
. Twinlab Corporation; and
. Weider Nutrition International, Inc.
Nutritional supplements are offered for sale in a wide-variety of ways.
While we believe that consumers appreciate the convenience of ordering
products from home through a sales person or the Internet, the buying habits
of many consumers who have purchase products through traditional retail
methods are difficult to change. The number of our products in each product
category is also relatively small compared to the wide variety of products
offered by many other nutritional product companies.
We also compete for new associates with other retail, multilevel marketing
and direct selling companies in the nutritional supplements industry. Many of
our competitors and other direct selling organizations have longer operating
histories, are better known and have greater financial resources. These
competitors include:
. Amway Corporation;
. Nu Skin Enterprises, Inc.;
. Body Wise International, Inc.;
. ENVION International;
. Herbalife International, Inc.;
. Enrich International;
. Rexall Showcase International;
. Rexall Sundown, Inc.;
. Forever Living Products, Inc.; and
. Melaleuca, Inc.
16
We compete for new associates by stressing the ease of our delivery system,
the superiority of our compensation plans and our proprietary and quality
products. We believe that many more direct selling organizations will enter
the market as the number of direct sellers expands over the next several
years. Because the pool of individuals interested in direct selling is limited
in each market, the potential pool of associates for our products is reduced
when other network marketing companies successfully recruit these people into
their businesses.
Employees
As of December 31, 1999, we employed 310 people in the United States, 16 of
whom occupy executive positions; 14 people in Australia; 12 people in the
United Kingdom and 1 person in Japan. This number does not include our
associates, who are independent contractors and not employees of Mannatech.
Our employees are not unionized and we believe we have a good relationship
with our employees.
Item 2. Properties
We lease property at several locations for our headquarters and distribution
facilities, including:
Expiration
Location Square Feet Term Date
-------- ----------- ---- ----------
Coppell, Texas (corporate
headquarters).......................... 110,000 10 years January 2007
Coppell, Texas (distribution center).... 75,000 10 years January 2008
Dallas, Texas (Internet subsidiary
headquarters).......................... 6,400 3 years November 2002
St. Leonards, Australia (Australian
headquarters).......................... 9,000 5 years August 2003
Basingstoke, Hampshire (U.K.
headquarters).......................... 1,255 2 years May 2001
Tokyo, Japan (Japanese headquarters).... 10,000 2 years February 2002
Our United States distribution facility is capable of filling 18,000 orders
per day and is currently operating at 34% of its full capacity. We also have
several contract distribution center operations. We believe all of these
leased facilities are adequate for our current operations in the immediate
future. Our contract distribution center operations are as follows:
Orders Current
Square per Day Operating
Location Feet Capacity Capacity
-------- ------ -------- ---------
Roanoke, Texas..................................... 3,000 2,000 2%
Calgary, Alberta................................... 6,000 3,200 25%
Botany, Australia.................................. 5,000 20,000 2%
Perth, Australia................................... 1,000 500 25%
Poyle, United Kingdom.............................. 5,000 3,200 22%
Item 3. Legal Proceedings
In October 1997, we filed an objection to the issuance of a registered
trademark being issued to IntraCell Nutrition, Inc., which had filed a
trademark application for the name, "Manna." In our objection, we state that,
among other things, "Manna" is a general descriptive term often applied to
nutritional products, and is for that reason not entitled to trademark
protection. Discovery was completed in this case and briefs were filed. The
case is now pending an oral hearing before the Trademark Trial and Appeal
Board of the United States Patent and Trademark Office. We believe that we
have a substantial likelihood of prevailing in our objection to the granting
of the tradename.
In March 1998, Johnnie Hill d/b/a Taylor Enterprises, one of our associates,
filed a lawsuit in the 44th Judicial District Court, Dallas County, Texas,
alleging that we breached the contract with Mr. Hill as an associate. Mr. Hill
further alleged that we committed fraud, conversion, conspiracy and that we
failed to properly account
17
for the payments owed to him. In May 1998, the suit was ordered into
arbitration by the District Court. In March 1999, Mr. Hill filed an
arbitration claim with the American Arbitration Association in Dallas, Texas,
alleging that we breached our contract with him, interfered with his business
relationships, did not pay him money owed to him, committed fraud and damaged
him in the amount of $5.0 million. We filed a counterclaim against Mr. Hill
for $79,750, which is the alleged amount fraudulently diverted and that
asserted the alleged damages by Mr. Hill were artificially inflated and not
related to the actual performance of Mr. Hill's associate position. In
December 1999, the American Arbitration Association issued an award of
arbitrators, which resulted in an estimated credit to us of approximately
$6,000. Subsequently, Mr. Hill asked for reconsideration by the arbitrators,
which was denied by the arbitration panel.
On August 20, 1999, we initiated a legal action in the United States
District Court for the Northern District of Texas against Dr. Daryl See
alleging among other things, that he misled Mannatech when he claimed that one
of his studies, which Mannatech used to illustrate the positive effects of our
products, had been funded by the National Institutes of Health and conducted
under auspices of the University of California-Irvine.
Item 4. Submission of Matters to a Vote of Security Holders
On October 20, 1999, shareholders controlling 74.5% of the voting stock of
Mannatech, acting by written consent, amended our Bylaws in order to:
. allow our shareholders to set the size of the board; however, the board
of directors must have a minimum of three directors;
. revise the procedures for call, notice and administration of board
meetings;
. revise the duties of the Chairman of the Board to include presiding over
and determining the order of business at board meetings;
. revise the procedures for amending certain Bylaws provisions adopted by
our shareholders;
. allow special meetings of the board to be called by the President, or by
any two other directors acting together; however, 24-hour notice must be
given for these meetings, which notice may, under some circumstances be
waived; and
. provide that only board members may attend board meetings and that
directors are not allowed to have personal legal counsel present, unless
allowed by a majority vote of the directors.
In the written consent, the shareholders also approved the expansion of the
board from five to seven members and elected Mr. James M. Doyle, Jr., as a
Class III director with his term expiring in 2002. This information was filed
November 3, 1999, on a preliminary information statement on Form Pre 14C (file
No. 000-24657) reporting the shareholder consent with the Commission.
On November 19, 1999, the board appointed Mr. Anthony E. Canale to replace
and complete the term of Mr. Patrick D. Cobb, a Class I director whose term
expires in 2000 and had resigned from the board. The board also elected Mr.
Terry L. Persinger, as a Class III director whose term will expire in 2002.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market for our Common Stock. On February 12, 1999, we completed our initial
public offering and on February 16, 1999, our common stock began trading on
the Nasdaq National Market under the symbol "MTEX." As of March 24, 2000 the
total number of outstanding shares of our common stock was 24,939,293 and the
closing price on such date was $4.688. Pricing information prior to February
16, 1999 is not available, because our common stock was not publicly traded
prior to that date. Set forth below are the high and low closing sales prices
of our common stock as reported on the Nasdaq National Market for each quarter
of the fiscal year ended December 31, 1999:
High Low
------- -------
First Quarter (from February 16, 1999)......................... $31 3/4 $10 1/2
Second Quarter................................................. $23 7/8 $10 1/8
Third Quarter.................................................. $13 5/8 $6 9/16
Fourth Quarter................................................. $ 8 7/8 $ 4 5/8
Holders. As of March 24, 2000, there were approximately 5,218 shareholders
of record of our common stock.
Dividends. Our shareholders received dividends totaling approximately
$9,936,882 and $1,326,104 in 1998 and 1999, respectively. We do not intend to
pay any dividends in 2000; however, our board of directors intends, from time-
to-time, to reevaluate this policy based on our consolidated results of
operations, financial condition, cash requirements and other factors deemed
relevant. Any future payments of dividends will be subject the discretion of
our board of directors and subject to certain limitations under the Texas
Business Corporation Act.
Sales of Unregistered Securities.
None.
Uses of Proceeds from Registered Securities. On February 12, 1999, we
completed our initial public offering. In the initial public offering, we and
certain shareholders sold an aggregate of 3,056,016 shares of our common
stock, par value $0.0001 per share, at a price of $8.00 per share. None of
such payments were direct or indirect payments to directors, officers,
affiliates or 10% beneficial owners of Mannatech. No underwriter was involved
in the initial public offering.
Of the total number of shares sold in the initial public offering, 1,556,016
shares of common stock were sold by certain shareholders of Mannatech at a
price of $8.00 per share, yielding gross proceeds, of $12,448,128. The net
proceeds to the selling shareholders were $11,950,203, after deducting the
placement agent's fee of approximately $497,925.
The remaining 1,500,000 shares sold in the initial public offering were sold
by Mannatech at a price of $8.00 per share, yielding gross proceeds to
Mannatech of $12 million. The net proceeds were $9,240,958, after deducting:
. deferred offering costs of approximately $1,963,431;
. legal, accounting, printing and other costs of approximately $406,385;
and
. the placement agent's fee of $389,226, net of reimbursement of $90,774
in expenses by the placement agent.
19
We intend to use our net proceeds of $9.2 million as follows:
. $6,265,858 of the net proceeds is intended to fund our international
expansion. As of December 31, 1999, we had used $4,445,200 of these
proceeds to pay for our expansion to Australia, the United Kingdom, and
begin our expansion into Japan. We have $1,820,658 of the net proceeds
remaining for future international expansion.
. $2,975,100 of the net proceeds was used, as planned, to fund our current
working capital needs.
Item 6. Selected Financial Data
The Selected Financial Data set forth below for each of the five years ended
December 31, 1999 have been derived from and should be read in conjunction
with (A) our Consolidated Financial Statements set forth in Item 14 of this
report, beginning on page F-1, and (B) "Management's Discussion and Analysis
of Financial Condition and Results of Operations," which follows this table.
Year Ended December 31,
------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- --------
(in thousands, except per share amounts)
Consolidated Statement of
Income Data:
Net sales.................... $32,071 $86,311 $150,570 $164,933 $179,730
Gross profit................. 14,852 37,750 64,158 71,144 77,033
Income from operations....... 2,587 8,240 14,718 16,057 16,081
Net income................... 2,339 7,162 10,622 10,054 10,788
Earnings per Common Share:(1)
Basic...................... $ 0.11 $ 0.35 $ 0.50 $ 0.45 $ 0.45
======= ======= ======== ======== ========
Diluted.................... $ 0.11 $ 0.35 $ 0.47 $ 0.42 $ 0.43
======= ======= ======== ======== ========
Weighted Average Common and
Common Equivalent Shares
Outstanding:(1)
Basic...................... 20,627 20,627 21,449 22,102 24,133
======= ======= ======== ======== ========
Diluted.................... 20,627 20,627 22,400 23,659 25,224
======= ======= ======== ======== ========
Pro Forma Information:(2)
Income before income taxes,
as reported................. $ 2,406 $ 8,356 $ 14,761
Pro forma provision for
income tax expense.......... 902 3,134 5,683
------- ------- --------
Pro forma net income......... $ 1,504 $ 5,222 $ 9,078
======= ======= ========
Pro Forma Earnings per Common
Share:(2)
Basic...................... $ 0.07 $ 0.25 $ 0.42
======= ======= ========
Diluted.................... $ 0.07 $ 0.25 $ 0.41
======= ======= ========
Other Financial Data:
Capital expenditures(3)...... $ 769 $ 2,660 $ 9,135 $ 6,098 $ 3,243
Dividends declared per common
share....................... $ 1.00(4) $ 10.00(4) $ 0.37 $ 0.39 $ 0.06
Consolidated Balance Sheet
Data:
Total assets................. $ 5,712 $11,410 $ 19,558 $ 26,874 $ 44,779
Long-term obligations
excluding current portion... $ 33 $ -- $ 110 $ 1,056 $ 325
- --------
(1) Computed on the basis described in Note 1 in the Notes to Consolidated
Financial Statements.
(2) The pro forma information shows our net income and earnings per share as
if all income earned by us and certain related partnerships was taxable
at federal and state statutory rates. The earnings per share is computed
on the basis described in Note 1 in the Notes to Consolidated Financial
Statements.
(3) Capital expenditures include assets acquired through capital lease
obligations of $397,402 and $1,471,986 in 1997 and 1998, respectively.
(4) Dividends were calculated based upon shares outstanding prior to the
stock split and our reorganization (10,000 shares), each of which took
place in 1997. Aggregate dividends declared amounted to $10,000 and
$100,000 in 1995 and 1996, respectively.
20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the Consolidated
Financial Statements and related notes in Item 14 of this report, beginning on
page F-1. Unless we state otherwise, all financial information presented
below, throughout this report and in the Consolidated Financial Statements and
related notes includes Mannatech and all of our subsidiaries on a consolidated
basis.
Overview
Since beginning operations in November 1993, we have achieved year-to-year
growth in overall net sales. Our growth is mainly attributable to (A) our
introduction of new products; (B) growth in the number of associates; and (C)
expansion into new international markets. In the future, as we expand into
additional international markets, we expect international operations to
account for an increasing percentage of our consolidated net sales. As a
result, in 1998 and 1999, which marked the beginning of our expansion
internationally, our growth rate in net sales generated in the United States
began to shrink as compared to prior years and in 1999, for the first time,
Canadian net sales actually decreased slightly in both sales dollars and as a
percentage of net sales. However, the growth rate of net sales generated in
Australia increased and continues to exceed our expectations. Furthermore, in
November 1999, we opened our United Kingdom operation. We expect these trends
to continue as we continue to expand internationally. We have also noticed
similar trends from some of our competitors, who have expanded
internationally. Net sales (in millions and as a percentage of consolidated
net sales) by country for the three years ended December 31, 1999 were as
follows:
United United
Year States Canada Australia Kingdom
---- ------------ ----------- ---------- ----------
1997.......................... $127.9 84.9% $22.7 15.1% $ -- -- % $ -- -- %
1998.......................... $135.9 82.5% $26.8 16.1% $ 2.2 1.4% $ -- -- %
1999.......................... $137.9 76.7% $25.7 14.3% $15.8 8.8% $ 0.3 0.2%
The basic earnings per share of $0.45 for the year ended December 31, 1999
remained the same for the year ended December 31, 1998. This was due to the
following: (A) an increase in sales; offset by (B) the increase in start up
expenses relating to our continued international expansion; (C) expenses
related to some of our new compensation programs for our associates; (D) the
$750,000 buyout of a contract with Ray Robbins, who is an associate and
shareholder; and (E) expenses related to our secondary offering in August
1999. The secondary offering registered shares of our common stock, for sale
by certain existing shareholders. We expect our earnings trend to soften in
the first half of 2000 as we expect to incur significant start up costs
associated with launching our Japanese operations; scheduled for the summer of
2000. However like our competitors have seen and reported, we foresee the
Japanese market potential as exceptional.
Our revenues are primarily from sales of our products and our associate
starter and renewal packs, which include some combination of our products and
promotional materials. The purchase of a starter or renewal pack allows the
associate to purchase products at wholesale prices. If the associate purchases
a pack with a wholesale price of $300 or higher, the associate also receives a
$50 credit toward admission to one of our corporate events. Our packs sold to
associates contain various combinations of our products and promotional
materials. We offer a comparable associate starter pack in each country in
which we do business; however, each country has different regulatory
guidelines which must be followed and therefore not all types of packs are
offered in all countries. All pack prices stated in this report are translated
into United States currency.
Each of our starter packs sold, contain 0 to 30 different combinations of
our various nutritional and topical products sold and 10 to 250 different
combinations of our various promotional materials sold. On average, the total
wholesale value of the nutritional and topical products contained in each pack
is between 60% and 70% of the packs wholesale value. On average, the total
promotional materials value contained in each kit is between
21
30% and 40% of the packs wholesale value. The average wholesale selling price
and total wholesale value of our starter packs sold to our associates are
follows:
. In the United States and Canada associates purchase starter packs as
follows:
(1) Prior to June 1998, the starter packs could be purchased at
$49.00, $229.00, $339.00, $568.00 and $1,000.00 levels. The
average wholesale values of the contents of our starter packs was
approximately $16.12, $44.62, $322.81, $817.32 and $1,138.83,
respectively.
(2) Beginning in June 1998, starter packs could be purchased at
$29.00, $49.00, $289.00, $664.00 and $1,000.00 levels. The average
wholesale values of the contents of our starter packs were
approximately $16.12, $44.62, $322.81, $817.32 and $1,138.83,
respectively. Beginning in April 1999, the average wholesale
values of the contents of our starter packs is approximately
$15.05, $43.25, $319.50, $814.95 and $1,153.95.
. In Australia, only one associate starter pack is available, is priced at
approximately $29.00, and has an approximate wholesale value of $19.06.
. In the United Kingdom, starter packs can be purchased at approximately
$29.00, $49.00 and $289.00 with an average wholesale value of
approximately $15.26, $103.17 and $380.00, respectively.
Associates who do not renew their associate status may continue to purchase
our products at the wholesale price and resell the products; however, they
would not earn commissions under our compensation plan. Associates can renew
their status each year by either:
(1) renewing as a preferred customer and continue to sponsor new
associates;
(2) purchase a renewal pack; or
(3) earn enough personal points volume from commissionable product sales
to automatically renew their associate status for one year.
The average selling price of the renewal packs sold to associates are as
follows:
. In the United States and Canada:
(1) Prior to June 1998, renewal packs could be purchased at $49.00,
$229.00 or $568.00 levels.
(2) Beginning in June 1998, renewal packs can be purchased at $29.00,
$200.00 or $350.00, levels.
. In Australia, renewal packs can be purchased at approximately $29.00,
$200.00 and $350.00 levels.
Associates are also eligible to purchase upgrade packs. Upgrade packs are
accounted for as renewal packs, as they renew an associate's membership for
one year from the time of upgrade. Upgrade packs are sold to associates as
follows:
. In the United States and Canada:
(1) Prior to June 1998, associates could purchase upgrade packs at
approximately $229.00, $339.00, $568.00 and $1,000.00 levels.
(2) Beginning in June 1998, upgrade packs can be purchased at $289.00,
$375.00, $664.00 and $1,000.00 levels.
. Beginning in April 1999, Australian associates can purchase upgrade
packs at $49.00, $289.00, $375.00 and $664.00 levels.
. In the United Kingdom, upgrade packs can be purchased at $289.00,
$375.00 and $664.00 levels.
We generally recognize revenues when products or promotional materials are
shipped. Our revenues are based primarily on the wholesale prices of the
products sold. We defer revenue received from the sale of
22
promotional packs to the extent that it is greater than the wholesale value of
the individual items included in such packs. Revenues from promotional packs
are allocated between products and events admission based on the proportionate
fair value of these items. Allocated event revenues are also deferred. All
deferred revenue is amortized over a 12-month period. Total deferred revenue
was approximately $809,000, $662,000 and $845,000 at December 31, 1997, 1998
and 1999, respectively.
Associates are compensated by commissions, which are our most significant
expense. Commissions are paid to associates based on the following:
. their placement and position within our compensation plan;
. volume of direct commissionable sales; and
. number of new enrolled associates.
In October 1998, we revised portions of our compensation plan to perfect our
global seamless downline compensation concept and ensure compliance with
common international standards for paying commissions. The commission pool, as
a whole, remains unchanged and we do not intend for commissions, under our
revised compensation plan, to materially exceed 42% of commissionable net
sales.
Our United States federal statutory tax rate was 34% for 1997 and 35%
beginning in 1998. We pay taxes in Australia at a statutory tax rate of 36%
and in the United Kingdom at 31%. We expect to pay taxes in Japan at a
statutory tax rate of 54%. We also pay taxes in various state jurisdictions at
an approximate average statutory tax rate of 3%. As our international
expansion continues, a portion of our income will be subject to taxation in
the countries in which we operate. We may receive foreign tax credits that
would reduce the amount of United States taxes we owe, based upon the amount
of foreign taxes paid. We may not be able to use all of such foreign tax
credits in the United States. The use of the foreign tax credits is based upon
the proportionate amount of net sales in each country. Because many of the
countries that we may expand to during 2000 and beyond have maximum statutory
tax rates higher than the United States tax rate, we could pay a higher
overall effective tax rate on our consolidated operations.
23
Results of Operations
The following table summarizes our consolidated operating results as a
percentage of net sales for each of the years indicated:
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
Net sales....................................... 100.0% 100.0% 100.0%
Cost of sales................................... 16.4 16.5 16.2
Commissions..................................... 41.0 40.4 40.9
------- ------- -------
Gross profit.................................. 42.6 43.1 42.9
Operating expenses:
Selling and administrative expenses........... 18.5 19.3 19.4
Other operating costs......................... 12.9 13.6 14.5
Cancellation of incentive compensation
agreements................................... 1.5 -- --
Write-off of deferred offering costs.......... -- 0.5 --
------- ------- -------
Income from operations.......................... 9.7 9.7 9.0
Interest income................................. (0.0) (0.1) (0.4)
Interest expense................................ 0.0 0.0 0.1
Other expense, net.............................. 0.0 0.3 0.1
------- ------- -------
Income before income taxes...................... 9.7 9.5 9.2
Income tax expense.............................. 2.7 3.4 3.2
------- ------- -------
Net income...................................... 7.0% 6.1% 6.0%
======= ======= =======
Number of starter packs sold.................... 133,461 117,003 140,521
Number of renewal packs sold.................... 41,219 58,476 66,119
------- ------- -------
Total number of packs sold...................... 174,680 175,479 206,640
======= ======= =======
Total associates canceling associate status..... 5,163 6,142 5,972
======= ======= =======
Year ended December 31, 1999 compared with the year ended December 31, 1998
Net Sales. Net sales increased 9.0% to $179.7 million in 1999 from $164.9
million in 1998. This increase was primarily composed of the following:
. A $7.8 million increase from the sale of several new products introduced
during 1999 and from existing products that were not available for sale
in other countries in 1998. Also contributing to the increase was the
opening of our United Kingdom operation in November 1999 and the opening
of our Australian operations in October 1998.
. A $4.5 million increase in existing product sales resulting from an
increase in the volume of products sold and having operations in
Australia open for the entire fiscal 1999.
. An increase of $2.6 million from associate pack sales. Of this $2.6
million increase, approximately $1.5 million resulted from an increase
in the number and a change in the mix of associate packs sold to new
associates. The additional increase of $1.1 million resulted from an
increase in associate renewal packs sold. The increase in the number of
packs sold is a result of our international expansion and the hiring of
a marketing firm to concentrate on our associate renewal program. We
will continue to explore new strategies to further the increase in
associate pack sales and renewal pack sales.
Cost of Sales. Cost of sales increased 7.3% to $29.1 million in 1999 from
$27.1 million in 1998. As a percentage of net sales, cost of sales decreased
to 16.2% for 1999 from 16.5% in 1998. The decrease in cost of
24
sales as a percentage of net sales was primarily due to changes in the product
mix and the volume of finished goods sold. The dollar amount increase was
primarily due to:
. a net increase related to the increased volume and the product mix of
finished goods sold;
. the recording of $160,000 for recovery of inventory in 1998 which had
been written off in December 1997; and
. a write-off of approximately $600,000 for other product changes.
Commissions. Commissions consist of payments to associates for sales
activity and downline growth. Commissions increased 10.4% to $73.6 million in
1999 from $66.7 million in 1998. As a percentage of net sales, commissions
increased to 40.9% in 1999 from 40.4% in 1998. The increase was the direct
result of the following:
. an increase in the number of associate packs sold;
. the introduction of new incentive programs for associates, including the
fast start program;
. the start up of operations in Australia in October 1998; and
. the start up of operations in the United Kingdom in November 1999.
Gross Profit. Gross profit increased 8.3% to $77.0 million in 1999 from
$71.1 million in 1998. As a percentage of net sales, gross profit decreased to
42.9% in 1999 from 43.1% in 1998. These changes were primarily attributable to
the factors described above.
Selling and Administrative Expenses. Selling and administrative expenses
consist of human resource expenses, including wages, bonuses and marketing
expenses, and are a mixture of both fixed and variable expenses. Selling and
administrative expenses increased 9.4% to $34.9 million in 1999 from $31.9
million in 1998. As a percentage of net sales, selling and administrative
expenses increased to 19.4% in 1999 from 19.3% in 1998. The dollar amount of
the increase was due primarily to sales increases, which increased freight
costs by $900,000, and a $2.3 million increase in wages and contract labor
expenses resulting from pay raises and an increase in personnel for the
Australian and United Kingdom operations.
Other Operating Costs. Other operating costs include utilities,
depreciation, travel, office supplies and printing expenses. Other operating
costs increased 16.7% to $26.1 million in 1999 from $22.4 million in 1998. As
a percentage of net sales, other operating costs increased to 14.5% in 1999
from 13.6% in 1998. The dollar amount increase was primarily due to the
following:
. a $750,000 charge for the cancellation of the remaining incentive
contract with Ray Robbins, as described in the notes to the Consolidated
Financial Statements; in Item 14 of this report beginning on page F-1;
. $1.7 million for consulting services related to our international
expansion;
. $350,000 for settlement of various lawsuits;
. $225,000 incurred related to our secondary offering for certain existing
shareholders; and
. $200,000 for additional research and development costs related to our
recently opened laboratory facility.
Write-off of Deferred Offering Costs. During August 1998, we withdrew our
original underwritten institutional/retail offering and recorded a one-time
charge of approximately $847,000. In September 1998, we began the direct
initial public offering, which was not underwritten and was completed on
February 12, 1999.
Interest Income. Interest income increased 677.7% to $713,000 in 1999 from
$92,000 in 1998. As a percentage of net sales, interest income increased to
0.4% in 1999 from 0.1% in 1998. The increase was primarily due to the receipt
of the initial public offering net proceeds, which we invested in interest
bearing accounts and certain investments.
25
Interest Expense. Interest expense increased 200.0% to $150,000 in 1999 from
$53,000 in 1998. As a percentage of net sales, interest expense increased to
0.1% in 1999 from 0.0% in 1998. The increase was due primarily to the signing
two lease agreements with a bank, to purchase various equipment for our
warehouse and laboratory facility.
Other Expense, Net. Other expense consists of penalties related to tax
payments for payroll, income and sales and miscellaneous nonoperating items.
Other expense decreased (61.9%) to $114,000 in 1999 from $299,000 in 1998. As
a percentage of net sales, other expense decreased to 0.1% in 1999 from 0.3%
in 1998. For the year ended December 31, 1999, other expense consisted
primarily of certain federal tax penalties. For the year ended December 31,
1998, other expense consisted primarily of the write-off of abandoned fixed
assets of $250,000.
Income Tax Expense. Income tax expense remained at $5.7 million for both
1999 and 1998; however, our effective tax rate decreased to 34.7% in 1999 from
36.4% in 1998. Our effective tax rate decreased primarily as a result of the
establishment of a Foreign Sales Corporation and an overall increase in
international sales, which are not subject to state income taxes averaging 3%.
Net Income. Net income increased 7.3% to $10.8 million in 1999 from $10.1
million in 1998. As a percentage of net sales, net income decreased to 6.0% in
1999 from 6.1% in 1998. The dollar amount of the increase was due to net sales
increasing by 9% offset by expenses incurred related to our international
expansion and cancellation of the remaining incentive compensation contract
for $750,000.
Year ended December 31, 1998 compared with the year ended December 31, 1997
Net Sales. Net sales increased 9.5% to $164.9 million in 1998 from $150.6
million in 1997. This increase was primarily composed of the following:
. A $10.8 million increase from the sale of several new products
introduced during 1998 and from existing products that were not
available for sale during the first nine months of 1997. Also
contributing to the increase was the opening of our Australian operation
in October 1998.
. An increase of $10.8 million in existing product sales. This increase
resulted solely from increases in the volume of products sold.
. A decrease of ($7.3 million) due to an overall decrease in associate
pack sales. A decrease of approximately ($8.6 million) in associate pack
sales related to the enrollment of new associates, which was partially
offset by a $1.3 million increase in renewal packs sold to associates.
Associate pack sales decreased due to a delay in introducing the new
associate packs until May 1998. In addition, we believe the slowdown was
caused by associates focusing on the pre-opening activities in
Australia, resulting in a temporary decrease in domestic recruiting and
pack sales.
Cost of Sales. Cost of sales increased 9.7% to $27.1 million in 1998 from
$24.7 million in 1997. As a percentage of net sales, cost of sales increased
to 16.5% for 1998 from 16.4% in 1997. The increase in cost of sales was due to
a $2.7 million increase in net sales of finished goods and a slight increase
in the price of raw materials due to using a new vendor. These increases were
partially offset by a ($200,000) decrease in freight due to a change in
vendors and a ($100,000) decrease in normal costs of spoilage and shrinkage of
inventory.
Commissions. Commissions consist of payments to associates for sales
activity and downline growth. Commissions increased 8.1% to $66.7 million in
1998 from $61.7 million in 1997. As a percentage of net sales, commissions
decreased to 40.4% in 1998 from 41.0% in 1997. The slight decrease as a
percentage of net sales was the direct result of a decrease in the number of
associate packs sold and of our operations beginning in Australia.
Gross Profit. Gross profit increased 10.9% to $71.1 million in 1998 from
$64.2 million in 1997. As a percentage of net sales, gross profit increased to
43.1% in 1998 from 42.6% in 1997. These changes resulted from the factors
described above.
26
Selling and Administrative Expenses. Selling and administrative expenses
consist of human resource expenses, including wages, bonuses and marketing
expenses, and are a mixture of both fixed and variable expenses. Selling and
administrative expenses increased 14.5% to $31.9 million in 1998 from $27.8
million in 1997. As a percentage of net sales, selling and administrative
expenses increased to 19.3% in 1998 from 18.5% in 1997. The dollar amount
increase was a result of increased labor costs due to sales volume increases,
$1.0 million spent on our first large-scale national associate meeting and
$400,000 related to the opening of our Australian operations.
Other Operating Costs. Other operating costs include utilities,
depreciation, travel, office supplies and printing expenses. Other operating
costs increased 15.2% to $22.4 million in 1998 from $19.4 million in 1997. As
a percentage of net sales, other operating costs increased to 13.6% in 1998
from 12.9% in 1997. The dollar amount increase was primarily due to the
following:
. $1.5 million in additional expenses related to our expansion into
Australia and research into the potential expansion into other
international markets;
. $1.0 million increase in depreciation expense; and
. $500,000 increase in rent, repair and maintenance due to the addition of
our new laboratory and the relocation of our Texas distribution center.
Cancellation of Incentive Compensation Agreements. Cancellation of incentive
compensation agreements consists of a one-time charge in 1997 totaling
approximately $2.2 million. This charge resulted from the exchange of shares
of our common stock for the cancellation of certain incentive compensation
agreements.
Write-off of Deferred Offering Costs. During August 1998, we withdrew our
original underwritten institutional/retail offering and expensed $847,000
related to the offering, which included printing, legal, accounting and
roadshow costs. In September 1998, we began the direct initial public
offering, which was not underwritten and was completed on February 12, 1999.
Interest Income. Interest income increased 10.8% to $92,000 in 1998 from
$83,000 in 1997. As a percentage of net sales, interest income increased to
0.1% in 1998 from 0.0% in 1997. The slight increase was the result of
converting accounts receivable from a related party to interest bearing notes
receivable due from shareholders.
Interest Expense. Interest expense increased 354.5% to $53,000 in 1998 from
$11,000 in 1997. As a percentage of net sales, interest expense remained at
0.0% in 1998 and in 1997, respectively. The dollar amount of the increase was
the result of paying interest on various capital leases.
Other Expense, Net. Other expense consists of royalties from vendors and
miscellaneous nonoperating expenses. Other expense increased 931.0% to
$299,000 in 1998 from $29,000 in 1997. As a percentage of net sales, other
expense increased to 0.3% in 1998 from 0.0% in 1997. The 1998 increase in
expense was primarily due to the write-off of abandoned fixed assets of
$250,000.
Income Tax Expense. Income tax expense increased 38.8% to $5.7 million in
1998 from $4.2 million in 1997. Our effective tax rate increased to 36.4% in
1998 from 28.0% in 1997. The increase in our effective tax rate was primarily
the result of reorganizing our corporate structure, effective as of June 1,
1997. Prior to that date, the income from partnerships related to Mannatech
was subject to income tax only at the individual partners' level.
Net Income. Net income decreased (5.3%) to $10.1 million in 1998 from $10.6
million in 1997. As a percentage of net sales, net income decreased to 6.1% in
1998 from 7.0% in 1997. The decrease was due to the increase in net sales
offset by a one-time charge of approximately $847,000 for the canceled initial
public offering, costs incurred in connection with the international
expansion, income tax expense and the other factors described above.
27
Seasonality and Selected Quarterly Statements of Income
We believe the impact of seasonality on our results of operations is
minimal. Historically, the first quarter has been slower each year and this
trend has continued in 2000. This trend may change as we continue to expand
internationally and international markets become a more significant part of
our business. We may experience variations on our quarterly results of
operations in response to, among other things:
. a concentration on opening new international markets;
. the timing of the introduction of new products;
. the recruiting and retention of associates;
. the general overall economic outlook;
. the general industry and network marketing industry conditions; and
. the consumer perception of our products and overall operations.
As a result of these and other factors, our quarterly results could vary
significantly in the future. Period-to-period comparisons should not be relied
upon as an indication of future performance since we can give no assurances
that the revenue growth rate in new markets will follow our historical
pattern. The market price of our common stock could be adversely affected by
the above factors.
28
The following table sets forth the unaudited consolidated quarterly
statement of income data for the year periods indicated. In our opinion, this
information has been prepared on the same basis as the audited Consolidated
Financial Statements set forth in this report and includes all necessary
adjustments, consisting only of normal recurring adjustments, that we consider
necessary to present fairly this information in accordance with generally
accepted accounting principles. You should read this information in
conjunction with the Consolidated Financial Statements and related notes in
Item 14 of this report, beginning on page F-1. Our consolidated operating
results for any one quarter are not necessarily indicative of results for any
future period.
Mar. 31 June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec 31,
1998 1998 1998(1) 1998(2) 1999 1999(3) 1999(4) 1999(5)
------- -------- --------- -------- -------- -------- --------- -------
(in millions, except per share and pack information)
Net sales............... $ 41.1 $ 42.6 $ 39.1 $ 42.1 $ 42.6 $ 45.0 $ 45.8 $ 46.3
Gross profit............ 18.1 18.2 17.0 17.8 18.4 19.2 19.8 19.6
Income before income
taxes.................. 5.8 5.5 2.7 1.8 4.6 3.4 5.0 3.5
Income tax expense...... 2.2 2.2 1.0 0.3 1.7 1.2 1.8 1.0
Net income.............. $ 3.6 $ 3.3 $ 1.7 $ 1.5 $ 2.9 $ 2.2 $ 3.2 $ 2.5
Earnings per share(6)
Basic.................. $ 0.16 $ 0.15 $ 0.08 $ 0.06 $ 0.13 $ 0.09 $ 0.13 $ 0.10
======= ======= ======= ======= ======= ======= ======= =======
Diluted................ $ 0.15 $ 0.14 $ 0.07 $ 0.06 $ 0.12 $ 0.08 $ 0.12 $ 0.10
======= ======= ======= ======= ======= ======= ======= =======
Number of starter packs
sold................... 30,261 29,176 17,183 40,383 32,530 33,279 31,299 43,413
Number of renewal packs
sold................... 13,892 8,636 21,629 14,319 14,604 13,189 20,689 17,637
------- ------- ------- ------- ------- ------- ------- -------
Total number of packs
sold................... 44,153 37,812 38,812 54,702 47,134 46,468 51,988 61,050
======= ======= ======= ======= ======= ======= ======= =======
Total associates
canceling associates
status................. 1,376 1,597 1,683 1,486 1,448 1,336 1,608 1,580
======= ======= ======= ======= ======= ======= ======= =======
- --------
(1) In September 1998, we recorded a charge of approximately $941,000 for the
write-off of various deferred offering costs. In December 1998, we
recovered $94,000 of these costs.
(2) During the fourth quarter of 1998, we began operations in Australia and
incurred approximately $1.0 million in start-up costs. In addition, we
expensed $500,000 for ongoing modification costs associated with our
internally developed software.
(3) For the second quarter of 1999, income before income taxes has been
reduced by a $750,000 charge for the cancellation of an incentive
contract, $400,000 for consulting services related to our international
expansion, $200,000 for settlement of a lawsuit and $100,000 for
additional research and development costs related to the opening of our
laboratory facility.
(4) For the third quarter of 1999, income before income taxes has been reduced
by $225,000 related to the secondary offering of registering shares of our
common stock for sale by certain shareholders.
(5) For the fourth quarter of 1999, income before income taxes has been
reduced by $1.0 million related to the start up expenses for operations in
the United Kingdom and Japan.
(6) Computed on the basis described in Note 1 in the notes to the Consolidated
Financial Statements.
The following table sets forth certain unaudited quarterly results of
operations expressed as a percentage of net sales for each of the eight
quarters ending with the year ended December 31, 1999.
Mar. 31 June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec 31,
1998 1998 1998 1998 1999 1999 1999 1999
------- -------- --------- -------- -------- -------- --------- -------
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 44.0 42.6 43.4 42.2 43.2 42.6 43.2 42.4
Income before income
taxes.................. 14.3 13.0 7.0 4.2 10.8 7.6 11.0 7.6
Income tax expense...... 5.3 5.0 2.7 0.7 4.0 2.7 4.0 2.1
Net income.............. 9.0% 8.0% 4.3% 3.5% 6.8% 4.9% 7.0% 5.4%
Liquidity and Capital Resources
In February 1999, we received approximately $9.2 million in net proceeds
from the sale of our common stock in our initial public offering. In the
initial public offering, some of our existing shareholders sold 1,556,016
29
shares and we sold 1,500,000 shares of our common stock, at $8.00 per share.
We planned to use approximately $6.3 million of our proceeds from the initial
public offering for international expansion, primarily for product
registration, initial inventory requirements and similar items and have
expended approximately $4.4 million on these items as of December 31, 1999.
The remaining $2.9 million was used to fund working capital and for general
corporate purposes. In February 1999, we also received $641,271 from the
exercise of 475,015 outstanding warrants at $1.35 per share. During 1999, we
also received $785,600 from the exercise of 563,774 stock options at a price
per share ranging from $1.35 to $2.00 per share.
Our primary capital requirement is to fund working capital to support our
growth. In the past, we financed our operations mostly through cash flows from
operating activities and capital leases. As a result of our expenditures on
the facilities, equipment and personnel necessary to support our growth and
international expansion, we had a working capital deficiency of $12.4 million
as of December 31, 1998 compared to working capital of $11.7 million at
December 31, 1999. In 1998, we invested approximately $6.1 million, in the
relocation of our distribution center to Coppell, Texas, the completion of our
new laboratory facility and beginning operations in Australia. In 1999, we
invested approximately $600,000, in our expansion into the United Kingdom.
These projects were funded primarily through operating cash flow and capital
leases in 1998 and from operating cash flow in 1999.
We paid approximately $9.9 million and $1.3 million in dividends to our
shareholders in 1998 and 1999, respectively. In 1998, current liabilities
increased due to an increase in payables, income taxes and inventory
purchases. The increase was primarily related to increased sales volume in
1998, the costs of the initial public offering, our expansion into Australia
and research into future planned expansion into other international markets.
In 1999, our current liabilities decreased due to our using the net proceeds
of the initial public offering to reduce accounts payable and accrued
expenses, an increase in net sales and a reduction in income taxes due to the
income tax benefit related to the exercise of warrants and stock options.
In March and August 1998, we entered into two capital leases with principal
amounts of $631,000 and $841,000, respectively. These capital leases bear
interest at 9.3%, are collateralized by the leased assets and are payable in
thirty-six monthly installments. In July 1998, we entered into a thirty-six
month, unsecured note payable with a finance company to finance our three-year
product liability insurance premium. The initial principal amount of this note
was $435,670, the interest rate is 8.0% and monthly installments are due
through December 2000.
Net cash provided by operating activities was $19.8 million, $18.1 million
and $4.8 million in 1997, 1998 and 1999, respectively. Throughout these years,
increases in net sales were partially offset by increases in inventory and
other expenses related to our international expansion and a decrease in income
tax payable of approximately $3.5 million from the tax benefit related to the
exercise of warrants and options. In 2000, we expect to spend up to an
estimated $2.0 million for start-up costs and between $1.0 and $2.0 million
for initial inventory for our planned expansion into Japan in the summer of
2000.
Net cash (used in) investing activities was ($8.9 million), ($4.4 million)
and ($4.6 million) in 1997, 1998 and 1999, respectively. In 1997 these
activities consisted primarily of purchases of equipment and build-out of
leased facilities in connection with our relocation to our new headquarters
facility. In 1998, these activities consisted of the relocation of our Texas
distribution center, the build-out of our research and development facility
and the development and implementation of our proprietary software program. In
1999, these activities consisted primarily of purchases of computer hardware,
internal development of computer software and furnishings for our Australian
and United Kingdom headquarters and investing the net proceeds from the
initial public offering into investments offset by the repayment of the notes
receivable due from certain shareholders to us of approximately $974,000. We
believe the new facilities and software program should be sufficient for our
immediate needs. However, in 2000 we intend to spend up to an estimated $3.8
million for translation of our software into other languages, additional
purchases of equipment and build-out of leased facilities for our planned
international expansion into Japan in the summer of 2000.
30
Net cash provided by (used in) financing activities totaled ($11.9 million),
($12.9 million) and $10.6 million in 1997, 1998 and 1999, respectively. In
1997, we made distributions to the partners of the partnerships of $4.1
million. Following the reorganization, we paid dividends on a monthly basis to
our shareholders in the amount of $0.02-$0.06 per share and paid dividends
each month until the completion of the initial public offering on February 12,
1999. Our board of directors intends, from time-to-time, to reevaluate this
policy after considering relevant factors, including the level of our net
income and alternative uses of retained earnings. In February 1999, the gross
initial public offering proceeds of approximately $12.0 million were received
and during 1999, proceeds of $785,000 were received from the exercise of stock
options offset by the repayment of capital leases and note payable of
approximately $800,000.
Our existing capital resources, including cash provided by operating
activities, bank borrowings together with the proceeds from the initial public
offering and suspension of dividend payments to shareholders, should be
adequate to fund our operations for at least the next 12 months. We have no
present commitments or agreements with respect to any acquisitions or
purchases of manufacturing facilities or new technologies. Changes could occur
that would consume available capital resources faster than anticipated. Our
capital requirements depend on numerous factors, including:
. the timing and pace of our entry into international markets;
. growth in the number of associates; and
. our research and development efforts.
If our existing capital resources, together with the net proceeds of the
initial public offering, are insufficient to meet our capital requirements, we
will be required to raise additional funds. We cannot be sure that additional
funding, if necessary, will be available on favorable terms, if at all.
Year 2000
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many computer systems
and software programs. This inability to distinguish whether "00" means 1900
or 2000, may have resulted in failures or the creation of erroneous results.
Most reports to date, however, are that computer systems are functioning
normally and the compliance and remediation work accomplished leading up to
2000 was effective and prevented such problems.
We believe that our current versions of software products licensed from
third parties, are Year 2000 compliant. However, some of our suppliers may be
running earlier versions of software products that may not be Year 2000
compliant. We have evaluated the Year 2000 readiness of our vendors and third
parties and found no system failures. Furthermore, we currently are unaware of
any material operational issues or costs associated with preparing and
maintaining our computer and technology systems for the Year 2000. However, we
still may experience material unanticipated problems and costs caused by
undetected errors or defects, which could seriously harm our business.
Our total cost associated with Year 2000 identification, remediation and
testing was approximately $100,000 and was funded through operating cash
flows. None of our applications failed to perform on January 1, 2000; however,
computer experts have warned that there may still be residual consequences of
the change in centuries. If we experience any application failures in 2000, it
could result in a decrease in sales of our products or an increase in the
allocation of resources to address the problem with the Year 2000. If this
should occur, we would have to resort to temporary manual processing, which is
not expected to have a material adverse impact on our short-term operations.
Impact of Inflation
We believe that inflation historically has not had a material impact on our
operations or profitability. In 1998, we expanded into Australia and in 1999,
into the United Kingdom. We plan to expand into Japan in the
31
summer of 2000. Revenues and expenses in foreign markets are currently
translated using historical and weighted-average currency exchange rates;
therefore a weakening United States dollar should have a positive impact
whereas a strengthening United States dollar should have a negative impact on
translations of our foreign operations. The planned expansion into Japan may
not proceed as planned if there is a further economic downturn or fluctuation
in Asian currencies. We intend to proceed cautiously with the Japanese
expansion in order to help minimize any material impact on our operations or
profitability.
Subsequent Event
On February 29, 2000, a class action lawsuit was filed of record in District
Court, County of Boulder, Colorado; naming Mannatech and three other companies
as co-defendants. The other defendants were involved in certain health benefit
programs offered to our Associates. The suit alleged the defendants were
marketing and selling illegal health insurance policies, committed fraud and
failure to pay benefits under such policies, which caused economic loss to the
plaintiffs and others. The suit seeks a trial by jury and an unspecified
amount of damages. Mannatech believes it has valid defense and that the
allegations are completely without merit. We intend to vigorously defend our
position. Nevertheless, an adverse resolution to this matter could have a
material adverse effect on our business, results of operations, financial
condition and liquidity.
Recent Financial Accounting Standards Board Statements
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 133, "Accounting for Derivative, Instruments and
Hedging Activities." This statement establishes accounting and reporting
standards for derivative financial instruments, including certain derivative
financial instruments imbedded in other contracts and for hedging activities.
In June 1999, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 137, which defers the effective date of Financial
Accounting Standard No. 133 to fiscal years beginning after June 15, 2000. As
we do not have any derivative financial instruments, this pronouncement is not
expected to impact us.
Forward-Looking Statements
Some of our statements under "Business," "Properties," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Quantitative and Qualitative Disclosures about Market Risk" and
the Notes to Consolidated Financial Statements and elsewhere in this report
constitute "forward-looking statements" within the meaning of Section 21E of
the Securities Exchange Act of 1934 that are subject to certain events, risk
and uncertainties that may be outside our control. These forward-looking
statements include statements of:
. management's plans and objectives for our future operations and future
economic performance;
. our capital budget and future capital requirements;
. meeting our future capital needs;
. realization of our deferred tax assets;
. the level of future expenditures; and
. the outcome of regulatory and litigation matters, and the assumptions
described in this report underlying such forward-looking statements.
Actual results and developments could differ materially from those expressed
in or implied by such statements due to a number of factors, including,
without limitation:
. those described in the context of such forward-looking statements;
. future product development and manufacturing costs;
32
. timely development and acceptance of new products;
. the entrance into new countries and markets;
. the impact of competitive products and pricing;
. the political and economic climate in which we conduct operations; and
. the risk factors described from time to time in other documents and
reports filed with the Securities and Exchange Commission.
In some cases, forward-looking statements are identified by terminology such
as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "approximates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements.
We are under no duty to update any of the forward-looking statements after the
date of this report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We do not engage in trading market risk sensitive instruments and do not
purchase as investments, as hedges, or for purposes "other than trading,"
instruments that are likely to expose us to certain types of market risk,
including interest rate, commodity price or equity price risk. We do have
investments but there has been no material change in our exposure to interest
rate risk on our investments. We have not issued any debt instruments, entered
into any forward or futures contracts, purchased any options or entered into
any swaps.
We also are exposed to certain other market risks, including changes in
currency exchange rates as measured against the United States dollar. The
value of the United States dollar affects our financial results. Changes in
exchange rates may positively or negatively affect our sales (as expressed in
United States dollars), gross margins, operating expenses and retained
earnings. When the United States dollar increases against currencies in which
we sell products or a weakening exchange rate against currencies in which we
incur costs, our net sales or costs may be adversely affected. We have
established policies, procedures, and internal processes governing the
management of market risk and the use of any financial instruments to manage
our exposure to such risks. The sensitivity of earnings and cash flows to
variability in currency exchange rate is assessed by applying an appropriate
range of potential rate fluctuations to our assets, obligations and projected
transactions denominated in foreign currency. Based upon our overall currency
rate exposure at December 31, 1999, we do not believe that its exposure to
exchange rate fluctuations will have a material impact on our consolidated
financial position or consolidated results of operations. All statements other
than historical information incorporated in this Item 7A are forward-looking
statements. The actual impact of future market changes could differ materially
due to, among other things, factors discussed in this report.
Item 8. Financial Statements and Supplementary Data
The Financial Statements and Supplementary Data of the Company required by
this Item 8 are set forth at the pages indicated in Item 14, beginning on page
F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
33
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
Our executive officers and directors and their ages as of March 24, 2000 are
as follows:
Name Age Position
---- --- --------
Charles E. Fioretti....... 53 Chairman of the Board and Chief Executive
Officer
Samuel L. Caster.......... 49 President and Director
Anthony E. Canale......... 47 Executive Vice President, Chief Operating
Officer of International Operations and
Director
Patrick D. Cobb........... 47 Executive Vice President, Chief Executive
Officer of subsidiaries
Deanne Varner............. 47 Senior Vice President of Compliance and General
Counsel
Jeffrey P. Bourgoyne...... 38 Vice President of Operations
Peter E. Hammer........... 45 Vice President of New Business and
International Development
Donald W. Herndon......... 49 Vice President of Marketing Administration
Bill H. McAnalley, Ph.D... 55 Senior Vice President of Research and Product
Development and Chief Scientific Officer
Ronald D. Norman.......... 41 Vice President and Treasurer
Eoin Redmond.............. 34 Vice President of Information Technology and
Chief Information Officer
Stephen D. Fenstermacher.. 47 Senior Vice President of Accounting and Chief
Financial Officer
Eileen M. Vennum.......... 52 Vice President of Regulatory Affairs
Gwendolyn J. Pennington... 56 Vice President of Human Resources
Terry L. Persinger........ 54 Executive Vice President, Chief Operating
Officer of Domestic Operations, Director and
Secretary
Brad G. Wayment........... 34 Vice President of Marketing
Steven A. Barker, Ph.D.... 50 Director
Chris T. Sullivan......... 51 Director
James M. Doyle, Jr........ 55 Director
Charles E. Fioretti is one of our founders, has been our Chairman of the
Board and Chief Executive Officer since May 1997, and has been a director
since November 1993. His current term as director expires in 2001. Mr.
Fioretti was our Chief Operating Officer from November 1993 to July 1996. From
June 1990 until April 1995, Mr. Fioretti was an owner and operator of several
Outback Steakhouse, Inc. restaurants in Arizona, Indiana and Kentucky. Mr.
Fioretti is Peter E. Hammer's brother-in-law and William C. Fioretti's cousin.
Samuel L. Caster is one of our founders and has served as our President and
as a director since November 1993. His current term as director expires in
2000. From April 1992 until August 1993, Mr. Caster served as co-founder,
owner and President of Funds-4-Kids, Inc., a multilevel marketing company that
sold healthy candy bars for children. Mr. Caster is Donald W. Herndon's
brother-in-law.
Anthony E. Canale joined us in January 1997 and since then has served as our
Executive Vice President. From January 1997 to October 1999, Mr. Canale served
as our Chief Operating Officer. In October 1999, Mr. Canale was moved to Chief
Operating Officer of International Operations and appointed as a director. His
term as director will expire in 2000. From February 1993 until October 1996,
Mr. Canale was President of Canale and Associates, an Outback Steakhouse, Inc.
joint venture partnership. Mr. Canale received a B.S. in Management from
American International College in Springfield, Massachusetts.
Patrick D. Cobb joined us in August 1994 and served as our Chief Financial
Officer and Executive Vice President until October 1999. In October 1999, Mr.
Cobb remained as Executive Vice President and moved to Chief Executive Officer
of subsidiaries. Mr. Cobb was appointed as a director in November 1997 and
34
resigned on November 19, 1999. Mr. Cobb served as our corporate secretary from
February 1997 until November 19, 1999. Mr. Cobb received a B.S. in Finance
from the University of Oklahoma and is a Certified Public Accountant.
Deanne Varner joined us in January 1996 and since May 1996 has served as our
General Counsel and Senior Vice President of Compliance. From 1986 until
January 1996, Ms. Varner maintained a law practice in Dallas, Texas focusing
on business law and related transactions. Ms. Varner has over 20 years of
experience in business, corporate and transactional law. Ms. Varner received a
B.A. in Social Sciences and a J.D. from Southern Methodist University.
Jeffrey P. Bourgoyne joined us in December 1996 and since February 1998 has
served as our Vice President of Operations. From May 1995 until December 1996,
Mr. Bourgoyne served as facility manager for DSC Logistics, Inc., a third-
party logistics provider. From June 1993 until May 1995, Mr. Bourgoyne was a
Transportation Services Manager for Abbott Laboratories, a pharmaceutical
company. Mr. Bourgoyne received a B.S. in Management from University of New
Orleans and an M.B.A. from Lake Forest Graduate School of Management.
Peter E. Hammer joined us in March 1995 and since January 1998 has served as
our Vice President of New Business and International Development. From
November 1991 until February 1995, Mr. Hammer served as the Vice President and
Chief Information Officer of The Network, Inc., a business solutions company
in Atlanta, Georgia. Mr. Hammer received a B.A. in Liberal Arts from State
University College at Buffalo and an A.A.S. in Electronics from Suffolk
Community College. Mr. Hammer is Charles E. Fioretti's brother-in-law.
Donald W. Herndon joined us in November 1993 and until December 1996 served
as our Vice President of Distribution. From December 1996 until November 1999,
Mr. Herndon served as our Vice President of Marketing. Beginning in November
1999, Mr. Herndon was moved to Vice President of Marketing Administration.
From January 1993 through November 1993, Mr. Herndon served as the Vice
President of Operations for Funds-4-Kids, Inc. a multilevel marketing company
that sold healthy alternative candy bars for children. Mr. Herndon is the
brother-in-law of Samuel L. Caster and is also the brother-in-law of Terry L.
Persinger.
Bill H. McAnalley, Ph.D. joined us in July 1996 and has served as Senior
Vice President of Research and Product Development and Chief Scientific
Officer since December 1997. From March 1995 until July 1996, Dr. McAnalley
was a consultant to us. From March 1987 until February 1995, Dr. McAnalley was
Vice President of Research and Product Development at Carrington Laboratories,
Inc., a pharmaceutical research, development and manufacturing company. Dr.
McAnalley received a Ph.D. in Pharmacology and Toxicology from the University
of Texas Health Science Center in Dallas, Texas.
Ronald D. Norman joined us in May 1996 and from August 1997 until September
1998 served as our Controller. In September 1998, Mr. Norman began serving as
our Treasurer. In June 1998, Mr. Norman was promoted to Vice President. From
September 1994 until April 1996, Mr. Norman was a Tax Manager with Belew
Averitt L.L.P., a public accounting firm in Dallas, Texas. Mr. Norman received
an M.A. in Tax and a B.B.A. in Accounting from Baylor University and is a
Certified Public Accountant.
Eoin Redmond joined us in July 1997 and since served as our Vice President
of Information Technology. In October 1999, Mr. Redmond was promoted to Chief
Information Officer. From August 1996 through June 1997, Mr. Redmond, was a
computer systems consultant for us. From October 1995 until August 1996, Mr.
Redmond was head of client services for Tate Bramald Ltd., an accounting
software provider. From December 1993 until September 1995, Mr. Redmond was
employed as the Technology Service Manager--Europe for SSA Europe Ltd., an
industrial software provider. Mr. Redmond matriculated at Presentation
College, County Wicklow, Ireland and subsequently attended AnCo Technology
Center, County Dublin, Ireland.
Stephen D. Fenstermacher joined us in November 1998 and until October 1999
served as our Vice President of Accounting and Controller. In October 1999,
Mr. Fenstermacher was promoted to Senior Vice President and
35
Chief Financial Officer. From January 1998 until October 1998, Mr.
Fenstermacher was a consultant for Kibel, Green, ISSA, Inc., a crisis
management firm specializing in turnaround strategy and execution consulting.
From April 1995 until October 1997, Mr. Fenstermacher served as Executive Vice
President and Chief Financial Officer for The Johnny Rockets Group, Inc. From
May 1994 until April 1995, Mr. Fenstermacher served as Vice President for
Brinker International, Inc., an international restaurant chain. From September
1991 until May 1994, Mr. Fenstermacher served as Chief Executive Officer and
Chief Financial Officer for On The Border Cafes, Inc., an international
restaurant chain. Mr. Fenstermacher received an M.B.A. from the University of
Pittsburgh and a B.A. from the University of Notre Dame.
Eileen M. Vennum joined us in January 1997 and until January 1998 served as
our Director of Regulatory Affairs. From January 1998 until June 1999, Ms.
Vennum served as Executive Director of Regulatory Affairs. In July 1999, Ms.
Vennum was promoted to Vice President of Regulatory Affairs. From 1988 until
December 1996, Ms. Vennum was a Director of Regulatory Affairs, Document
Control and Technical Editor for Carrington Laboratories, Inc., a
pharmaceutical research, development and manufacturing company. Ms. Vennum
attended David Lipscomb University, Harding University and the University of
Dallas. Ms. Vennum holds a Regulatory Affairs Certified designation from the
Regulatory Affairs Professional Society.
Gwendolyn J. Pennington joined us in September 1996 and until October 1999
served as our Executive Director of Human Resources. In October 1999, Ms.
Pennington was promoted to Vice President of Human Resources. From October
1994 until August 1996, Ms. Pennington was the Director of Human Resources at
Excel Communications, Inc., a multilevel marketing telephone long-distance
service provider. Ms. Pennington received a B.S. in Behavioral Management from
the University of Texas at Dallas and an M.B.A. from the University of Dallas.
Terry L. Persinger joined us in November 1999 and since has served as our
Executive Vice President, Chief Operating Officer of Domestic Operations and
director. His current term as director expires in 2002. From 1968 until August
1999, Mr. Persinger worked at Goodyear Tire & Rubber Company, an international
manufacturer of tires and rubber products and from January 1995 to August 1999
served as their Vice President and General Manager of Engineered Products. Mr.
Persinger received a B.S. in Chemical Engineering from the University of
Cincinnati and a graduate of the PMD management program at Harvard University.
Mr. Persinger is the brother-in-law of Donald W. Herndon.
Brad G. Wayment joined us in November 1999 and since has served as our Vice
President of Marketing. From June 1998 to October 1999, Mr. Wayment was Vice
President of Marketing at New Vision International, a network marketing
company involved in the distribution and sales of nutritional and personal
care products. From November 1996 to June 1998, Mr. Wayment served as the
Business Development/Product Marketing Manager with Novell Inc., a network and
internet directory software and services company. From November 1989 to
November 1996, Mr. Wayment was the Product Management Team Leader of
Marketing/Product Development at Nu Skin Enterprises, Inc., a direct selling
company involved in the distribution and sales of nutritional and personal
products. Mr. Wayment received a B.A. and M.B.A. from Brigham Young
University.
Steven A. Barker Ph.D. became one of our independent directors in January
1998. His current term as director expires in 2002. Dr. Barker has been a full
professor of Physiology, Pharmacology and Toxicology at Louisiana State
University since April 1990. Dr. Barker received a B.S. and an M.S. in
Chemistry and a Ph.D. in Chemistry/Neurochemistry from the University of
Alabama-Birmingham.
Chris T. Sullivan became one of our independent directors in October 1997.
His current term as director expires in 2001. Mr. Sullivan has been the
Chairman of the Board and Chief Executive Officer of Outback Steakhouse, Inc.
since founding that company in 1988. Mr. Sullivan serves on the executive
committee for The Outback/Gary Koch Pro-Am, the Tampa Bay Devil Rays, the
Employment Policies Institute and the Presidents Conference. Mr. Sullivan
received a degree in Business and Economics from the University of Kentucky.
James M. Doyle, Jr. became one of our independent directors in October 1999.
His current term as director expires in 2002. In 1975, Mr. Doyle joined
Matthews & Branscomb, P.C., a law firm, located in San Antonio,
36
Texas where he is currently a shareholder. Mr. Doyle practices in the area of
business transactions, mergers and acquisitions and corporate law. Mr. Doyle
is a Fellow of the Texas Bar Foundation and a member of the board of directors
of the San Antonio Economic Development Foundation. Mr. Doyle received a B.A.
from the University of the South in Sewanee, Tennessee and a J.D. from
Vanderbilt University.
Classes of our Board of Directors
Our board of directors is divided into three classes that serve staggered
three-year terms expiring at the annual meeting of shareholders as follows:
Class Expiration Member
----- ---------- ------
Class I.................................. 2000 Canale, Caster
Class II................................. 2001 Fioretti, Sullivan
Class III................................ 2002 Barker, Persinger, Doyle
Committees of the Board of Directors
Our board of directors has three committees each composed solely of two of
our independent directors, Messrs. Barker and Sullivan. The committees and
their function are as follows:
. The audit committee is charged with reviewing our annual audit and
meeting with our independent accountants to review our internal controls
and financial management practices;
. The compensation committee is responsible for establishing salaries,
bonuses and other compensation for our executive officers.
. The option committee has the authority to determine the terms and
conditions of each option to be issued under our stock option plans and
the responsibility for administration of each such plan.
In addition, the Company also maintains an executive operating committee
comprised of seven executive officers. The executive operating committee has
the authority to make specific recommendations and render advice to the board
of directors on various matters regarding operations. The eight members
include the President, Chief Executive Officer and all of our Executive and
Senior Vice Presidents.
Director Compensation
Messrs. Barker and Sullivan, two of our three independent directors, each
receives an annual fee of $30,000 for serving on our board of directors. In
addition, our directors are reimbursed for their reasonable out-of-pocket
expenses, in connection with their travel to and attendance at meetings of our
board of directors or its committees. On October 19, 1999, we granted 50,000
stock options to Mr. Barker at an exercise price of $7.69 per share, which was
the approximate fair value of our common stock on that date.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of our common stock, to file with
the Commission initial reports of ownership and reports of changes in
ownership of our common stock and other equity securities. Such persons are
required by the Commission's regulations to furnish us with copies of all
Section 16(a) reports they file. Prior to our initial public offering, our
directors, executive officers and persons who own more than 10% of our common
stock were not subject to the requirements of the Exchange Act.
Based solely upon a review of the copies of such reports or written
representations that no other reports were required, we believe that during
the fiscal year ended December 31, 1999 our executive officers, directors and
greater than 10% beneficial owners complied with all applicable Section 16(a)
filing requirements, except for the following:
37
. Stephen D. Fenstermacher, Donald W. Herndon, Gwendolyn J. Pennington,
Terry L. Persinger, Eileen M. Vennum and Brad G. Wayment, all of whom
are our executive officers did not timely file their initial report on
Form 3.
. Steven A. Barker, Ph.D., one of our directors and Jeffrey P. Bourgoyne,
Stephen D. Fenstermacher and Eileen M. Vennum, all of whom are our
executive officers did not timely file Form 4's required as a result of
being granted stock options.
. Mr. William C. Fioretti, 10% beneficial owner of our common stock, did
not timely file Form 4's on seven different occasions relating to the
sale of his shares.
. Peter E. Hammer, one of our executive officers, did not timely file a
Form 4 on two occasions relating to sale of his shares.
. Donald W. Herndon, executive officer, did not timely report on a Form 4
on two occasions relating to the sale of his shares.
We have begun to send monthly reporting reminders to each of our executive
officers and 10% beneficial owners to assist in their Section 16(a) reporting
requirements.
38
Item 11. Executive Compensation
The following table summarizes the compensation paid to or earned for each
of the three years ended December 31, 1999, by each person who served as the
chief executive officer during 1999 and the four most highly compensated
executive officers, other than the chief executive officer, who were serving
as executive officers at the end of 1999 (collectively, the "Named Executive
Officers").
Summary Compensation Table
Long-Term
Compensation
------------
Number of
Shares
Annual Compensation Other Underlying
------------------- Annual Options
Name And Principal Position Year Salary Bonus Compensation(1) Granted
- --------------------------- ---- ------------------- --------------- ------------
Charles E. Fioretti(2)..
Chairman of the Board 1999 $ 600,000 $ 158,517 $ 112,595(3) --
and Chief Executive 1998 433,517 750,000 9,044(4) --
Officer 1997 403,434 760,000 109,765(4) --
Samuel L. Caster........ 1999 600,000 101,981 29,571(5) --
President 1998 433,517 500,000 2,942(6) --
1997 403,434 760,000 16,012(6) --
Anthony E. Canale.......
Executive Vice
President and Chief 1999 300,000 64,759 1,395,528(7) --
Operating Officer of 1998 287,500 326,293 11,925(8) 250,000
International 1997 221,978 190,172 -- 250,000
Patrick D. Cobb(9)......
Executive Vice
President and Chief 1999 300,000 51,990 1,172,911(10) --
Executive Officer of 1998 245,055 250,000 2,077 100,000
subsidiaries 1997 214,011 171,666 43,000(11) 100,000
Deanne Varner...........
Executive Vice 1999 261,539 58,032 1,388,900(12) --
President of Compliance 1998 225,275 323,793 1,644 228,000
and General Counsel 1997 187,019 159,884 -- 228,000
- --------
(1) Includes our matching contribution to the 401(k) plan, paid to executives
except for Mr. Fioretti and Mr. Caster.
(2) Mr. Fioretti became Chief Executive Officer on May 1, 1997.
(3) Represents the value of two of our vehicles transferred to Mr. Fioretti
in 1999.
(4) Represents the amounts paid to Mr. Fioretti under his incentive
compensation agreement.
(5) Represents a car allowance paid to Mr. Caster.
(6) Represents the amount paid to Mr. Caster under his incentive compensation
agreement.
(7) Represents $10,000 for the 401(k) Plan matching contribution, $2,786 car
allowance paid to Mr. Canale and $1,274,680 for the noncash compensation
value for stock options sold.
(8) Represents the amount paid to Mr. Canale for costs of relocation.
(9) Mr. Cobb served as Chief Financial Officer until October 1999.
(10) Represents $10,840 car allowance, $10,000 for the 401(k) Plan matching
contribution paid to Mr. Cobb and $1,160,125 for the noncash compensation
value for stock options sold.
(11) Represents the value of one of our vehicles transferred to Mr. Cobb in
1997.
(12) Represents $10,000 for the 401(k) Plan matching contribution, $4,212 car
allowance paid to Ms. Varner and $1,374,688 for the noncash compensation
value for stock options sold.
Stock Option Grants in the Last Fiscal Year
We did not grant any stock options to any of the Named Executive Officers
during the fiscal year ended December 31, 1999.
39
Stock Options Exercised in Last Fiscal Year
The following table sets forth certain information concerning the exercise
of stock options held by the Named Executive Officers during the fiscal year
ended December 31, 1999:
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Number of Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Fiscal Year-End Fiscal Year-End(1)
Shares Acquired Value ---------------------------- -------------------------
Name On Exercised (#) Realized ($) Exercisable(2) Unexercisable Exercisable Unexercisable
---- ---------------- ------------ -------------- ------------- ----------- -------------
Anthony E. Canale....... 100,000 $135,000 400,000 -- $575,700 $--
Patrick D. Cobb......... 100,000 $135,000 100,000 -- $ -- $--
Deanne Varner........... 174,074 $235,000 281,926 -- $206,968 $--
- --------
(1) Based on the closing price of $5.188 per share of our common stock on the
Nasdaq National Market on December 31, 1999, our fiscal year-end, less the
per share exercise price of $1.35.
(2) 250,000 of Mr. Canale's, 100,000 of Mr. Cobb's and 228,000 of Ms. Varner's
options are exercisable at $8.00 and were considered out-of-the-money for
the value calculation.
Executive Employment Agreements
We have employment agreements with each of Charles E. Fioretti, Patrick D.
Cobb, Anthony E. Canale, Bill H. McAnalley and Deanne Varner. These agreements
expire in September 2003 but will extend automatically for one additional year
unless both parties agree to terminate the contract before the end of any
term. In addition, in November 1999, we entered into an employment agreement
with Terry L. Persinger, which expires in November 2002. All of these
agreements provide for a current base salary, bonus compensation based upon
the management bonus plan formula the right to receive stock options and
certain confidentiality and non-compete clauses. If we terminate any of these
employment agreements for any reason other than reasons specified in the
agreements, the officer is entitled to receive an amount equal to the sum of
all salary and bonus that would have been paid during the remainder of their
employment agreement.
Management Bonus Plan
Executive officers and some other members of corporate management are
eligible to receive bonuses in addition to their base salaries. Our
compensation committee is responsible for reviewing and approving bonuses for
these officers.
Compensation Committee Interlocks and Insider Participation
In February 1999, after the completion of our initial public offering, our
board of directors established the compensation committee. The compensation
committee is responsible for decisions regarding compensation of our executive
officers. The compensation committee is composed solely of two of our three
independent directors, Messrs. Barker and Sullivan. None of the members of the
compensation committee has ever been an officer or employee of Mannatech.
Executive Compensation Report of the Board of Directors
The compensation committee was formed in February 1999. Prior to February
1999, our board of directors performed the functions of the compensation
committee.
This Executive Compensation Report discusses our executive compensation
policies and the basis for the compensation paid to our executive officers,
including the Chief Executive Officer, Charles E. Fioretti, during the fiscal
year ended December 31, 1999.
40
Compensation Policy. Our policy with respect to executive compensation has
been designed to:
. Adequately and fairly compensate executive officers in relation to their
responsibilities, capabilities and contributions to Mannatech and in a
manner that is commensurate with compensation paid by companies of
comparable size or within our industry; and
. Reward our executive officers for the achievement of short-term
operating goals and for the enhancement of our long-term value.
Components of compensation. The primary components of compensation paid to
our executive officers and the relationship of such components of compensation
to our performance are discussed below:
(a) Base Salary. As the compensation committee was not formed until
February 1999, the fiscal year ended December 31, 1999 base salaries
were reviewed and approved by our board of directors. At the beginning
of each new fiscal year the compensation committee reviews the base
salaries of the executive officers to ensure the salaries are based
correctly upon a number of factors. These factors include our
performance (to the extent such performance can fairly be attributed or
related to each executive officer's performance), as well as the nature
of each executive officer's responsibilities, capabilities, loyalties
and contributions. The compensation committee believes that base
salaries for our executive officers have been reasonable in relation to
our size and performance in comparison with the compensation paid by
similarly sized companies or companies within the same industry.
(b) Bonus. Our executive officers are eligible to participate in our
Management Bonus Plan. The bonus plan is based upon the attainment of
certain financial goals including general performance of Mannatech and
to a reasonable degree, our performance in accordance with a projected
budget. The bonuses for the fiscal year ended December 31, 1999 were
reviewed and approved by the compensation committee and paid by January
15, 2000. Subsequent bonuses paid to the executive officers will be
reviewed and approved by the compensation committee and paid no less
than annually. During the fiscal year ended December 31, 1999, our
Chief Executive Officer, Charles E. Fioretti, was awarded an additional
bonus of $56,536 for his efforts with respect to the completion of our
initial public offering.
(c) Other Annual Compensation. We maintain certain other plans and
arrangements for the benefit of our executive officers and other
management, including participation in the 401(k) plan, use of a
company vehicle and health, life, automobile and long term disability
insurance. During the last quarter of 1999, the compensation committee
approved a new policy where by all employees at the Vice President
level and above were awarded monthly car allowances of $500.00. In
addition, the Chief Executive Officer, Chief Operating Officer's, Chief
Financial Officer, Chief Scientific Officer, President, General Counsel
and Chief Executive Officer of our subsidiaries were awarded the use of
a vehicle leased by Mannatech. In 1999, the Chief Executive Officer
elected not to use a vehicle leased by Mannatech. We believe these
benefits are reasonable in relation to the executive compensation
practices of other similarly sized companies or companies within the
same industry.
(d) Long-term Compensation. We maintain stock option plans to reward
certain members of management for the attainment of certain goals or
events. The stock option grants are reviewed and approved by our
compensation committee. We believe these long-term compensation
arrangements are reasonable in relation to the executive compensation
practices of other similarly sized companies or companies within the
same industry.
1999 Chief Executive Officer Compensation
As previously described, the compensation committee considered several
factors in determining the Chief Executive Officer's compensation package,
with the primary factor being our performance and the competitive compensation
paid to other executive officers of comparable size companies of companies
within the same industry. Specific actions taken by the compensation committee
regarding Mr. Fioretti's 1999 compensation are summarized below:
(a) Base Salary. As with our other executive officers, Mr. Fioretti's 1999
salary was based on a number of factors. These factors include our
performance, overall consolidated financial results, as well as the
41
nature of his responsibilities, capabilities, loyalties and
contributions to Mannatech. For fiscal year 1999, Mr. Fioretti's salary
remained at $600,000.
(b) Bonus. Our Chief Executive Officer is allowed to participate in our
Management Bonus Plan. Our bonus plan is based upon the attainment of
certain financial goals. The board of directors approved a $56,536
bonus to Mr. Fioretti in February 1999, prior to the formation of the
compensation committee. The bonus was awarded in recognition of Mr.
Fioretti's efforts relating to the successful completion of our initial
public offering. In addition, Mr. Fioretti was paid $101,981 pursuant
to the Management Bonus Plan.
(c) Other Annual Compensation. All of our other executive officers may
participate in our 401(k) plan, but the Chief Executive officer has
elected not to participate at this time. In 1999, the compensation
committee elected to bonus two remaining company-owned vehicles having
a combined value of $112,595 to the Chief Executive Officer in lieu of
a cash bonus. Mr. Fioretti has elected not to be furnished a vehicle
leased by Mannatech at this time. Mr. Fioretti is also provided with
health, life, automobile and long-term disability insurance coverage.
$1 Million Pay Deductibility Cap. Under Section 162(m) of the Internal
Revenue Code, public companies are precluded from receiving a tax deduction on
compensation paid to executive officers in excess of $1 million, unless the
compensation is excluded from the $1 million limit as a result of being
classified as performance-based. At this time, none of our executive officers'
cash compensation levels exceed the $1 million pay limit. We do not anticipate
exceeding this limit in the near future. Nonetheless, the compensation
committee intends to periodically review its executive pay plans in light of
this regulation.
Conclusion. The compensation committee believes the concepts discussed above
further the stockholders' interests and that officer compensation encourages
responsible management of Mannatech. The compensation committee regularly
considers the effect of executive compensation on shareholder interests. These
factors, reports of the executive operating committee and discussions with and
information compiled by various independent consultants retained by us will be
used in determining executive officer compensation.
Compensation Committee (1)
Chris T. Sullivan
Steven A. Barker Ph.D.
- --------
(1) The compensation committee was formed on February 10, 1999; prior to that
time, the board of directors approved compensation. The board of directors
consisted of Messr. Charles E. Fioretti, Samuel L. Caster, Patrick D.
Cobb, Chris T. Sullivan and Steven A. Barker Ph.D.
Stock Option Plans
The 1997 Stock Option Plan was adopted by our board of directors and
approved by our shareholders on May 14, 1997. The 1998 Incentive Stock Option
Plan was adopted by our board of directors on April 8, 1998 and amended on
September 4, 1998 to increase the number of shares reserved for issuance from
500,000 to 1,000,000 shares. Both stock option plans are intended to encourage
investment by our officers, employees, non-employee directors and consultants
in shares of our common stock so that they will have an increased interest in
and greater concern for the welfare of Mannatech.
Options granted under either stock option plan may either be incentive stock
options or options that do not qualify for treatment as incentive stock
options under Section 422 of the Internal Revenue Code of 1986. Options
granted under the 1998 Incentive Stock Option Plan may only be granted to our
officers, directors and employees.
Incentive stock options may be granted under our stock option plans to any
person who is one of our officers or other employees (including officers and
employees who are also directors) or any parent or subsidiaries that
42
may exist in the future. The exercise price of incentive stock options must be
at least the fair market value of a share of our common stock on the date of
grant.
The following table sets forth information regarding our stock option plans
as of March 24, 2000:
Stock Option Plan Information
# of Weighted Vested # of Shares
Shares # of Options Average and Available
Authorized Granted Exercise Price Exercisable for Grant
---------- ------------ -------------- ----------- -----------
1997 Stock Option Plan.. 2,000,000 2,000,000 $2.34 1,001,152 --
1998 Incentive Stock
Option Plan............ 1,000,000 963,500 $7.89 291,333 36,500
The option committee has full and final authority in its discretion, subject
to the stock option plans' provisions, to determine, among other things:
. the individuals to whom options shall be granted;
. whether the option granted shall be an incentive stock option or a non-
qualified stock option;
. the number of shares of our common stock covered by each option;
. the time or times at which options will be granted;
. the option vesting schedule;
. the exercise price of the options;
. the duration of the options granted;
. to prescribe, amend and rescind rules and regulations relating to the
stock option plans;
. accelerate or defer (with the consent of the optionee) the exercise date
of any option; and
. authorize any person to execute on our behalf any instrument required to
effectuate the grant of an option previously granted by our board of
directors.
The option committee consisting of two of our three independent directors,
Messr Barker and Sullivan, also has the power to decide upon and make rules
that control the stock option plans and take all other actions necessary for
the proper administration of the stock option plans. The stock option plans
may be changed or canceled by our board of directors at any time without the
approval of our shareholders, with a few exceptions. However, they may not
take action that affects options previously granted under the stock option
plans.
401(k) Plan
On May 9, 1997, we adopted a 401(k) Pre-tax Savings Plan. All employees who
have been employed by us for at least 90 days at the beginning of a quarter
and are at least 21 years of age are eligible to participate. Employees may
contribute a maximum of 15.0% of their current compensation to the 401(k)
Plan, up to a statutorily prescribed annual limit. We will make regular
matching contributions to the 401(k) Plan in the amount of $0.25 for each
$1.00 contributed by a participating employee, up to 6.0% of a participating
employee's annual compensation, including overtime. The 401(k) Plan also
provides that Mannatech can make profit-sharing contributions to the plan each
year based upon our profit. Employee contributions and our matching
contributions are paid to a corporate trustee and invested as directed by the
participating employee. Our contribution in the 401(k) Plan vests over 5 years
or earlier if the participating employee retires at age 65, becomes disabled
or dies. Payments to participating employees may also be made in the case of a
financial hardship. Payments may be made in a lump sum. The 401(k) Plan is
intended to qualify under Section 401 of the Internal Revenue Code of 1986, so
that contributions made by employees or by us to the 401(k) Plan, and income
earned on these contributions, are not taxable to employees until withdrawn
from the 401(k) Plan.
43
Performance Graph
The graph below depicts our stock price as an index, assuming $100.00 was
invested on February 16, 1999, the date of our initial public offering, along
with the composite prices of companies listed in the S & P Midcap Index. This
information has been provided to us by the Nasdaq National Stock Market. The
comparisons in the graph are required by regulations of the Commission and are
not intended to forecast or to be indicative of the possible future performance
of our common stock. The publicly traded companies in our peer group are Rexall
Sundown, Inc.; Twinlab Corp.; Weider Nutrition International, Inc.; Nature's
Sunshine Products, Inc.; Reliv International, Inc.; and Nu Skin Enterprises
Inc.
[PERFORMANCE GRAPH]
* $100.00 invested on 2/16/99 in stock or index including reinvestment of
dividends fiscal year ending December 31.
The preceding report on executive compensation and the stock performance
graph is not incorporated by reference into any of our previous or future
filings under the Securities Act of 1933 or the Securities Exchange Act of 1934
which might incorporate filings made by us under those Acts, except to the
extent that we specifically incorporate this information by reference.
Measurement Period Company S&P Midcap Index Peer Group Index
------------------ ------- ---------------- ----------------
February 16, 1999............... $100.00 $100.00 $100.00
December 31, 1999............... $ 23.10 $123.40 $ 59.76
44
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 29, 2000, the number of
shares of our common stock and the percentage of the outstanding shares of
such class that are beneficially owned by (A) each person who is the
beneficial owner of more than 5% of the outstanding shares of our common
stock, (B) each of our directors and the Named Executive Officers, and (C) all
of our current officers and directors, as a group.
Beneficial Ownership(1)
-----------------------------------------------
Number of
Shares
Name of Directors and Excluding Stock % of Class
Executive Officers Options Options(2) Total Outstanding(3)
--------------------- ---------- ---------- ---------- --------------
Samuel L. Caster.............. 5,713,549 -- 5,713,549 22.9%
c/o Mannatech, Incorporated
600 S. Royal Lane
Suite 200
Coppell, TX 75019
Charles E. Fioretti........... 5,181,267 -- 5,181,267 20.8
c/o Mannatech, Incorporated
600 S. Royal Lane
Suite 200
Coppell, TX 75019
William C. Fioretti(4)........ 5,165,549 -- 5,165,549 20.7
c/o Agritech Labs, Inc.
6333 N. St. Highway 161
Suite 350
Irving, TX 75063
Chris T. Sullivan(5).......... 342,537 100,000 442,537 1.8
Patrick D. Cobb(6)............ 318,525 100,000 418,525 1.7
Anthony E. Canale............. -- 350,000 350,000 1.4
Deanne Varner................. 74,074 281,926 356,000 1.4
Terry L. Persinger............ 1,000 -- 1,000 *
All executive officers and
directors as a group (19
persons)..................... 12,344,489 1,195,485 13,539,974 51.8%
- --------
* Less than 1%
(1) The information contained in this table with respect to beneficial
ownership reflects "beneficial ownership" as defined in Rule 13d-3 under
the Exchange Act. All information with respect to the beneficial ownership
of any shareholder has been furnished by such shareholder and, except as
otherwise indicated or pursuant to community property laws, each
shareholder has sole voting and investment power with respect to shares
listed as beneficially owned by such shareholder.
(2) The directors and executive officers have the right to acquire shares of
our common stock shown in this column within 60 days through the exercise
of stock options.
(3) Shares of our common stock which are not outstanding but the beneficial
ownership of which can be acquired by a person upon exercise of an option
within 60 days of February 29, 2000 are deemed outstanding for the purpose
of computing the percentage of outstanding shares beneficially owned by
such person and by the group of executive officers and directors. However,
such shares are not deemed to be outstanding for the purpose of computing
the percentage of outstanding shares beneficially owned by any other
person.
(4) Includes 1,450,102 shares of our common stock held by the Fioretti Family
Partnership, Ltd. of which William C. Fioretti is the general partner and
he, his wife and trusts for the benefit of their children are the limited
partners.
(5) All of these shares of our common stock and the options are held by Multi-
Venture Partners, Limited, an investment partnership formed by Mr.
Sullivan and two other partners. The management of Multi-Venture is
controlled by its sole general partner, SBG Investments, L.L.C., which
owns a 0.6% general partnership interest in Multi-Venture. Mr. Sullivan
owns a 27.2% interest in SBG. Mr. Sullivan shares voting and dispositive
power with respect to our common stock owned by Multi-Venture.
(6) Includes 60,000 shares of our common stock held by Joni J. Cobb, Mr.
Cobb's spouse, and 10,000 shares held by trusts established for the
benefit of Mr. Cobb's children and stepchildren.
45
We are not aware of any arrangements, including any pledge of our
securities, the operation of which may at a subsequent date result in a change
in control of Mannatech.
Item 13. Certain Relationships and Related Transactions
Loans to Officers
We orally agreed to advance certain officers money to pay the taxes caused
by the cancellation of their incentive compensation agreements. On December
31, 1997, we made loans of $162,052 to Dr. Bill H. McAnalley Ph.D., our senior
vice president of research and product development, and of $121,782 to Peter
E. Hammer, our vice president of new business and international development.
The non-interest bearing loans were collateralized by shares of our common
stock owned by these officers. The loans were repaid in February 1999 after
the officers received the proceeds from the sale of their shares of common
stock in our initial public offering.
Loans to Agritech Labs, Inc.
During 1996 and 1997, we made cash advances to Agritech Labs, Inc. and
Agritech Technology, Ltd. totaling approximately $918,000. The Agritech
companies were owned by individual partners of which over 90% of the Agritech
companies were owned by Messrs. Charles E. Fioretti, Samuel L. Caster, Patrick
D. Cobb, who are shareholders and executive officers of Mannatech and Mr.
William C. Fioretti, who is a shareholder and former executive officer of
Mannatech. Because we were concerned about the ability of these Agritech
companies to repay the loans, each of Messrs. William C. Fioretti, Charles E.
Fioretti, Samuel L. Caster and Patrick D. Cobb agreed to pay the obligations
that these Agritech companies owed Mannatech. Each of these individuals gave
promissory notes to us totaling approximately $918,000. Each promissory note
bore interest at 6.0% per year and was payable on the earlier of the sale of
the Agritech companies or December 31, 1998. The principal amount outstanding
under the notes issued by each of Messrs. William C. Fioretti, Charles E.
Fioretti and Samuel L. Caster at December 31, 1998 was approximately $275,400
and the principal amount outstanding under the note made by Mr. Patrick D.
Cobb at December 31, 1998 was approximately $45,900. On December 31, 1998, we
renewed the notes with an extended due date of December 31, 1999. On February
17, 1999, we signed new notes with each of the shareholders. The new notes
bear interest at 6.0% per year, with the first payment due immediately and the
remainder to be paid in annual installments through February 17, 2004. As of
December 31, 1999, the principal amount outstanding under the new notes made
by each of Messrs. William C. Fioretti, Charles E. Fioretti and Samuel L.
Caster is approximately $210,000 and the principal amount outstanding under
the new note made by Mr. Patrick D. Cobb is approximately $35,000. Mr. William
C. Fioretti has not paid his annual payment due February 17, 2000 of
approximately $45,000 related to such notes receivable; however we expect
payment in full and intend to pursue the collection of such note.
Commission Agreement, Consulting Fees and Receivables from Related Parties
In 1998 and 1999, William C. Fioretti earned approximately $121,000 and
$453,000, respectively, for commissions pursuant to an agreement with
Mannatech, which commissions were paid in 1998 and 1999. On October 20, 1998,
we paid Mr. Fioretti $250,000 for consulting services he performed for us over
the course of 1998 in sports marketing and product development issues. Mr.
Fioretti is one of our founders, a major shareholder and the cousin of Charles
E. Fioretti, our chairman of the board and chief executive officer.
During 1997, we advanced $125,000 to Mr. William C. Fioretti's brother-in-
law, which remained unpaid at December 31, 1998. During 1999, Mr. Fioretti
guaranteed the repayment of this payable to us; however, in December 1999, we
wrote off this loan, when we determined it was not collectible and released
Mr. Fioretti from his guarantee.
46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The following financial statements and the Report of Independent Public
Accountants are filed as a part of this report on the pages indicated:
Index to Consolidated Financial Statements............................. F-1
Report of Independent Accountants...................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999........... F-3
Consolidated Statements of Income for the Years ended December 31,
1997, 1998 and 1999................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1997, 1998 and 1999.......................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1998 and 1999................................................... F-6
Notes to Consolidated Financial Statements............................. F-7
(a) 2. Financial Statement Schedules
Financial statement schedules have been omitted because they are not
applicable or the information required therein is included elsewhere in the
Consolidated Financial Statements or notes thereto.
(a) 3. Exhibits required by Item 601 of Regulation S-K
3.1 Amended and Restated Articles of Incorporation of Mannatech dated
October 25, 1995, incorporated herein by reference to Exhibit 3.1 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
3.2 Amended and Restated Bylaws of Mannatech dated August 26, 1997,
incorporated herein by reference to Exhibit 3.2 to Mannatech's Form S-1
(File No. 333-63133) filed with the Commission on September 10, 1998.
3.3 Amendment to the Bylaws of Mannatech dated May 19, 1998, incorporated
herein by reference to Exhibit 3.3 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
3.4 Amendment to the Bylaws of Mannatech dated October 20, 1999,
incorporated herein by reference to Exhibit 99.1 to Mannatech's Form 8-K
(File No. 000-24657) filed with the Commission on November 3, 1999.
4.1 Specimen Certificate representing our common stock, par value $0.0001
per share, incorporated herein by reference to Exhibit 4.1 to
Mannatech's Amendment No. 1 to Form S-1 (File No. 333-63133)
filed with the Commission on October 28, 1998.
10.1 1997 Stock Option Plan dated May 20, 1997, incorporated herein by
reference to Exhibit 10.1 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.2 1998 Incentive Stock Option Plan dated April 8, 1998, incorporated
herein by reference to Exhibit 10.2 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
10.3 Agreement and Plan of Merger dated as of June 1, 1997 among Mannatech
and Eight Point Services, Inc., Triple Gold Business, Inc., Five Small
Fry, Inc., and Beta Nutrient Technology, Inc., incorporated herein by
reference to Exhibit 10.3 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
47
10.4 Exchange Agreement dated June 1, 1997 among Mannatech and the limited
partners of Power Three Partners, Ltd., Eleven Point Partners, Ltd. and
Beta M. Partners, Ltd., incorporated herein by reference to Exhibit
10.4 to Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.5 Plan and Agreement of Reorganization dated June 1, 1997 by and among
Mannatech, Dynamic Eight Partners, Ltd., Power Three Partners, Ltd.,
Eleven Point Partners, Ltd. and Beta M. Partners, Ltd.and the general
and limited partners of the partnerships, incorporated herein by
reference to Exhibit 10.5 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.6 Exchange Agreement by and among Gary Watson, Patrick Cobb, Samuel
Caster, Charles Fioretti and William Fioretti and Mannatech dated
August 31, 1997, incorporated herein by reference to Exhibit 10.6 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.7 Option Agreement dated July 1, 1997 with Multi-Venture Partners, Ltd.,
incorporated herein by reference to Exhibit 10.7 to Mannatech's Form S-
1 (File No. 333-63133) filed with the Commission on September 10, 1998.
10.8 Option Agreement dated October 19, 1999 with Steven A. Barker Ph.D.*
10.9 Form of Indemnification Agreement with a schedule of director
signatories, incorporated herein by reference to Exhibit 10.8 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.10 Schedule of additional directors signatories relating to the Form of
Indemnification Agreements in Exhibit 10.9 above.*
10.11 Letter of Understanding Regarding Development of Proprietary
Information for Mannatech effective as of August 1, 1997, as amended,
by and between Bill H. McAnalley, Ph.D. and Mannatech, incorporated
herein by reference to Exhibit 10.12 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
10.12 Commercial Lease Agreement dated November 7, 1996 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First Amendment
thereto dated May 29, 1997 and the Second Amendment thereto dated
November 13, 1997, incorporated herein by reference to Exhibit 10.13 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.13 Commercial Lease Agreement dated May 29, 1997 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First Amendment
thereto dated November 6, 1997, incorporated herein by reference to
Exhibit 10.14 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.14 Assignment of Patent Rights dated October 30, 1997 by and among Bill H.
McAnalley, Ph.D., H. Reginald McDaniel, D. Eric Moore, Eileen P. Vennum
and William C. Fioretti and Mannatech, incorporated herein by reference
to Exhibit 10.15 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.15 Supply Agreement effective as of August 14, 1997 by and between
Mannatech and Caraloe, Inc., incorporated herein by reference to
Exhibit 10.17 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.16 Trademark License Agreement effective as of August 14, 1997 by and
between Mannatech and Caraloe, Inc., incorporated herein by reference
to Exhibit 10.19 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.17 Supply Agreement effective as of January 12, 2000 by and between
Mannatech and Caraloe, Inc.*
10.18 Letter of Agreement from Mannatech to Michael L. Finney of LAREX,
Incorporated dated December 23, 1997, incorporated herein by reference
to Exhibit 10.20 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
48
10.19 Product Development and Distribution Agreement effective as of
September 15, 1997 between New Era Nutrition Inc. and Mannatech,
incorporated herein by reference to Exhibit 10.21 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Commission on September 10,
1998.
10.20 Severance and Consulting Agreement and Complete Release dated August 1,
1997 between Ronald E. Kozak and Mannatech, incorporated herein by
reference to Exhibit 10.22 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.21 Summary of Management Bonus Plan, incorporated herein by reference to
Exhibit 10.23 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.22 Individual Guaranty of Samuel L. Caster dated January 5, 1998,
incorporated herein by reference to Exhibit 10.27 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Commission on September 10,
1998.
10.23 Individual Guaranty of Charles E. Fioretti dated January 5, 1998,
incorporated herein by reference to Exhibit 10.28 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Commission on September 10,
1998.
10.24 Form of Employment Agreement to be entered into between Mannatech and
each of Charles E. Fioretti, Patrick D. Cobb, Anthony E. Canale, Bill
H. McAnalley and Deanne Varner, incorporated herein by reference to
Exhibit 10.30 to Mannatech's Amendment No. 1 to Form S-1 (File No. 333-
63133) filed with the Commission on October 28, 1998.
10.25 Employment Agreement dated November 1, 1999, entered into between
Mannatech and Terry L. Persinger.*
10.26 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $33,316.02 made by Patrick D. Cob, incorporated herein by
reference to Exhibit 10.25 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Commission on March 31, 1999.
10.27 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.10 made by Samuel L. Caster incorporated herein by
reference to Exhibit 10.26 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Commission on March 31, 1999.
10.28 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.09 made by Charles E. Fioretti incorporated herein
by reference to Exhibit 10.27 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Commission on March 31, 1999.
21 List of Subsidiaries.*
23 Consent of PricewaterhouseCoopers LLP.*
27 Financial Data Schedule.*
- --------
* Filed herewith.
(b) Reports on Form 8-K.
On November 3, 1999, Mannatech filed a report on Form 8-K with the
Commission disclosing under Item 5--"Other Events" that on October 20, 1999,
shareholders controlling 74.5% of the voting stock of Mannatech acting by
written consent, amended our Bylaws in order to:
. allow our shareholders to set the size of the board; however, the board
of directors must have a minimum of three directors;
. revise the procedures for call, notice and administration of board
meetings;
. revise the duties of the Chairman of the Board to include presiding over
and determining the order of business at board meetings;
. revise the procedures for amending certain Bylaws provisions adopted by
our shareholders;
49
. allow special meetings of the board to be called by the President or by
two other directors acting together; however, 24-hour notice must be
given for these meetings, which notice may, under some circumstances be
waived; and
. provide that only board members may attend board meetings and that
directors are not allowed to have personal legal counsel present, unless
allowed by a majority vote of the directors.
In the written consent, the shareholders also approved the expansion of the
board from five to seven members and elected Mr. James M. Doyle, Jr., as a
Class III director with his term expiring in 2002. This information was filed
November 3, 1999, on a preliminary information statement on Form Pre 14C (File
No. 000-24657) with the Commission.
(d) Item 601 Exhibits
The exhibits required by Item 601 of Regulation S-K are set forth in (a) 3.
above.
(e) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are set forth
in (a) 2. above.
50
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, in the City of
Dallas, State of Texas on March 30, 2000.
Mannatech, Incorporated
/s/ Charles E. Fioretti
By: _________________________________
Charles E. Fioretti
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 30, 2000, on
behalf of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Charles E. Fioretti Chairman of the Board and Chief
______________________________________ Executive Officer (principal
Charles E. Fioretti executive officer)
/s/ Samuel L. Caster President and Director
______________________________________
Samuel L. Caster
/s/ Stephen D. Fenstermacher Senior Vice President and Chief
______________________________________ Financial Officer (principal
Stephen D. Fenstermacher accounting officer)
/s/ Anthony E. Canale Executive Vice President, Chief
______________________________________ Operating Officer--International
Anthony E. Canale and Director
/s/ Terry L. Persinger Executive Vice President, Chief
______________________________________ Operating Officer--Domestic and
Terry L. Persinger Director
/s/ Steven A. Barker Ph.D. Director
______________________________________
Steven A. Barker Ph.D.
/s/ James M. Doyle, Jr. Director
______________________________________
James M. Doyle, Jr.
/s/ Chris T. Sullivan Director
______________________________________
Chris T. Sullivan
MANNATECH, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Annual Financial Statements:
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............ F-3
Consolidated Statements of Income for the Years ended December 31, 1997,
1998 and 1999.......................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
ended
December 31, 1997, 1998 and 1999....................................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1997, 1998 and 1999.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Mannatech, Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Mannatech, Incorporated and its subsidiaries at December 31, 1998 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 29, 2000
F-2
MANNATECH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
December 31,
------------------------
1998 1999
----------- -----------
ASSETS
Cash and cash equivalents........................... $ 763,375 $11,575,711
Short-term investments.............................. -- 1,388,239
Accounts receivable, less allowance for doubtful
accounts of $58,000................................ 62,834 274,913
Receivable from related party....................... 125,000 --
Current portion of notes receivable-shareholders.... 307,487 158,359
Inventories......................................... 6,875,044 13,318,495
Prepaid expenses and other current assets........... 446,564 727,483
Deferred tax assets................................. 398,000 563,632
----------- -----------
Total current assets.............................. 8,978,304 28,006,832
Property and equipment, net......................... 14,103,372 14,092,916
Notes receivable-shareholders, excluding current
portion............................................ 701,042 542,683
Other assets........................................ 947,489 1,230,623
Long-term investments............................... -- 905,772
Deferred offering costs............................. 2,143,743 --
----------- -----------
Total assets...................................... $26,873,950 $44,778,826
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of capital leases and note payable.. $ 854,423 $ 732,320
Accounts payable.................................... 5,480,033 1,890,294
Accrued expenses.................................... 15,063,237 13,721,377
----------- -----------
Total current liabilities......................... 21,397,693 16,343,991
Capital leases and note payable, excluding current
portion............................................ 1,055,609 325,442
Deferred tax liabilities............................ 1,438,000 817,256
----------- -----------
Total liabilities................................. 23,891,302 17,486,689
----------- -----------
Commitments and contingencies (Note 13)............. -- --
Redeemable warrants................................. 300,000 --
----------- -----------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding....... -- --
Common stock, $.0001 par value, 99,000,000 shares
authorized, 22,101,738 shares issued and
outstanding in 1998, 24,790,601 issued and
24,774,293 outstanding in 1999..................... 2,210 2,477
Additional paid-in capital.......................... 2,632,238 17,347,319
Notes receivable from shareholders.................. (636,418) --
Retained earnings................................... 684,618 10,146,437
----------- -----------
2,682,648 27,496,233
Less treasury stock, at cost, 16,308 shares in
1999............................................... -- (204,096)
----------- -----------
Total shareholders' equity........................ 2,682,648 27,292,137
----------- -----------
Total liabilities, redeemable warrants and
shareholders' equity............................. $26,873,950 $44,778,826
=========== ===========
See accompanying notes to consolidated financial statements.
F-3
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
Net sales............................ $150,569,843 $164,933,261 $179,729,902
Cost of sales........................ 24,735,616 27,139,647 29,117,108
Commissions.......................... 61,677,103 66,650,001 73,580,293
------------ ------------ ------------
86,412,719 93,789,648 102,697,401
------------ ------------ ------------
Gross profit....................... 64,157,124 71,143,613 77,032,501
------------ ------------ ------------
Operating expenses:
Selling and administrative
expenses.......................... 27,845,502 31,880,442 34,860,898
Other operating costs.............. 19,402,317 22,359,134 26,090,427
Cancellation of incentive
compensation agreements........... 2,191,610 -- --
Write-off of deferred offering
costs............................. -- 846,782 --
------------ ------------ ------------
Total operating expenses......... 49,439,429 55,086,358 60,951,325
------------ ------------ ------------
Income from operations............... 14,717,695 16,057,255 16,081,176
Interest income...................... (83,497) (91,623) (712,509)
Interest expense..................... 10,885 52,772 149,749
Other expense, net................... 29,442 298,763 113,616
------------ ------------ ------------
Income before income taxes........... 14,760,865 15,797,343 16,530,320
Income tax expense................... 4,138,822 5,743,364 5,742,397
------------ ------------ ------------
Net income........................... $ 10,622,043 $ 10,053,979 $ 10,787,923
============ ============ ============
Earnings per common share:
Basic.............................. $ 0.50 $ 0.45 $ 0.45
============ ============ ============
Diluted............................ $ 0.47 $ 0.42 $ 0.43
============ ============ ============
Unaudited pro forma data (Note 1)
Income before income taxes, as
reported.......................... $ 14,760,865
Pro forma provision for income
taxes............................. 5,682,933
------------
Pro forma net income................. $ 9,077,932
============
Pro forma earnings per common share:
Basic.............................. $ 0.42
============
Diluted............................ $ 0.41
============
See accompanying notes to consolidated financial statements.
F-4
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Common Stock Additional Notes Retained Treasury Stock Total
-------------------- paid-in receivable from earnings ---------------- shareholders'
Shares Par value capital shareholders (deficit) Shares Amounts equity
---------- --------- ----------- --------------- ----------- ------ --------- -------------
Balance at December 31,
1996................... 20,626,971 $2,063 $ -- $ -- $ 828,764 -- $ -- $ 830,827
Issuance of common
stock to cancel
incentive compensation
agreements............ 1,474,767 147 2,191,463 -- -- -- -- 2,191,610
Vesting of nonemployee
stock options......... -- -- 155,503 -- -- -- -- 155,503
Tax benefit of shares
issued for merger of
partnerships.......... -- -- 285,272 -- -- -- -- 285,272
Issuance of notes
receivable--to
shareholders.......... -- -- -- (636,418) -- -- -- (636,418)
Dividends declared
($0.37 per share)..... -- -- -- -- (8,150,201) -- -- (8,150,201)
Net income............. -- -- -- -- 10,622,043 -- -- 10,622,043
Distributions to
partners.............. -- -- -- -- (4,054,739) -- -- (4,054,739)
---------- ------ ----------- --------- ----------- ------ --------- -----------
Balance at December 31,
1997................... 22,101,738 2,210 2,632,238 (636,418) (754,133) -- -- 1,243,897
Dividends declared
($0.39 per share)..... -- -- -- -- (8,615,228) -- -- (8,615,228)
Net income............. -- -- -- -- 10,053,979 -- -- 10,053,979
---------- ------ ----------- --------- ----------- ------ --------- -----------
Balance at December 31,
1998................... 22,101,738 2,210 2,632,238 (636,418) 684,618 -- -- 2,682,648
Dividends declared
($0.06 per share)..... -- -- -- -- (1,326,104) -- -- (1,326,104)
Repayment of notes
receivable--
shareholders.......... -- -- -- 636,418 -- -- -- 636,418
Net proceeds from
offering.............. 1,500,000 150 9,240,808 -- -- -- -- 9,240,958
Exercise of warrants... 475,015 47 941,223 -- -- -- -- 941,270
Tax benefit from
exercise of warrants
and stock options..... -- -- 3,543,424 -- -- -- -- 3,543,424
Tender of common stock
for exercise of stock
options............... 133,766 14 204,082 -- -- 16,308 (204,096) --
Proceeds from stock
option exercises...... 563,774 56 785,544 -- -- -- -- 785,600
Net income............. -- -- -- -- 10,787,923 -- -- 10,787,923
---------- ------ ----------- --------- ----------- ------ --------- -----------
Balance at December 31,
1999................... 24,774,293 $2,477 $17,347,319 $ -- $10,146,437 16,308 $(204,096) $27,292,137
========== ====== =========== ========= =========== ====== ========= ===========
See accompanying notes to consolidated financial statements.
F-5
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
December 31,
---------------------------------------
1997 1998 1999
------------ ------------ -----------
Cash flows from operating activities:
Net income........................... $ 10,622,043 $ 10,053,979 $10,787,923
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization....... 1,189,494 2,226,931 2,969,363
Loss on disposal of assets.......... 411,202 351,642 287,475
Noncash charge for cancellation of
incentive compensation agreements.. 2,191,610 -- --
Vesting of nonemployee stock options
and warrants....................... 455,503 -- --
Tax benefit from exercise of
warrants and stock options......... -- -- 3,543,424
Write-off of deferred offering
costs.............................. -- 846,782 --
Write-off of receivable from related
party ............................. -- -- 125,000
Deferred income tax expense
(benefit).......................... 350,283 934,368 (790,000)
Changes in operating assets and
liabilities:
Accounts and notes receivable....... (1,740,731) 437,358 (212,079)
Refundable income taxes............. 741,000 -- --
Inventories......................... (375,719) (1,551,988) (6,443,451)
Prepaid expenses and other current
assets............................. (376,507) 96,414 (280,919)
Other assets........................ (4,749) (41,067) (283,134)
Accounts payable.................... 1,747,043 1,192,874 (3,589,739)
Accrued expenses.................... 4,555,685 3,522,660 (1,341,860)
------------ ------------ -----------
Net cash provided by operating
activities....................... 19,766,157 18,069,953 4,772,003
------------ ------------ -----------
Cash flows from investing activities:
Acquisition of property and
equipment and construction in
progress........................... (8,737,232) (4,625,849) (3,242,758)
Repayment from related parties...... -- -- 943,905
Investments and restricted cash..... (199,619) 199,619 (2,294,011)
------------ ------------ -----------
Net cash used in investing
activities....................... (8,936,851) (4,426,230) (4,592,864)
------------ ------------ -----------
Cash flows from financing activities:
Distributions to partners........... (4,054,739) -- --
Payment of dividends................ (6,928,547) (9,936,882) (1,326,104)
Proceeds from offering.............. -- -- 12,000,000
Proceeds from stock options
exercised.......................... -- -- 785,600
Repayment of capital lease
obligations........................ (37,265) (301,031) (662,551)
Advances from shareholders and
employees.......................... 61,055 -- --
Repayments to shareholders and
employees.......................... (598,527) -- --
Proceeds from warrants exercised.... -- -- 641,270
Payment of note payable............. (26,400) (56,730) (189,719)
Deferred offering costs............. (343,672) (2,646,853) (615,299)
------------ ------------ -----------
Net cash provided by (used in)
financing activities............. (11,928,095) (12,941,496) 10,633,197
------------ ------------ -----------
Net increase (decrease) in cash and
cash equivalents.................... (1,098,789) 702,227 10,812,336
Cash and cash equivalents:
Beginning of year................... 1,159,937 61,148 763,375
------------ ------------ -----------
End of year......................... $ 61,148 $ 763,375 $11,575,711
============ ============ ===========
Supplemental disclosure of cash flow
information:
Income taxes paid................... $ 68,800 $ 3,642,000 $ 3,091,000
============ ============ ===========
Interest paid....................... $ 10,885 $ 109,000 $ 150,000
============ ============ ===========
Summary of non-cash investing and
financing activities follows:
Accrued dividends and
distributions...................... $ 1,321,654 $ -- $ --
============ ============ ===========
Tax benefit of shares granted for
merger of partnerships............. $ 285,272 $ -- $ --
============ ============ ===========
Assets acquired through capital
lease obligations.................. $ 397,402 $ 1,471,986 $ --
============ ============ ===========
Assets acquired through note
payable............................ $ -- $ 435,986 $ --
============ ============ ===========
See accompanying notes to consolidated financial statements.
F-6
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mannatech, Incorporated (the "Company") was incorporated in the State of
Texas on November 4, 1993, as Emprise International, Inc. Effective October
25, 1995, the Company changed its name to Mannatech, Incorporated. The
Company, located in Coppell, Texas, develops and sells proprietary nutritional
supplements and topical products through a network marketing system. The
Company currently sells its products in the United States, Canada, Australia
and the United Kingdom. Independent associates ("Associates") purchase
products, at wholesale, for the primary purpose of selling to retail consumers
or for personal consumption. In addition, Associates earn commissions on their
downline growth and sales volume.
On April 22, 1998, the Company formed a wholly-owned subsidiary, Mannatech
Australia Pty Limited for the purpose of conducting business in Australia. The
Australian subsidiary, located in St. Leonards, began operations on October 1,
1998.
On December 1, 1998, the Company formed a wholly-owned subsidiary, Mannatech
Limited, for the purpose of conducting business in the Republic of Ireland.
This subsidiary is dormant pending the start-up operations in the Republic of
Ireland.
In April 1999, the company formed a wholly-owned subsidiary, Mannatech Ltd.,
for the purpose of conducting business in the United Kingdom as a limited
service provider. The United Kingdom subsidiary is located in Basingstoke,
Hampshire and began operations on November 15, 1999.
On May 1, 1999, the Company formed a wholly-owned subsidiary, Mannatech
Foreign Sales Corporation, under the laws of Barbados to act as a "foreign
sales corporation" as defined in the United States Internal Revenue Code.
On May 7, 1999, the Company formed a wholly-owned subsidiary, Internet
Health Group, Inc., a Texas corporation, for marketing its proprietary
products, specially developed nutritional supplements and sports nutrition
products over the Internet. Internet Health Group, Inc. is located in Dallas,
Texas, and operates through its website, www.clickwell.com, which began
operations on December 20, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Reorganization
In December 1994, to achieve certain tax efficiencies and to protect certain
of the Company's proprietary rights, the Company transferred certain of its
rights and interests in intellectual property, the right to use a supplier's
trademark and it's marketing rights to two affiliated partnerships ("Royalty
Partnership" and "Marketing Partnership," respectively, or collectively the
"Partnerships"). The Marketing Partnership was owned by two affiliated
partnerships that also shared common ownership with the Company. The
respective ownership interests in the Partnerships were structured with the
intention of retaining the same economic interests among the partners as that
of the shareholders of the Company. In the case of the intellectual property
and trademark transferred to the Royalty Partnership, the Company entered into
a 17-year agreement with the Royalty Partnership to pay a royalty based on
sales volume. In the case of the Marketing Partnership, the Company paid a
commission based on a specified percentage of sales volume. At the time of
transfer, the rights and interest in intellectual property, supplier's
trademark and marketing rights had a minimal basis. During 1994, the Company
also entered into separate incentive compensation agreements with two of its
shareholders pursuant to which the
F-7
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company agreed to pay commissions based on specified monthly sales volumes and
increases in number of new enrolled Associates. These agreements were designed
to compensate for the differences in ownership in the Partnerships for one of
the principal shareholders and to provide compensation to a shareholder in
lieu of receiving a Partnership interest.
On June 1, 1997, in order to simplify the Company's ownership structure and
consolidate all operating activities, the Company entered into agreements to
effect a reorganization through merging with the corporate general partners of
the Partnerships (with the Company as the surviving corporation) and
exchanging 10,000,000 shares of the Company's common stock, par value $0.0001
per share, for the entire ownership interests of the corporate general
partners and the Partnerships and issued 2,027,571 shares of its common stock
in consideration for the cancellation of certain incentive compensation
agreements with a shareholder who is an associate, a shareholder who is an
executive officer and four other employees of the Company. The net effect of
the foregoing transactions was to increase the Company's common shares
outstanding by 12,027,571 while retaining substantially the same relative
original ownership of the Company. The only ownership percentage change among
the original shareholders related to 208,024 shares granted to one shareholder
in recognition of significant contributions to the Company, which resulted in
minor dilution to the other original seven shareholders at the time of the
exchange. The fair value of these additional shares was expensed, and included
in the cancellation of incentive compensation agreements in the statement of
income. No monetary consideration changed hands and the changes were designed
to reestablish the original economic characteristics of the Company. Aside
from the new shares issued to the four employees to cancel their incentive
compensation agreements, relative ownership interests, as evidenced by
retention of economic risks and benefits, remained virtually the same. After
the exchange, the Company terminated and liquidated the Partnerships at no
gain or loss. The merger was accounted using the historical basis for each
entity, effectively combining the entities as a pooling of interests.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make certain
estimates and assumptions that may affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting periods. Actual
results may differ from such estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
Accounts Receivable Allowance Account
Accounts receivable consist of a refund due for the overpayment of a 1998
sales tax assessment, a refund of value added tax from the United Kingdom and
payments due from vendors for the purchase of raw material inventories offset
by an allowance account for any amounts that are deemed uncollectible. The
balance of the allowance for doubtful accounts was approximately $58,000 at
both December 31, 1998 and 1999.
Inventories
Inventories consist of raw materials and finished goods and are stated at
the lower of cost (using the first-in, first-out method) or market.
F-8
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
that is computed using the straight-line method over the estimated useful life
of each asset. Expenditures for maintenance and repairs are charged to expense
as incurred. The cost of property and equipment sold or otherwise retired and
the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in other (income) expense.
Property and equipment are reviewed for impairment whenever an event or
change in circumstances indicates the carrying amount of an asset or group of
assets may not be recoverable. The impairment review includes a comparison of
future cash flows expected to be generated by the asset or group of assets
with their associated carrying value. If the carrying value of the asset or
group of assets exceeds expected cash flows (undiscounted and without interest
charges), an impairment loss is recognized to the extent the carrying amount
of the asset exceeds its fair value.
Other Assets
Other assets consist primarily of deposits in an Australian bank that
include a restricted term deposit of approximately $88,000 at December 31,
1998 and $99,000 at December 31, 1999. This term deposit matures every six
months and is automatically renewed by the Company as security for the
Australian building lease.
Deferred Offering Costs
Deferred offering costs were costs incurred in connection with the initial
public offering of the Company's common stock (the "Offering"). The Offering
was consummated on February 12, 1999 and the deferred offering costs were
deducted from the proceeds received.
Accounts Payable
The Company records book overdrafts in its cash accounts as accounts
payable. Accounts payable includes book overdrafts of $1,309,908 at December
31, 1998.
Income Taxes
The Company accounts for income taxes using the asset and liability approach
to financial accounting and reporting for income taxes. In the event that
differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities result in net deferred tax assets, the
Company evaluates the probability of realizing the future benefits indicated
by such assets. A valuation allowance is provided for a portion or all of the
net deferred tax assets when it is more likely than not that such portion, or
all of such deferred tax assets, will not be realized.
Prior to the merger of the Partnerships, the Company and the Partnerships
filed separate tax returns. Prior to June 1, 1997, no provision for income
taxes was necessary in the consolidated financial statements for the income
attributable to the Partnerships because, as partnerships, they were not
subject to federal income tax because the tax effect of their activities
flowed through directly to the individual partners. Beginning June 1, 1997,
all income earned by the Company became subject to income tax.
Pro Forma Information (Unaudited)
Pro forma income tax information has been provided, using the statutory tax
rate of the Company, as if all of the Company's and the Partnerships' income
had been subject to income taxes.
F-9
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue is recognized for product sales upon the receipt of payment and
shipment of the products to the Associates. A reserve for product returns is
accrued based on historical experience. Revenues are received for starter and
renewal packs sold to Associates, which include nutritional products, sales
aids and admission to a corporate event.
The Company defers revenue received from the sale of the starter and renewal
packs, which is in excess of the average wholesale value of the individual
items included in such packs. Such deferrals are amortized over a twelve-month
period. Revenues from the packs are allocated between products and event
admission based on the proportionate average fair value of these items.
Allocated event revenue from the sales of these packs was approximately
$906,000, $471,000 and $423,000 in 1997, 1998 and 1999, respectively. The
allocated event revenues are amortized over a twelve-month period. Total net
deferred revenue was $662,176 and $844,649 at December 31, 1998 and 1999,
respectively. Substantially all product sales are made to Associates at a
published wholesale price. Net sales also reflect product returns and any
related refunds.
Accounting for Stock-based Compensation
The Company uses Statement of Financial Accounting Standards No. 123 ("FAS
123"), "Accounting for Stock-Based Compensation," for stock-based compensation
issued to nonemployees. FAS 123 requires that stock-based compensation be
measured by the fair value at the date of grant. The Company measures the cost
of stock-based compensation issued to employees and directors under Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB
25"), and its related interpretations. The Company has provided pro forma
disclosures, as required by FAS 123, in Note 12 for stock-based compensation
accounted for under APB 25.
Advertising Costs
Advertising and promotional expenses are included in selling and
administrative expenses and are charged to operations when incurred.
Advertising and promotional expenses were approximately $2,241,000, $3,821,000
and $3,621,000 for 1997, 1998 and 1999, respectively. Literature and
promotional items, called sales aids, are sold to Associates to support their
sales effort and are included in inventories and charged to cost of sales when
sold.
Research and Development Costs
The Company expenses research and development costs when incurred. Research
and development costs related to specific clinical studies, quality assurance
programs and new product development were approximately $381,000, $391,000 and
$438,000 in 1997, 1998 and 1999, respectively. Research and development costs
related to conceptualizing new products, enhancing existing products, Food and
Drug Administration compliance studies, general supplies, internal salaries
and consulting fees were approximately $3,008,000, $3,365,000 and $3,623,000
in 1997, 1998 and 1999, respectively. Salaries are included in selling and
administrative expenses and all other research and development costs are
included in other operating expenses in the accompanying consolidated
financial statements.
Software Development Costs
The Company capitalizes qualifying costs relating to the development of
internal use software pursuant to Statement Of Position No. 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use"
("SOP 98-1"). SOP 98-1 requires capitalization of qualifying costs after the
conceptual
F-10
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
formulation stage has been completed, and such costs are amortized over the
estimated useful life of the software, which is estimated at five years.
Capitalized costs totaled $1,713,000, $929,000 and $1,673,000 in 1997, 1998
and 1999, respectively. Amortization expense related to capitalized software
totaled $0, $346,000 and $528,000 in 1997, 1998 and 1999, respectively.
Earnings per Share
The Company calculates earnings per share pursuant to Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS 128
requires dual presentation of basic and diluted earnings per share ("EPS") on
the face of the consolidated statement of income for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Basic EPS calculations are computed using the
weighted-average number of common shares outstanding during the period, while
diluted EPS calculations are calculated using the weighted-average number of
common shares and dilutive common share equivalents outstanding during each
period.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents,
investments and receivables from related parties. The Company utilizes
financial institutions, which the Company considers to be of high credit
quality. The Company believes its notes receivables from shareholders, at
December 31, 1999, are fully collectible.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments, including cash and
cash equivalents, notes receivable, notes payable, capital leases, payable to
affiliates and accrued expenses, approximate their recorded values due to
their relatively short maturities.
Foreign Currency Translation
The Australian and the United Kingdom subsidiaries' functional currency is
the United States dollar. Nonmonetary assets and liabilities are translated at
historical rates, monetary assets and liabilities are translated at exchange
rates in effect at the end of the year, and income statement accounts are
translated at average exchange rates for the year. Translation (gains) and
losses of our foreign subsidiaries totaled $16,541 and ($175,564) in 1998 and
1999 respectively, and are included, in other expense, in the consolidated
statements of income.
Commissions
Associates are paid commissions, which are based on direct and indirect
commissionable sales, downline growth and training of Associates. Commissions
are accrued when earned and generally paid at various times within the
following month.
Reclassification
Certain prior years' balances have been reclassified to conform to the 1999
consolidated financial statement presentation.
F-11
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 2 INITIAL PUBLIC OFFERING
On February 12, 1999, the Company completed an initial public offering, (the
"Offering") on the Nasdaq National Market under the symbol "MTEX". In the
Offering, the Company and certain selling shareholders sold an aggregate of
3,056,016 shares of common stock, par value $0.0001 per share, at a price of
$8.00 per share. Of the total shares sold, 1,500,000 were sold by the Company,
yielding gross proceeds to the Company of $12,000,000. The net proceeds to the
Company were $9,240,958 after deducting deferred offering costs of $1,963,431,
legal, accounting, printing and other costs of approximately $406,385, and the
fee to the placement agent involved in the Offering of $389,226, net of
reimbursement of $90,774 in expenses by the placement agent.
The selling shareholders sold 1,556,016 shares of common stock, yielding
gross proceeds of $12,448,128. The net proceeds paid to the selling
shareholders were $11,950,203, after deducting the fee to the placement agent
of approximately $497,925.
NOTE 3 INVESTMENTS
The Company accounts for investments in accordance with the provisions of
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"). Under FAS 115, debt
securities that have readily determinable fair values are to be classified in
three categories: held-to-maturity, trading securities and available for sale.
Investments that the Company has the intent and the ability to hold to
maturity are carried at amortized cost. The amortized cost of debt securities
are classified as held-to-maturity and adjusted for amortization of premiums
and accretion of discounts. Realized gains and losses on sales of securities
are included in other expense, net in the statements of income.
At December 31, 1999, investments consist of obligations of United States
Government sponsored enterprises, which are classified as held-to-maturity,
and include the following:
Gross
Amortized Unrealized Fair
Matures Cost Loss Value
------- ---------- ---------- ----------
0 - 1 year................................ $1,388,239 ($1,371) $1,386,868
1 - 5 years............................... $ 755,662 ($1,960) $ 753,702
5 + years................................. $ 150,110 ($217) $ 149,893
---------- ------- ----------
$2,294,011 ($3,548) $2,290,463
========== ======= ==========
NOTE 4 INVENTORIES
Inventories at December 31, 1998 and 1999 consist of the following:
1998 1999
---------- -----------
Raw materials......................................... $3,054,317 $ 5,788,087
Finished goods........................................ 3,820,727 7,530,408
---------- -----------
$6,875,044 $13,318,495
========== ===========
F-12
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consist of the
following:
Estimated
Useful Lives 1998 1999
------------ ----------- -----------
Office furniture and equipment...... 5 to 7 years $ 6,833,690 $ 5,043,233
Computer equipment.................. 3 to 5 years 4,776,409 9,926,177
Automobiles......................... 5 years 394,806 27,601
Leasehold improvements.............. 10 years 4,845,439 4,910,688
----------- -----------
16,850,344 19,907,699
Less accumulated depreciation and
amortization....................... (3,379,202) (6,161,515)
----------- -----------
13,471,142 13,746,184
Construction in progress............ 632,230 346,732
----------- -----------
$14,103,372 $14,092,916
=========== ===========
Capital leases of $1,869,388 and $1,729,478 are included in both the
December 31, 1998 and 1999 balances and respectively, and relate to the
warehouse equipment and laboratory. In 1998, construction in progress consists
of the construction of a new warehouse facility, a research and development
laboratory and the internal development of a new computer software package. In
1999, construction in progress consists of internally developed software and
warehouse equipment.
NOTE 6 ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consist of the following:
1998 1999
----------- -----------
Commissions payable................................. $ 3,706,301 $ 4,018,421
Income taxes payable................................ 3,865,000 34,890
Accrued royalties and compensation.................. 2,086,290 2,061,638
Accrued inventory purchases......................... 1,559,845 3,121,184
Sales and other taxes payable....................... 839,931 875,011
Deferred revenue.................................... 662,176 844,649
Customer deposits................................... 660,557 417,541
Other accrued expenses.............................. 1,683,137 2,348,043
----------- -----------
$15,063,237 $13,721,377
=========== ===========
NOTE 7 NOTE PAYABLE
In 1998, the Company entered into an unsecured note payable totaling
$435,670, with a finance company to finance its three-year product liability
insurance premiums. The note bears interest at 8.0% and is payable in monthly
installments of $16,412 through December 2000. The remaining balance at
December 31, 1999 was $189,221, which is reflected as a current liability.
NOTE 8 CAPITAL LEASE OBLIGATIONS
In March and August 1998, the Company entered two new lease agreements
totaling $631,000 and $841,000, respectively, with Banc One Leasing
Corporation to fund the purchase of furniture and certain capital
F-13
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
equipment in connection with its new laboratory facility and its warehouse.
The leases are collateralized by the leased assets, bear interest at 9.3%, are
payable in thirty-six monthly installments and contain certain covenants which
require the Company to maintain stated levels of debt to tangible net worth
and cash flow coverage. The Company was in compliance with these covenants at
December 31, 1999.
The Company also leases certain equipment under various capital leases
agreements of approximately $280,000. These agreements have terms that range
from three to five years and contain either a bargain purchase option or a
buyout provision, which the Company intends to exercise. A summary of future
minimum payments under these capital lease agreements is as follows:
Year Ending
December 31,
------------
2000............................................................ $ 601,760
2001............................................................ 312,873
2002............................................................ 28,189
---------
Future minimum lease payments................................... 942,822
Less imputed interest (approximately 9.3%)...................... (74,281)
---------
868,541
Less current portion of capital lease obligations............... (543,099)
---------
Capital lease obligations, excluding current portion............ $ 325,442
=========
NOTE 9 INCOME TAXES
The components of the Company's income before income taxes are attributable
to the following jurisdictions for the years ended December 31:
1997 1998 1999
----------- ----------- -----------
United States.......................... $14,760,865 $15,733,192 $16,315,716
Foreign................................ -- 64,151 214,604
----------- ----------- -----------
$14,760,865 $15,797,343 $16,530,320
=========== =========== ===========
The components of the Company's income tax provision for 1997, 1998 and 1999
were as follows:
1997 1998 1999
---------- ---------- ----------
Current provision:
Federal.................................. $3,324,855 $4,350,762 $6,283,820
State.................................... 463,685 430,234 276,577
Foreign.................................. -- 28,000 (28,000)
---------- ---------- ----------
3,788,540 4,808,996 6,532,397
---------- ---------- ----------
Deferred provision:
Federal.................................. 291,223 853,368 (674,000)
State.................................... 59,059 81,000 (116,000)
---------- ---------- ----------
350,282 934,368 (790,000)
---------- ---------- ----------
$4,138,822 $5,743,364 $5,742,397
========== ========== ==========
F-14
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of income tax based on the U.S. federal statutory rate is
summarized as follows for the years ended December 31:
1997 1998 1999
---- ---- ----
Federal statutory income taxes............................ 35.0% 35.0% 35.0%
Partnership income........................................ (9.6) -- --
State income taxes, net of federal benefit................ 2.4 2.1 1.0
Difference between U.S. statutory rate and foreign rate... 0.0 (1.4) (1.0)
Nondeductible expenses.................................... 0.5 0.7 0.7
Other..................................................... (0.2) -- (1.0)
---- ---- ----
28.1% 36.4% 34.7%
==== ==== ====
Deferred taxes consisted of the following at December 31:
1998 1999
---------- ----------
Deferred tax assets:
Current:
Deferred revenue..................................... $ 253,000 $ 312,000
Inventory capitalization............................. 123,000 207,000
Other................................................ 22,000 44,632
---------- ----------
Total current deferred tax assets.................. 398,000 563,632
---------- ----------
Noncurrent:
Compensation expense................................. 213,000 82,000
Start up costs....................................... -- 272,000
Capital loss carryforward............................ 19,000 19,000
---------- ----------
Total noncurrent deferred tax assets............... 232,000 373,000
---------- ----------
Total gross deferred tax assets.................. $ 630,000 $ 936,632
========== ==========
Deferred tax liabilities:
Noncurrent:
Depreciation and amortization........................ $1,670,000 $1,190,256
========== ==========
The net deferred tax assets (liabilities) are classified in the consolidated
financial statements as follows:
1998 1999
----------- ---------
Current deferred tax assets......................... $ 398,000 $ 563,632
Noncurrent deferred tax liabilities................. (1,438,000) (817,256)
----------- ---------
Net deferred tax assets (liabilities)............... $(1,040,000) $(253,624)
=========== =========
It is the opinion of the Company's management that the deferred tax assets
will more likely than not be realized; therefore, a valuation allowance is not
required.
NOTE 10 TRANSACTIONS WITH RELATED PARTIES AND AFFILIATES
During 1997, the Company converted certain accounts receivable from an
affiliated company to notes receivable due from the shareholders of the
affiliated company. These shareholders are also shareholders of the Company.
The notes receivable bear interest at 6.0%, and were due upon the earlier of
the sale of the affiliated
F-15
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
company or December 31, 1998. On December 31, 1998, the due date was extended
to December 31, 1999. On February 17, 1999, the Company signed new notes
receivable agreements with each of the shareholders. The new notes bear
interest at 6.0%; the first payment is payable immediately and the remaining
installments are due annually through February 17, 2004. The total amount of
such notes outstanding at December 31, 1998 and 1999 was $1,008,529 and
$701,042, respectively. The future maturities of notes receivables due from
shareholders are as follows:
Year Ending
December 31,
------------
2000.......................................................... $158,359
2001.......................................................... 125,241
2002.......................................................... 132,807
2003.......................................................... 140,830
2004.......................................................... 143,805
--------
701,042
Less current portion.......................................... (158,359)
--------
Notes receivable due from shareholders, excluding current
portion...................................................... $542,683
========
On December 31, 1997, the Company advanced $283,834 to two officers and
$352,584 to two directors of the Company to pay taxes due in connection with
the cancellation of their incentive compensation agreements. These advances
were evidenced by notes receivable from the shareholders. These notes were
non-interest bearing, collateralized by 203,101 shares of common stock held by
such shareholders and were due upon the earlier of December 31, 1999 or upon
sale of the stock. The total amount of these notes outstanding at December 31,
1998 was $636,418, which were paid in full in February 1999.
In 1997, 1998 and 1999, the Company accrued commission expenses to a major
shareholder and former executive officer of approximately $14,378, $121,000
and $453,000 of which $30,034 and $37,134 remained unpaid at December 31, 1998
and 1999, respectively. During 1998, the Company also paid to the major
shareholder and former executive officer $250,000 for various consulting
activities related to new product development. During 1997, the Company
advanced $125,000 to the major shareholder and former executive officer's
brother-in-law, which remained unpaid at December 31, 1998. During 1999, the
major shareholder and former executive officer guaranteed these funds to the
Company; however, in December 1999, the $125,000 was written off by the
Company and included in other operating expenses in the consolidated financial
statements
NOTE 11 CANCELLATION OF INCENTIVE COMPENSATION AGREEMENTS
Prior to June 1, 1997, the Company paid certain shareholders and employees
commissions, which were based on sales volume. During 1997, the Company issued
2,027,571 shares of the Common Stock to shareholders and employees to cancel
these agreements. These shares included 626,971 of shares issued to cancel
incentive compensation agreements, which had been provided to two shareholders
in lieu of ownership interests in the Partnerships (Note 1). The shares issued
were valued at $1.30 per share, which was based on an appraisal at the date of
the transaction. In December 1997, the Company agreed to cancel another
incentive compensation agreement by issuing 74,167 shares of the common stock
valued at $5.00 per share. As a result of these transactions, during 1997 the
Company recognized additional nonrecurring compensation expense of $2,191,610.
In April 1994, the Company entered into two incentive compensation
agreements with Ray Robbins, an Associate and a shareholder of the Company.
The agreements and their subsequent amendments required the Company to pay
compensation based on a specified monthly sales volume and increase in the
admittance of new
F-16
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
independent Associates. One of these agreements was subsequently canceled in
1997. In June 1999, the other incentive agreement was canceled by paying Mr.
Robbins $750,000. Of this amount, $500,000 was paid at the time the agreement
was canceled. The remaining $250,000 is payable in monthly installments of
$10,000 over two years. These installments are non-interest bearing and are
included in accrued expenses. The $750,000 charge is included in other
operating expenses in the consolidated financial statements. During 1997, 1998
and 1999 the Company paid Mr. Robbins related to the incentive agreements
approximately $467,000, $120,000 and $58,000, respectively.
NOTE 12 EMPLOYEE BENEFIT PLANS
Employee Retirement Plan
Effective May 9, 1997, the Company adopted a defined contribution 401(k) and
Profit sharing plan (the "Plan"). The Plan covers all full-time employees who
have completed three months of service and attained the age of twenty-one.
Employees can contribute up to 15% of their annual compensation. The Company
will match 25% of the first 6% contributed and may also make discretionary
contributions to the Plan, which may not exceed 100% of the first 15% of the
employees annual compensation. Company contributions to employees vest ratably
over a five-year period. During 1997, 1998 and 1999, the Company contributed,
to the plan, approximately $49,000, $93,000 and $150,000, respectively.
Stock Option Plans
In May 1997, the Board of Directors approved the 1997 Stock Option Plan (the
"1997 Stock Option Plan") which provides incentive and nonqualified stock
options to employees and nonemployees, respectively. The Company reserved
2,000,000 shares of common stock for issuance pursuant to the stock options
granted under the 1997 Stock Option Plan. In 1997, 1,600,000 options were
granted under the 1997 plan that became exercisable on May 13, 1999. The
remaining 400,000 options were granted in 1998 of which 50,000 options were
canceled in 1999 and the remaining 350,000 options became exercisable
beginning July 31, 1999. On October 19, 1999, 50,000 options were granted to a
director and vest over three years beginning, October 19, 2000.
In May 1998, the Board of Directors approved the 1998 Stock Option Plan (the
"1998 Stock Option Plan") which provides incentive and nonqualified stock
options to employees and nonemployees, respectively. The Company reserved
1,000,000 shares of common stock for issuance pursuant to the stock options
granted under the 1998 Stock Option Plan. Options granted become exercisable
ratably over a period up to three years. No options will remain exercisable
later than ten years after the date of the grant.
F-17
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock options outstanding for the 1998 and 1999 Stock Options Plans,
(collectively, "the Stock Option Plans") are as follows:
1997 1998 1999
--------------- --------------- ----------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
(000s) Price (000s) Price (000s) Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of
year........................ -- $ -- 1,600 $1.45 2,343 $3.53
Granted..................... 1,600 1.45 743 8.00 675 7.81
Exercised................... -- -- -- -- (714) 1.38
Canceled.................... -- -- -- -- 50 8.00
Outstanding at end of year... 1,600 $1.45 2,343 $3.53 2,254 $5.39
----- ----- ----- ----- ----- -----
Options exercisable at year-
end......................... -- $ -- -- $ -- 1,422 $4.33
----- ----- ----- ----- ----- -----
Weighted-average fair value
of options granted during
the year.................... $1.11 $2.20 $3.03
===== ===== ===== ===== ===== =====
During 1999, the Board of Directors of the Company's wholly-owned
subsidiary, Internet Health Group, Inc.'s ("IHG"), approved their 1999
Incentive and Nonstatutory Stock Option Plan ("IHG Plan"). Under the IHG Plan,
a total of 1,500,000 shares of IHG's common stock, par value $0.0001 per share
was reserved for issuance. During 1999, IHG granted 1,258,750 incentive stock
options to various employees and to the executive officers of the Company. The
stock options are exercisable at $0.27 per share, which was the estimated fair
value on the date of grant. The options are exercisable over three years
beginning on July 10, 2000. As of December 31, 1999 none of these options were
exercised or canceled. The weighted-average fair value of options granted
during 1999 was $0.15 per share and the weighted-average remaining contractual
life was 9.8 years.
The following table summarizes information with respect to options
outstanding and exercisable at December 31, 1999:
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Number Weighted Weighted Average Weighted
of Average Remaining Average
Shares Exercise Contractual Number Exercise
Exercise Price Range (000s) Price Life (in years) of Shares Price
-------------------- ------ -------- ---------------- ---------- ---------
$1.35 -- $2.00.......... 886 $1.51 7.4 806 $ 1.51
$7.00 -- $8.00.......... 1,368 7.91 9.1 616 8.00
----- ----- --- --------- ---------
$1.35 -- $8.00.......... 2,254 $5.39 8.4 1,422 $ 4.33
===== ===== === ========= =========
F-18
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For both IHG and Mannatech stock option plans, incentive stock options
granted to employees are valued using the intrinsic method, are
nontransferable and are granted for terms no longer than ten years and at a
price which may not be less than 100% of the fair value of the common stock on
the date of grant. For purposes of pro forma disclosures, the estimated fair
values of the options are amortized to expense over the vesting period. The
Company's pro forma information follows:
1997 1998 1999
----------- ----------- -----------
Consolidated net income
As reported............................ $10,622,043 $10,053,979 $10,787,923
Pro forma.............................. $10,542,364 $ 9,701,349 10,042,488
Basic EPS
As reported............................ $ 0.50 $ 0.45 $ 0.45
Pro forma.............................. $ 0.49 $ 0.44 $ 0.42
Diluted EPS
As reported............................ $ 0.47 $ 0.42 $ 0.43
Pro forma.............................. $ 0.47 $ 0.41 $ 0.42
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions during 1997, 1998 and 1999:
1997 1998 1999
---- ---- ----
Dividend yield............................................. 4% 4% 0%
Expected volatility........................................ 0% 0% 47.7%
Risk-free rate of return................................... 5.0% 5.4% 6.3%
Expected life (in years)................................... 10 6 6
Under the Stock Option Plans, nonqualified stock options granted to
nonemployees are valued using the fair value method, are nontransferable and
are granted for terms no longer than six years and at a price which may not be
less than 100% of the fair value of the common stock on the date of grant.
During 1997, the Company issued 356,000 nonqualified stock options to
nonemployees at an exercise price of $1.35 per share. Additionally, the
Company issued 100,000 nonqualified stock options in July 1997. These options
are priced at $2.00, vest immediately, are exercisable after one year and have
a term of six years.
During 1997, compensation expense of $155,503 was included in other
operating expenses for the nonemployee options. This expense was determined by
calculating the fair value of options granted on the date of grant using the
Black-Scholes option-pricing model and the following weighted-average
assumptions:
Dividend yield.......................................................... 4%
Expected volatility..................................................... 30%
Risk-free rate of return................................................ 5.0%
Expected life (in years)................................................ 6
During 1997, the Company granted a consulting firm 475,015 warrants to
purchase the same number of shares of the Company's common stock. These
warrants were nontransferable and vested as follows: 178,125 shares at
issuance and 26,990 each month through March 1, 1998. The warrants were
exercisable at $1.35 per share and were to expire on the earlier of May 1,
2003 or thirty-six months after the underlying shares were
F-19
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
registered for public resale under the Securities Act. At December 31, 1998,
all of the warrants were vested and in February 1999, all of these warrants
were exercised.
As a provision of the warrant agreement, the consulting firm could require
the Company to repurchase the outstanding warrants between May 1998 and May
1999 for $300,000. Accordingly, it was determined that the fair value of the
warrants as of December 31, 1998 was $300,000.
NOTE 13 COMMITMENTS AND CONTINGENCIES
The Company leases certain office space, automobiles and equipment under
various noncancelable operating leases, and has options to renew and
renegotiate most of the leases. The leases expire at various times through
January 2008. The Company also leases equipment under various month-to-month
cancelable operating leases. Total rent expense was approximately $702,000,
$1,160,000 and $1,600,000 in 1997, 1998 and 1999, respectively.
Approximate future minimum rental commitments for the operating leases are
as follows:
Year Ending
December 31,
------------
2000............................................................ $1,675,000
2001............................................................ 1,595,000
2002............................................................ 1,263,000
2003............................................................ 889,000
2004............................................................ 755,000
Thereafter...................................................... 1,616,000
----------
$7,793,000
==========
Effective September 1, 1998, the Company entered into various employment
agreements with six of its executives. The employment agreements are for five
years with a specified minimum salary and are extended automatically each year
for one additional year unless both parties agree to termination prior to the
end of any term. On November 1, 1999, the Company entered into an employment
agreement with another one of its executives. This agreement expires in
October 2002. The agreements can be canceled by either party; however, if
canceled without cause, by the Company, the Company is required to pay the
minimum salary for the life of the agreement. In 1995 and 1996, the Company
entered into various cancelable employment agreements with some of its key
employees which provide for minimum annual salaries based on sales volume. In
1997 the Company terminated several of these contracts. As a result of the
terminations, the Company incurred approximately $499,000 in severance
charges.
The Company has a commitment with a supplier to purchase raw materials
through August 2000. On January 12, 2000, the Company extended this commitment
for an additional two years. The purchase commitment with this supplier is
approximately $5.6 million, $7.9 million and $4.6 million for 2000, 2001 and
2002, respectively.
The Company utilizes royalty agreements with individuals or entities to
provide compensation for items such as reprints of articles or speeches
relating to the Company; sales of promotional videos featuring sports
personalities and promotional efforts in product sales or attracting new
Associates. In addition, in 1997 until August 1998, the Company paid a monthly
fee of $20,000 to a research foundation for promoting and conducting health
studies of Associates. The total expenses for all of these agreements were
approximately $1,568,000, $933,000 and $416,000 in 1997, 1998 and 1999,
respectively.
F-20
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In 1998, the Company paid $295,000 for any possible sales tax assessment
from a certain state comptroller, including any applicable interest by the
state agency. In 1999, the sales tax audit was completed and the Company was
refunded approximately $135,000 related to the 1998 assessment. The expense
and refund was included in operating expenses in the consolidated financial
statements.
In October 1999, the Company entered into an agreement with a shareholder
and a high level Associate where the Associate will promote the Company and
begin the development of downline growth in Japan. Under the terms of the
agreement, the Company will pay the Associate $50,000 a month plus all
expenses for two years. The Associate can also earn additional commissions of
up to $1,600,000 for the development and sale of training materials and sales
aids. During 1999, the Company accrued $206,000 of which $106,000 remained
unpaid at December 31, 1999.
NOTE 14 CAPITAL TRANSACTIONS
Stock Split
On May 14, 1997, the Board of Directors declared a 1,000-for-1 stock split
of the Company's common stock. The Board also approved a change in the stated
par value of common shares from $0.01 per share to $0.0001 per share, and
increased the number of authorized shares to 100,000,000. All share and per
share data have been retroactively adjusted for this split.
Preferred Stock
On April 8, 1998, the Company amended its Articles of Incorporation to
reduce the number of authorized shares of common stock from 100,000,000 to
99,000,000. Additionally, the Company has authorized 1,000,000 shares of
preferred stock with a par value of $0.01 per share.
Treasury Stock
During 1999, three of the Company's existing shareholders tendered 16,308
shares of their common stock, to the Company, at the current market price on
the date of transfer, to exercise 150,074 stock options at $1.35 per share.
The Company recorded these shares received as treasury stock.
NOTE 15 LITIGATION
On February 29, 2000, a class action lawsuit was filed in District Court,
County of Boulder, Colorado; naming the Company and three other companies as
co-defendants. The other companies were involved in selling of certain health
benefits program offered to the Company's Associates. The suit alleged the
defendants were marketing and selling illegal health insurance policies,
committed fraud and failed to pay benefits under such policies, which caused
economic loss to the plaintiffs and others. The suit seeks a trial by jury and
an unspecified amount of damages. The Company believes it has valid defenses
and that the allegations are completely without merit. The Company intends to
vigorously defend its position. Nevertheless, an adverse resolution to this
matter might have a material adverse effect on the Company's business, results
of operations, financial condition and liquidity.
The Company has several other pending claims incurred in the normal course
of business which, in the opinion of management, can be resolved without
material affect on the Company's consolidated results of operations or
consolidated financial condition.
F-21
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 16 EARNINGS PER SHARE
The following data show the amounts used in computing earnings per share and
the effect on the weighted-average number of shares of dilutive common stock.
The number of shares used in the calculations for 1997 reflects the 1,000-for-
1 stock split on April 15, 1997.
1997 1998 1999
----------------------------------- ----------------------------------- -----------------------------------
Income Shares Per Share Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
Basic EPS
Net income
available to
common
shareholders.... $10,622,043 21,448,551 $0.50 $10,053,979 22,101,738 $0.45 $10,787,923 24,133,161 $0.45
----------- ---------- ===== ----------- ---------- ===== ----------- ---------- =====
Effect of
dilutive
securities:
Stock options... -- 770,018 -- 1,293,481 -- 1,091,179
Stock warrants.. -- 181,815 -- 263,703 -- --
----------- ---------- ----------- ---------- ----------- ----------
Diluted EPS
Net income
available to
common
shareholders
plus assumed
conversions.... $10,622,043 22,400,384 $0.47 $10,053,979 23,658,922 $0.42 $10,787,923 25,224,340 $0.43
=========== ========== ===== =========== ========== ===== =========== ========== =====
At December 31, 1999, 1,367,500 common stock options were excluded from the
dilutive EPS calculation as the option exercise price was greater than the
average market price of the common stock. The effect of such inclusion in the
EPS calculation would be to increase the income per share.
NOTE 17 SEGMENT INFORMATION
The Company conducts its business within one industry segment. No Associate
accounted for more than 10% of total sales for the years ended December 31,
1997, 1998 and 1999. There were no long-lived assets in Canada. Australia had
recorded long-lived assets totaling approximately $0.5 million and $0.9
million for December 31, 1998 and 1999, respectively. The United Kingdom
recorded long-lived assets totaling approximately $0.5 million at December 31,
1999. Net sales (in millions and as a percentage of net sales) by country for
the years ended December 31, 1997, 1998 and 1999 were as follows:
Year United States Canada Australia United Kingdom
---- -------------- ----------- ---------- ---------------
1997 $ 127.9 84.9% $22.7 15.1% $ -- --% $ -- --%
1998 $ 135.9 82.5% $26.8 16.1% $ 2.2 1.4% $ -- --%
1999 $ 137.9 76.7% $25.7 14.3% $15.8 8.8% $ 0.3 0.2%
F-22
INDEX TO EXHIBITS
3.1 Amended and Restated Articles of Incorporation of Mannatech dated
October 25, 1995, incorporated herein by reference to Exhibit 3.1 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
3.2 Amended and Restated Bylaws of Mannatech dated August 26, 1997,
incorporated herein by reference to Exhibit 3.2 to Mannatech's Form S-1
(File No. 333-63133) filed with the Commission on September 10, 1998.
3.3 Amendment to the Bylaws of Mannatech dated May 19, 1998, incorporated
herein by reference to Exhibit 3.3 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
3.4 Amendment to the Bylaws of Mannatech dated October 20, 1999,
incorporated herein by reference to Exhibit 99.1 to Mannatech's Form 8-K
(File No. 000-24657) filed with the Commission on November 3, 1999.
4.1 Specimen Certificate representing our common stock, par value $0.0001
per share, incorporated herein by reference to Exhibit 4.1 to
Mannatech's Amendment No. 1 to Form S-1 (File No. 333-63133)
filed with the Commission on October 28, 1998.
10.1 1997 Stock Option Plan dated May 20, 1997, incorporated herein by
reference to Exhibit 10.1 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.2 1998 Incentive Stock Option Plan dated April 8, 1998, incorporated
herein by reference to Exhibit 10.2 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
10.3 Agreement and Plan of Merger dated as of June 1, 1997 among Mannatech
and Eight Point Services, Inc., Triple Gold Business, Inc., Five Small
Fry, Inc., and Beta Nutrient Technology, Inc., incorporated herein by
reference to Exhibit 10.3 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.4 Exchange Agreement dated June 1, 1997 among Mannatech and the limited
partners of Power Three Partners, Ltd., Eleven Point Partners, Ltd. and
Beta M. Partners, Ltd., incorporated herein by reference to Exhibit 10.4
to Mannatech's Form S-1 (File No. 333-63133) filed with the Commission
on September 10, 1998.
10.5 Plan and Agreement of Reorganization dated June 1, 1997 by and among
Mannatech, Dynamic Eight Partners, Ltd., Power Three Partners, Ltd.,
Eleven Point Partners, Ltd. and Beta M. Partners, Ltd. and the general
and limited partners of the partnerships, incorporated herein by
reference to Exhibit 10.5 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.6 Exchange Agreement by and among Gary Watson, Patrick Cobb, Samuel
Caster, Charles Fioretti and William Fioretti and Mannatech dated August
31, 1997, incorporated herein by reference to Exhibit 10.6 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.7 Option Agreement dated July 1, 1997 with Multi-Venture Partners, Ltd.,
incorporated herein by reference to Exhibit 10.7 to Mannatech's Form S-1
(File No. 333-63133) filed with the Commission on September 10, 1998.
10.8 Option Agreement dated October 19, 1999 with Steven A. Barker Ph.D.*
10.9 Form of Indemnification Agreement with a schedule of director
signatories, incorporated herein by reference to Exhibit 10.8 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.10 Schedule of additional directors signatories relating to the Form of
Indemnification Agreements in Exhibit 10.9 above.*
1
10.11 Letter of Understanding Regarding Development of Proprietary Information
for Mannatech effective as of August 1, 1997, as amended, by and between
Bill H. McAnalley, Ph.D. and Mannatech, incorporated herein by reference
to Exhibit 10.12 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.12 Commercial Lease Agreement dated November 7, 1996 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First Amendment
thereto dated May 29, 1997 and the Second Amendment thereto dated
November 13, 1997, incorporated herein by reference to Exhibit 10.13 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.13 Commercial Lease Agreement dated May 29, 1997 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First Amendment
thereto dated November 6, 1997, incorporated herein by reference to
Exhibit 10.14 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.14 Assignment of Patent Rights dated October 30, 1997 by and among Bill H.
McAnalley, Ph.D., H. Reginald McDaniel, D. Eric Moore, Eileen P. Vennum
and William C. Fioretti and Mannatech, incorporated herein by reference
to Exhibit 10.15 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.15 Supply Agreement effective as of August 14, 1997 by and between
Mannatech and Caraloe, Inc., incorporated herein by reference to Exhibit
10.17 to Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.16 Trademark License Agreement effective as of August 14, 1997 by and
between Mannatech and Caraloe, Inc., incorporated herein by reference to
Exhibit 10.19 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.17 Supply Agreement effective as of January 12, 2000 by and between
Mannatech and Caraloe, Inc.*
10.18 Letter of Agreement from Mannatech to Michael L. Finney of LAREX,
Incorporated dated December 23, 1997, incorporated herein by reference
to Exhibit 10.20 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.19 Product Development and Distribution Agreement effective as of September
15, 1997 between New Era Nutrition Inc. and Mannatech, incorporated
herein by reference to Exhibit 10.21 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
10.20 Severance and Consulting Agreement and Complete Release dated August 1,
1997 between Ronald E. Kozak and Mannatech, incorporated herein by
reference to Exhibit 10.22 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.21 Summary of Management Bonus Plan, incorporated herein by reference to
Exhibit 10.23 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.22 Individual Guaranty of Samuel L. Caster dated January 5, 1998,
incorporated herein by reference to Exhibit 10.27 to Mannatech's Form S-
1 (File No. 333-63133) filed with the Commission on September 10, 1998.
10.23 Individual Guaranty of Charles E. Fioretti dated January 5, 1998,
incorporated herein by reference to Exhibit 10.28 to Mannatech's Form S-
1 (File No. 333-63133) filed with the Commission on September 10, 1998.
10.24 Form of Employment Agreement to be entered into between Mannatech and
each of Charles E. Fioretti, Patrick D. Cobb, Anthony E. Canale, Bill H.
McAnalley and Deanne Varner, incorporated herein by reference to Exhibit
10.30 to Mannatech's Amendment No. 1 to Form S-1 (File No. 333-63133)
filed with the Commission on October 28, 1998.
2
10.25 Employment Agreement dated November 1, 1999, entered into between
Mannatech and Terry L. Persinger.*
10.26 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $33,316.02 made by Patrick D. Cob, incorporated herein by
reference to Exhibit 10.25 to Mannatech's Form 10-K (File No. 000-24657)
filed with the Commission on March 31, 1999.
10.27 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.10 made by Samuel L. Caster incorporated herein by
reference to Exhibit 10.26 to Mannatech's Form 10-K (File No. 000-24657)
filed with the Commission on March 31, 1999.
10.28 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.09 made by Charles E. Fioretti incorporated herein by
reference to Exhibit 10.27 to Mannatech's Form 10-K (File No. 000-24657)
filed with the Commission on March 31, 1999.
21 List of Subsidiaries.*
23 Consent of PricewaterhouseCoopers LLP.*
27 Financial Data Schedule.*
- --------
* Filed herewith.
3