Back to GetFilings.com
2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THIS
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 000-24657
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2508900
(State or other Jurisdiction (I.R.S. Employer
of 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 each class Name of each exchange on which registered
- ------------------------------------------------------------------------------------------------
Common Stock, par value $0.0001 per share Nasdaq National Market
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 13,037,642 shares of registrant's voting
stock held by non-affiliates of the registrant was $15,071,514, based on the
closing price of the registrant's common stock on the Nasdaq National Market on
March 19, 2001 of $1.156 per share.
Documents Incorporated by Reference
Mannatech incorporates information required by Part III (Items 10, 11, 12
and 13) of this report by reference to its definitive proxy statement to be
filed pursuant to Regulation 14A on or before April 30, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
Special Note Regarding Forward-Looking Statements........................ 1
Part I
Item 1. Business......................................................... 2
General................................................................ 2
Industry Overview...................................................... 3
Operating Strengths.................................................... 4
Growth Strategy........................................................ 5
Products and Product Development....................................... 6
Product Distribution System............................................ 8
Information Technology and Systems..................................... 12
Production and Distribution............................................ 12
Government Regulations................................................. 13
Competition............................................................ 17
Employees.............................................................. 17
Item 2. Properties....................................................... 18
Item 3. Legal Proceedings................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.............. 19
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.................................................. 23
Year ended December 31, 2000 compared with the Year ended December 31,
1999.................................................................. 23
Year ended December 31, 1999 compared with the Year ended December 31,
1998.................................................................. 25
Seasonality and Selected Quarterly Statements of Operations............ 27
Liquidity and Capital Resources........................................ 29
Impact of Inflation.................................................... 30
Recent Financial Accounting Standards Board Statements................. 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 31
Item 8. Financial Statements and Supplementary Data...................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 31
Part III
Item 10. Directors and Executive Officers of the Registrant.............. 32
Item 11. Executive Compensation.......................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 32
Item 13. Certain Relationships and Related Transactions.................. 32
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K....................................................................... 32
i
Special Note Regarding Forward-Looking Statements
Some of Mannatech's 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," the Notes to Consolidated Financial Statements and elsewhere in this
report constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These statements are subject to certain events, risks and
uncertainties that may be outside Mannatech's control. Some of these forward-
looking statements include statements of:
. management's plans, objectives and budgets for its future operations and
future economic performance;
. capital budget and future capital requirements;
. meeting future capital needs;
. realization of any deferred tax assets;
. the level of future expenditures;
. impact of foreign currency translations;
. impact of recent accounting pronouncements;
. the outcome of regulatory and litigation matters; and
. the assumptions described in this report underlying such forward-looking
statements.
Actual results and developments may materially differ from those expressed
in or implied by such statements due to a number of factors, including:
. those described in the context of such forward-looking statements;
. future product development and manufacturing costs;
. changes in Mannatech's incentive plans;
. timely development and acceptance of new products;
. the markets of Mannatech's domestic and international operations;
. the impact of competitive products and pricing;
. the political, social and economic climate in which Mannatech conducts
operations; and
. the risk factors described 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," "would," "expects," "plans,"
"intends," "anticipates," "believes," "estimates," "approximates," "predicts,"
"potential" or "continue" or the negative of such terms and other comparable
terminology.
Although Mannatech believes that the expectations reflected in these
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither Mannatech
nor anyone else assumes responsibility for the accuracy and completeness of
such statements and is under no duty to update any of the forward-looking
statements after the date of this report.
1
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. Mannatech operates in a single segment in which it sells its
products in the United States, Canada, Australia, the United Kingdom and Japan
through a network of approximately 237,000 active associates as of March 8,
2001 compared to approximately 269,000 active associates as of March 9, 2000.
An "active" associate is one who has purchased products from Mannatech within
the last 12 months.
Mannatech focuses its development efforts primarily in the area of
carbohydrate technology by creating its proprietary ingredient, Ambrotose(R)
complex, which combines certain naturally occurring sugars required to support
optimal cell-to-cell communication. Mannatech's products are primarily 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. Mannatech's 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.
Mannatech markets its products exclusively through a network marketing
system that it believes is well suited to its products, which emphasize health
and nutrition. Mannatech believes network marketing appeals to a broad cross-
section of the population, particularly those seeking to supplement family
income, start a home-based business or pursue employment opportunities other
than conventional, full-time employment, because it allows in-person product
education not available through traditional marketing techniques.
Mannatech completed the following during the past 12 months:
. opened its Japan subsidiary on June 26, 2000;
. closed operations of its Internet website subsidiary - Internet Health
Group, Inc. - on December 29, 2000;
. introduced ImmunoStart(TM) Chewables in October 2000;
. introduced Glyco-Bears(TM), a children's multi-vitamin, in March 2001;
. made various management changes, including hiring a new Chief Executive
Officer, new Chief Information Officer and new President of
International Operations;
. appointed two new independent directors to its Board of Directors;
. entered into a separation agreement with its former Chief Operating
Officer, and
. entered into a consulting agreement with its former President to provide
various consulting services as the Global Vision Architect.
Since its initial public offering, Mannatech's common stock has traded on
the Nasdaq National Market under the symbol "MTEX." Information for each of
Mannatech's most recent five fiscal years, with respect to the amounts of net
sales, results of operations and identifiable assets is set forth in this
report under Item 6.
2
Mannatech's principal executive offices are located at 600 S. Royal Lane,
Suite 200, Coppell, Texas 75019, its telephone number is (972) 471-7400 and
its website address is www.mannatech-inc.com. You can contact the Investor
Relations department at (972) 471-6512 or IR@mannatech.com. Unless the context
states otherwise, the term "Mannatech," "Company," "our," "we," "their" or
"its" as used in this report shall mean Mannatech, Incorporated and all of its
subsidiaries, collectively.
Industry Overview
Mannatech believes that the nutritional supplement industry targets two
sub-industries: the wellness industry and the sickness or healthcare industry.
The sickness or healthcare industry focuses on curing diseases, disorders and
trauma whereas the wellness industry focuses on maintaining optimal health.
Each sub-industry includes manufacturers and distributors of products that are
generally intended to cure the symptom or disease and/or enhance the body's
performance and contributes to optimal health and wellness. Nutritional
supplements include:
. vitamins;
. minerals;
. dietary supplements;
. herbs;
. botanicals; and
. compounds derived from the above.
In recent years, the nutritional supplement industry has experienced
substantial growth. Mannatech believes the growth is a result of the
following:
. the adoption of the Dietary Supplement Health and Education Act of 1994,
which allows vendors of dietary supplements to educate consumers
regarding the effects of certain ingredients;
. a widespread and growing interest and awareness among consumers on
issues of diet, nutrition and health;
. the continued rise in the introduction of new nutritional products in
response to scientific research;
. a boom in exercise and fitness activities, fitness facilities and stress
management programs;
. the world's developed economies and domestic economy that generates
discretionary income and created an educated populace;
. aging generations, particularly the baby-boomers, who are willing to
purchase products, services and activities that are associated with
achieving optimal wellness; and
. a trend toward preventive health treatments.
According to the 2000 Nutrition Business Journal Annual Industry Survey,
global nutrition sales by region for 2000 and expected growth for the industry
by region for 2001 and 2002 are as follows:
Nutritional Expected Growth
Sales for 2000 Percentage for
Region (in billions) 2001/2002
------ -------------- ---------------
United States............................. $ 47.9 8%
Canada.................................... 4.0 8%
Australia................................. 1.7 7%
Europe.................................... 45.7 6%
Japan..................................... 24.4 6%
Other regions............................. 14.2 7%
------
Total for all regions..................... $137.9 7%
======
3
Mannatech believes nutritional supplements are most successful when they are
sold primarily through:
. direct sales organizations;
. mass market retailers, including mass merchandisers, drug stores,
supermarkets and discount stores;
. health food stores; and
. mail order companies.
Operating Strengths
Mannatech maintains the following business strategy:
. to develop, maintain and continuously improve its proprietary
nutritional supplements, which contain ingredients that are naturally-
occurring, plant-derived and carbohydrate-based. New and existing
products should have both health benefits and mass appeal to a general
population, that is seeking non-toxic healthcare alternatives;
. to provide an appealing framework for persons interested in its products
to establish a network marketing business; and
. to broaden its product focus in the nutritional supplement industry from
the sickness sub-industry to also include the wellness sub-industry.
Mannatech believes its business strategy will enable it to continue, by
capitalizing on the following strengths:
Proprietary Products. Mannatech believes that the discovery and development
of products containing certain carbohydrates necessary for optimal health is
key in expanding business opportunities for its associates. Mannatech
recognized the nutritional need for the eight known monosaccharides in
supporting optimal health and believes it offers innovative proprietary
products to fulfill this nutritional need. Mannatech filed a patent application
on its compound containing certain specific monosaccharides called Ambrotose(R)
complex. Mannatech believes inclusion of this compound in its proprietary
products is important for two reasons:
. it is a marketing factor that continues to differentiate its products
from its competitors; and
. the limited availability helps drive demand and enable optimal pricing.
Research and Development. Mannatech believes that its research and
development facilities and experienced personnel will allow it to develop and
market additional proprietary products. Mannatech's research and development
efforts are led by scientists with significant years of experience designing
products based on carbohydrate technology. Mannatech's technologically advanced
laboratory is equipped with gas and liquid chromatographs and mass
spectrometers, which are used to:
. maintain quality standards;
. support research and development in the area of new herbal complexes;
and
. help support the development of both new and existing products.
To complement its in-house staff and facilities, Mannatech sought, and will
continue to seek, strategic alliances with several large manufacturers of
nutritional supplements. These companies work with Mannatech to create, develop
and manufacture its proprietary products. Mannatech also works with other
smaller companies to identify and develop new innovative products that
complement its existing products.
Associate Support Philosophy. Mannatech is committed to providing the
highest level of support services to its associates and believes that it meets
the needs of, and builds loyalty with, its associates through its highly
personalized and responsive customer service. Mannatech sponsors four to six
associate events throughout
4
the year to provide education and motivation for thousands of associates. These
events offer information, aid in business development, provide a venue for
launching new products and allow associates the ability to interact with
Mannatech's leading distributors and researchers.
Flexible Operating Strategy. Flexibility is a key part of Mannatech's
ongoing operations. Mannatech currently outsources production and formed
strategic alliances to minimize capital expenditures where practicable.
Mannatech uses the expertise and resources of its strategic allies in the areas
of distribution and logistics, call center operations, product registration and
export requirements. Mannatech also continues to monitor its operating strategy
to try to operate in an efficient and cost-effective manner.
Experience and Depth of Mannatech's Management Team. Mannatech made
significant management changes based on recent international expansion and
lower than expected operating results. Within the last 12 months, Mannatech
hired a new Chief Executive Officer, new Chief Information Officer and new
President of International Operations. Mannatech also shifted certain
management duties to its President and Chief Operating Officer. Finally,
Mannatech hired its former President as a Global Vision Architect consultant,
to concentrate his efforts and expertise on expansion, motivation and retention
of Mannatech's associate base. Mannatech believes these management changes made
during 2000 created a management group with a variety of backgrounds and
expertise in various fields, including:
. product research and development;
. marketing;
. direct sales and network marketing;
. international operations;
. finance and analysis;
. legal and compliance;
. information technology; and
. product distribution.
All of Mannatech's principal managers have substantial business experience,
primarily with larger businesses. These managers are able to bring the
perspective of traditional business to Mannatech's network marketing system.
The primary goal of Mannatech 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
Mannatech's growth strategy is to:
. Introduce New Products. Since its inception, Mannatech has and intends
to continue to introduce new products each year. Mannatech expects each
new product to contain one or more proprietary components and to
complement existing products.
. Attract and Retain New Associates and Enhance Associate
Productivity. Mannatech focuses on its operating strengths and strives
to create a business climate that recognizes associates for their
achievements. Mannatech has introduced several new incentive programs
for its associates, including a car bonus and "fast-start" programs.
Further, Mannatech plans to simplify its incentive program for its
associates, in part to encourage greater retention, motivation and
productivity. In addition, Mannatech will continue to modify its
associate events and recognition programs to encourage retention and
growth in the number of associates. No single associate accounted for
more than 10% of total sales, in 2000.
5
. Expand its Existing International Markets. Mannatech believes the
potential for growth also exists in its international markets based upon
its experience over the past year. Mannatech currently operates in
Canada, Australia, the United Kingdom and Japan. In February 2001,
Mannatech hired Mr. C. Armando Contreras to lead its international team
of employees. Mr. Contreras brings to Mannatech considerable experience
in network marketing as well as international market development.
Mannatech suspended its plans to enter the New Zealand market in order
to concentrate on growing its existing markets.
Products and Product Development
Mannatech believes it markets quality and proprietary products that include
26 different nutritional products and 3 topical products. Mannatech also offers
a variety of sales aids, including enrollment and renewal packs, brochures,
videotapes and a personalized website for its associates. Sales aids accounted
for approximately 18.9%, 17.6% and 17.3% of net sales in 1998, 1999 and 2000,
respectively.
Mannatech scientists believe that the discovery and use of certain
carbohydrates offer significant potential for nutritional benefits. Healthy
bodies are comprised of many sophisticated components working together, which
must have 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 carbohydrates is important because up
to 85% of glycoproteins are composed of specific monosaccharides. Mannatech
believes that these carbohydrates are necessary to support and maintain optimal
health.
Harper's Biochemistry, a leading biochemistry reference source, lists eight
monosaccharides commonly found in human glycoproteins that are important to the
healthy functioning of cell-to-cell communication, in the human body. These
monosaccharides are as follows:
. fucose;
. galactose;
. glucose;
. mannose;
. N-acetylgalactosamine;
. N-acetylglucosamine;
. N-acetylneuraminic acid; and
. xylose.
From the universe of approximately 200 monosaccharides found in nature,
Mannatech's proprietary ingredient, Ambrotose(R) complex, is designed to
provide certain of the monosaccharides listed above that are necessary for
optimal cell-to-cell communication.
Mannatech focuses on bringing new proprietary and, where possible,
patentable, products to market when expanding its existing product line.
Research and development costs related to specific clinical studies, quality
assurance programs and new product development were approximately $391,000,
$439,000 and $392,000 in 1998, 1999 and 2000, respectively. Mannatech 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 $3.4
million in 1998, $3.6 million in 1999 and $4.4 million in 2000.
6
The following chart lists Mannatech's products and the body systems
targeted by each, as of December 31, 2000:
Cell-to-Cell Immune Endocrine Intestinal Dermal Sports Nutritional
Communication System System System System Performance Needs
------------- ------ --------- ---------- ------ ----------- -----------
Ambroderm............... X
AmbrostartTM............ X X X
Ambrotose(R)............ X
Bulk Ambrotose(R)....... X
Bulk EmPactTM........... X
EmPactTM................ X
Emprizone(R)............ X
Firm.................... X
GlycoLEANTM
Accelerator............ X X X
GlycoLEANTM Catalyst.... X X X
GlycoLEANTM Fiber Full.. X X X
GlycoLEANTM Manager..... X X X
GlycoSLIMTM Drink....... X X X
ImmunoStartTM
Chewables.............. X X
ManAloe(R).............. X
MannaBARTM Carbohydrate
Formula................ X X X
MannaBARTM Protein
Formula................ X X X
MannaBARTM Apple-Yogurt
Crunch................. X X X
Manna-CTM............... X
MannaCleanseTM.......... X
Mannatonin.............. X
MVPTM................... X
Optimal Health PackTM... X X X
Bulk PhytAloe(R)........ X
PhytAloe(R)............. X
PhytoBears(R)........... X
Plus.................... X
Profile 1............... X
Profile 2............... X
Profile 3............... X
Sport with
Ambrotose(R)........... X
Mannatech introduced the following new products in 2000:
. Optimal Health Pack(TM)-- a convenient pack that contains 60
individually-wrapped packages of Mannatech's most popular supplements:
Ambrotose(R) capsule, Phyt-Aloe(R) capsule and Plus caplet; and
. ImmunoStart(TM) Chewables-- a chewable tablet that energizes and
optimizes the immune system, especially in times of stress.
7
The following chart indicates the year Mannatech introduced its products:
Year Products Introduced
---- -------------------
1994 ManAloe(R), Plus, MVP(TM), Ambroderm, PhytAloe(R), Firm
1995 PhytoBears(R), EmPact(TM), Emprizone(R)
1996 Ambrotose(R), Mannatonin, Profile 1, 2 and 3, Sport with Ambrotose(R)
1997 Bulk Ambrotose(R), Bulk EmPact(TM), MannaCleanse(TM)
1998 MannaBAR(TM) Carbohydrate Formula, MannaBAR(TM) Protein Formula, Manna-
C(TM), Ambrostart(TM),
Bulk PhytAloe(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)
2000 Optimal Health Pack(TM) and ImmunoStart(TM) Chewables
Mannatech plans to release additional products when new nutritional
compounds or areas of consumer demand are identified. All new products are
expected to contain its proprietary components. Mannatech usually launches new
products during its corporate events. New products selected for development are
based on:
. the marketability and proprietary nature of the product;
. regulatory considerations;
. the availability of ingredients; and
. the existence of data supporting claims of functionality.
To ensure quality control and to support, validate and monitor the
proprietary nature of its products, Mannatech's quality assurance department
conducts appropriate research both before and after product launches and
continuously throughout the year by taking samples directly from shipments
received from manufacturers.
Product Distribution System
Overview. The foundation of Mannatech's sales philosophy and distribution
system is network marketing. Mannatech believes that its network-marketing
system is an effective vehicle to distribute its products for the following
reasons:
. it is easier to explain the benefits of Mannatech's 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 the 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
. direct contact with customers help to facilitate repeat purchases.
8
Mannatech encourages, but does not require, associates to use its products,
nor does it require a person to be an associate in order to purchase its
products. Mannatech believes its network marketing system is particularly
attractive to prospective associates for the following reasons:
. the potential for income;
. no requirement to purchase inventory;
. no need to collect money from customers;
. limited paperwork involved in the sales process; and
. a flexible work schedule.
Mannatech suggests associates enroll new associates with whom the associates
have relationships such as: family members, friends, business associates,
neighbors or otherwise. Mannatech believes that associates will be more likely
to remain active if they are enrolled by someone with whom they have an ongoing
relationship.
Associates pay for products purchased prior to shipment. Mannatech carries
no accounts receivable from its associates, except for amounts owed for check
returns or other exceptions. Associates generally pay for products by credit
card; however, orders are also paid with cash, money orders and checks.
Associates may automatically order products on a continuous basis and receive a
discount. Automatic orders accounted for approximately 44.9%, 47.1% and 49.2%
of net sales for the years ended December 31, 1998, 1999 and 2000,
respectively.
Advances in communications, including telecommunications, the Internet and
the increasing use of videotape players, fax machines and personal computers
have enhanced the effectiveness of network marketing as a distribution channel
in the past decade. Mannatech offers high-quality video and audiotapes for use
in product education, demonstrations and sponsoring activities. In March 2000,
Mannatech substantially completed its science-based website,
www.GlycoScience.com, which allows users to search for science-based
information about various nutritional ingredients, some of which are found in
Mannatech's products. Mannatech believes these sales aids play an important
role in the success of its associate efforts and Mannatech is committed to
using current and future technological advances to enhance the effectiveness of
the network marketing efforts of its associates.
Associate Development. Mannatech believes key contributing factors to its
long-term growth and success will be the recruitment of new associates and the
retention of existing associates. Mannatech is active in the development of its
associates, which includes the areas of recruitment, support, motivation and
compensation.
Mannatech primarily relies 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
Mannatech at wholesale prices and can sponsor other associates in order to
build a network of associates and product users.
Mannatech also relies heavily on existing associates to train new
associates. Mannatech's 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 Mannatech
provides brochures, magazines and other sales materials, advanced training is
especially designed to provide systematic and uniform training to associates
about Mannatech and its products, compensation plan and methods of doing
business. Mannatech continues to update its training courses to ensure that its
associates receive the latest information on its products, sales aids,
technology advances, and sales methods available.
The needs of Mannatech's associates are a priority and Mannatech believes
that the high level of support it provides for its associates' efforts is
important to Mannatech's success. Mannatech provides a large number of support
services tailored to the needs of its associates, including:
. motivational meetings;
. educational and informative conference calls;
9
. 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;
. web-based conference calls;
. a current database of each associates' downline information;
. business development materials that Mannatech believes will help
increase product sales and recruitment; and
. an innovative website database, www.GlycoScience.com, designed to
provide a user with the ability to search and provide science-based
information about nutritional ingredients, some of which are included in
Mannatech's products.
Mannatech currently recognizes 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, ranging from 15% of commissionable sales at the regional director
level to 9% of commissionable sales at the presidential level, excluding the
generational bonus. An associate can achieve four levels within presidential
status. The levels are bronze, silver, gold and platinum. In addition,
associates are eligible for a "generation bonus," which is an additional
achievement level specially designed to motivate sales and downline growth. In
2001, Mannatech intends to simplify its plan, yet expand its associate
recognition programs as necessary to reward increased levels of performance and
to further motivate its associates.
Associate Compensation. Mannatech's plan combines the aspects of two widely
used multilevel marketing compensation plan concepts. Mannatech's plan pays
commissions based on a percentage of the associate's commissionable sales and
the attainment of certain associate leadership levels. The elements of
Mannatech's compensation plan are similar to other multi-level marketing
compensation plans. In addition each associate may determine their own optimal
resale price of products purchased from Mannatech.
Mannatech's compensation plan attempts to compensate an associate both in
the early stages of building their business and when the associate has
developed their business, by rewarding the associate for breadth and depth in
their downline organizations. Mannatech's compensation plan pays the following:
. a bonus or commission to qualified associates, ranging from $20.00 to
$180.00 based on downline growth and commissionable product sales;
. $25.00 to an associate for each eligible associate they train if they
have completed advanced training and obtained the all star level;
. bonuses or commissions ranging from $10.00 to $200.00 based on products
included in starter or renewal packs sold;
10
. a "fast-start" bonus, ranging from $100.00 to $500.00, for a new
associate who obtains regional or national level within three months of
initially signing up as an associate;
. a "car incentive" bonus, ranging from $200.00 to $700.00, for an
associate who achieves certain sales levels and who has increased their
product sales by at least 10% from their previous year's sales volume;
and
. various other bonus programs including earning various promotional
travel awards.
Based upon the knowledge of industry-related network marketing compensation
plans, Mannatech believes that its compensation plan is among the most
financially rewarding plans offered in the industry. Mannatech's commissions as
a percentage of net sales was 40.4%, 40.9% and 41.2% for 1998, 1999 and 2000,
respectively.
Mannatech does not employ the entire compensation plan described above
outside of the United States and Canada. In the international sector, Mannatech
uses similar plans with regard to commissionable product sales that are
tailored to fit the laws and considerations governing compensation of
associates in each country. Mannatech integrated its international compensation
plan across all markets in which its products are, or will be sold, thereby
allowing associates to receive commissions for global product sales. Mannatech
refers to this as its "global seamless downline structure" and hopes it will
help associates to build their global networks by expanding their downlines
into international markets without having to establish new downlines or
requalify for higher levels of commissions within each new country. Mannatech's
international compensation plan is designed to pay approximately the same
percentage compensation as in the United States and Canada.
Management of Associates. Mannatech believes it takes an active role in the
management of its associates. Mannatech believes any oversight process is
complicated because the associates are independent contractors and not
employees of Mannatech. Mannatech seeks to restrict the statements and conduct
of associates regarding its business by contractually binding associates to
abide by its associate policies and procedures. Each associate receives a copy
of the policies and procedures that must be followed in order to maintain
associate status with Mannatech. Associates are expressly forbidden from making
any representation of the possible earnings of any associate, other than
through statements by Mannatech indicating the range of actual earnings by all
associates. Mannatech also monitors its associate websites for content on a
continuing basis and introduced MannapagesTM, a standardized, personal,
Internet website program established to assist Mannatech in monitoring
associate websites on a regular basis, and help associates in their sales
efforts.
Mannatech has established a compliance program for addressing associates who
do not comply with its policies and procedures. Mannatech has developed formal
steps for proceeding if a complaint is filed against an associate. Mannatech's
primary goal is to educate its associates to ensure they understand and follow
all of Mannatech's policies and procedures. Mannatech's compliance and legal
departments, in cooperation with other departments, regularly evaluate
associate conduct and the need for new and revised policies. Mannatech believes
its compliance program assists in the maintenance of associate ethics and help
associates in their sales efforts.
Product Return Policy. Mannatech's product return policy states that any
retail customer may return the unused portion of any product to the selling
associate and receive a full cash refund from the associate. Mannatech will
then reimburse any associate who provides a refund to a retail customer with
product if they provide Mannatech with the proper documentation and return the
remainder of the product to Mannatech. Mannatech's product return policy for
associates states that any associate will receive a 90% refund 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 and returns as a percentage of net sales were
1.7%, 1.0% and 0.8% in 1998, 1999 and 2000, respectively.
11
Information Technology and Systems
Mannatech believes that maintaining sophisticated and reliable transactions-
processing systems is essential to its long-term success. Mannatech's systems
are designed to:
. reduce the time required to supply an associate or customer with
products;
. provide detailed and customized ordering information;
. 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 the customer service department; and
. help to monitor, analyze and report financial and operating results.
During 2001, Mannatech expects to spend approximately $6.6 million on its
information technology operations of which approximately $1.7 million will be
for capital expenditures. These expenditures will help to provide new
technology to continue to address the needs of associates and expand
transaction-processing systems to accommodate international operations.
Mannatech believes the significant investment in software, hardware and
personnel will enable it to:
. respond rapidly to its business needs for information technology
assessment and development;
. manage international operations and its seamless downline structure;
. help identify areas in which Mannatech can reduce operating expenses;
and
. safeguard Mannatech's database.
Mannatech's sophisticated financial system includes a report-writing system
that is windows-based and capable of operating on several platforms. The
financial system enables Mannatech to track and analyze financial information
and create and produce customized reports. Mannatech believes its systems are
adequate for its immediate future needs.
Production and Distribution
All of Mannatech's products are manufactured by outside contractors. This
strategy provides Mannatech with the virtual production capacity necessary to
respond to fluctuations in its sales, but limiting its investment in capital
equipment. Mannatech believes that it currently has the contract manufacturers'
support necessary to meet inventory requirements over the next several years.
Mannatech continues to identify new quality-driven manufacturers to supply the
products necessary for its success. Mannatech also continues to seek cost-
cutting measures by periodically reviewing current pricing considerations and
by requiring competitive bids from various manufacturers that meet its quality
and performance requirements.
Mannatech currently acquires its ingredients from superior suppliers of such
ingredients and has identified dependable alternative sources for all of its
ingredients except Manapol(R) and Arabinogalactan, which are components of
Ambrotose(R) complex. With these alternative sources, Mannatech could produce,
purchase or replace any of the ingredients if it was unable to purchase any of
these ingredients from its current suppliers. In January 2000, Mannatech signed
a new supply agreement with its supplier of Manapol(R) and in February 2001,
modified the purchasing requirements of the supply agreement. The supply
agreement requires Mannatech to buy a minimum monthly volume at an agreed-upon
price through August 2002.
Mannatech's distribution operation is located in Coppell, Texas, and
consists of 75,000 square feet of leased space in which it maintains its
automated system capable of processing up to 18,000 orders per day. This system
enhances productivity and will support sales volume growth. The distribution
facility contains
12
warehouse and distribution offices. Mannatech also has contract distribution
facilities in Canada, Australia, the United Kingdom and Japan. For further
information on these contract facilities see "Properties" on page 18 of this
report.
Government Regulations
In the United States, network marketing activities are regulated by a large
number of laws, governmental regulations, administrative determinations, court
decisions and similar legal requirements at the federal, state and local
levels. These regulations address, among other things:
. network marketing systems;
. transfer pricing and similar regulations affecting the amount of foreign
taxes and customs duties paid;
. taxation of associates, and the requirement to collect taxes and
maintain appropriate records;
. how a company makes, packages, labels, distributes, imports, sells and
stores products;
. product ingredients;
. product claims;
. advertising; and
. the extent in which a company may be responsible for associates' claims
about its products.
Products. The following governmental agencies regulate some aspect of
Mannatech's business or its products in the United States:
. 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 and localities, in which Mannatech's
products are sold.
The Food and Drug Administration regulates the formulation, manufacture,
packaging, storage, labeling, promotion, distribution and sale of foods,
dietary supplements and over-the-counter drugs. Food and Drug Administration
regulations require both Mannatech and its suppliers to meet good manufacturing
practice regulations for the preparation, packing and storage of its products
and has published a Notice of Advanced Rule Making for good manufacturing
practices for dietary supplements. On January 6, 2000, the Food and Drug
Administration issued a final rule called "Statements made for Dietary
Supplements Concerning the Effect of the Product on the Structure or Function
of the Body." Mannatech believes this final rule has not had an adverse effect
as it was already in compliance.
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. Mannatech believes this act is
generally favorable to the dietary supplement industry because it created a new
class, by statute, of "dietary supplements," which includes vitamins, minerals,
herbs, amino acids and other dietary substances for human use to supplement the
diet. This act grandfathers, with certain limitations, dietary ingredients on
the market before October 15, 1994. A dietary supplement that contains a
dietary ingredient that was not on the market before October 15, 1994 must
provide evidence establishing that the supplement is reasonably expected
13
to be safe. Manufacturers of dietary supplements that 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 Mannatech markets are classified as
dietary supplements under the Federal Food, Drug and Cosmetic Act. In 1999, the
Food and Drug Administration issued new regulations governing the labeling and
marketing of dietary supplement products. These regulations include:
. 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.
Mannatech is required to continue its ongoing program of providing evidence
for its product performance claims, and to notify the Food and Drug
Administration of certain types of performance claims made for its products.
Mannatech's substantiation program involves compiling and reviewing the
scientific literature pertinent to the ingredients contained in its products.
In certain markets, including the United States, claims made by Mannatech
with respect to dietary supplements, personal care or any of its other products
may change the regulatory status of the product. For example, in the United
States, the Food and Drug Administration could possibly take the position that
claims made for some of Mannatech's 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 Mannatech sells
that is labeled as an over-the-counter monograph drug. If the Food and Drug
Administration asserts that the product claims cause it to be considered new
drugs or fall within the scope of over-the-counter monographs, Mannatech would
be required to file a new drug application and comply with the applicable
monographs or change the claims made in connection with such products.
Dietary supplements are also 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 research and is pre-approved by
the Food and Drug Administration.
The Federal Trade Commission regulates the marketing practices and
advertising of all of Mannatech's 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 also increased its review of the use of the type of
testimonials Mannatech uses in its 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
14
threatened an enforcement action against Mannatech for the advertising of its
products, there can be no assurance that the Federal Trade Commission will not
question Mannatech's advertising or other operations in the future.
Mannatech cannot predict the contents of any future laws, regulations,
interpretations or applications or the future impact of different governmental
regulations; however, any or all of such requirements maybe costly to
Mannatech. Future regulations could require Mannatech to:
. change in the way it conducts business;
. change its product contents;
. keep additional records;
. increase the available documentation of its product properties; and/or
. increase or use different labeling and scientific proof of product
ingredients, safety or usefulness.
Network Marketing System. Mannatech's network marketing system, which
includes Mannatech's compensation plan, is controlled by a number of federal
and state statutes and regulations, and is administered by the Federal Trade
Commission, various state authorities and foreign government agencies. The
legal requirements controlling network marketing organizations are, in part,
directed to ensure 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 states or provinces limit the amount associates
may earn from commissions on sales by other associates, not directly sponsored
by the associate. Mannatech believes it has and will continue to obtain
regulatory approval of its network marketing system in jurisdictions that
require such approval. If regulatory approval is not required, Mannatech relies
on the advice of counsel to ensure regulatory compliance.
As a result of contents contained in an associate's self-generated
literature, the Michigan Attorney General's office contacted Mannatech in the
summer of 1999 and asked Mannatech to provide data maintained under a consent
decree. In addition, the Attorney General requested documentation of the
measures taken to address the associate's conduct, the measures implemented in
order to prevent a violation of the decree from occurring and the measures that
would be implemented in the future to help ensure compliance with the consent
decree. Mannatech cooperated and believes it complied with this request. In
order to comply with the State of Michigan's Franchise Investment law against
involuntary inventory stockpiling, Mannatech monitors its associates in the
state of Michigan by conducting random audits of its associates in Michigan to
identify evidence of stockpiling and coerced sales. To date, Mannatech has
found no evidence of coerced sales or stockpiling by its associates in
Michigan. Mannatech designed its associates' policies and procedures to provide
no incentive or reward to an associate for engaging in such activities.
In Canada, Mannatech's network marketing system is regulated by both
national and provincial law. Under Canada's Federal Competition Act, Mannatech
must make sure that any representations relating to associate compensation made
to prospective associates constitute fair, reasonable and timely disclosure and
that it meets other legal requirements of the Federal Competition Act.
Mannatech's compensation plan has been reviewed and no objection to its
provisions was received from the appropriate Canadian authorities. All Canadian
provinces and territories other than Ontario have legislation requiring that
Mannatech register or become licensed 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 its
associates be licensed. Mannatech believes it holds all of the required
provincial or territorial direct sellers' licenses.
In Australia, Mannatech's network marketing system is subject to both
federal and state regulation. The compensation plan in Australia is designed to
meet state requirements and the requirements of Australia's Trade Practices
Act. Mannatech's business and trade practices and those of its associates, are
regulated by state law and the Trade Practices Act. Claims and representations
relating to its products are regulated by both the Trade Practices Act and
Australia's Therapeutic Goods Act.
15
In the United Kingdom, Mannatech's network marketing system is subject to
national regulations. The 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 of 1997. Mannatech's business and trade
practices, and those of 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 Mannatech's business
are regulated by the Trading Standards Office.
In Japan, Mannatech's network marketing system, business and trade
practices, compensation plan and associates are governed by the Door-to-Door
Sales law as enacted in 1976 by the Department of Trade and Ministry.
Other Regulations. Mannatech is 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;
. consumption taxes;
. customs duties;
. employee/independent contractor regulations;
. employment and severance pay requirements;
. import/export regulations; and
. antitrust laws.
For example, in many markets Mannatech is restricted in the amounts and
types of rules and termination criteria that it can contractually impose on its
associates. If Mannatech does not comply with these restrictions, it may be
required to pay social security or other tax or tax-type assessments on behalf
of its associates, and may incur severance obligations to terminate the
associate. In some foreign countries, Mannatech may also be subject to such
taxes or payment requirements.
In some countries, including the United States, Mannatech is also governed
by regulations concerning the activities of its associates. Regulators may find
that Mannatech is responsible for its associates' conduct and may request or
require that Mannatech take steps to make certain that its associates comply
with these regulations. The types of conduct governed by regulations include,
in part:
. claims made about products;
. promises or claims of income by Mannatech or its associates; and
. sales of products in markets where the products have not been approved,
licensed or legally allowed for sale.
In some markets, including the United States, improper product claims by its
associates could cause Mannatech's products to be reviewed or re-reviewed by
regulatory authorities. This review could result in Mannatech's 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 its
business, Mannatech has developed formal compliance measures that include
associate disciplinary procedures and internal policies for compliance with the
Food and Drug Administration and Federal Trade Commission rules and
regulations.
16
Mannatech continues to research laws governing associate conduct and to
revise or alter its business system, compensation plans, associate requirements
and other materials and programs as required by laws and regulations in each
market. Mannatech attempts to educate its associates about acceptable business
conduct in each market through policies, procedures, manuals, seminars and
other training materials and programs. Mannatech is able to perform only
limited monitoring procedures to make certain that associates comply with
existing policies, procedures and regulations, Mannatech cannot promise that
all of its associates comply with all existing policies, procedures and
regulations.
Competition
The nutritional supplements industry is large and intensely competitive.
Mannatech competes directly with companies that manufacture and market
nutritional products with similar product lines, including:
. Solgar Vitamin and Herb Company, Inc.;
. Nu Skin Enterprises, Inc.;
. Twinlab Corporation;
. Usana, Inc.;
. Natures Sunshine Products, Inc.; and
. Weider Nutrition International, Inc.
Nutritional supplements are offered for sale in a variety of ways. While
Mannatech believes that consumers appreciate the convenience of ordering
products from home through a sales person or the Internet, the buying habits of
many consumers who purchased products through traditional retail methods are
difficult to change. The number of Mannatech's products in each product
category is also relatively small compared to the wide variety of products
offered by many other nutritional product companies.
Mannatech also competes for new associates with other retail, multilevel
marketing and direct selling companies in the nutritional supplements industry.
Many of its 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.;
. Mary Kay Cosmetics, Inc.;
. Forever Living Products, Inc.; and
. Melaleuca, Inc.
Mannatech believes it competes for new associates by stressing the ease of
its delivery system, the superiority of its compensation plans and its
proprietary and quality products. Because the pool of individuals interested in
direct selling is limited in each market, available recruits are reduced when
other network marketing companies successfully recruit these people into their
businesses.
Employees
As of December 31, 2000, Mannatech employed 263 people in the United States,
of which 10 people occupy executive postions. Mannatech also employs 14 people
in Australia 12 people in the United Kingdom and 15 people in Japan. This
number does not include Mannatech's associates, who are independent contractors
and not employees of Mannatech. Mannatech employees are not unionized and
Mannatech believes it has a good relationship with its employees.
17
Item 2. Properties
Mannatech leases property at several locations for its headquarters and
distribution facilities, including:
Square
Location Feet Term Expiration Date
- -------- ------- --------- -----------------------
Coppell, Texas (corporate
headquarters)...................... 110,000 10 years January 2007
Coppell, Texas (distribution
center)(1)......................... 75,000 10 years January 2008
Dallas, Texas (Internet subsidiary
headquarters)(2)................... 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 2.3 years February and April 2002
- --------
(1) The United States distribution facility is capable of filling 18,000
orders per day and is currently operating at 34% of its full capacity.
(2) Internet Health Group, Inc.'s headquarters is being subleased for the
remaining term of the lease as Mannatech ceased its operations.
Mannatech also has several contract distribution center operations and
believes all of its leased facilities are adequate for its operations in the
immediate future. Mannatech's contract distribution center operations are as
follows:
Orders Current
Square per Day Operating
Location Feet Capacity Capacity
- -------- ------ -------- ---------
Calgary, Alberta...................................... 6,000 3,200 20%
Botany, Australia..................................... 5,000 20,000 10%
Perth, Australia...................................... 1,000 500 2%
Poyle, United Kingdom................................. 5,000 3,200 5%
Tokyo, Japan.......................................... 7,000 10,000 10%
Item 3. Legal Proceedings
In October 1997, Mannatech filed a Notice of Objection to the issuance of a
registered trademark being issued to IntraCell Nutrition, Inc., which had filed
a trademark application for the name, "Manna." On May 19, 2000, Mannatech's
Notice of Opposition to the issuance of a registered trademark issued to
IntraCell Nutrition, Inc. for the name "Manna" was rejected. To date, no action
has been filed against Mannatech by IntraCell, which would contend any
infringement by Mannatech on that of IntraCell. If IntraCell brings any
infringement action against Mannatech, an adverse determination could have an
adverse effect on Mannatech's business, results of operations, financial
condition and liquidity.
On August 20, 1999, Mannatech filed a lawsuit against Dr. Daryl See in the
United States District Court for the Northern District of Texas 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 its products had
been funded by the National Institutes of Health and conducted under the
auspices of the University of California-Irvine. On May 22, 2000, Mannatech
agreed to dismiss all claims against Dr. Daryl See. Under the terms of the
settlement agreement, Dr. See's conduct was restricted regarding Mannatech, its
products and associates.
On February 24, 2000, Ms. Caroline Rivers filed a class action complaint
against Mannatech and three other defendants, in the District Court, County of
Boulder, State of Colorado alleging breach of contract, negligence and that the
defendants were marketing and selling illegal health insurance policies. On
June 29, 2000, Mannatech's Motion for Dismissal was granted and all claims
relating to the uncertified class action complaint were dismissed against
Mannatech.
18
On May 30, 2000, Mannatech filed suit for breach of contract in the United
States District Court of the Northern District of Texas, Dallas Division,
against Gryphon Advisors II, L.L.C., a Delaware limited liability company.
Mannatech alleged amounts billed for out-of-pocket expenses and advisory
service fees totaling $1.6 million were unreasonable and that Gryphon Advisors
breached the advisory agreement. Under the Advisory agreement, Gryphon was to
provide advice on potential financing opportunities, acquisitions, the
financial management of Mannatech, all aspects of its capital structure,
capital-raising transactions and assist Mannatech in evaluating potential
acquisition targets. On June 26, 2000, Gryphon Advisors filed a cross-action
suit for breach of contract and fraud seeking the payment of $1.6 million and
exemplary damages. On March 1, 2001, Mannatech and Gryphon Advisors agreed to
dismiss its respective claims with prejudice and Mannatech agreed to pay
Gryphon Advisors $650,000 over a 12-month period.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market for its Common Stock. On February 12, 1999, Mannatech completed its
initial public offering and on February 16, 1999, its common stock began
trading on the Nasdaq National Market under the symbol "MTEX." As of March 19,
2001 the total number of outstanding shares of its common stock was 24,799,301
and the closing price on such date was $1.156. Pricing information prior to
February 16, 1999 is not available, because Mannatech's common stock was not
publicly traded prior to that date. Set forth below are the high and low sales
prices of Mannatech's common stock as reported on the Nasdaq National Market
for each quarter of the fiscal years ended December 31, 1999 and 2000:
High Low
------- -------
First Quarter (from February 16, 1999)......................... $31.750 $10.500
Second Quarter 1999............................................ $23.875 $10.125
Third Quarter 1999............................................. $13.625 $ 6.563
Fourth Quarter 1999............................................ $ 8.875 $ 4.625
First Quarter 2000............................................. $ 5.313 $ 3.688
Second Quarter 2000............................................ $ 3.938 $ 2.125
Third Quarter 2000............................................. $ 3.875 $ 1.125
Fourth Quarter 2000............................................ $ 2.469 $ 1.234
Holders. As of March 19, 2001, there were approximately 5,011 shareholders
of record who hold Mannatech's common stock directly and approximately 133
security brokers and dealers who hold approximately 37.1% of Mannatech's common
stock on behalf of approximately 9,000 shareholders.
Dividends. Mannatech shareholders received dividends totaling approximately
$1,326,104 in 1999. Mannatech did not pay any dividends in 2000 and does not
intend to pay any dividends in 2001. The Board of Directors intends, from time-
to-time, to reevaluate this policy based on its consolidated results of
operations, financial condition, cash requirements and other factors deemed
relevant. Any future payments of dividends will be subject to the discretion of
Mannatech's 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
None.
19
Item 6. Selected Financial Data
The Selected Financial Data set forth below for each of the five years ended
December 31, 2000 have been derived from and should be read in conjunction with
(A) Mannatech's 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,
----------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(in thousands, except per share amounts)
Consolidated Statement of
Income Data:
Net sales..................... $86,311 $150,570 $164,933 $179,730 $150,006
Gross profit.................. 37,750 64,158 71,143 77,033 61,175
Income (loss) from
operations................... 8,240 14,718 16,057 16,081 (8,439)
Income (loss) before
cumulative effect of
accounting change............ 7,162 10,622 10,054 10,788 (7,139)
Cumulative effect of
accounting change (1)........ -- -- -- -- (210)
Net income (loss)............. 7,162 10,622 10,054 10,788 (7,349)
Earnings (loss) per common
share--basic:
Before cumulative effect of
accounting change........... $ 0.35 $ 0.50 $ 0.45 $ 0.45 $ (0.29)
Cumulative effect of
accounting change(1)......... -- -- -- -- (0.01)
------- -------- -------- -------- --------
Net.......................... $ 0.35 $ 0.50 $ 0.45 $ 0.45 $ (0.30)
======= ======== ======== ======== ========
Earnings (loss) per common
share--diluted:
Before cumulative effect of
accounting change........... $ 0.35 $ 0.47 $ 0.42 $ 0.43 $ (0.29)
Cumulative effect of
accounting change(1)......... -- -- -- -- (0.01)
------- -------- -------- -------- --------
Net.......................... $ 0.35 $ 0.47 $ 0.42 $ 0.43 $ (0.30)
======= ======== ======== ======== ========
Weighted average common and
common equivalent shares
outstanding:
Basic......................... 20,627 21,449 22,102 24,133 24,946
======= ======== ======== ======== ========
Diluted....................... 20,627 22,400 23,659 25,224 24,946
======= ======== ======== ======== ========
Pro Forma Information:(2)
Income before income taxes, as
reported..................... $ 8,356 $ 14,761
Pro forma provision for income
tax expense.................. 3,134 5,683
------- --------
Pro forma net income.......... $ 5,222 $ 9,078
======= ========
Pro forma earnings per common
share:(2)
Basic......................... $ 0.25 $ 0.42
======= ========
Diluted....................... $ 0.25 $ 0.41
======= ========
Other Financial Data:
Capital expenditures (3)...... $ 2,660 $ 9,135 $ 6,098 $ 3,243 $ 4,109
Dividends declared per common
share........................ $ 10.00(4) $ 0.37 $ 0.39 $ 0.06 $ --
Consolidated Balance Sheet
Data:
Total assets.................. $11,410 $ 19,558 $ 26,874 $ 44,779 $ 38,902
Long-term obligations
excluding current portion.... $ -- $ 110 $ 1,056 $ 325 $ 527
- --------
(1) Cumulative effect of accounting change is the result of Mannatech adopting
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" retroactively to January 1, 2000.
(2) The pro forma information shows net income and earnings per share as if all
income earned by Mannatech and certain related partnerships was taxable at
federal and state statutory rates.
20
(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 Mannatech's reorganization (10,000 shares), each of which took
place in 1997. Aggregate dividends declared amounted to $100,000 in 1996.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to assist in the understanding of
Mannatech's financial position and results of its operations for the three
years ended December 31, 2000. This discussion should be read in conjunction
with the Consolidated Financial Statements and related Notes in Item 14,
beginning on page F-1. Unless stated otherwise, all financial information
presented below, throughout this report and in the Consolidated Financial
Statements and related Notes includes Mannatech and all of its subsidiaries on
a consolidated basis.
Overview
Mannatech develops and sells proprietary nutritional supplements and topical
products in the United States, Canada, Australia, the United Kingdom and Japan,
through a worldwide network marketing system of approximately 237,000 active
associates as of March 8, 2001, compared to approximately 269,000 active
associates as of March 9, 2000.
Mannatech's diluted earnings (loss) per share was ($0.30) for the year ended
December 31, 2000 compared to $0.43 per share in 1999. This decrease was
primarily due to the following:
. a decrease in sales of $29.7 million;
. incurring approximately $4.1 million in expenses related to its Internet
website subsidiary, Internet Health Group, Inc., which includes: funding
its operating losses, recording a write-off of its fixed asset software
of $870,000, a write-off of its inventory of $837,000 and the
cancellation of various agreements relating to closing its operations as
of December 29, 2000 totaled approximately $332,000;
. incurring $4.2 million for start-up expenses relating to the expansion
into Japan; and
. accruing $1.0 million for various severance packages related to the
former Chief Operating Officer of International Operations and former
Chief Information Officer.
In 2001, Mannatech increased some of the sale prices of its products,
starter and renewal packs and shipping fees; however, it believes the negative
trend in sales will continue into the first half of 2001. In the future,
Mannatech expects its international operations to account for an increasing
percentage of consolidated net sales. The net sales by country as a percentage
of consolidated net sales were as follows:
Year Ended December 31, U.S. Canada Australia U.K. Japan Total
----------------------- ----- ------ --------- ---- ----- ------
2000.............................. 77.0% 13.5% 5.7% 1.3% 2.5% 100.0%
1999.............................. 76.7% 14.3% 8.8% 0.2% 0.0% 100.0%
1998.............................. 82.5% 16.1% 1.4% 0.0% 0.0% 100.0%
Net sales for the United States, Canada and Australia continue to decrease
as compared to the same period in 1999. Mannatech believes the decrease is due
to a number of factors including the following:
. its associates in the United States, Canada and Australia concentrating
their efforts on the development of Mannatech's presence in the United
Kingdom and Japan;
. some of its associates exploring new competitive Internet networking
companies as another way to supplement their income;
. associates' concerns about recent management changes; and
21
. concerns about the decline of Mannatech's stock price which may, in part
may have resulted from unanticipated selling pressure.
On October 28, 2000, Mannatech introduced a new product, ImmunoStart(TM)
Chewables, which helps trigger immune responses. In March 2001, Mannatech
introduced a chewable multi-vitamin for children called Glyco-Bears(TM).
Mannatech also intends to introduce other new products during 2001, which it
hopes will further complement its current products and help boost net sales.
Mannatech's revenues are primarily derived from sales of its products and
associate starter and renewal packs, which include some combination of its
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
received a $50 credit toward admission to one of Mannatech's corporate events.
In January 2001, Mannatech made changes to some of its packs including a change
in product mix, price changes and the discontinuation of the credit toward
admission. Mannatech tries to offer a comparable associate starter pack in each
country in which it does business; however, each country has different
regulatory guidelines that must be followed and therefore not all of
Mannatech's packs are offered in all countries.
Mannatech adopted Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" ("SAB 101") in the fourth quarter of 2000. Under SAB 101,
Mannatech is required to defer the recognition of revenues until the associate
receives the products shipped. The adoption of SAB 101 resulted in a cumulative
effect of accounting change of approximately $210,000, net of tax of $126,000.
On average, the wholesale value of the nutritional and topical products
contained in each of Mannatech's starter and renewal packs is between 60% and
70% of the total wholesale value of the packs and the remainder of the total
wholesale value consists of various promotional materials and products. If the
pack contains a credit toward admission to a corporate event, the revenue from
the promotional pack is allocated between product revenue and the corporate
event admission based on the proportionate fair value of these items. Mannatech
defers revenue received from the sale of its promotional packs to the extent
that the sales price is greater than the wholesale value of the individual
items included in such packs. Allocated corporate event admission revenues are
also deferred. All deferred revenue is amortized over a twelve-month period.
Total deferred revenue was approximately $845,000 at December 31, 1999 and
$691,000 at December 31, 2000.
Mannatech compensates its 7 associates by commissions and incentives, which
is its most significant expense; however, the commission structure is designed
not to materially exceed 42% of commissionable net sales. Mannatech plans to
announce some changes to its worldwide compensation plans, yet offer more
bonuses and incentive programs and revamp the training program for its
associates. The changes would simplify the compensation plan but would not
change the total commission paid as a percentage of net sales. Commissions and
incentives are paid to associates based on the following:
. associates' placement and position within the compensation plan;
. volume of their direct commissionable sales;
22
. number of new enrolled associates; and
. achievement of certain levels to qualify for incentive programs.
In 2000, Mannatech's United States federal statutory tax rate was 34%.
Mannatech pays taxes in Australia at a statutory tax rate of approximately 36%
and in the United Kingdom at a statutory tax rate of approximately 31%.
Mannatech expects to pay taxes in Japan at a statutory tax rate ranging between
42% and 48%. Mannatech also pays taxes in various state jurisdictions at an
approximate average effective tax rate of 3%. Due to its international
operations, a portion of Mannatech's income will be subject to taxation in the
countries in which it operates; however, it may receive foreign tax credits
that would reduce the amount of United States taxes owed. Mannatech may not be
able to use all of such foreign tax credits in the United States. Mannatech may
also incur net operating losses that may not be fully realizable.
Results of Operations
The following table summarizes Mannatech's consolidated operating results as
a percentage of net sales for each of the years indicated:
Year Ended December 31,
-------------------------
1998 1999 2000
------- ------- -------
Net sales......................................... 100.0% 100.0% 100.0%
Cost of sales..................................... 16.5 16.2 18.0
Commissions....................................... 40.4 40.9 41.2
------- ------- -------
Gross profit.................................... 43.1 42.9 40.8
Operating expenses:
Selling and administrative expenses............. 19.3 19.4 24.7
Other operating costs........................... 13.6 14.5 21.1
Write-off of fixed asset........................ -- -- 0.6
Write-off of deferred offering costs............ 0.5 -- --
------- ------- -------
Income (loss) from operations..................... 9.7 9.0 (5.6)
Interest income................................... (0.1) (0.4) (0.5)
Interest expense.................................. -- 0.1 0.1
Other expense, net................................ 0.3 0.1 0.4
------- ------- -------
Income (loss) before income taxes and cumulative
effect of accounting change...................... 9.5 9.2 (5.6)
Income tax expense (benefit)...................... 3.4 3.2 (0.8)
------- ------- -------
Income (loss) before cumulative effect of
accounting change................................ 6.1 6.0 (4.8)
Cumulative effect of accounting change............ -- -- (0.1)
------- ------- -------
Net income (loss)................................. 6.1% 6.0% (4.9)%
======= ======= =======
Number of starter packs sold...................... 117,003 140,521 107,763
Number of renewal packs sold...................... 58,476 66,119 63,930
------- ------- -------
Total number of packs sold........................ 175,479 206,640 171,693
======= ======= =======
Total associates canceling associate status....... 6,142 5,972 5,952
======= ======= =======
Year ended December 31, 2000 compared with the year ended December 31, 1999
Net Sales. Net sales decreased (16.5%) to $150.0 million in 2000 from $179.7
million in 1999. This decrease was primarily composed of the following:
. a $5.0 million increase from the sale of new products introduced during
2000, including the Optimal Health Pack(TM) and ImmunoStart(TM)
Chewables;
23
. a ($29.8) million decrease in existing product sales resulting from a
decrease in the volume of products sold, and
. a decrease of ($4.9) million from associate pack sales. Of this ($4.9)
million decrease, approximately ($4.2) million resulted from an overall
decrease in the number of associate packs sold to new associates. The
additional decrease of approximately ($700,000) resulted from a decrease
in the number of associate renewal packs sold. Mannatech is exploring
ways and strategies to increase associate pack and renewal pack sales.
Cost of Sales. Cost of sales decreased (6.9%) to $27.1 million in 2000 from
$29.1 million in 1999. As a percentage of net sales, cost of sales increased to
18.0% in 2000 from 16.2% in 1999. The increase in cost of sales as a percentage
of net sales was primarily due to the inventory write-off of Internet Health
Group, Inc. and a change in the product mix of finished goods sold. The dollar
decrease was primarily due to:
. the write-off of approximately $837,000 for the inventory of Internet
Health Group, Inc.;
. a write-off of approximately $300,000 for obsolete sales aids; and
. a decrease in volume of finished goods sold.
Commissions. Commissions consist of payments to associates for sales
activity and downline growth. Commissions decreased (16.2%) to $61.7 million in
2000 from $73.6 million in 1999. As a percentage of net sales, commissions
increased to 41.2% in 2000 from 40.9% in 1999. The increase as a percentage of
sales was the result of the introduction of new incentive programs during 2000.
The dollar decrease was the direct result of a decrease in the number of
associate packs sold, which was partially offset by the introduction of new
incentive programs for associates, which includes the car bonus and "fast-
start" programs.
Gross Profit. Gross profit decreased (20.5%) to $61.2 million in 2000 from
$77.0 million in 1999. As a percentage of net sales, gross profit decreased to
40.8% in 2000 from 42.9% in 1999. These changes were primarily attributable to
the factors described above.
Selling and Administrative Expenses. Selling and administrative expenses
include wages, bonuses, shipping and freight and marketing expenses and are a
mixture of both fixed and variable expenses. Selling and administrative
expenses increased 6.0% to $37.0 million in 2000 from $34.9 million in 1999. As
a percentage of net sales, selling and administrative expenses increased to
24.7% in 2000 from 19.4% in 1999 due to a decrease in net sales, which did not
reduce the fixed and semi-variable expenses. The dollar increase was due
primarily to the following:
. a $1.4 million increase in wages and contract labor, primarily from
various pay raises, an increase in personnel for the United Kingdom and
Japan and hiring a new Chief Executive Officer and a new Chief
Information Officer;
. a $1.0 million charge for severance packages related to the former Chief
Information Officer and former Chief Operating Officer of International
Operations;
. a decrease in freight cost of ($1.0) million;
. a $1.7 million increase in expenses related to hosting various events
related to international expansion; and
. a decrease in management bonuses of ($1.0) million.
Other Operating Costs. Other operating costs include utilities,
depreciation, travel, office supplies and printing expenses. Other operating
costs increased 21.5% to $31.7 million in 2000 from $26.1 million in 1999. As a
percentage of net sales, other operating costs increased to 21.1% in 2000 from
14.5% in 1999. The dollar increase was primarily due to the following:
. a $4.6 million increase for travel, accounting, building rent and
consulting services related to the international expansion;
24
. recording $600,000 for the settlement of the Gryphon Advisors L.L.C.
lawsuit; and
. paying Mr. Samuel L. Caster, the former President, $350,000 for
consulting services, as described in the Notes to the Consolidated
Financial Statements, in Item 14, of this report, beginning on page F-1.
Write-off of Fixed Asset. In the second quarter of 2000, Mannatech recorded
an impairment charge of $870,000 as it determined the fixed asset software of
Internet Health Group. Inc., provided no future benefit. On December 29, 2000,
Internet Health Group, Inc. ceased operations.
Interest Income. Interest income decreased (4.1%) to $684,000 in 2000 from
$713,000 in 1999. As a percentage of net sales, interest income increased to
0.5% in 2000 from 0.4% in 1999. The dollar decrease was primarily due to using
investments to fund Mannatech's current year operations, including its
international expansion.
Interest Expense. Interest expense decreased (54.0%) to $69,000 in 2000 from
$150,000 in 1999. As a percentage of net sales, interest expense remained the
same at 0.1% in 2000 and in 1999. The dollar decrease was primarily due to the
repayment of the existing loan and leases during the year.
Other Expense, Net. Other expense may consist of penalties related to tax
payments for payroll, income and sales, foreign currency translation
adjustments and miscellaneous non-operating items. Other expense increased
389.5% to $558,000 in 2000 from $114,000 in 1999. As a percentage of net sales,
other expense increased to 0.4% in 2000 from 0.1% in 1999. For the year ended
December 31, 2000, other expense consisted primarily of translation exchange
losses of $359,000 and $36,000 in sales tax payments and tax penalties. In
1999, other expense consisted primarily of federal tax penalties.
Income Tax Expense (Benefit). Income tax expense (benefit) decreased to
($1.2) million in 2000 from $5.7 million in 1999. Mannatech's effective tax
rate decreased to 14.8% in 2000 from 34.7% in 1999. Mannatech's effective tax
rate decreased primarily as a result of the establishment of a valuation
allowance for the net operating losses from its Japan subsidiary.
Cumulative Effect of Accounting Change. In the fourth quarter of 2000,
Mannatech adopted Staff Accounting Bulletin No. 101 "Revenue Recognition in
Financial Statements" ("SAB 101") which resulted in a charge of $210,000, net
of tax of $126,000 for the cumulative effect of the accounting change. SAB 101
requires Mannatech to defer the recognition of revenues until the associates
receive products shipped by Mannatech.
Net Income (loss). Net income (loss) decreased to ($7.3) million in 2000
from $10.8 million in 1999. As a percentage of net sales, net income decreased
to (4.9%) in 2000 from 6.0% in 1999. The decrease was due to net sales
decreasing by 16.5%, expenses incurred related to its international expansion,
recording various severance packages and discontinuing operations of Internet
Health Group, Inc.
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;
. 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 year 1999; and
. 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 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 the
international expansion and hiring a marketing firm to concentrate on
the associate renewal program.
25
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 sales as a
percentage of net sales was primarily due to changes in the product mix of
finished goods sold. The dollar increase was primarily due to:
. an increase in volume of finished goods sold;
. the recording of $160,000 for recovery of inventory in 1998 which had
been written off in 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 of operations in Australia in October 1998; and
. the start 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
include wages, bonuses, shipping and freight 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 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 increase was primarily due to the following:
. a $750,000 charge for the cancellation of the remaining incentive
contract with Mr. 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 the international
expansion;
. $350,000 for settlement of various lawsuits;
. $225,000 incurred related to the secondary offering for certain existing
shareholders; and
. $200,000 for additional research and development costs related to
opening Mannatech's laboratory facility.
Write-off of Deferred Offering Costs. During August 1998, Mannatech withdrew
its original underwritten institutional/retail offering and recorded a one-time
charge of approximately $847,000.
Interest Income. Interest income increased 675.0% 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 was invested in interest
bearing accounts and certain investments.
26
Interest Expense. Interest expense increased 183.0% 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
of two lease agreements with a bank to purchase various equipment for the
warehouse and laboratory facility.
Other Expense, Net. Other expense consists of penalties related to tax
payments for payroll, income and sales and miscellaneous non-operating 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. In 1999, other expense consisted primarily of federal tax penalties. In
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, Mannatech's effective tax rate decreased to 34.7% in
1999 from 36.4% in 1998. The 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 which averaged
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%, which was partially offset by expenses incurred related to
the international expansion and cancellation of the remaining incentive
compensation contract for $750,000.
Seasonality and Selected Quarterly Statements of Operations
Mannatech believes the impact of seasonality on its results of operations is
minimal. Mannatech has and may continue to experience variations on its
quarterly results of operations in response to, among other things:
. 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 its products and overall operations.
As a result of these and other factors, the quarterly results may vary
significantly in the future. Period-to-period comparisons should not be relied
upon as an indication of future performance since Mannatech can give no
assurances that the revenue growth rate in new markets will follow its
historical pattern. The market price of Mannatech's common stock may also be
adversely affected by the above factors.
27
The following table sets forth the unaudited consolidated quarterly
statement of income data for the periods indicated. In Mannatech's opinion,
this information has been prepared on the same basis as its audited
Consolidated Financial Statements set forth in this report and includes all
necessary adjustments, consisting only of normal recurring adjustments, that
are considered 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. Mannatech's 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,
1999 1999(1) 1999(2) 1999(3)
------------- ------------- ------------- -------------
(in millions, except per share and pack information)
Net sales............... $ 42.6 $ 45.0 $ 45.8 $ 46.3
Gross profit............ 18.4 19.2 19.8 19.6
Income before income
taxes.................. 4.6 3.4 5.0 3.5
Income tax expense...... (1.7) (1.2) (1.8) (1.0)
Net income ............. 2.9 2.2 3.2 2.5
Earnings per share (8)
Basic................. $ 0.13 $ 0.09 $ 0.13 $ 0.10
============= ============= ============= =============
Diluted............... $ 0.12 $ 0.08 $ 0.12 $ 0.10
============= ============= ============= =============
Number of starter packs
sold................... 32,530 33,279 31,299 43,413
Number of renewal packs
sold................... 14,604 13,189 20,689 17,637
------------- ------------- ------------- -------------
Total number of packs
sold................... 47,134 46,468 51,988 61,050
============= ============= ============= =============
Total associates
canceling associates'
status................. 1,448 1,336 1,608 1,580
============= ============= ============= =============
As
As As As As reported As
reported Restated(7) reported Restated (7) Sept. Restated (7)
Mar. 31, Mar. 31, June 30, June 30, 30, Sept. 30, Dec 31,
2000 2000 2000(4) 2000(4) 2000(5) 2000(5) 2000(6)
-------- ----------- -------- ------------ -------- ------------ -------
(in millions, except per share and pack information)
Net sales............... $ 40.3 $ 39.7 $ 39.3 $ 39.0 $ 36.2 $ 37.4 $ 33.9
Gross profit............ 16.5 16.3 16.9 16.7 14.8 15.3 12.9
Loss before income taxes
and cumulative effect.. (0.8) (1.0) (0.8) (0.9) (2.1) (1.6) (4.9)
Income tax benefit...... 0.3 0.4 0.2 0.2 0.6 0.4 0.2
Cumulative effect of
accounting change (7).. (--) (0.2) -- -- -- -- --
Net loss................ $ (0.5) $ (0.8) $ (0.6) $ (0.7) $ (1.5) $ (1.2) $ (4.6)
Earnings per share (8)
Basic................. $ (0.02) $ (0.03) $ (0.02) $ (0.03) $ (0.06) $ (0.05) $ (0.19)
======= ======= ======= ======= ======= ======= =======
Diluted............... $ (0.02) $ (0.03) $ (0.02) $ (0.03) $ (0.06) $ (0.05) $ (0.19)
======= ======= ======= ======= ======= ======= =======
Number of starter packs
sold................... 32,438 32,438 31,135 31,135 24,493 24,493 19,697
Number of renewal packs
sold................... 18,337 18,337 14,227 14,227 16,215 16,215 15,151
------- ------- ------- ------- ------- ------- -------
Total number of packs
sold................... 50,775 50,775 45,362 45,362 40,708 40,708 34,848
======= ======= ======= ======= ======= ======= =======
Total associates
canceling associates'
status................. 2,496 2,496 1,225 1,225 1,182 1,182 1,049
======= ======= ======= ======= ======= ======= =======
- --------
(1) For the second quarter of 1999, income before income taxes was reduced
by a $750,000 charge for the cancellation of an incentive contract,
$400,000 for consulting services related to international expansion,
$200,000 for settlement of a lawsuit and $100,000 for additional
research and development costs related to the opening of the laboratory
facility.
(2) 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 Mannatech's common stock for sale by certain shareholders.
28
(3) 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.
(4) For the second quarter of 2000, income before taxes was reduced by $1.2
million for the start-up of Japan operations, $870,000 for the write-
off of software related to Internet Health Group, Inc. and $1.0 million
related to its ongoing operations.
(5) For the third quarter of 2000, income before income taxes was reduced
by $800,000 million related to operating Internet Health Group, Inc.
and $1.3 million related to the opening of Japan.
(6) For the fourth quarter of 2000, income before taxes was reduced by $1.0
million for severance expenses related to the former Chief Operating
Officer of International Operations and former Chief Information
Officer and $1.1 million related to the ceasing operations of Internet
Health Group, Inc.
(7) All of the 2000 quarters have been adjusted for the adoption of Staff
Accounting Bulleting No. 101 "Revenue Recognition in Financial
Statements," in the fourth quarter of 2000.
(8) Computed on the basis described in Note 1 in the Notes to the
Consolidated Financial Statements.
Liquidity and Capital Resources
In February 1999, Mannatech received approximately $9.2 million in net
proceeds from the sale of its common stock in its initial public offering. In
the initial public offering, certain existing shareholders sold 1,556,016
shares and Mannatech sold 1,500,000 shares of its common stock, at $8.00 per
share. Mannatech used approximately $6.3 million of the proceeds from the
initial public offering for international expansion, including product
registration, initial inventory requirements and similar items. The remaining
$2.9 million was used to fund working capital and for general corporate
purposes. During 1999, Mannatech also received $641,271 from the exercise of
475,015 outstanding warrants at $1.35 per share and received $785,600 from the
exercise of 563,774 stock options at a prices per share ranging from $1.35 to
$2.00. During 2000, Mannatech received $363,000 from the exercise of 260,700
stock options at prices per share ranging from $1.35 to $2.00.
Mannatech's primary capital requirement is to fund working capital that
historically been financed through operations. As a result of expenditures on
its facilities, equipment and personnel to support its international
expansion, Mannatech's working capital decreased from $11.7 million at
December 31, 1999 to $7.3 million at December 31, 2000. In 1999, Mannatech
invested approximately $600,000 in the expansion into the United Kingdom.
Mannatech paid approximately $1.3 million in dividends to its shareholders in
1999. In 2000, Mannatech invested approximately $4.4 million in its expansion
into Japan and $4.1 million to fund operations for Internet Health Group, Inc.
Mannatech plans to fund its 2001 working capital through its operations.
In March and August 1998, Mannatech 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 leased assets, are payable in 36
monthly installments and contain various financial covenants. At December 31,
2000, Mannatech violated the annual cash flow coverage ratio covenant but
obtained a waiver from the bank on March 14, 2001 that waived this violation
at December 31, 2000. In July 1998, Mannatech entered into a 36-month,
unsecured note payable with a finance company to finance a 3-year product
liability insurance premium. The initial principal amount of this note was
$435,670, with interest at 8.0% and due in monthly installments through
December 2000.
Net cash provided by (used in) operating activities was $18.1 million, $4.8
million and ($4.6) million in 1998, 1999 and 2000, respectively. In 1998,
operating activities included net income and increases in accrued operating
expenses and inventory. In 1999, operating activities consisted of net income,
an increase in inventory, a decrease in accured operating expenses and
recording the tax benefit related to the exercise of warrants and options. In
2000, operating activities included a net loss and increases in income tax
receivable and accrued operating expenses. The increase in accrued operating
expenses was the result of recording severance packages and closing operations
of Internet Health Group, Inc.
Net cash (used in) investing activities was ($4.4) million, ($4.6) million
and ($1.7) million in 1998, 1999 and 2000, respectively. In 1998, these
activities consisted of the relocation of the Texas distribution center, the
29
build-out of the research and development facility and the development and
implementation of its proprietary software. In 1999, these activities
consisted primarily of purchases of computer hardware, continued internal
development of Mannatech's propriety software, furnishings for the Australian
and United Kingdom operations and interest from investments of the net
proceeds from its initial public offering, which were partially offset by the
repayment of notes receivable due from certain shareholders of approximately
$944,000. In 2000, these activities consisted of approximately $4.1 million
for purchases of fixed assets primarily for the Japan operations, offset by
the maturities of investments of $2.3 million and the repayment of the notes
receivable due from certain shareholders of approximately $124,000. Mannatech
believes its facilities and software programs should be sufficient for its
immediate needs.
Net cash provided by (used in) financing activities totaled ($12.9)
million, $10.6 million and $0.6 million in 1998, 1999 and 2000, respectively.
In 1998, Mannatech paid dividends on a monthly basis to its 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. During 1999,
gross initial public offering proceeds of approximately $12.0 million were
received and proceeds of $786,000 were received from the exercise of certain
stock options, which were partially offset by the repayment of capital leases
and a note payable of approximately $900,000. During 2000, proceeds of
approximately $363,000 were received from the exercise of stock options, which
was partially offset by the repayment of capital leases and a note payable of
$730,000, issuance of a $500,000 loan and lock-up agreement to Mr. Charles E.
Fioretti and recording cash overdrafts of approximately $1.5 million. Under
the terms of the lock-up and repurchase agreement, Mannatech will be required
for the next 12 months, beginning March 3, 2001 to purchase $83,333.33 worth
of common stock from Mr. Charles Fioretti valued at 90% of the fair market
price, in exchange, Mr. Charles Fioretti will be prohibited from trading his
shares of Mannatech common stock through March 2, 2002, unless approved by the
Board of Directors.
Mannatech believes that its existing capital resources, including gross
cash provided by operating activities, bank borrowings and suspension of
dividend payments to shareholders, should be adequate to fund its operations
for at least the next 12 months. Mannatech has no present commitments or
agreements with respect to any acquisitions or purchases of manufacturing
facilities or new technologies. Future changes could occur that would consume
available capital resources faster than anticipated. Mannatech's capital
requirements depend on numerous factors, including:
. the introduction of new products;
. changes in the number of associates and the retention rate of the
associate base; and
. research and development efforts.
If existing capital resources are insufficient to meet Mannatech's capital
requirements for 2001, Mannatech would be required to raise additional funds,
which it cannot assure will be available on favorable terms, if at all.
Impact of Inflation
Mannatech believes that inflation historically has not had a material
impact on its operations or profitability. Mannatech expanded into Australia
in 1998, into the United Kingdom in 1999 and into Japan in 2000. Revenues and
expenses in foreign markets are currently translated using historical and
weighted-average currency exchange rates; therefore a weakening United States
dollar would have a positive impact whereas a strengthening United States
dollar would have a negative impact on translations of its foreign operations.
Recent Financial Accounting Standards Board Statements
30
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 133, "Accounting for Derivative, Instruments and
Hedging Activities" ("FAS 133"). This statement establishes accounting and
reporting standards for hedging activites and derivative financial instruments,
including certain derivative financial instruments embedded in other contracts.
In June 1999, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 137, which defers the effective date of FAS No. 133 to
fiscal years beginning after June 15, 2000. In June 2000, the Financial
Accounting Standards Board issued Financial Accounting Standard No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
which addressed certain issues causing implementation difficulties. Mannatech
has adopted FAS 133 and the corresponding amendments on January 1, 2001. The
adoption of this statement is not expected to have a material impact on
Mannatech's consolidated financial position, results of operation or cash
flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Mannatech does not engage in trading market-risk-sensitive instruments and
does not purchase as investments, as hedges, or for purposes "other than
trading," instruments that are likely to expose it to certain types of market
risk, including interest rate, commodity price or equity price risk. Mannatech
does have investments but there has been no material change in its exposure to
interest rate risk on its investments. Mannatech has not issued any debt
instruments, entered into any forward or futures contracts, purchased any
options or entered into any swaps.
Mannatech is 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 may affect Mannatech's financial results. Changes
in exchange rates may positively or negatively affect its financial results, as
expressed in United States dollars. When the United States dollar increases
against currencies in which products are sold or a weakening exchange rate
against currencies in which Mannatech incurs costs, net sales or costs may be
adversely affected. Mannatech has established policies, procedures and internal
processes governing the management of its market risk and the use of any
financial instruments to manage its 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 Mannatech's
assets, obligations and projected transactions denominated in foreign currency.
Based upon its overall currency rate exposure at December 31, 2000, Mannatech
does not believe that its exposure to exchange rate fluctuations will have a
material impact on the consolidated financial position, results of operations
or cash flows. The foreign currencies in which Mannatech has exposure to
foreign currency exchange rate risk include Australia, the United Kingdom and
Japan. The high and low exchange rates to the United States dollar, for each of
these countries, for the year ended December 31, 2000 were as follows:
Country/Currency High Low
---------------- -------- --------
Australia/Dollar.................... $0.66850 $0.50730
United Kingdom/British Pound........ $1.65690 $1.39450
Japan/Yen........................... $0.00987 $0.00870
Given the uncertainty of the exchange rate fluctuation against the United
States dollar, Mannatech cannot determine the dollar effect, if any, of the
fluctuation on future business, product pricing, results of operations or
financial condition. All statements other than historical information
incorporated in this Item 7A are forward-looking statements. The actual impact
of future market changes may 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 Mannatech required by
this Item 8 are set forth on the pages indicated in Item 14, of this report,
beginning on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
31
PART III
The information required by Items 10, 11, 12 and 13 of Part III is
incorporated by reference to Mannatech's definitive proxy statement to be filed
with the Securities and Exchange Commission no later than April 30, 2001.
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 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, 1999 and 2000........... F-3
Consolidated Statements of Operations for the Years ended December 31,
1998, 1999 and 2000................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the
Years ended December 31, 1998, 1999 and 2000.......................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1998, 1999 and 2000................................................... F-6
Notes to Consolidated Financial Statements............................. F-7
(a) 2.Financial Statement Schedules
Financial statement schedules have been omitted because they are either 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 May 19,
1998, incorporated herein by reference to Exhibit 3.1 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Commission on October 28, 1998.
3.2 Amended and Restated Bylaws of Mannatech dated April 27, 1999,
incorporated herein by reference to Exhibit 4.3 to Mannatech's Form S-1
(File No. 333-77227) filed with the Commission on April 28, 1999.
3.3 First Amendment to the Bylaws of Mannatech dated October 20,1999,
incorporated herein by reference to Exhibit 3.4 to Mannatech's Form 10-Q
(File No. 000-24657) filed with the Commission on August 14, 2000.
3.4 Second Amendment to the Bylaws of Mannatech dated February 22, 2000.*
3.5 Third Amendment to the Bylaws of Mannatech dated March 6, 2000.*
3.6 Fourth Amendment to the Bylaws of Mannatech dated November 17, 2000.*
4.1 Specimen Certificate representing Mannatech's 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.
32
10.3 2000 Option Plan dated June 19, 2000, incorporated by reference to
Exhibit 10.26 to Mannatech's Form 10-Q (File No. 000-24657) filed with
the Commission on November 14, 2000.
10.4 Exchange Agreement by and among Mr. Gary Watson, Mr. Patrick D. Cobb,
Mr. Samuel L. Caster, Mr. Charles E. Fioretti and Mr. William C.
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.
10.5 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.
10.6 Schedule of additional directors signatories relating to the Form of
Indemnification Agreements in Exhibit 10.9 above, incorporated herein by
reference to Exhibit 10.7 to Mannatech's Form 10-K (File No.000-24657)
filed with the Commission on March 30, 2000.
10.7 Letter of Understanding Regarding Development of Proprietary Information
for Mannatech effective as of August 1, 1997, as amended, by and between
Mr. 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.
10.8 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.
10.9 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.
10.10 Assignment of Patent Rights dated October 30, 1997 by and among Mr. Bill
H. McAnalley, Ph.D., Mr. H. Reginald McDaniel, Mr. D. Eric Moore, Ms.
Eileen P. Vennum and Mr. 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.
10.11 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.
10.12 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.
10.13 Supply Agreement effective as of January 12, 2000 by and between
Mannatech and Caraloe, Inc. incorporated herein by reference to Exhibit
10.7 to Mannatech's Form 10-K (File No. 000-24657) filed with the
Commission on March 30, 2000.
10.14 Letter of Agreement from Mannatech to Mr. 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.
10.15 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.
10.16 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.
33
10.17 Individual Guaranty of Mr. 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.
10.18 Individual Guaranty of Mr. 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.
10.19 Form of Employment Agreement to be entered into between Mannatech and
each of Mr. Patrick D. Cobb, Mr. Anthony E. Canale, Mr. Bill H.
McAnalley and Ms. 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.
10.20 Employment Agreement dated November 1, 1999, entered into between
Mannatech and Mr. Terry L. Persinger, incorporated herein by reference
to Exhibit 10.7 to Mannatech's Form 10-K (File No. 000-24657) filed with
the Commission on March 30, 2000.
10.21 Form of Employment Agreement entered into between Mannatech and Mr.
Robert M. Henry, incorporated by reference to Exhibit 10.24 to
Mannatech's Form 10-Q (File No. 000-24657) filed with the Commission on
May 15, 2000.
10.22 Employment Agreement dated September 21, 2000, entered into between
Mannatech and Mr. Charles E. Fioretti.*
10.23 Employment Agreement dated February 19, 2001, entered into between
Mannatech and Mr. C. Armando Contreras.*
10.24 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $33,316.02 made by Mr. Patrick D. Cobb, 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.
10.25 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.10 made by Mr. 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.
10.26 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.09 made by Mr. 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.
10.27 Consultancy Agreement dated June 1, 2000 by and between Mannatech,
Incorporated and Mr. Samuel L. Caster incorporated by reference to
Exhibit 10.25 to Mannatech's Form 10-Q (File No. 000-24657) filed with
the Commission on August 14, 2000.
10.28 Lock-up Agreement and Promissory Note for $500,000 between Mannatech and
Mr. Charles E. Fioretti, dated August 8, 2000, incorporated by reference
to Exhibit 10.27 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on August 14, 2000.
10.29 Separation Agreement dated February 28, 2001 with Mr. Anthony E.
Canale.*
21 List of Subsidiaries*
23 Consent of PricewaterhouseCoopers LLP*
- --------
* Filed herewith.
(b) Reports on Form 8-K.
None.
(c) Item 601 Exhibits
The exhibits required by Item 601 of Regulation S-K are set forth in (a) 3
above.
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are set forth
in (a) 2 above.
34
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 April 2, 2001.
Mannatech, Incorporated
/s/ Robert M. Henry
By: _________________________________
Robert M. Henry
Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on April 2, 2001, on
behalf of the registrant and in the capacities indicated.
Signature Title
--------- -----
/s/ Robert M. Henry Chief Executive Officer and Director
______________________________________ (principal executive officer)
Robert M. Henry
/s/ Terry L. Persinger President, Chief Operating Officer and
______________________________________ Director
Terry L. Persinger
/s/ Stephen D. Fenstermacher Senior Vice President and Chief
______________________________________ Financial Officer (principal
Stephen D. Fenstermacher accounting officer)
/s/ Charles E. Fioretti Chairman of the Board
______________________________________
Charles E. Fioretti
/s/ Samuel L. Caster Director
______________________________________
Samuel L. Caster
/s/ Anthony E. Canale Director
______________________________________
Anthony E. Canale
/s/ Steven A. Barker Ph.D. Director
______________________________________
Steven A. Barker Ph.D.
/s/ James M. Doyle, Jr. Director
______________________________________
James M. Doyle, Jr.
/s/ Jules T. Zimmerman Director
______________________________________
Jules Zimmerman
/s/ Roger Beutner Director
______________________________________
Roger Beutner
35
MANNATECH, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Annual Financial Statements:
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000............ F-3
Consolidated Statements of Operations for the Years ended December 31,
1998, 1999 and 2000.................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years
ended
December 31, 1998, 1999 and 2000....................................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1998, 1999 and
2000................................................................... 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 operations, 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, 1999 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
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 of America, 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 our opinion.
As discussed in Note 1 of the Notes to Consolidated Financial Statements,
the Company changed its method of accounting for revenue recognition as a
result of the adoption of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
PricewaterhouseCoopers LLP
Dallas, Texas
February 27, 2001, except as to Note 8,
which is as of March 14, 2001
F-2
MANNATECH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
December 31,
----------------
1999 2000
------- -------
ASSETS
Cash and cash equivalents.................................... $11,576 $ 5,736
Short-term investments....................................... 1,388 --
Accounts receivable, less allowance for doubtful accounts of
$58 in 1999 and 2000........................................ 275 692
Income tax receivable........................................ -- 2,300
Current portion of notes receivable-shareholders............. 158 187
Inventories.................................................. 13,318 13,326
Prepaid expenses and other current assets.................... 727 745
Deferred tax assets.......................................... 564 1,201
------- -------
Total current assets....................................... 28,006 24,187
Property and equipment, net.................................. 14,093 13,324
Notes receivable-shareholders, excluding current portion..... 543 390
Other assets................................................. 1,231 1,000
Long-term investments........................................ 906 1
------- -------
Total assets............................................... $44,779 $38,902
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of capital leases and note payable........... $ 732 $ 301
Accounts payable............................................. 1,892 4,309
Accrued expenses............................................. 13,721 12,288
------- -------
Total current liabilities.................................. 16,345 16,898
Capital leases and note payable, excluding current portion... 325 27
Accrued compensation......................................... -- 500
Deferred tax liabilities..................................... 817 1,752
------- -------
Total liabilities.......................................... 17,487 19,177
------- -------
Commitments and contingencies (Note 13)...................... -- --
Commitment to repurchase common stock........................ -- 1,000
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares --
authorized, no shares issued and outstanding................ --
Common stock, $0.0001 par value, 99,000,000 shares
authorized, 24,790,601 shares issued and 24,774,293
outstanding in 1999; 25,051,301 issued and 24,929,173
outstanding in 2000......................................... 2 3
Additional paid-in capital................................... 17,347 17,949
Note receivable from shareholder............................. -- (167)
Retained earnings............................................ 10,147 2,798
Accumulated other comprehensive loss--foreign currency
translation adjustment...................................... -- (321)
------- -------
27,496 20,262
Less treasury stock, at cost, 16,308 shares in 1999 and
122,128 shares in 2000 and a commitment to purchase common
stock of $1,000............................................. (204) (1,537)
------- -------
Total shareholders' equity................................. 27,292 18,725
------- -------
Total liabilities, commitment to repurchase common stock
and shareholders' equity.................................. $44,779 $38,902
======= =======
See accompanying notes to consolidated financial statements.
F-3
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share information)
For the Year Ended
December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Net sales....................................... $164,933 $179,730 $150,006
Cost of sales................................... 27,140 29,117 27,088
Commissions..................................... 66,650 73,580 61,743
-------- -------- --------
93,790 102,697 88,831
-------- -------- --------
Gross profit.................................. 71,143 77,033 61,175
-------- -------- --------
Operating expenses:
Selling and administrative expenses........... 31,880 34,861 37,038
Other operating costs......................... 22,359 26,091 31,706
Write-off of fixed asset...................... -- -- 870
Write-off of deferred offering costs.......... 847 -- --
-------- -------- --------
Total operating expenses.................... 55,086 60,952 69,614
-------- -------- --------
Income (loss) from operations................... 16,057 16,081 (8,439)
Interest income................................. (92) (713) (684)
Interest expense................................ 53 150 69
Other expense, net.............................. 299 114 558
-------- -------- --------
Income (loss) before income taxes and cumulative
effect of accounting change.................... 15,797 16,530 (8,382)
Income tax expense (benefit).................... 5,743 5,742 (1,243)
-------- -------- --------
Income (loss) before cumulative effect of
accounting change.............................. 10,054 10,788 (7,139)
Cumulative effect of accounting change, net of
tax of $126.................................... -- -- (210)
-------- -------- --------
Net income (loss)............................... $ 10,054 $ 10,788 $ (7,349)
======== ======== ========
Earnings (loss) per common shares -- Basic:
Before cumulative effect of accounting
change....................................... $ 0.45 $ 0.45 $ (0.29)
Cumulative effect of accounting change........ -- -- (0.01)
-------- -------- --------
Net........................................... $ 0.45 $ 0.45 $ (0.30)
======== ======== ========
Earnings (loss) per common share -- Diluted:
Before cumulative effect of accounting
change....................................... $ 0.42 $ 0.43 $ (0.29)
Cumulative effect of accounting change........ -- -- $ (0.01)
-------- -------- --------
Net........................................... $ 0.42 $ 0.43 $ (0.30)
======== ======== ========
Weighted-average common shares outstanding:
Basic......................................... 22,102 24,133 24,946
======== ======== ========
Diluted....................................... 23,659 25,224 24,946
======== ======== ========
Dividends declared per common share............. $ 0.39 $ 0.06 $ --
======== ======== ========
See accompanying notes to consolidated financial statements.
F-4
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(in thousands, except per share information)
Accumulated
Common stock Additional Notes other Treasury stock Total
----------------- paid-in receivable from Retained comprehensive -------------- shareholders'
Shares Par value capital shareholders earnings income (loss) Shares Amounts equity
------ --------- ---------- --------------- -------- ------------- ------ ------- -------------
Balance at
December 31, 1997.... 22,102 $ 2 $ 2,632 $ (636) $ (754) $ -- -- $ -- $ 1,244
Dividends declared
($0.39 per share)... -- -- -- -- (8,615) -- -- -- (8,615)
Comprehensive income:
Net income........... -- -- -- -- 10,054 -- -- -- 10,054
------ ------- ------- ------- ------- ------- ------ ------- --------
Balance at
December 31, 1998.... 22,102 2 2,632 (636) 685 -- -- -- 2,683
Dividends declared
($0.06 per share)... -- -- -- -- (1,326) -- -- -- (1,326)
Repayment of notes
receivable--
shareholders........ -- -- -- 636 -- -- -- -- 636
Net proceeds from
offering............ 1,500 -- 9,241 -- -- -- -- -- 9,241
Exercise of
warrants............ 475 -- 941 -- -- -- -- -- 941
Tax benefit from
exercise of warrants
and stock options... -- -- 3,543 -- -- -- -- -- 3,543
Tender of common
stock for exercise
of stock options.... 133 -- 204 -- -- -- 16 (204) --
Proceeds from stock
option exercises.... 564 -- 786 -- -- -- -- -- 786
Comprehensive income:
Net income........... -- -- -- -- 10,788 -- -- -- 10,788
------ ------- ------- ------- ------- ------- ------ ------- --------
Balance at
December 31, 1999.... 24,774 2 17,347 -- 10,147 -- 16 (204) 27,292
Proceeds from stock
option exercises.... 261 1 362 -- -- -- -- -- 363
Tax benefit from
exercise of warrants
and stock options... -- -- 240 -- -- -- -- -- 240
Issuance of note
receivable--
shareholders........ -- -- -- (500) -- -- -- -- (500)
Repayment of note
receivable--
shareholders........ (106) -- -- 333 -- -- 106 (333) --
Commitment to
repurchase common
stock from
shareholder......... -- -- -- -- -- -- -- (1,000) (1,000)
Comprehensive loss:
Foreign currency
translation
adjustment.......... -- -- -- -- -- (321) -- -- (321)
Net loss............. -- -- -- -- (7,349) -- -- -- (7,349)
------ ------- ------- ------- ------- ------- ------ ------- --------
Balance at December
31, 2000............ 24,929 $ 3 $17,949 $ (167) $ 2,798 $ (321) 122 $(1,537) $ 18,725
====== ======= ======= ======= ======= ======= ====== ======= ========
See accompanying notes to consolidated financial statements.
F-5
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31,
-----------------------------------
1998 1999 2000
----------- ---------- ----------
Cash flows from operating activities:
Net income (loss)........................ $ 10,054 $ 10,788 $ (7,349)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization........... 2,227 2,969 3,738
Write-off of fixed asset software....... -- -- 870
Loss on disposal of assets.............. 352 287 157
Tax benefit from exercise of stock
options exercised...................... -- 3,543 240
Write-off of deferred offering costs.... 847 -- --
Write-off of receivable from related
party.................................. -- 125 --
Cumulative effect of accounting change,
net of tax.............................. -- -- 210
Deferred income tax expense (benefit)... 934 (790) 298
Changes in operating assets and
liabilities:
Accounts receivable..................... 437 (212) (428)
Income tax receivable................... -- -- (2,174)
Inventories............................. (1,552) (6,443) 82
Prepaid expenses and other current
assets................................. 96 (281) (23)
Other assets............................ (41) (283) 230
Accounts payable........................ 1,193 (3,589) 981
Accrued expenses........................ 3,523 (1,342) (1,393)
----------- ---------- ----------
Net cash provided by (used in)
operating activities................. 18,070 4,772 (4,561)
----------- ---------- ----------
Cash flows from investing activities:
Acquisition of property and equipment... (4,626) (3,243) (4,109)
Repayment by shareholders/related
parties................................ -- 944 124
(Purchase) Maturities of investments and
restricted cash........................ 200 (2,294) 2,293
----------- ---------- ----------
Net cash used in investing
activities........................... (4,426) (4,593) (1,692)
----------- ---------- ----------
Cash flows from financing activities:
Cash overdrafts......................... -- -- 1,451
Payment of dividends.................... (9,937) (1,326) --
Proceeds from the initial public
offering............................... -- 12,000 --
Proceeds from stock options exercised... -- 786 363
Repayment of capital lease obligations.. (301) (663) (541)
Advances to shareholder................. -- -- (500)
Proceeds from warrants exercised........ -- 641 --
Payment of note payable................. (56) (190) (189)
Deferred offering costs................. (2,647) (615) --
----------- ---------- ----------
Net cash provided by (used in)
financing activities................. (12,941) 10,633 584
----------- ---------- ----------
Effect of exchange rate changes on cash
and cash equivalents.................... -- -- (171)
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................. 703 10,812 (5,840)
Cash and cash equivalents:
Beginning of year....................... 61 764 11,576
----------- ---------- ----------
End of year............................. $ 764 $ 11,576 $ 5,736
=========== ========== ==========
Supplemental disclosure of cash flow
information:
Income taxes paid....................... $ 3,642 $ 3,091 $ 200
=========== ========== ==========
Interest paid........................... $ 109 $ 150 $ 69
=========== ========== ==========
Summary of non-cash investing and
financing activities follows:
Assets acquired through capital lease
obligations............................ $ 1,472 $ -- $ --
=========== ========== ==========
Assets acquired through note payable.... $ 436 $ -- $ --
=========== ========== ==========
Commitment to repurchase common stock
from shareholder....................... $ -- $ -- $ 1,000
=========== ========== ==========
Treasury shares received for the payment
of note receivable--shareholder........ $ -- $ -- $ 333
=========== ========== ==========
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 in the
United States, Canada, Australia, the United Kingdom and Japan. Independent
associates ("Associates") purchase products at wholesale prices 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. The Company has eight wholly owned subsidiaries located throughout the
world. The wholly owned subsidiaries are as follows:
Wholly-owned Subsidiary Date Operations
Name Date Incorporated Location of Subsidiary Began
- ----------------------- ----------------- ----------------------- -----------------
Mannatech Australia Pty April 22, 1998 St. Leonards, Australia October 1, 1998
Limited
Mannatech Limited December 1, 1998 Republic of Ireland No operations
Mannatech Ltd. November 18, 1998 Basingstoke, Hampshire November 15, 1999
U.K.
Mannatech Payment April 11, 2000 Coppell, Texas June 26, 2000
Services Incorporated
Mannatech Foreign Sales May 1, 1999 Barbados May 1, 1999
Corporation
Internet Health Group, May 7, 1999 Coppell, Texas December 20, 1999
Inc. (ceased operations
as of December 31,
2000)
Mannatech Japan, Inc. January 21, 2000 Tokyo, Japan June 26, 2000
Mannatech Limited February 14, 2000 New Zealand No operations
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.
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
At December 31, 2000, accounts receivable consist of the overpayment of
consumption tax paid in Japan, 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 amounts that are deemed
uncollectible.
F-7
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 1999, accounts receivable consist of 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 amounts that are deemed uncollectible.
Inventories
Inventories consist of raw materials and finished goods and are stated at
the lower of cost (using standard costs, which approximates average costs) or
market.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
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 the accompanying consolidated statements
of operations.
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
its 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. During 2000, the Company recorded an impairment loss of
$870,000 on fixed asset software.
Other Assets
Other assets consist primarily of deposits for building leases and a
restricted term deposit in an Australian bank, of approximately $99,000 at
December 31, 1999 and $84,000 at December 31, 2000. This term deposit matures
every six months and is automatically renewed by the Company as security for
the Australian building lease.
Accounts Payable
The Company records book overdrafts in its cash accounts as accounts
payable. Accounts payable includes book overdrafts of $1,450,623 at December
31, 2000.
Income Taxes
The Company accounts for income taxes using the asset and liability approach
for financial accounting and reporting. 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.
F-8
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company's revenues consist of sales from products sold, starter and
renewal packs sold and shipping fees charged. Substantially all product sales
are made to Associates at a published wholesale price. Net sales also reflect
product returns and any related refunds. The Company also records a reserve for
product returns based on historical experience.
The Company adopted Staff Accounting Bulletin No. 101 "Revenue Recognition
in Financial Statements" ("SAB 101") in the fourth quarter of 2000. Under SAB
101, the Company recognizes revenue for product sales upon the receipt of the
products by the Associates. As a result of adopting SAB 101, the Company
recorded a charge of $210,000, net of tax of $126,000 for the cumulative effect
of this change at January 1, 2000. Beginning in 2000, the Company deferred all
revenues until the Associate receives the shipment. The change in accounting
method would not have a material effect on the Statements of Operations in 1999
and 1998 if adopted in those periods.
The Company also 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 revenues contained in pack sales are amortized over a twelve-
month period. As of January 1, 2001, the Company discontinued the inclusion of
the event admission in the starter and renewal packs. Total net deferred
revenue was $845,000 and $691,000 at December 31, 1999 and 2000, respectively.
Shipping and Handling Cost
In accordance with the Emerging Issues Task Force No. 00-10 "Accounting for
Shipping and Handling Fees and Costs", the Company records freight and shipping
revenues, collected from the Associate, as revenue. The Company records in-
bound freight and shipping costs as a part of cost of sales and the Company
records shipping and handling costs associated with shipping products to its
Associates as selling and administrative expenses in the accompanying
consolidated financial statements. Total shipping and handling costs included
in selling and administrative expense was approximately $8.2 million, $9.1
million and $6.6 million for 1998, 1999 and 2000, respectively.
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 require 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 $3.8 million, $3.6
million and $5.3 million for 1998, 1999 and 2000, respectively. Literature and
promotional items, called sales aids, are sold to Associates to support their
sales efforts and are primarily included in inventories and charged to cost of
sales when sold.
F-9
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $391,000, $439,000 and
$392,000 in 1998, 1999 and 2000, 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 $3.4 million, $3.6 million and $4.4 million
in 1998, 1999 and 2000, 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 related 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 formulation stage has been completed. Such costs are amortized over
the estimated useful life of the software, which is five years. Capitalized
costs were approximately $929,000, $1.7 million and $681,000 in 1998, 1999 and
2000, respectively. Amortization expense related to capitalized software was
approximately $346,000, $528,000 and $712,000 in 1998, 1999 and 2000,
respectively.
Earnings (Loss) per Share
The Company calculates earnings (loss) 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 (loss) per share
("EPS") on the face of the consolidated statement of operations 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 based on
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 that the Company considers to be of high credit quality.
The Company believes its notes receivables from shareholders 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 and accrued
expenses, approximate their recorded values due to their relatively short
maturities.
Foreign Currency Translation
The Australian and the United Kingdom subsidiaries' are limited service
providers and their 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 revenues and expenses are translated at average exchange rates
for the year. Translation (gains) and losses of Mannatech's foreign
subsidiaries totaled approximately $17,000 ($176,000) and $345,000 in 1998,
1999 and 2000 respectively, and are included, in other expense, in the
consolidated statements of operations.
F-10
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accumulated Other Comprehensive Income (loss)
The Japan subsidiary conducts substantially all of its business in Japanese
Yen; therefore, the Company considers the Japanese Yen as it's functional
currency. Its subsidiary's assets and liabilities are translated into United
States dollars at exchange rates existing at the balance sheet dates, revenues
and expenses are translated at weighted-average exchange rates, and
shareholders' equity and intercompany accounts are translated at historical
exchange rates. The foreign currency translation adjustment is recorded as a
separate component of shareholders' equity and is included as accumulated other
comprehensive income (loss) as required under Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income." Comprehensive income (loss)
is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances from nonowner sources and
includes all changes in equity during a period.
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.
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 $12.0 million. The net proceeds to
the Company were $9,240,958 after deducting deferred offering costs related to
legal, accounting and printing fees of approximately $2.0 million, other costs
of approximately $406,000 and the fee to the placement agent involved in the
Offering of approximately $389,000, net of reimbursement of approximately
$91,000 of expenses by the placement agent.
The selling shareholders sold 1,556,016 shares of common stock, yielding
gross proceeds of approximately $12.4 million. The net proceeds paid to the
selling shareholders were approximately $12.0 million, after deducting the fee
to the placement agent of approximately $498,000.
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 classified
as held-to-maturity and are 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 accompanying statements of operations.
F-11
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, investments consist of an obligation of a United
States Government sponsored enterprise, of $1,130, which matures in 2003 and is
classified as held-to-maturity. 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 (in thousands):
Gross
Amortized Unrealized Fair
Matures Cost Loss Value
------- --------- ---------- ------
0--1 year...................................... $1,388 ($1) $1,387
1--5 years..................................... $ 756 ($2) $ 754
5 + years...................................... $ 150 ($-) $ 150
------ --- ------
$2,294 ($3) $2,291
====== === ======
NOTE 4 INVENTORIES
Inventories at December 31, 1999 and 2000 consist of the following (in
thousands):
1999 2000
------- -------
Raw materials............................................... $ 5,788 $ 6,587
Finished goods less inventory reserve of $166, in 2000...... 7,530 6,739
------- -------
$13,318 $13,326
======= =======
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 2000 consist of the
following (in thousands):
Estimated
Useful Lives 1999 2000
------------- ------- -------
Office furniture and equipment............. 5 to 7 years $ 5,043 $ 5,732
Computer equipment......................... 3 to 5 years 9,926 11,247
Automobiles................................ 5 years 28 28
Leasehold improvements..................... 2 to 10 years 4,911 5,636
------- -------
19,908 22,643
Less accumulated depreciation and
amortization.............................. (6,162) (9,319)
------- -------
13,746 13,324
Construction in progress................... 347 --
------- -------
$14,093 $13,324
======= =======
Gross capital leased assets of $1.7 million were included in both the
December 31, 1999 and 2000 balances, respectively, and relate to warehouse and
laboratory equipment. In 1999, construction in progress consists of internally
developed software and warehouse equipment.
F-12
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6 ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and 2000 consist of the following (in
thousands):
1999 2000
-------- -------
Commissions payable........................................ $ 4,018 $ 3,598
Income taxes payable....................................... 35 --
Accrued royalties and compensation......................... 2,062 1,874
Accrued inventory purchases................................ 3,121 1,024
Accrued legal and accounting............................... 625 1,522
Sales and other taxes payable.............................. 875 776
Deferred revenue........................................... 845 691
Customer deposits.......................................... 418 1,219
Other accrued expenses..................................... 1,722 1,584
-------- -------
$ 13,721 $12,288
======== =======
NOTE 7 NOTE PAYABLE
In 1999, the Company entered into an unsecured note payable of approximately
$436,000, with a finance company to finance its three-year product liability
insurance premiums. The note bears interest at 8.0% and was payable in monthly
installments of approximately $16,000 through December 2000.
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 equipment for its
laboratory facility and warehouse. The leases are collateralized by the leased
assets, bear interest at 9.3%, are payable in thirty-six monthly installments
and contain certain financial covenants which require the Company to maintain
stated levels of debt to tangible net worth and an annual cash flow coverage
ratio. At December 31, 2000, the Company was in violation of the annual cash
flow ratio coverage covenant; however, a satisfactory waiver of this violation
was received from the lender on March 14, 2001 that waived this violation at
December 31, 2000.
The Company 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
that the Company intends to exercise. A summary of future minimum payments
under capital lease agreements is as follows (in thousands):
Year Ending
December 31,
------------
2001............................................................ $312
2002............................................................ 32
----
Future minimum lease payments................................... 344
Less imputed interest (approximately 9.3%)...................... (16)
----
328
Less current portion of capital lease obligations............... (301)
----
Capital lease obligations, excluding current portion............ $ 27
====
F-13
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 9 INCOME TAXES
The components of the Company's income (loss) before income taxes are
attributable to the following jurisdictions for the years ended December 31 (in
thousands):
1998 1999 2000
------- ------- -------
United States.......................................... $15,733 $16,316 $(4,054)
Foreign................................................ 64 214 (4,328)
------- ------- -------
$15,797 $16,530 $(8,382)
======= ======= =======
The components of the Company's income tax provision for 1998, 1999 and 2000
were as follows:
1998 1999 2000
------ ------ -------
Current provision:
Federal............................................... $4,351 $6,284 $(1,827)
State................................................. 430 276 213
Foreign............................................... 28 (28) 73
------ ------ -------
4,809 6,532 (1,541)
------ ------ -------
Deferred provision:
Federal............................................... 853 (674) 451
State................................................. 81 (116) (153)
------ ------ -------
934 (790) 298
------ ------ -------
$5,743 $5,742 $(1,243)
====== ====== =======
A reconciliation of income tax based on the U.S. federal statutory rate is
summarized as follows for the years ended December 31:
1998 1999 2000
---- ---- -----
Federal statutory income
taxes.................. 35.0% 35.0% 35.0%
State income taxes, net
of federal benefit..... 2.1 1.0 (0.1)
Difference between U.S.
statutory rate and
foreign rate........... (1.4) (1.0) (7.8)
Effect of valuation
allowance.............. -- -- (11.0)
Nondeductible expenses.. 0.7 0.7 (1.0)
Other................... -- (1.0) (0.3)
---- ---- -----
36.4% 34.7% 14.8%
==== ==== =====
At December 31, 2000, the Company had an income tax refund of $2.3 million,
which primarily contained federal tax net operating loss that will be carried
back. The Company also had state tax net operating losses that are eligible to
be carried forward and will begin to expire in various tax years.
F-14
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred taxes consisted of the following at December 31 (in thousands):
1999 2000
------ ------
Deferred tax assets:
Current:
Deferred revenue............................................. $ 312 $ 255
Inventory capitalization..................................... 207 327
Accrued expenses related to Internet Health Group Inc. ...... -- 322
Inventory reserve............................................ -- 61
State tax net operating loss carryforward.................... -- 193
Other........................................................ 45 43
------ ------
Total current deferred tax assets.......................... 564 1,201
------ ------
Noncurrent:
Net operating loss carryforward for the Japan subsidiary....... -- 924
Compensation expense........................................... 82 58
Start-up costs................................................. 272 --
Capital loss carryforward...................................... 19 18
------ ------
Total noncurrent deferred tax assets......................... 373 1,000
------ ------
Total gross deferred tax assets.............................. 937 2,201
Valuation allowance.......................................... -- (924)
------ ------
Total net deferred tax assets................................ $ 937 $1,277
====== ======
Deferred tax liabilities:
Noncurrent:
Depreciation and amortization................................ $1,190 $1,828
====== ======
The valuation allowance represents a reserve against the deferred tax asset
related to the Japan operating loss carryforward, which may not be fully
realized.
The net deferred tax assets (liabilities) are classified in the accompanying
consolidated financial statements as follows (in thousands):
1999 2000
----- -------
Current deferred tax assets.................................... $ 564 $ 1,201
Noncurrent deferred tax liabilities............................ (817) (1,752)
----- -------
Net deferred tax assets (liabilities).......................... $(253) $ (551)
===== =======
F-15
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10 TRANSACTIONS WITH RELATED PARTIES AND AFFILIATES
On February 17, 1999, the Company signed notes receivable agreements with
certain shareholders. The notes bear interest at 6.0%, with installments due
annually through February 17, 2004. The total amount of such notes outstanding
at December 31, 1999 and 2000 was approximately $701,000 and $577,000,
respectively. The future maturities of notes receivables due from shareholders
are as follows (in thousands):
Year Ending
December 31,
------------
2001.......................................................... $187
2002.......................................................... 138
2003.......................................................... 141
2004.......................................................... 111
----
577
Less current portion.......................................... (187)
----
Notes receivable due from shareholders, excluding current
portion...................................................... $390
====
On December 31, 1997, the Company advanced $284,000 to two officers and
$353,000 to two directors of the Company to pay taxes due in connection with
the cancellation of their incentive compensation agreements. These advances
were paid in full in February 1999.
In 1998, 1999 and 2000, the Company accrued commission expenses to a major
shareholder and former executive officer, Mr. William C. Fioretti, of
approximately $121,000, $453,000 and $181,000 of which $37,000 and $27,000
remained unpaid at December 31, 1999 and 2000, respectively. During 1998, the
Company also paid Mr. William Fioretti $250,000 for various consulting
activities related to new product development. During 1997, the Company
advanced $125,000 to Mr. William Fioretti's brother-in-law, which remained
unpaid at December 31, 1998. During 1999, Mr. William Fioretti guaranteed these
funds to the Company; however, in December 1999, the $125,000 was written off
by the Company as uncollectible.
On May 5, 2000 Mr. Samuel L. Caster resigned as President. On June 1, 2000,
the Company entered into a consulting agreement with Mr. Caster. Under the
terms of the agreement, the Company agreed to pay Mr. Caster $50,000 each month
plus automobile insurance and other expenses. During 2000, the Company paid
Mr. Caster approximately $312,000 of which $50,000 remained unpaid at December
31, 2000.
On August 8, 2000, the Company loaned Mr. Charles E. Fioretti $500,000. The
loan was collateralized by 174,570 shares of Mr. Charles Fioretti's stock and
is being repaid in six successive monthly installments of 26,455 shares of his
common stock beginning on September 3, 2000 and continuing through February 3,
2001. During 2000, Mr. Charles Fioretti exchanged 105,820 shares of his stock
to reduce the loan to him by $333,000. As of December 31, 2000, the balance of
the note receivable was $167,000.
On August 8, 2000, the Company entered into a lockup and repurchase
agreement with Mr. Charles Fioretti. Under the terms of the agreement, the
Company agreed to buy $1.0 million worth of his stock. The commitment to
repurchase common stock reduced shareholders' equity on the balance sheet. On a
monthly basis, beginning on March 3, 2001 and continuing through February 3,
2002, the Company agreed to buy $83,333.33 worth of his stock, valued at 90% of
the fair market value price on the close of that business day.
F-16
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mr. Charles Fioretti is prohibited from selling any of his shares through March
2, 2002, unless approved by the Board of Directors. Beginning March 3, 2002,
the Company will have the option, but not the obligation to repurchase on a
monthly basis, at least $100,000 worth of his stock, valued at the greater of
90% of the fair market value or $2.00 per share. As long as the Company
exercises this option, Mr. Charles Fioretti will be prohibited from selling any
of his shares.
On December 29, 2000, the Board of Directors entered into a Separation
Agreement with Mr. Anthony Canale. Under the terms of the agreement, Mr. Canale
will remain a Director of the Company but will resign as Chief Operating
Officer of International Operations as of February 28, 2001. The Company will
pay Mr. Canale $400,000 on March 1, 2001, $250,000 on February 28, 2002 and
$250,000 on February 28, 2003. The Company will also continue to pay the lease
payments for his car and are for any future consulting. On March 1, 2000, Mr.
Canale will begin to receive $2,500 for each Board of Director's meeting he
attends, which is an amount set by the Board of Directors for his service to
the Board and reimbursement for any expenses. Finally, the Company agreed to
grant Mr. Canale a total of 213,333 warrants on March 1, 2001 at an exercise
price ranging from $1.75 to $4.00, which vest on March 1, 2001 and are
exercisable for seven years. As of December 31, 2000, the Company accrued
$950,000 relating to Mr. Canale and also accrued compensation of approximately
$140,000 related to the termination of various other officers.
NOTE 11 CANCELLATION OF INCENTIVE COMPENSATION AGREEMENTS
In April 1994, the Company entered into two incentive compensation
agreements with Mr. Ray Robbins, an Associate, shareholder and advisory board
member of the Company. The agreements and its subsequent amendments required
the Company to pay compensation based on a specified monthly sales volume and
increase in the admittance of new 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 1999 consolidated
financial statements. In 2000, the Company agreed to pay Mr. Robbins an
additional $200,000 related to the cancellation of his other incentive
agreement, which was canceled in June 1999. During 1998, 1999 and 2000, the
Company paid Mr. Robbins approximately $120,000, $618,000 and $320,000,
respectively related to the incentive agreement. Mr. Robbins also receives
commissions from the Company for his product sales and downline growth.
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 20% of their annual compensation, but are
limited to the maximum percentage allowable under the Internal Revenue Code.
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 1998, 1999 and 2000, the Company
contributed, approximately $93,000, $150,000 and $177,000, respectively, to the
plan.
F-17
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1997 Stock Option
Plan. On October 19, 1999, 50,000 options were granted to a Director and vest
over three years beginning October 19, 2000. No options granted under this plan
will remain exercisable later than ten years after the date of grant.
In May 1998, the Board of Directors approved the 1998 Stock Option Plan (the
"1998 Stock Option Plan") that 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. No options granted under this plan
will remain exercisable later than ten years after the date of the grant.
In June 2000, the Board of Directors approved the 2000 Stock Option Plan
(the "2000 Stock Option Plan") that 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 2000 Stock Option Plan. On August 23, 2000, 150,000 stock
options were granted to three Directors and vest over three years beginning
August 23, 2001. No options granted under this plan will remain exercisable
later than ten years after the date of grant. At December 31, 2000, the 2000
Stock Option Plan had 290,000 shares available for grant by the Board of
Directors.
Stock options outstanding for the 1997, 1998 and 2000 Stock Options Plans,
(collectively, "the Stock Option Plans") are as follows:
1998 1999 2000
--------------- ---------------- ----------------
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 $ .45 2,343 $3.53 2,255 $5.39
Granted................... 743 8.00 677 7.81 1,795 2.62
Exercised................. -- -- (715) 1.38 (261) 1.39
Canceled.................. -- -- (50) 8.00 (247) 3.14
----- ----- ----- ----- ----- -----
Outstanding at end of year.. 2,343 $3.53 2,255 $5.39 3,542 $4.44
----- ----- ----- ----- ----- -----
Options exercisable at year
end........................ -- $ -- 1,422 $4.33 1,833 $6.14
----- ----- ----- ----- ----- -----
Weighted-average fair value
of options granted during
the year................... $2.20 $3.03 $1.81
===== ===== =====
F-18
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information with respect to options
outstanding and exercisable at December 31, 2000:
Options
Options Outstanding 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........... 528 $1.47 7 504 $1.45
$2.01 -- $6.99........... 1,685 $2.63 10 -- $0.00
$7.00 -- $8.00........... 1,329 $7.91 8 1,329 $7.91
----- -----
$1.35 -- $8.00........... 3,542 $4.44 9 1,833 $6.14
===== =====
During 1999, the Board of Directors of the Company's wholly-owned
subsidiary, Internet Health Group, Inc.'s ("IHG"), approved its 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 were exercisable at $0.27 per share, which was the estimated fair
value on the date of grant. 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. As of December 31, 2000, none of the IHG
options were exercised.
Incentive stock options granted to employees are nontransferable and are
granted for terms no longer than ten years 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 (in thousands, except for per share information):
1998 1999 2000
------- ------- -------
Consolidated net income (loss)
As reported...................................... $10,054 $10,788 $(7,349)
Pro forma........................................ $ 9,701 $10,042 $(8,184)
Basic EPS
As reported...................................... $ 0.45 $ 0.45 $ (0.29)
Pro forma........................................ $ 0.44 $ 0.42 $ (0.33)
Diluted EPS
As reported...................................... $ 0.42 $ 0.43 $ (0.29)
Pro forma........................................ $ 0.41 $ 0.42 $ (0.33)
The fair value of each option granted was estimated on the date of grant
using the Black-Shoales option-pricing model with the following weighted-
average assumptions during 1998, 1999 and 2000:
1998 1999 2000
---- ---- ----
Dividend yield............................................. 4% 0% 0%
Expected volatility........................................ 0% 47.7% 68.0%
Risk-free rate of return................................... 5.4% 6.3% 5.8%
Expected life (in years)................................... 6 6 7
F-19
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 1999 and 2000, 120,000 and 230,000 of these
nonqualified options were exercised at an exercise price of $1.35.
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 registered for
public resale under the Securities Act. In February 1999, all of these
warrants were exercised.
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 $1.2
million, $1.6 million and $2.4 million in 1998, 1999 and 2000, respectively.
Approximate future minimum rental commitments for the operating leases are
as follows (in thousands):
Year Ending
December 31,
------------
2001........................................................ $ 1,839
2002........................................................ 1,270
2003........................................................ 925
2004........................................................ 759
2005........................................................ 736
Thereafter.................................................. 876
----------
$ 6,405
========== ===
Effective September 1, 1998, the Company entered into various employment
agreements with five 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. Either party can cancel the agreements; however, if canceled by
the Company, without cause, the Company is required to pay the minimum salary
for the life of the agreement. In 2000, one of the five-year employment
agreements, dated September 1, 1998, was canceled and replaced with a new
three-year employment contract for his change in duties. In 2000, an
employment agreement was entered into which expires on March 31, 2003. Either
party can cancel this agreement; however, if canceled without cause, by the
Company, the Company is required to pay the minimum salary for the life of the
agreement.
The Company had 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. In February 2001, the
F-20
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company modified the agreement to reduce the purchase commitment. The purchase
commitment with this supplier is approximately $5.0 million, for both 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. From 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 $933,000, $416,000 and $459,000 in 1998, 1999 and 2000,
respectively.
In October 1999, the Company entered into an agreement with a high level
Associate, shareholder and advisory board member whereby the Associate would
promote the Company and develop downline growth in Japan. Under the terms of
the agreement, the Company agreed to pay the Associate $50,000 a month plus
all expenses for two years. The Associate can also earn additional
commissions, up to $1.6 million, 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. During 2000, the Company
accrued $850,000 of which $50,000 remained unpaid at December 31, 2000.
NOTE 14 CAPITAL TRANSACTIONS
Preferred Stock
On April 8, 1998, the Company amended its Articles of Incorporation to
reduce the number of authorized shares of common stock from 100.0 million to
99.0 million. Additionally, the Company has authorized 1.0 million shares of
preferred stock with a par value of $0.01 per share. No shares of preferred
stock have been issued or are outstanding.
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.
During 2000, the Company loaned Mr. Charles E. Fioretti $500,000 that was
repaid, in part, by Mr. Fioretti tendering 105,820 shares of his common stock,
to the Company, at the fixed price of $3.15 per share, which was the current
market price on the date of the note receivable.
NOTE 15 LITIGATION
On May 30, 2000, the Company filed suit for breach of contract in the
United States District Court of the Northern District of Texas, Dallas
Division, against Gryphon Advisors II, L.L.C., a Delaware limited liability
company. The Company alleged amounts billed for out-of-pocket expenses and
advisory service fees totaling $1.6 million were unreasonable and that Gryphon
Advisors breached the advisory agreement. Under the advisory agreement,
Gryphon was to provide advice on potential financing opportunities,
acquisitions, the financial management of the Company, all aspects of its
capital structure, capital-raising transactions and to assist the Company in
evaluating potential acquisition targets. On June 26, 2000, Gryphon Advisors
filed a cross-action suit for breach of contract and fraud seeking the payment
of $1.6 million and exemplary damages. On March 1, 2001, the Company and
Gryphon Advisors agreed to dismiss its respective claims with prejudice and
the Company agreed to pay Gryphon Advisors $650,000 over a 12-month period.
F-21
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
NOTE 16 EARNINGS PER SHARE
The following data show the amounts used in computing earnings (loss) per
share and the effect on the weighted-average number of shares of dilutive
common share equivalents (in thousands, except for per share information).
1998 1999 2000
-------------------------------- -------------------------------- --------------------------------
Per Per Per
Income Shares Share Income Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------ ------ ---------- ------------ ------ ---------- ------------ ------
Basic EPS
Net income (loss)
available to Common
Shareholders....... $10,054 22,102 $ 0.45 $10,788 24,133 $ 0.45 ($7,349) 24,946 ($0.30)
Effect of dilutive
Securities:
Stock options...... -- 1,293 -- -- 1,091 -- -- -- --
Stock warrants..... -- 264 -- -- -- -- -- -- --
------- ------ ------ ------- ------ ------ ------- ------ ------
Diluted EPS
Net income (loss)
available
to common
shareholders plus
assumed
conversions....... $10,054 23,659 $ 0.42 $10,788 25,224 $ 0.43 ($7,349) 24,946 ($0.30)
======= ====== ====== ======= ====== ====== ======= ====== ======
At December 31, 1999, 1.4 million common stock options were excluded from
the dilutive EPS calculation and at December 31, 2000 all 3.5 million common
stock options were excluded from the dilutive EPS calculation, as their effect
was antidilutive.
NOTE 17 ASSET IMPAIRMENT LOSS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," the Company recorded an impairment loss of $870,000 as it
determined the Internet Health Group, Inc., fixed asset software provided no
future benefit.
F-22
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 18 SEGMENT INFORMATION
The Company conducts its business within one industry segment. No single
Associate accounted for more than 10% of total sales for the years ended
December 31, 1998, 1999 and 2000.
Long-lived assets by country for the years ended December 31, 1998, 1999 and
2000 were as follows (in millions):
Country 1999 2000
------- ----- -----
Canada........................................................... $ -- $ --
Australia........................................................ $ 0.9 $ 0.6
United Kingdom................................................... $ 0.5 $ 0.4
Japan............................................................ $ -- $ 1.2
United States.................................................... $15.4 $12.5
----- -----
$16.8 $14.7
===== =====
Net sales (in millions and as a percentage of net sales) by country for the
years ended December 31, 1998, 1999 and 2000 were as follows:
United
Year States Canada Australia United Kingdom Japan
---- ------------ ----------- ---------- -------------- ---------
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% $ -- --%
2000.......... $115.7 77.0% $20.2 13.5% $ 8.5 5.7% $ 1.9 1.3% $3.7 2.5%
F-23
INDEX TO EXHIBITS
3.1 Amended and Restated Articles of Incorporation of Mannatech dated May 19,
1998, incorporated herein by reference to Exhibit 3.1 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Commission on October 28, 1998.
3.2 Amended and Restated Bylaws of Mannatech dated April 27, 1999,
incorporated herein by reference to Exhibit 4.3 to Mannatech's Form S-1
(File No. 333-77227) filed with the Commission on April 28, 1999.
3.3 First Amendment to the Bylaws of Mannatech dated October 20,1999,
incorporated herein by reference to Exhibit 3.4 to Mannatech's Form 10-Q
(File No. 000-24657) filed with the Commission on August 14, 2000.
3.4 Second Amendment to the Bylaws of Mannatech dated February 22, 2000.*
3.5 Third Amendment to the Bylaws of Mannatech dated March 6, 2000.*
3.6 Fourth Amendment to the Bylaws of Mannatech dated November 17, 2000.*
4.1 Specimen Certificate representing Mannatech's 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 2000 Option Plan dated June 19, 2000, incorporated by reference to
Exhibit 10.26 to Mannatech's Form 10-Q (File No. 000-24657) filed with
the Commission on November 14, 2000.
10.4 Exchange Agreement by and among Mr. Gary Watson, Mr. Patrick D. Cobb, Mr.
Samuel L. Caster, Mr. Charles E. Fioretti and Mr. William C. 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.
10.5 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.
10.6 Schedule of additional directors signatories relating to the Form of
Indemnification Agreements in Exhibit 10.9 above, incorporated herein by
reference to Exhibit 10.7 to Mannatech's Form 10-K (File No.000-24657)
filed with the Commission on March 30, 2000.
10.7 Letter of Understanding Regarding Development of Proprietary Information
for Mannatech effective as of August 1, 1997, as amended, by and between
Mr. 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.
10.8 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.
10.9 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.
1
10.10 Assignment of Patent Rights dated October 30, 1997 by and among Mr. Bill
H. McAnalley, Ph.D., Mr. H. Reginald McDaniel, Mr. D. Eric Moore, Ms.
Eileen P. Vennum and Mr. 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.
10.11 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.
10.12 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.
10.13 Supply Agreement effective as of January 12, 2000 by and between
Mannatech and Caraloe, Inc. incorporated herein by reference to Exhibit
10.7 to Mannatech's Form 10-K (File No. 000-24657) filed with the
Commission on March 30, 2000.
10.14 Letter of Agreement from Mannatech to Mr. 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.
10.15 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.
10.16 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.
10.17 Individual Guaranty of Mr. 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.
10.18 Individual Guaranty of Mr. 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.
10.19 Form of Employment Agreement to be entered into between Mannatech and
each of Mr. Patrick D. Cobb, Mr. Anthony E. Canale, Mr. Bill H.
McAnalley and Ms. 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.
10.20 Employment Agreement dated November 1, 1999, entered into between
Mannatech and Mr. Terry L. Persinger, incorporated herein by reference
to Exhibit 10.7 to Mannatech's Form 10-K (File
No. 000-24657) filed with the Commission on March 30, 2000.
10.21 Form of Employment Agreement entered into between Mannatech and Mr.
Robert M. Henry, incorporated by reference to Exhibit 10.24 to
Mannatech's Form 10-Q (File No. 000-24657) filed with the Commission on
May 15, 2000.
10.22 Employment Agreement dated September 21, 2000, entered into between
Mannatech and Mr. Charles E. Fioretti.*
10.23 Employment Agreement dated February 19, 2001, entered into between
Mannatech and Mr. C. Armando Contreras.*
10.24 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $33,316.02 made by Mr. Patrick D. Cobb, 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.
10.25 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.10 made by Mr. 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.
2
10.26 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.09 made by Mr. 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.
10.27 Consultancy Agreement dated June 1, 2000 by and between Mannatech,
Incorporated and Mr. Samuel L. Caster incorporated by reference to
Exhibit 10.25 to Mannatech's Form 10-Q (File No. 000-24657) filed with
the Commission on August 14, 2000.
10.28 Lock-up Agreement and Promissory Note for $500,000 between Mannatech and
Mr. Charles E. Fioretti, dated August 8, 2000, incorporated by reference
to Exhibit 10.27 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on August 14, 2000.
10.29 Separation Agreement dated February 28, 2001 with Mr. Anthony E.
Canale.*
21 List of Subsidiaries*
23 Consent of PricewaterhouseCoopers LLP*
- --------
* Filed herewith.
3