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2001
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
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:
Common Stock, par value $0.0001 per share
Title of each class
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 12,451,019 shares of registrant's voting
stock held by non-affiliates of the registrant was $32,995,200, based on the
closing price of the registrant's common stock on the Nasdaq National Market on
March 20, 2002 of $2.65 per share. At such date, a total of 25,134,840 shares
of the registrant's common stock were outstanding.
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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 for the
registrant's 2002 annual shareholders meeting to be filed pursuant to
Regulation 14A on or before April 30, 2002.
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TABLE OF CONTENTS
Page
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Special Note Regarding Forward-Looking Statements ................................................ 1
Part I
Item 1. Business .................................................................................. 2
General .................................................................................. 2
Industry Overview ........................................................................ 3
Operating Strengths ...................................................................... 4
Business Strategy ........................................................................ 6
Products and Product Development ......................................................... 7
Intellectual Property .................................................................... 10
Associate Distribution System ............................................................ 10
Information Technology and Systems ....................................................... 14
Production and Distribution of Products .................................................. 14
Government Regulations ................................................................... 15
Competition .............................................................................. 19
Employees ................................................................................ 19
Risk Factors ............................................................................. 19
Item 2. Properties ................................................................................ 25
Item 3. Legal Proceedings ......................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 25
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ..................... 26
Item 6. Selected Financial Data ................................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 28
Company Overview and Critical Accounting Policies and Estimates ......................... 28
General Summary ......................................................................... 29
Results of Operations ................................................................... 31
Year ended December 31, 2001 compared with the Year ended December 31, 2000 ............. 31
Year ended December 31, 2000 compared with the Year ended December 31, 1999 ............. 33
Seasonality and Selected Quarterly Statements of Operations ............................. 34
Liquidity and Capital Resources ......................................................... 36
Impact of Inflation ..................................................................... 38
Recent Financial Accounting Standards Board Statements .................................. 38
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ................................ 39
Item 8. Financial Statements and Supplementary Data ............................................... 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 39
Part III
Item 10. Directors and Executive Officers of the Registrant ........................................ 39
Item 11. Executive Compensation .................................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 39
Item 13. Certain Relationships and Related Transactions ............................................ 39
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........................... 40
Signatures ....................................................................................... 44
Special Note Regarding Forward-Looking Statements
Certain disclosure and analysis in this report, including information
incorporated by reference, includes forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, or Securities
Act, Section 21E of the Securities Exchange Act of 1934 as amended, or Exchange
Act, and the Private Securities Litigation Reform Act of 1995 that are subject
to various risks and uncertainties. Opinions, forecasts, projections, guidance
or other statements other than statements of historical fact are considered
forward-looking statements and reflects the current view Mannatech,
Incorporated's ("Mannatech") about future events and financial performance.
These forward-looking statements are subject to certain events, risks and
uncertainties that may be outside Mannatech's control. Some of these
forward-looking statements include statements regarding:
o management's plans, objectives for its future operations and economic
performance;
o existing cash flows being adequate to fund future capital needs;
o capital budget and future capital requirements relating to capital
projects and future obligations;
o the realization of deferred tax assets;
o the ability to maintain current levels of operating expenditures;
o the impact of future market changes due to future exposure to foreign
currency translations;
o any significant impact on its financial positions, results of operations
or cash flows by recent accounting pronouncements;
o the outcome of regulatory and litigation matters;
o the global statutory tax rates remaining unchanged;
o the establishment of certain policies, procedures and internal processes
to combat exposure to market risk; and
o 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:
o those factors described in the context of such forward-looking
statements;
o future product development and manufacturing costs;
o the impact of any changes to Mannatech's global incentive plans;
o the retention and expansion of Mannatech's associate and member base;
o the impact of new competition and competitive products and pricing;
o the political, social and economic climate in which Mannatech conducts
its operations; and
o the risk factors described in this report, as well as other reports filed
with the Securities and Exchange Commission.
Forward-looking statements may be identified by terminology such as "may,"
"will," "should," "could," "would," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "approximates," "predicts," "projects,"
"potential" or "continue" or the negative of such terms and other comparable
terminology. Readers are cautioned when considering these forward-looking
statements to keep in mind these risks and uncertainties and any other
cautionary statements in this report, as all of the forward-looking statements
contained herein speak only as of the date of this report.
Unless stated otherwise, all financial information throughout this report
and in the Consolidated Financial Statements and related Notes include
Mannatech, Incorporated and all of its subsidiaries on a consolidated basis and
may be referred to as "Mannatech", "the Company," "its," "we," "our" or
"their."
These statements have not been evaluated by the Food and Drug
Administration ("FDA"). Mannatech's products are not intended to diagnose,
treat, cure, or prevent any disease.
1
PART I
Item 1. Business
General
Mannatech develops innovative, high-quality, proprietary nutritional
supplements, topical products and weight-management products that are sold
through a global network-marketing system throughout the United States, Canada,
Australia, the United Kingdom and Japan. Currently, Mannatech operates as a
single segment and primarily sells its products through a network of
approximately 192,000 active associates and members. Mannatech defines an
"active associate" as an associate or member who has purchased Mannatech's
products within the last twelve-months.
From its inception, Mannatech's philosophy has been to formulate
high-quality, primarily naturally-occurring, plant-derived, carbohydrate-based
products rather than a synthetic-based product. Mannatech has designed its
products to use nutrients that work through the body's normal physiology to
help achieve and maintain optimal health and wellness. Mannatech believes that
antioxidants are key to a healthy immune system and that it is nearly
impossible for food alone to provide the quantities of antioxidants the body
needs to handle all of the increased free radicals found in today's environment
including pollutants in the air, food and water. Mannatech intends to continue
to base its products on scientific advances in the emerging field of
phytochemistry, which has identified certain naturally-occurring components of
various plants, known as "phytochemicals" that are believed to support optimal
health and wellness.
In 1996, Mannatech developed its own proprietary blend of glyconutrients
called Ambrotose[RegTM] complex. Ambrotose[RegTM] complex combines certain
naturally-occurring monosaccharides and polysaccharides that contain sugars,
which are essential to support optimal cell-to-cell communication.
Ambrotose[RegTM] complex is a key compound found in most of Mannatech's
high-quality, proprietary products. Recently, Mannatech developed
Ambroglycin(TM), which is a proprietary, food-mineral matrix that delivers to
the body, in a balanced food matrix supplement, certain vitamins, chelated
minerals, trace minerals, antioxidant co-factors and Ambrotose[RegTM] complex.
Mannatech strives to ensure that each of its high-quality products are designed
to support various systems and functions of the human body, including:
o cell-to-cell communication and optimal health and wellness;
o sports performance;
o skin care;
o children's optimal health and wellness; and
o weight-management.
Mannatech believes its high-quality products are well suited to the direct
selling and network-marketing environment. Mannatech believes that direct
selling and network-marketing are effective communication channels that allow
associates to effectively educate consumers about the unique potential
benefits, as well as the importance of the science, behind each of Mannatech's
products. These selling techniques also allow Mannatech's associates to
supplement their income or even develop their own financial freedom by building
their own successful direct selling and network-marketing system of operation.
During 2001, Mannatech concentrated a substantial amount of effort on
improving business opportunities for its associates and strengthening its own
operations. Some of Mannatech's business developments and accomplishments
during the last twelve-months included:
o the development of Success Tracker(TM), a web-based downline management
system that provides global, seamless reporting on the status of each
associates' sales organization;
o the development of a state-of-the-art training/orientation CD-ROM, which
expands Mannatech's existing associates training program by integrating
audio, video and motion graphics into a user-friendly, interactive
presentation tool that associates can tailor into their own individual
marketing and training aid;
o the introduction in March 2001 of GlycoBears(TM), a children's
multivitamin especially formulated for children between the ages of 4 to
14 that helps provide 26 essential vitamins, chelated minerals and other
vital nutrients;
o the introduction in August 2001 of Glycentials(TM) Vitamin,
Ambroglycin(TM) Mineral and Antioxidant Formula, a dietary supplement
that helps provide a balanced food matrix of vitamins, minerals, trace
minerals, antioxidant co-factors and Ambrotose[RegTM] complex;
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o the introduction in October 2001 of CardioBALANCE(TM) Heart Care Formula,
a dietary supplement that provides a wide range of specific nutritional
benefits designed to aid in keeping an already normal cardiovascular
system strong and well;
o the introduction in January 2002 of the new and reformulated
GlycoLEAN[RegTM] Body System, which includes a full spectrum of various
weight management products, comprehensive information, charts, better
tasting meal replacement drinks and reformulated GlycoLEAN[RegTM]
Accelerator(TM) to include a new ephedrine-free ingredient and renamed it
GlycoLEAN[RegTM] Accelerator2(TM);
o the establishment of a member program for individuals who wish to
purchase Mannatech's products at discounted retail prices for personal
consumption without participating in any business opportunities;
o the establishment of two new incentive programs for associates called the
power plan and the team bonus plan, which aim at rewarding entry-level
associates more quickly for their successful efforts in building their
organizations;
o the outlining of Mannatech's strategy to make their associate's global
compensation plan more attractive, encourage excellence in recruitments,
expand global network development efforts and help broaden business
opportunities without materially altering the overall payout of
commissions as a percentage of total commissionable net sales;
o the reduction of Mannatech's operating expenses by 20.5%, excluding
severance charges;
o broadening its overall board expertise by adding Ray Robbins, one of
Mannatech's co-founders and J. Stanley Fredrick as directors; and finally
o the addition of new and highly experienced officers in charge of
international operations and legal services and naming new general
managers for its operations in Australia and Japan.
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.
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.com. Mannatech's Investor Relations department
can be contacted at (972) 471-6512 or [email protected].
Industry Overview
According to the Nutrition Business Journal, the global nutrition industry
was a $140 billion industry in 2000, of which $50 billion related to the United
States. The Nutrition Business Journal believes the nutrition industry, which
includes vitamins, minerals, herbs and botanicals, sports performance, organic
food, personal care and functional foods may be stabilizing; however, the
Nutrition Business Journal currently predicts the industry will continue to
grow between 4% to 6% annually through 2004. Mannatech believes the industry
should continue to experience growth as a result of the following:
o the United States Congress established the Office of Alternative Medicine
and the Office of Dietary Supplements within the National Institutes of
Health to foster research into alternative medical treatments and to
conduct and coordinate research into the role of dietary supplements in
maintaining health and preventing disease;
o the Dietary Supplement Health and Education Act of 1994, which allows
vendors of dietary supplements to educate consumers regarding certain
effects of certain ingredients;
o widespread and growing consumer interest on the issues of diet, nutrition
and health and how certain nutritional supplements affect diet, nutrition
and health;
o the increase of new nutritional products offered as a result of
scientific research;
o the increase in health care and prescription drug costs in relation to
conventional medical treatment, which results in a growing trend toward
alternative complementary health treatments;
o an increase in exercise and fitness activities, fitness facilities and
stress management programs; and
o an aging population, particularly the baby-boomers, who are willing and
able to purchase products, services and activities that are associated
with achieving optimal health and wellness.
3
Mannatech believes it can experience growth as a result of the following:
o increasing its market share by continuing to offer new high-quality,
proprietary products;
o increasing its overall brand awareness;
o capturing market share from its competitors in the nutritional
supplement industry who some of which have disbanded; and
o continuing to emphasize its overall strengths.
Operating Strengths
High-Quality, Proprietary Products. Mannatech's products are predominately
formulated with naturally-occurring, plant-derived, carbohydrate-based products
designed to use nutrients working through normal physiology to help achieve and
maintain optimal health and wellness. By creating a proprietary blend of
glyconutrients called Ambrotose[RegTM] complex, Mannatech believes it has
distinguished itself as a leader in the nutritional supplements industry.
Mannatech believes that certain carbohydrates are essential to a healthy
immune system and that it is nearly impossible for food alone to provide the
quantities of antioxidants necessary to respond to the increased free radicals
found in today's environment including pollutants in the air, food and water.
Mannatech believes nutritional supplements that are potent enough to support
the nutritional requirements to help neutralize free radicals found in the
environment should be added to a balanced diet to help achieve optimal health
and wellness.
In 1996, Mannatech focused its research product development on the
fundamental discovery that the body needs eight monosaccharides to support
optimal health and wellness. Rather than attempting to develop synthetic
carbohydrate-based products, as many other companies were doing, Mannatech
began formulating naturally-occurring products to fulfill this newly identified
nutritional need. After developing a key naturally-occurring compound,
Mannatech filed for several patents for this compound it called
Ambrotose[RegTM] complex. Mannatech believes using this compound in its
high-quality, proprietary products is important to help differentiate and
distinguish Mannatech's products from its competitor's products. Furthermore,
the limited availability of this compound helps stimulate demand and achieve
optimal pricing.
Research and Development. Mannatech believes its research and development
facilities, strategic alliances with its suppliers and manufacturers combined
with its experienced personnel allow it to continue to identify, develop and
market additional high-quality, proprietary products, which should increase its
competitive advantage in the nutritional supplement industry. Mannatech incurred
$4.0 million, $4.8 million and $3.4 million, in 1999, 2000 and 2001 toward its
various research and development efforts, which historically have been between
2% and 3% of its annual net sales. These efforts are led by a research team
including several scientists with significant years of experience including
designing products based on carbohydrate-based technology. Mannatech's
philosophy is to concentrate its research and development efforts, to identify
new high-quality, complementary products and improve its existing products to
ensure it maintains high-quality standards. A recent example of its on-going
research and development includes the development of Ambroglycin(TM), a
proprietary, food-mineral matrix that delivers vitamins, chelated minerals,
trace minerals, antioxidant co-factors and Ambrotose[RegTM] complex in a
balanced food matrix supplement. Some of its research and development efforts
are conducted in Mannatech's technologically advanced laboratory that is
equipped with various gas and liquid chromatographs and mass spectrometers,
which are used to:
o maintain Mannatech's quality standards;
o support research and development efforts of new naturally-occurring
compounds;
o help support the development of new products; and
o continuously improve existing products.
Quality Assurance Program. Mannatech believes in using only the highest
quality ingredients in manufacturing its products and uses the highest
standards of production for making its products. Mannatech's team of quality
assurance professionals, research scientists and medical doctors include
professionals who have significant experience in the pharmaceutical industry.
Mannatech's quality assurance team helps ensure that Mannatech's quality
standards of production are consistently followed by routinely performing
quality assurance testing on its products in its laboratory.
4
Mannatech's comprehensive quality assurance program is based on the Good
Manufacturing Practices for foods. In addition, Mannatech has expanded its
quality assurance program to incorporate additional unique requirements for
dietary supplements. Mannatech's team of experts helps ensure that its
formulations are made with natural ingredients whenever possible, that its
products are produced using Mannatech's strict guidelines and that the
conditions at the various suppliers and manufacturers are adequate to ensure
batch-to-batch consistency. Mannatech further requires that its formulations
meet rigorous specifications for microbiological, chemical and physical
analysis. The strict manufacturing standards, along with the purity of the
ingredients in some of Mannatech's products, have resulted in certain of
Mannatech's products being certified as strict kosher.
To ensure strict controls over its products through all phases of
manufacturing, packaging and distribution, Mannatech only contracts with
suppliers and manufacturers that have a high-quality assurance system in place,
meet stringent requirements by the Food and Drug Administration and are
certified by official accredited bodies such as the Association for Clinical,
Environmental Research or the Information Sciences and the National Nutritional
Foods Association. Mannatech periodically reviews each of its suppliers' and
manufacturers' quality assurance programs to ensure that Mannatech's required
specifications, sampling plans and test procedures are being followed.
After the products are received from the manufacturers, Mannatech's
quality assurance team samples each batch and routinely tests the products to
determine the products' stability under controlled storage conditions and help
ensure accurate expiration dates. Mannatech's quality assurance program also
strives to ensure that its bulk products are packaged with an outer seal and
all other products are sealed with both an inner and outer seal. To help ensure
customer satisfaction, Mannatech offers a reasonable return policy. In
addition, Mannatech recommends that consumers should always examine any food
products for any sign of tampering before using or ingesting.
Associate Support Philosophy. Mannatech is committed to providing the
highest level of support services to its customers and believes that it meets
their needs and builds loyalty through the following:
o providing various order processing centers to support all of its
operations;
o offering highly-personalized and responsive customer service teams;
o having a reasonable product return policy;
o providing a comprehensive corporate website to allow instant access to
many of its forms, Internet ordering and marketing tools;
o offering personalized website development for its associates at minimal
cost;
o developing a $1 million web-based downline management system called
Success Tracker(TM) that provides global, seamless reporting on the
status of each associates' organization;
o developing a training/orientation CD-ROM to enhance its associate
training program by integrating audio, video and motion graphics into a
user-friendly, interactive presentation tool that each associate can
tailor into an individual marketing and training aid;
o providing distribution fulfillment centers in each country of operation
to help ensure that its products are timely shipped and minimizes
shipping and handling costs;
o providing an interactive and comprehensive legal/compliance department
that helps enforce Mannatech's policies and procedures; and
o sponsoring four to six corporate events throughout the year to provide
information, education and motivation, which aid in business development,
provide a venue for launching new products and services and allow
individuals the ability to interact with Mannatech's management,
researchers and some of its most successful associates.
Flexible Operating Strategy. Mannatech believes efficiency, focus and
flexibility are keys to its on-going operations. Since its inception, Mannatech
has contracted with third party suppliers and manufacturers for all of its
production to help minimize capital expenditures where practicable. Mannatech
capitalizes on the expertise and resources of its strategic allies by utilizing
them in the areas of distribution and logistics, call center operations,
product registration and export requirements. By contracting with various
high-quality suppliers and manufacturers and outsourcing its foreign operations
distribution, Mannatech believes it has minimized its start-up and on-going
operating costs and is able to quickly adapt its operations to current demand
in a timely, efficient and cost-effective manner. To ensure that its third
party contractors maintain a high quality level of service, Mannatech monitors
their performance and routinely performs spot checks. In addition, Mannatech
continues to seek alternative sources for
5
its raw materials suppliers and manufacturers to help minimize costs and to
ensure that no significant interruption in production would occur if existing
contractors could not perform.
Experience and Depth of Mannatech's Management Team. Mannatech continues
to strengthen its team of professionals and has taken a more conservative
approach to its on-going operations. Mannatech also capitalizes on the strength
and knowledge base of various consulting firms to further extend its research
and skill sets. Within the last twelve-months, Mannatech hired a new president
of international operations, a new general counsel, a new vice president of
product development, named new general managers for its operations in Australia
and Japan and shifted certain management duties to its president and chief
operating officer. In addition, Mannatech appointed a new chairman and
vice-chairman and appointed two new members to its board of directors, thereby
adding additional direct selling expertise to its board. Mannatech is confident
that the changes made during the last twelve-months strengthened and expanded
its management group to include expertise in various fields, including:
o product research and development;
o marketing;
o direct sales and network-marketing;
o international operations;
o finance and analysis;
o legal and compliance;
o information technology; and
o product distribution.
In addition, all of Mannatech's principal managers have substantial
business experience, primarily with larger businesses. Mannatech believes its
managers are able to bring the perspective of traditional business to
Mannatech's direct selling and network marketing operations. Mannatech also
believes that it provides a sound, systematic and reliable framework within
which each associate can fit his or her own personal style of conducting
business.
Business Strategy
Mannatech's goals for the future include:
o Increase Brand Awareness. Mannatech believes it has built a solid
foundation and has distinguished itself as an innovator in the
nutritional supplement industry. Mannatech plans to continue its research
and development efforts to identify and develop new and improved
associate tools to assist them in educating consumers on the science and
the unique benefits of its products.
o Introduce New Products and Continue to Enhance Existing Products. Since
inception, Mannatech has performed research and analysis and identified
certain targets for future product development. Mannatech tries to ensure
that each new product contains one or more of its high-quality,
proprietary compounds and that its new products complement its existing
products. Mannatech also strives to offer the highest quality ingredients
in its products and continues its on-going research to try to ensure that
its products contain the most effective ingredients. Through continued
research, Mannatech may identify alternative ingredients that improve the
efficacy of its products and may change existing formulations to include
such improvements or enhancements, which may stimulate existing product
sales.
o Attract and Retain New Associates and Enhance Associate Productivity.
Mannatech focuses on its operating strengths and strives to compensate
its associates for their on-going achievements. As a result, Mannatech
has introduced several new incentive programs for its associates,
including power bonus and team bonus programs, which reward associates
who achieve certain leadership levels. In addition, Mannatech offers
several trip incentives in hopes of continuing to attract new associates.
During 2001, Mannatech outlined its overall plans to enhance its
associate's global incentive program, in part to encourage greater
retention, motivation and productivity without materially altering the
overall payout of commissions as a percentage of total commissionable net
sales. No single associate accounted for more than 10% of Mannatech's
consolidated net sales in 2001.
o Expand its Existing International Markets. Based upon projections by
various data gathering organizations including the Nutrition Business
Journal and the World Federation of Direct Selling Association, Mannatech
believes its international markets have potential for growth. Mannatech's
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existing international markets include Canada, Australia, the United
Kingdom and Japan. In December 2001, Mannatech hired a new president of
international operations, Mr. John F. Crowley. Mr. Crowley has
significant experience in international market development. Mannatech has
recently concluded that limited product sales to New Zealand can be
accomplished without the expense of another full-scale market opening.
Shipments to New Zealand are expected to begin during the second quarter
of 2002. Net sales by country, as a percentage of consolidated net sales,
were as follows:
U.S. Canada Australia U.K. Japan Total
---------- ---------- ----------- --------- --------- -----------
2001 .......... 77.1% 14.1% 3.4% 1.0% 4.4% 100.0%
2000 .......... 77.0% 13.5% 5.7% 1.3% 2.5% 100.0%
Products and Product Development
Mannatech's products currently include 26 different nutritional products,
3 topical products and a weight-management system consisting of 6 products.
Mannatech also offers a variety of sales aids to its associates, including
enrollment and renewal packs, a CD-ROM orientation/training program, brochures,
videotapes, web-based data management tools and a personalized website
development package, all of which accounted for approximately 17.6%, 17.3% and
15.5% of net sales in 1999, 2000 and 2001, respectively.
Mannatech's products are based on a belief that the use of certain
carbohydrates may provide certain nutritional benefits. Healthy bodies are
comprised of many sophisticated components working together, which need
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 carbohydrate-based monosaccharides and polysaccharides are necessary to
support and maintain optimal health. In support of Mannatech's theory, Harper's
Biochemistry, a leading biochemistry reference source, listed eight different
monosaccharides commonly found in human glycoproteins, which are believed to be
key in helping healthy cell-to-cell communication in the human body. These
monosaccharides include:
o fucose;
o galactose;
o glucose;
o mannose;
o N-acetylgalactosamine;
o N-acetylglucosamine;
o N-acetylneuraminic acid; and
o xylose.
Mannatech's proprietary compound, Ambrotose[RegTM] complex, was designed
to provide certain of these monosaccharides. Mannatech has applied for various
patents for the formulation and use of this proprietary compound. Mannatech
expanded its products in 2001 to include the following:
o GLYCO-BEARS(TM), a chewable multivitamin especially formulated for
children between the ages of 4 to 14. This children's chewable
multivitamin helps provide the body with 26 essential vitamins, minerals,
other vital nutrients, Ambrotose[RegTM] complex and a phytonutrient
complex that is made from 30 different fruits and vegetables. This
children's multivitamin also helps support children's immune systems and
contains no artificial colors, flavors, sweeteners, iron, yeast or
hydrogenated oils.
o Glycentials(TM) Vitamin, Ambroglycin(TM) Mineral and Antioxidant Formula,
a dietary supplement that helps provide a balanced food matrix of
vitamins, chelated minerals, trace minerals, antioxidant co-factors and
Ambrotose[RegTM] complex. This antioxidant-rich formula contains no
artificial flavors, colors, sweeteners, yeast, sucrose or dextrose and
helps the body's natural ability to neutralize the effects of toxins,
environmental stress, poor diet and daily physical and oxidative
stress--all of which are believed to play a part in damaging cells,
tissues, DNA and cellular aging.
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o CardioBALANCE(TM) Heart Care Formula, a dietary supplement that provides
a wide range of specific nutritional benefits designed to aid in keeping
an already normal cardiovascular system strong and well. Among other
components, this product contains the following: a component to support
natural production of glutathione, the human body's most important
antioxidant for the breakdown of toxins; folic acid, for growth,
development and red blood cell formulation; garlic, for phytochemical
support; grape extract and hawthorn berry extract, for antioxidant
support; and a biochemical co-factor, which primarily helps sustain
energy metabolism in muscles. This formula helps maintain:
o homocysteine levels that are already in the normal range;
o already healthy artery walls and a strong heart muscle;
o circulation throughout the body's 60,000 miles of already healthy blood
vessels;
o blood pressure already within the normal range by aiding blood and oxygen
flow to the heart; and
o blood flow, heart beat and cholesterol levels, all of which are already
within their normal ranges.
These statements have not been evaluated by the Food and Drug Administration.
These products are not intended to diagnose, treat, cure, or prevent any
disease.
In response to recent overall public concerns related to products
containing the ingredient ephedrine, Mannatech voluntarily agreed to reformulate
two of its products that contain small amounts of ephedrine-- MVP and
GlycoLEAN[RegTM] BODY SYSTEM ACCELERATOR(TM). Mannatech identified a
high-quality ephedrine-free substitute ingredient and voluntarily began
reformulating its GlycoLEAN[RegTM] BODY SYSTEM ACCELERATOR(TM) product to
include an ephedrine-free formula, and renamed it GlycoLEAN[RegTM] BODY SYSTEM
ACCELERATOR2(TM), in January 2002. In addition, Mannatech is currently
identifying the most effective ephedrine-free substitute for its MVP product.
Mannatech has never had any significant complaint or allegation resulting from
the consumption of its products that contain ephedrine and even though Mannatech
cannot make any assurances or guarantees it believes the risk of any liability
would be minimal.
The following chart indicates the year Mannatech introduced each of its
products:
Year Products Introduced
- ------ ------------------------------------------------------------------------------------------
1994 ManAloe[RegTM], PLUS, MVP AmbroDerm(TM) LOTION, PhytAloe[RegTM], FIRM
1995 PHYTOBEARS[RegTM] EMPACT[RegTM], Emprizone[RegTM]
1996 Ambrotose[RegTM], Mannatonin, Profile 1, 2 and 3, SPORT
1997 Bulk Ambrotose[RegTM], Bulk EMPACT[RegTM], MANNACLEANSE(TM)
1998 MannaBAR(TM) Protein Dietary Supplement, Manna-C(TM), AmbroStart[RegTM], Bulk PhytAloe[RegTM]
1999 MannaBAR(TM) Vanilla Yogurt-Coated Apple Crunch, GlycoLEAN[RegTM] BODY SYSTEM
ACCELERATOR(TM)(1), GlycoLEAN[RegTM] BODY SYSTEM CATALYST, GlycoLEAN[RegTM] BODY
SYSTEM FIBERFULL, GlycoLEAN[RegTM] BODY SYSTEM Manager and GlycoSLIM[RegTM] MEAL
REPLACEMENT DRINK (two flavors--Chocolate and French vanilla)
2000 OPTIMAL HEALTH PACK(TM) and IMMUNOSTART(TM)
2001 GLYCO-BEARS(TM), CardioBALANCE(TM) Heart Care Formula and Glycentials(TM) Vitamin,
Ambroglycin(TM) Mineral and Antioxidant Formula
8
The following chart lists Mannatech's products and the body systems
targeted by each product, as of December 31, 2001:
Children's
Optimal health Skin Sports optimal health Weight-
and wellness care performance and wellness management
---------------- ------ ------------- ---------------- -----------
AmbroDerm(TM) LOTION ......................... X
AmbroStart[RegTM] ............................ X
Ambrotose[RegTM] ............................. X
Bulk Ambrotose[RegTM] ........................ X
Bulk EMPACT[RegTM] ........................... X
CardioBALANCE(TM) ............................ X
EMPACT[RegTM](TM) ............................ X
Emprizone[RegTM] ............................. X
FIRM ......................................... X
GLYCO-BEARS(TM) .............................. X
Glycentials(TM) Vitamin, Ambroglycin(TM)
Mineral and Antioxidant Formula ............. X
GlycoLEAN(TM) BODY SYSTEM
ACCELERATOR(1) .............................. X
GlycoLEAN(TM) BODY SYSTEM CATALYST ........... X
GlycoLEAN(TM) BODY SYSTEM FIBERFULL .......... X
GlycoLEAN(TM) BODY SYSTEM Manager ............ X
GlycoSLIM[RegTM] MEAL REPLACEMENT DRINKS ..... X
IMMUNOSTART(TM) .............................. X
ManAloe[RegTM] ............................... X
MannaBAR(TM) PROTEIN DIETARY
SUPPLEMENT .................................. X
MannaBAR(TM) Vanilla Yogurt-Coated
Apple-Crunch ................................ X
Manna-C(TM) ..................................
MANNACLEANSE(TM) ............................. X
Mannatonin ................................... X
MVP .......................................... X
OPTIMAL HEALTH PACK(TM) ...................... X
Bulk PhytAloe[RegTM] ......................... X
PhytAloe[RegTM] .............................. X
PHYTOBEARS[RegTM] ............................ X
PLUS ......................................... X
Profile 1 .................................... X
Profile 2 .................................... X
Profile 3 .................................... X
SPORT ........................................ X
- ------------
(1) In January 2002, Mannatech voluntarily reformulated its GlycoLEAN[RegTM]
BODY SYSTEM ACCELERATOR(TM) product to include an ephedrine-free ingredient
and renamed it GlycoLEAN[RegTM] BODY SYSTEM ACCELERATOR2(TM).
Mannatech continues its on-going research to explore ways to develop
additional products. All new products are expected to be formulated with
Mannatech's high-quality, proprietary compounds. Mannatech usually launches new
products during its corporate events held throughout the year. Mannatech has a
product committee that periodically meets to identify potential new products or
compounds that may strengthen its existing products. During 2002, Mannatech
intends to reformulate some of its existing products to enhance their
formulations. The product committee uses various criteria when considering new
products and compounds including the following:
o marketability and proprietary nature of the product;
o regulatory considerations;
o availability of ingredients; and
o existence of data supporting claims of functionality.
9
Intellectual Property
At March 20, 2002, Mannatech had approximately 17 trademark registrations
in the United States and approximately 9 trademark applications pending with
the United States Patent and Trademark Office. Mannatech's policy is to pursue
registrations for all the trademarks associated with its key products and try
to protect its legal rights concerning its trademarks.
Mannatech relies on common law trademark rights to protect its
unregistered trademarks, even though these common law trademark rights do not
provide Mannatech with the same level of protection as afforded by a United
States federal registration of a trademark. Common law trademark rights are
limited to the geographic area in which the trademark is actually used, while a
United States federal registration of a trademark enables the registrant to
discontinue the unauthorized use of the trademark by a third party anywhere in
the United States even if the registrant has never used the trademark in the
geographic area where the trademark is being used, provided however, that the
unauthorized third party user has not, prior to the registration date,
perfected its common law rights of the trademark in that geographic area.
Mannatech also has approximately 40 trademarks applications pending in 20
foreign jurisdictions. The protection available in such jurisdictions may not
be as extensive as the protection available to Mannatech in the United States.
Currently, Mannatech has a patent application pending in the United States
Patent and Trademark Office and has 4 issued patents and 18 patent applications
submitted to various foreign jurisdictions in connection with its
glyconutrients blend listed as compositions of plant carbohydrates as dietary
supplements. To the extent Mannatech does not have its products patented, there
can be no assurance that another company will not replicate one or more of
Mannatech's products.
Associate Distribution System
Overview. The foundation of Mannatech's sales philosophy is the
distribution of its product through a unique direct selling and
network-marketing operation. In its direct selling and network-marketing
operations, consumers called associates and members purchase products for
resale and/or for personal consumption. Associates and members are not
considered employees of Mannatech, but rather independent contractors who are
contractually bound to follow certain policies and procedures. These policies
and procedures require associates to act in a professional manner and abide by
certain regulatory guidelines. Mannatech believes that the direct selling and
network-marketing system is the most effective communication vehicle to sell
its products for the following reasons:
o it is easy to explain and educate the consumer on the unique benefits of
the products in a person-to-person, educational setting;
o it is more direct and personal than television and print advertisements;
o it allows potential consumers to try the products before purchasing;
o there is greater impact on the consumer than from television or print
advertising because the consumer learns directly from associates and
other consumers about the various experiences and benefits;
o associates can provide high levels of customer service and give
personalized attention by following up with consumers to ensure customer
satisfaction;
o obtaining a reasonable product return policy;
o recent advancements in technology, including the more wide-spread
acceptability of the Internet as a more acceptable vehicle in which to
place orders, has increased the effectiveness of the direct selling
market; and
o the development and integration of Mannatech's database website,
www.GlycoScience.com, which allows any user to search for science-based
information about various nutritional ingredients, some of which are
found in Mannatech's products.
Mannatech encourages, but does not require, associates to use its
products. Mannatech does not require a potential consumer to be enrolled as an
associate in order to purchase its products. In 2001, Mannatech created its
member program, in which consumers can sign up to purchase products at a
discount but not participate in any business opportunities. Mannatech believes
the direct selling and network-marketing system is particularly attractive to
prospective associates for the following reasons:
10
o it provides an avenue to supplement their income or become their main
source of income;
o there is no requirement to purchase inventory or maintain inventory
levels;
o there is no requirement to carry accounts receivables;
o there is limited paperwork involved in the sales process;
o it offers a reasonable product return and exchange policy; and
o it allows for a flexible work schedule.
Mannatech's net sales are very dependent upon the number of its active
associate and member base and their productivity. Over the last several years,
Mannatech has experienced a decline in the number of its active associates. To
combat any negative effect caused by a decline in active associates, Mannatech
strives to equip its associates with new tools and techniques necessary to grow
a successful business. Mannatech believes that the enrollment of new associates
and retention of its existing associates will be contributing factors to its
long-term growth and success. Mannatech suggests associates enroll individuals
with whom they have pre-existing relationships, such as family members,
friends, business associates or neighbors. Mannatech believes associates will
be more likely to remain active if they are enrolled by someone with whom they
have an on-going relationship. Mannatech remains active in the development of
its associates through recruitment, support, motivation and compensation.
Associates pay for purchases prior to shipment. Mannatech carries no
significant account receivables 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, direct deposit, money
orders and checks. Mannatech also offers discounts to its associates and
members if they sign up for a voluntary automatic monthly order. Automatic
orders have continued to increase and accounted for approximately 57.4% of net
sales in 2001 compared to 49.2% of net sales in 2000.
Associate Development. Mannatech primarily relies on existing associates
to enroll new associates. The enrollment of new associates creates multiple
levels in a direct selling environment. These new associates are referred to as
"downline" or "sponsored" associates. Enrolled associates can purchase products
directly from Mannatech at wholesale prices and can sponsor other associates in
order to build a network of associates, members and product users, which is
called network-marketing.
The needs of Mannatech's associates are a priority and Mannatech believes
that providing a high support level for its associates' efforts is very
important to Mannatech's success. Mannatech provides a large number of support
services tailored to its associates needs, including:
o motivational meetings and corporate sponsored events;
o educational and informative conference calls;
o automated fax services;
o an efficient decentralized ordering and distribution system;
o personalized customer service via telephone, Internet and e-mail;
o 24-hour, seven days per week access to information through touch-tone
phones and the Internet;
o web-based conference calls;
o a current database of each associate's downline information, including a
new web-based data management tool;
o business development materials intended to help stimulate product sales
and simplify enrollment; and
o an innovative website database, www.GlycoScience.com, designed to provide
any user with the ability to search and provide science-based information
about various nutritional ingredients, some of which are included in
Mannatech's products.
Mannatech also relies heavily on its existing associates to train new
associates. To assist its associates in their training endeavors, Mannatech
introduced a new CD-ROM for worldwide orientation training. This
orientation/training aid integrates audio, video and motion graphics into a
user-friendly, interactive CD-ROM that can be tailored by each associate into
their own individual, unique marketing and training tool. This CD-ROM should
help provide systematic and uniform training related to Mannatech's products,
compensation plan and methods of doing business. Mannatech also provides
various brochures, magazines and other sales materials to its associates to
assist them in training and continuing education. Mannatech will continue to
11
periodically update all of its training aids to ensure that its associates
receive the latest information available on its products, sales aids,
technology advances and sales methods.
Mannatech currently recognizes associate performance with ten different
associate leadership achievement levels. The leadership levels from lowest to
highest include:
o active;
o qualified;
o regional;
o national;
o executive;
o presidential;
o bronze;
o silver;
o gold; and
o platinum.
An associate leadership level is based upon the associate pack purchased,
the associates' downline growth and direct and indirect commissionable net
sales. Global commissionable net sales are derived from product and pack sales
each with certain assigned personal and group product point volume. Generally,
sales aids are not assigned any product point volume. Each associate leadership
level provides the associate with the opportunity to participate in Mannatech's
global incentive plan.
When Mannatech expanded internationally, it integrated the majority of its
global incentive plan across all markets in which its products were sold,
thereby allowing all of its existing associates to receive commissions for
global product sales and expansion of their networks. Mannatech believed this
situation, referred to as its "global seamless downline structure," allowed
each of its associates to build their global networks by expanding their
existing downlines into Mannatech's international markets rather than having to
establish new downlines to requalify for higher levels of commissions within
each new country. Certain governmental agencies in foreign countries govern the
various aspects of associates compensation and strongly discourage specific
types of commission, which pays associates incentives for building their
individual global network. As a precaution, Mannatech elected to eliminate this
type of commission from its global incentive plan used in its foreign
operations.
Mannatech's new global incentive plan was designed to eliminate the
commission described above in the United States and Canada and increase the
payout of all of the remaining commission types. The plan was also designed to
increase some of the payouts for each of the associate leadership levels. These
modifications should be implemented during 2002 and will help perfect
Mannatech's global incentive plan into a seamless commission plan for all
countries in which it operates and should help motivate its associates without
materially altering the overall payout of commissions as a percentage of
commissionable net sales.
Associate Compensation. Mannatech's global incentive plan combines the
aspects of two widely used network-marketing compensation plan concepts.
Mannatech's global incentive plan pays various types of commissions based upon
a percentage of the associate's commissionable direct and indirect net sales
and the attainment of certain associate leadership levels. The essential
elements of Mannatech's global incentive plan are similar to other direct
selling and network-marketing incentive plans. Mannatech's global incentive
plan attempts to compensate associates both in the early stages of building
their business and also when associates expand their existing business, by
rewarding the associate for both the breadth and depth within their global
downline organizations.
Mannatech's current global incentive plan pays various incentives and
commissions including:
o a bonus to active associates based on both their direct and indirect
product sales generated from their global downline and the level of
achievement the associate has earned;
o a bonus to associates who enroll new associates or members who place a
product order;
o a bonus to associates when they reach a certain level of leadership and
enroll other associates who place a monthly automatic order;
o a training bonus to associates who have obtained a certain leadership
level and trained another associate;
12
o a power bonus to associates who have obtained certain leadership levels
and developed certain leadership levels in both of their downlines;
o a car incentive bonus to associates who achieve certain sales levels and
consistently increase their sales levels;
o a team bonus to associates who build a team of six associates, who order
regularly; and
o various other incentive programs, including various travel incentives,
which are offered periodically throughout the year.
Mannatech projects that its new global incentive plan will be implemented
in mid-2002 and will pay similar commissions and incentives as its current
global incentive plan with the following exceptions:
o the team bonus will be modified to pay $100 per business period to an
associate who earns less than $100 if they build a team of six qualified
associates in their global downline, who order regularly;
o a new pool bonus will be paid to associates who achieve a certain
leadership level and remain at that level plus an additional bonus will
be paid to every associate within their downline who achieves that same
leadership level; and
o the car incentive bonus will be phased out.
Based upon the knowledge of industry-related network-marketing incentive
plans, Mannatech believes that its global incentive plan is currently among the
most financially rewarding plans offered in the industry. Mannatech's
commissions, as a percentage of net sales, were 40.9%, 41.2% and 40.4% for
1999, 2000 and 2001, respectively.
Management of Associates. Mannatech takes an active role in the management
of its associates. Mannatech's legal/compliance oversight process is complicated
since its associates are independent contractors and not Mannatech employees.
Mannatech tries to ensure that an associate's conduct comports with applicable
laws and regulations governing Mannatech and its products by contractually
binding associates to abide by Mannatech's associate policies and procedures.
Mannatech provides each associate with a copy of its policies and procedures
that must be followed in order to maintain good standing. Furthermore, Mannatech
requires its associates to act in an ethical and consistent manner. Mannatech's
legal/compliance department monitors its associates' websites for content on an
on-going basis. In an effort to both decrease the number of independent websites
owned by associates and to preserve and protect its trademarks, Mannatech
introduced Mannapages(TM), a standardized, personal, Internet website program
created to assist Mannatech in monitoring associate websites on a regular basis.
Mannatech's legal/compliance program depends on associate self-regulation
but also includes monitoring associate conduct in connection with adhering to
certain of its policies and procedures and addresses associates who do not
comply with Mannatech's policies and procedures. When a complaint is filed
against any of its associates, Mannatech reserves the right to suspend and/or
terminate that associates' rights and may impose various sanctions, including
warnings, probation and/or the withholding of commissions until the complaint
is rectified. Mannatech's legal/compliance department, in cooperation with
other departments, routinely evaluates associate conduct and the need for new
and revised policies and procedures. Mannatech believes that its compliance
program assists in the maintenance of associate ethics and helps associates in
their sales efforts. Mannatech tries to minimize associate complaints by
offering continuing education to its associates to help ensure that they
understand and abide by all of Mannatech's policies and procedures.
Product Return Policy. Mannatech offers a reasonable product return
policy. Mannatech's retail sale return policy states that any retail customer
may return the unused portion of any product to the original associate who sold
the product and receive a full cash refund from that associate. Mannatech will
then reimburse that associate who provided such refund to the retail customer
with replacement product if the associate provides Mannatech with the proper
documentation and return the remainder of the product or empty bottle to
Mannatech. Mannatech's associate product return policy states that any
associate requesting a refund will receive a 90% refund of the paid wholesale
cost for any returned, unopened, restockable products and any up-to-date
corporate literature that is in good, usable condition. Mannatech believes that
its return policies are consistent with the return policies of other direct
selling companies. Product returns as a percentage of net sales were 1.0%, 0.8%
and 0.6% in 1999, 2000 and 2001, respectively.
13
Information Technology and Systems
Mannatech believes that on-going improvement and maintenance of its
transaction-processing database is essential to its long-term success.
Mannatech's systems are designed to:
o reduce the time required to supply an associate, member or retail
customer with products;
o provide detailed and customized ordering information;
o respond quickly to associate needs and information requests;
o provide detailed and accurate information concerning qualification and
downline activity;
o provide detailed reports of commissions paid to associates;
o support the order processing and customer service departments; and
o help monitor, analyze and report financial and operating results.
Mannatech has a comprehensive service continuity plan to help minimize the
risk of loss. Mannatech has a wide-range of information technology
professionals on staff who performs daily backup procedures, monitor various
software and hardware systems and perform routine maintenance procedures.
Mannatech also continues to upgrade its software and hardware to help ensure
that its systems are working efficiently and effectively. Mannatech believes
that it will minimize any risk of loss or disruption of its operations by fully
integrating its service continuity plan in 2002.
During 2001, Mannatech developed a $1 million web-based database
management tool called Success Tracker(TM), which is primarily used by its
associates to manage their business organization by providing them with global,
seamless reporting on the status of their individual organization. Associates
who do not wish to have personal information such as their street address and
telephone number published on Success Tracker(TM) may elect to remove this
information from the database information that can be accessed by associates.
In 2002, Mannatech expects to spend approximately $8.3 million on its
information technology operations, of which approximately $940,000 will be for
capital expenditures. These expenditures will help provide additional
technology for Mannatech's business reporting for its associates, its
internally-based database management tools and the continued development of its
service continuity program. The service continuity program will help minimize
the risk of displacement due to any significant disruption in business
operations. Mannatech believes that new technology will continue to help
address the needs of its associates. Mannatech believes that the significant
investment in software, hardware and personnel is necessary for it to perform
the following:
o rapidly respond to any business needs for information technology
assessment and development;
o manage its global operations and downline structure;
o help analyze and identify ways to increase sales and improve operations;
o help identify areas in which it can reduce operating expenses; and
o help safeguard its database and associate information.
Mannatech also maintains a sophisticated financial system that includes a
general ledger module, five sub-modules that directly interface with the
general ledger module and a report-writing system that is windows-based and
capable of operating on several platforms. These financial systems enable
Mannatech to timely track and analyze financial information and produce
customized reports. Mannatech continues to update its financial systems for
technological advances and believes its current financial systems are adequate
for its projected reporting needs over the next twelve-months.
Production and Distribution of Products
All of Mannatech's products are manufactured by outside contractors.
Mannatech believes that this flexible operating strategy provides it with
sufficient production capacity to enable it to respond to significant
fluctuations in its sales, while limiting its required investment in capital
equipment. Mannatech believes it currently has high-quality contract suppliers
and manufacturers supporting Mannatech's current and projected inventory
requirements over the next several years. Nonetheless, Mannatech continues to
work with suppliers and manufacturers to ensure that if their current suppliers
or manufacturers cannot meet Mannatech's demand or if the suppliers and
manufacturers reduce their quality standards, Mannatech can switch production
of its products to another supplier or manufacturer without any significant
disruption of its operations. As a safeguard, Mannatech has successfully
identified dependable alternative sources for all of its ingredients in its
various formulations except Manapol[RegTM] and Arabinogalactan, which are
unique ingredients used in the production of Ambrotose[RegTM] complex. In
January 2000,
14
Mannatech signed a new supply agreement with its supplier of Manapol[RegTM] and
in February 2001, Mannatech 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 2003. Currently, Mannatech
purchases up to 40% of the production of its Manapol[RegTM] supplier. Although
Mannatech believes it maintains good working relationships with its suppliers
and manufacturers, it continues to identify new quality-driven sources to help
ensure that it maintains high-quality and minimizes its costs.
Mannatech's main distribution operation is located in Coppell, Texas, and
consists of 75,000 square feet of leased space in which it maintains an
automated system capable of processing up to 18,000 orders per day. This system
enhances productivity and is projected to support planned sales volume growth.
The distribution facility contains warehouse and distribution offices. To
maximize its operating strategy yet minimize costs, Mannatech contracts with
third-party contract distribution facilities in Canada, Australia, the United
Kingdom and Japan. By entering into these contracted distribution facility
agreements, Mannatech minimizes the fulfillment time for processing orders and
is generally able to process an order within 24 hours after order placement and
payment. For further information on these contract facilities, see "Item 2.
Properties" in this report.
Government Regulations
In the United States, governmental regulations, laws, administrative
determinations, court decisions and similar legal requirements at the federal,
state and local levels regulate direct selling and network-marketing
activities. These regulations address, among other things:
o direct selling and network-marketing systems;
o transfer pricing and similar regulations affecting the amount of foreign
taxes and customs duties paid;
o taxation of associates and the requirement to collect taxes and maintain
appropriate records;
o how a company manufacturers, packages, labels, distributes, imports,
sells and stores products;
o product ingredients;
o product claims;
o advertising; and
o the extent to which a company may be responsible for distributors'
claims.
Products. The following governmental agencies regulate certain aspects of
Mannatech's business and/or products in the United States:
o the Food and Drug Administration (FDA);
o the Federal Trade Commission (FTC);
o the Consumer Product Safety Commission;
o the Department of Agriculture;
o the Environmental Protection Agency;
o the United States Postal Service;
o state attorney general offices; and
o various agencies of the states and localities in which Mannatech's
products are sold.
The FDA regulates the formulation, manufacture, packaging, storage,
labeling, promotion, distribution and sale of foods, dietary supplements,
over-the-counter drugs and pharmaceuticals. The FDA issued a final rule called
"Statements Made for Dietary Supplements Concerning the Effect of the Product
on the Structure or Function of the Body" and has regulations that require
Mannatech and both its suppliers and manufacturers to meet Good Manufacturing
Practices in their preparation, packing, storage and shipment of products. The
FDA has also published a Notice of Advanced Rule Making for Good Manufacturing
Practices, which requires manufacturing of dietary supplements to also follow
Good Manufacturing Practices. Mannatech believes it meets all the necessary
regulations of the FDA.
Mannatech's core sales philosophy is based on the Dietary Supplement
Health and Education Act of 1994 (DSHEA). This DSHEA act revised the provisions
of the Federal Food, Drug and Cosmetic Act concerning the composition and
labeling of dietary supplements, which created a new class, by statute,
entitled "dietary supplements." Dietary supplements include vitamins, minerals,
herbs, amino acids and other dietary substances
15
used to supplement current diets. This act requires a company to provide
evidence establishing that a supplement is reasonably expected to be safe.
Manufacturers of dietary supplements must make a "statement of nutritional
support," describing certain types of product performance characteristics, to
help ensure the following:
o maintain evidence that the statement is truthful and not misleading;
o include a disclaimer in the statement itself; and
o notify the FDA of the statement no later than thirty-days after the
statement is first made.
Mannatech believes a majority of its products are included in the dietary
supplements class as outlined in the Federal Food, Drug and Cosmetic Act. The
FDA issues regulations governing the labeling and marketing of nutritional
supplement products. These regulations include:
o the identification of dietary or nutritional supplements and their
nutrition and ingredient labeling;
o requirements related to the wording used for claims about nutrients,
health claims and statements of nutritional support;
o labeling requirements for dietary or nutritional supplements for which
"high potency" and "antioxidant" claims are made;
o notification procedures for statements on dietary and nutritional
supplements; and
o premarket notification procedures for new dietary ingredients in
nutritional supplements.
Mannatech's substantiation program involves the compilation and review of
scientific literature pertinent to the ingredients contained in each of its
products. Mannatech continuously updates its on-going substantiation program to
provide evidence for its product claims and notifies the FDA of certain types
of performance claims made in connection with its products.
Because of its international expansion, Mannatech is also subject to
extensive regulations in each country in which it operates, which currently
include Canada, Australia, the United Kingdom and Japan. Some of the various
country-specific regulations include, but are not limited to, the following:
o the Therapeutic Goods Administration and the Trade Practices Act, in
Australia;
o the National Provincial Laws and the Federal Competition Act, in Canada;
o Federal and State regulations, in Australia;
o National regulations including the Local Trading Standards Officers, in
the United Kingdom;
o Regulation by the Ministry of International Trade and Industry, in Japan.
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, a product sold as
a dietary supplement but promoted on its label or in its marketing as a
treatment, prevention or cure for a specific disease or condition would likely
be considered by the FDA as unapproved and thus an illegal drug. To maintain
the product's status as a dietary supplement, the labeling and marketing must,
at a minimum, be consistent with the provisions in the DSHEA and must not be
inconsistent with the FDA's extensive regulations regarding drugs. As a result,
Mannatech has implemented procedures designed to ensure that its associates and
employees comply with the requirements of DSHEA and the Food, Drug and Cosmetic
Act. Because the scope of the FDA's authority under DSHEA and the Food, Drug
and Cosmetic Act is often open to interpretation and debate there can be no
assurance that the FDA will not question Mannatech's actions in the future.
Emprizone[RegTM] is the only product Mannatech currently sells that is labeled
as an over-the-counter monograph drug. If the FDA asserts that Mannatech's
other product claims should 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 specific health claim for dietary supplements unless
the health claim is supported by significant scientific research and is
pre-approved by the FDA.
The FTC regulates the marketing practices and advertising of all of
Mannatech's products. In the past several years, the FTC instituted enforcement
actions against several dietary supplement companies for false and misleading
marketing practices and advertising of certain products. These enforcement
actions have
16
resulted in consent decrees and monetary payments by the companies involved. In
addition to conveying product claims clearly and accurately, marketers must
verify that there is adequate support for their claims. Under FTC regulations,
before disseminating an advertisement, advertisers must have a reasonable basis
for all express and implied product claims. What constitutes a reasonable basis
is determined by what claims are being made, how the claims are presented in
the context of the entire ad and how the claims are qualified. The FTC's
standard for evaluation of substantiation is sufficiently flexible to ensure
that consumers have access to information about emerging areas of science but
requires reasonable evidence proving product claims at the time 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 FTC has never
threatened any enforcement action against Mannatech for the advertising of its
products, Mannatech can give no assurance that the FTC will not question its
advertising or other operations in the future.
Direct Selling and Network-Marketing System. Mannatech's direct selling
and network-marketing system, which includes its associates global incentive
plan, is controlled by a number of governmental regulations including various
federal and state statutes and is administered by the FTC, various state
authorities and foreign government agencies. The legal requirements governing
direct selling and 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 the sale of products
rather than compensation for 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 that are not directly sponsored
by the associate. Mannatech plans to continue to obtain regulatory approval of
its direct selling and network-marketing system in jurisdictions that require
such approval. If regulatory approval is not required, Mannatech relies and
often seeks advice from outside counsel to ensure regulatory compliance.
Mannatech is also subject to inquiries and enforcement actions from the
various state attorney general offices. Each state has its own state acts
called "Little FTC Acts." Each of these state's acts is usually similar to the
requirements of the federal laws. As a result of certain statements contained
in an associates' 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. The Michigan Attorney General also
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 with Michigan's
Attorney General's office and believes that it has fully complied with this
request. In order to comply with the State of Michigan's Franchise Investment
Law against involuntary inventory stockpiling, Mannatech monitored its
associates in Michigan by conducting random audits of Michigan associates 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. The
Michigan consent decree expired in March 2001.
In Canada, Mannatech's direct selling and network-marketing 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 such representations meet other legal requirements
of the Federal Competition Act. Mannatech's global incentive plan has been
reviewed and Mannatech did not receive objections to its provisions from the
appropriate Canadian authorities. Any future changes to the plan will require
review by 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 as direct sellers. Mannatech believes that it holds all
of the required provincial or territorial direct sellers' licenses.
In Australia, Mannatech's direct selling and network-marketing system is
subject to both federal and state regulation. Mannatech's global compensation
plan in Australia is designed to meet state requirements and the requirements
of Australia's Trade Practices Act. The Trade Practices Act and various state
offices regulate Mannatech's business and trade practices and those of its
associates. Australia's Therapeutic Goods Act, as well as its Trade Practices
Act regulate any claims or representations relating to Mannatech's products and
its associate global incentive plan.
17
In the United Kingdom, Mannatech's direct selling and network-marketing
system is subject to national regulations. Mannatech's global incentive 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.
The U.K. Codes of Advertising and Sales Promotion regulate Mannatech's business
and trade practice and the practices of its associates. The Trading Standards
Office regulates any claims or representations relating to Mannatech's
business.
In Japan, Mannatech's direct selling and network-marketing system, overall
business operations, trade practices and its associates global incentive plan
and its associates are all governed by the Door-to-Door Sales Law as enacted in
1976 by the Ministry of International Trade and Industry. Mannatech's global
incentive plan in Japan is designed to meet governmental requirements. Product
claims are subject to the Pharmaceutical Affairs Law, which prohibits the
making and publication of "drug effectiveness" claims regarding products that
have not received approval from the Ministry and Health Welfare and Labor.
Other Regulations. Mannatech is also subject to a variety of other
regulations in various foreign markets, including:
o social security assessments and taxes;
o value added taxes;
o goods and services taxes;
o sales taxes;
o consumption taxes;
o customs duties;
o employee/independent contractor regulations;
o employment and severance pay requirements;
o import/export regulations; and
o antitrust laws.
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
associate, and may incur severance obligations in order to terminate the
associate.
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 ensure that its associates comply with
these regulations. The types of conduct governed by regulations include, in
part:
o claims made about Mannatech's products;
o promises or claims of income by Mannatech or its associates; and
o sales of products in markets where the products have not been approved,
licensed or legally allowed to be sold.
In some markets, including the United States, improper product claims by
associates could result in Mannatech's products being reviewed or re-reviewed
by certain regulatory authorities. This review could result in Mannatech's
products being classified or placed into another product category with stricter
regulations or could require labeling changes.
Mannatech continues to research and monitor laws governing associate
conduct and to revise or alter its business system, associate's global
incentive plan, its associate's requirements and other materials and programs
as required by the laws and regulations in each market. Although 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 cannot guarantee that its associates always
act in a professional and consistent manner.
18
Competition
The size of the nutritional supplement industry has steadily increased and
remains intensely competitive. Mannatech competes directly with companies that
manufacture and market similar nutritional products including:
o Solgar Vitamin and Herb Company, Inc.;
o Nu Skin Enterprises, Inc.;
o Twinlab Corporation;
o Usana, Inc.;
o Nature's Sunshine Products, Inc.; and
o 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 purchase 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 competes for new associates with other retail, direct selling
and multilevel marketing companies. Many of Mannatech's competitors and other
direct selling organizations have longer operating histories, are better known
and/or have greater financial resources. These competitors include:
o Amway Corporation;
o Nu Skin Enterprises, Inc.;
o Body Wise International, Inc.;
o ENVION International;
o Herbalife International, Inc.;
o Mary Kay Cosmetics, Inc.;
o Forever Living Products, Inc.; and
o Melaleuca, Inc.
Mannatech competes for new associates by stressing the ease of its
delivery system, the benefits of its global incentive plan, its marketing and
educational tools and its high-quality, proprietary products. Because the pool
of individuals interested in direct selling is limited in each market,
available recruits decrease when other network-marketing companies successfully
recruit these people into their businesses.
Employees
As of December 31, 2001, Mannatech employed 240 people in the United
States, of which 10 employees hold executive positions. Mannatech also employs
20 people in Australia, 14 people in the United Kingdom and 17 people in Japan.
These numbers do not include Mannatech's associates, who are independent
contractors and not employees of Mannatech. Mannatech employees are not
unionized and Mannatech believes it maintains a good relationship with its
employees.
Risk Factors
In addition to the other information included in this report, the
following risk factors should be considered in evaluating Mannatech's business
and future prospects.
Mannatech's stock price may fluctuate significantly.
The trading price of Mannatech's common stock and the price at which
Mannatech may sell securities in the future, could be subject to significant
fluctuations in response to:
o broad market fluctuations, as well as general economic conditions, in the
United States or internationally;
o quarterly fluctuations in Mannatech's financial results;
o financial and business announcements by Mannatech and its competitors;
and
o the condition of the industry and general financial markets.
19
If Mannatech's international markets are not successful, its business may
suffer.
Mannatech currently operates in the international markets of Canada,
Australia, the United Kingdom and Japan. In its international markets Mannatech
may experience changes in legal and regulatory requirements and or difficulties
in adapting to foreign cultures and business customs. If Mannatech does not
adequately address these problems, its international markets may not meet
growth expectations, which could hurt Mannatech's overall business. Mannatech's
international operations and future expansion plans are subject to political,
economic and social uncertainties, including, among other things:
o inflation;
o the renegotiation or modification of existing agreements;
o increases in tariffs;
o changes and limits in export controls;
o government regulations and laws;
o trademark availability and registration issues;
o changes in exchange rates;
o adverse changes in taxation;
o wars and other hostilities; and
o changes or perception of the direct selling business.
Any changes related to these factors could have a material adverse effect
on Mannatech's business, profitability and growth prospects. Further, Mannatech
may have to incur significant amounts of time and money in distributing and
selling its products in international markets, which will be lost if these
efforts are not successful.
If Mannatech is unable to attract and retain associates its business may
suffer.
Mannatech's success depends largely upon its ability to attract, maintain,
motivate and retain a large base of associates, who in turn enroll additional
associates to purchase and sell products. Mannatech cannot give any assurance
that the number or the productivity of its associates will be sustained at
current levels or increase in the future. Several factors affect Mannatech's
ability to retain a sufficient number of associates, including:
o motivating associates;
o general economic conditions;
o changes in the amount of commissions paid;
o public perception of the industry and direct selling;
o public perception of Mannatech and its products;
o the limited number of people who are interested in pursing direct selling
as a business, and
o competition in recruiting and retaining associates from other direct
selling organizations.
Competition by other direct selling companies for new individuals
interested in direct selling is intense. Mannatech expects that competition
will continue to intensify as direct selling becomes more popular and as more
direct selling organizations enter the marketplace. The pool of individuals
interested in direct selling tends to be limited in each market. Every time
another network-marketing company successfully recruits an individual, the
potential pool of associates is reduced.
Mannatech sales and profits could suffer if:
o Mannatech is unable to attract and retain a sufficient number of
associates;
o Mannatech finds it necessary to terminate a significant number of
associates;
o other network-marketing companies recruit Mannatech's existing
associates, or
o other network-marketing companies deplete the pool of potential
associates in a given market.
20
If Mannatech incurs substantial liability from litigation, complaints or
enforcement actions resulting from associate misconduct, Mannatech's financial
condition could suffer.
Although Mannatech has policies and procedures in place to govern the
conduct of its associates, it is still difficult to detect and correct all
instances of associate misconduct. Violations of Mannatech's policies and
procedures by its associates could lead to litigation, formal or informal
complaints, enforcement actions, and inquiries by various federal, state or
foreign regulatory authorities. Because of Mannatech's expansion into foreign
countries, Mannatech is faced with the challenge and risk of coordinating its
associate policies and procedures to conform to the legal requirements of these
foreign countries. Litigation, complaints or enforcement actions involving
Mannatech and its associates could consume considerable amounts of money and
other corporate resources and could generally have a negative impact on
Mannatech's business profitability and growth prospects.
If government regulations regarding direct selling and network-marketing
systems are changed, interpreted or enforced in a manner adverse to Mannatech's
business, Mannatech may be subject to enforcement actions and material
limitations regarding its business operations.
Mannatech's network-marketing system is subject to extensive governmental
regulation, including federal and state regulation regarding network-marketing
plans and the offer and sale of business opportunities and securities. Any
change in legislation and regulations may hurt Mannatech's business. Further,
significant penalties may be imposed upon Mannatech if it or its associates do
not comply with existing statues or regulations. Violations may result from:
o misconduct by its associates
o the ambiguous nature of statutes;
o regulations and related court decisions;
o the considerable discretion granted to regulatory authorities and the
courts with regard to interpreting and enforcing laws, and
o regulations affecting Mannatech's business.
The nutritional industry market is intensely competitive, and market conditions
and the strengths of Mannatech's competitors may harm its business.
The nutritional supplements market is intensely competitive. Mannatech
also competes with other network-marketing companies for associates.
Mannatech's business profitability and growth prospects may be adversely
affected by market conditions and competition in the future. Many competitors
have much greater name recognition and financial resources than Mannatech has,
which may give them a competitive advantage. Mannatech's competitors may be
able to devote greater resources to marketing, promotional and pricing
campaigns that may influence Mannatech's existing and potential associates to
buy their products rather than Mannatech's.
If Mannatech's business or its products are subject to adverse publicity,
Mannatech's business may suffer.
Mannatech is very dependent upon its associates' perception of the overall
integrity of its business, as well as the safety and quality of its products
and similar products distributed by other companies. The number and motivation
of its associates could decline and Mannatech's business could suffer if
Mannatech or its products are subject to adverse publicity regarding:
o the nutritional supplement industry;
o competitors;
o the legality of network-marketing systems or Mannatech's
network-marketing system specifically;
o the safety and quality of Mannatech's competitors' products and product
ingredients;
o regulatory investigations of Mannatech's products or Mannatech's
competitors products;
o the actions of its associates;
o Mannatech's management of its associates;
o the public's perception of its associates, and
o the direct selling business.
21
If Mannatech's outside suppliers and manufacturers fail to supply its products
in sufficient quantities and in a timely fashion, Mannatech's business may
suffer.
All of Mannatech's products are manufactured by outside manufacturers.
Mannatech's profit margins and ability to deliver its products on a timely
basis are dependent upon the ability of its outside suppliers and manufacturers
to supply quality products in a timely and cost-efficient manner. Mannatech's
ability to enter new markets and sustain satisfactory levels of sales in each
market is dependent upon the ability of its outside manufacturers to
reformulate existing products, if necessary, to comply with local regulations
for market environments. Further, the development of new products in the future
will depend in part on these outside suppliers and manufacturers. The failure
of any manufacturer to supply the products or ingredients of products that
Mannatech requires could have an adverse effect on Mannatech's business,
profitability and growth prospects.
Mannatech believes it has dependable alternative suppliers for all of its
ingredients except Manapol[RegTM] and Arabinogalactan, which are components of
Mannatech's proprietary compounds. Mannatech believes that it can produce or
replace any of its ingredients if its current suppliers are unable to perform;
however, any delay in replacing or substituting such ingredients could affect
Mannatech's business.
If Mannatech is unable to protect its proprietary rights of its products, its
business may suffer.
Proprietary rights are important to Mannatech's success and its
competitive position. Mannatech's success largely depends on its ability to
protect and promote its proprietary rights including:
o Ambrotose[RegTM] complex, a glyconutritional dietary supplement
consisting of a blend of plant polysaccharides, which is a component in
the majority of Mannatech's products,
o Diascorea complex, a blend of herbal extracts; and
o Ambroglycin(TM), a food-mineral matrix, developed to use the latest food
science technology to deliver various dietary supplements in a balanced
food matrix supplement.
Mannatech has filed a composition of matter and use patent application for
Ambrotose[RegTM] complex and has entered into confidentiality agreements with
its suppliers and manufacturers and suppliers to protect its proprietary
rights. Nevertheless, Mannatech continues to face the risks (1) of not
receiving a patent for Ambrotose[RegTM] complex, (2) of receiving a patent much
narrower in scope than Mannatech requested; and (3) that Mannatech has not
properly protected its proprietary rights. Mannatech's business, profitability
and growth prospects will be adversely affected if it fails to protect its
proprietary rights. Mannatech consults with various legal counsel and
consultants to help ensure that it has done everything possible to properly
protect its proprietary rights.
If Mannatech violates various governmental regulations and fails to obtain
necessary regulatory approvals, Mannatech's business may suffer.
Mannatech is subject to and affected by extensive laws, governmental
regulations, administrative determinations, court decisions and similar
constraints at the federal, state and local level in both Mannatech's domestic
and foreign markets. These regulations involve, among other things:
o the formulation, manufacturing, packaging, labeling, distribution,
importation, sale and storage of its products;
o health and safety of food and drugs;
o trade practice laws and direct selling laws;
o product claims and advertising by Mannatech and its associates;
o Mannatech's network-marketing system;
o restrictions on pricing in transactions with Mannatech's foreign
subsidiaries or other related parties and similar regulations that affect
Mannatech's level of foreign taxable income;
o the assessment of customs duties;
o taxation of its associates, which in some cases may obligate Mannatech to
collect taxes and maintain appropriate records, and
o export and import restrictions.
22
New regulations could be adopted or existing regulations may change at any
time in a manner that could severely restrict Mannatech's ability to continue
to operate its business in the same manner as it has in the past and would hurt
Mannatech's business. Mannatech may experience complications regarding health
and safety and food and drug regulations for nutritional products. Mannatech's
products may need to be reformulated to comply with any changes in the
requirements. In some foreign countries, nutritional products may be considered
foods, while other countries may consider them drugs. Present or future health
and safety or food and drug regulations could delay or prevent Mannatech's
introduction of new products or suspend or prohibit the sale of existing
products into a given country or marketplace. If Mannatech expands into other
foreign markets, it may be affected by the general stability of foreign
governments and the regulatory environment relating to network-marketing and
its products.
If Mannatech's products are subject to high customs duties, its sales and
competitive position may suffer as compared to locally produced goods. In
addition, import restrictions in certain countries and jurisdictions may limit
Mannatech's ability to import products from the United States.
If Mannatech's direct selling activities do not comply with government
regulations, Mannatech's business may suffer.
Mannatech's direct selling activities are regulated by various
governmental agencies. If a government agency determines that Mannatech has
violated a law or regulation governing direct selling activities, Mannatech's
business, profitability and growth prospects may be hurt. These laws and
regulations are generally intended to prevent fraudulent or deceptive schemes,
often referred to as "pyramid" or "chain sales" schemes, which promise quick
rewards for little or no effort or risk, require high entry costs, use high
pressure recruiting methods and/or do not involve legitimate products.
Mannatech could be in violation of existing regulations as a result of, among
other things, the considerable interpretive and enforcement discretion given to
regulators, as well as misconduct by its associates. In addition, the adoption
of new laws or regulations, changes in the interpretation of existing laws or
regulations and inquiries by government agencies into Mannatech's operations
could generate negative publicity, which could have a negative impact on the
motivation and recruitment of associates and Mannatech's business.
If Mannatech is exposed to product liability claims, it may be liable for
damages and expenses, which could hurt its financial condition.
Mannatech may face financial exposure to product liability claims if the
use of its products results in an allegation of loss or injury. To date,
Mannatech has not been the subject of significant product liability claims.
Mannatech may be exposed to future product liability claims, including, among
other claims, that its products contain contaminants or include inadequate
instructions regarding use or inadequate warnings concerning side effects and
interactions with other substances. Although Mannatech and both its suppliers
and manufacturers maintain product liability insurance coverage, potential
product liability claims may exceed the amount of insurance coverage or
potential product liability claims may be excluded under the terms of the
policy, which could hurt Mannatech's financial condition.
Mannatech sells GlycoLEAN BODY SYSTEM[RegTM] ACCELERATOR(TM) and MVP, which
contain ephedrine. Recently, products containing ephedrine have been the
subject of adverse publicity in the United States and other countries relating
to alleged harmful effects, including the deaths of several individuals. The
FDA is proposing regulations that, if adopted, would subject any products
containing ephedrine to its labeling requirements and could possibly require
such products to be reformulated. Any negative publicity or product liability
claims that stem from products containing ephedrine could hurt Mannatech's
business. Moreover, depending on claims made, the FDA could regulate it as a
drug, thus requiring product approval prior to marketing. In addition, certain
states, including Texas and Nebraska, have begun to regulate products
containing ephedrine, including labeling requirements. As a precaution
Mannatech has voluntarily reformulated its GlycoLEAN BODY SYSTEM[RegTM]
ACCELERATOR(TM) to include a non-ephedrine ingredient and renamed it GlycoLEAN
BODY SYSTEM[RegTM] ACCELERATOR2.(TM) Mannatech is currently exploring an
ephedrine free ingredient for its MVP product. Sales for MVP were $3.7 million,
$2.0 million and $1.4 million in 1999, 2000 and 2001, respectively.
23
Mannatech's directors and officers own a significant amount of its common
stock, giving them influence over corporate transactions and other matters.
Certain of Mannatech's directors and executive officers, together with
their families and affiliates, beneficially own approximately 50.5% of
Mannatech's outstanding common stock. As a result, these individuals are able
to significantly influence Mannatech including the election of a majority of
the board of directors and approval of significant corporate transactions. As a
result, various transactions may be delayed, deferred or prevented without the
approval of these shareholders, including:
o transactions, which would result in a change in control;
o mergers and acquisitions;
o tender offers,
o election of directors; and
o proxy contests.
If this happens, Mannatech's shareholders may not have the opportunity to
sell their shares for more than the then-prevailing market price of Mannatech's
common stock and the market price of its common stock may decline.
If Mannatech's information technology systems fail, Mannatech's operations
could suffer.
Mannatech's business is very dependent upon information technology and its
related systems to manage and operate many of its key business functions,
including:
o order processing;
o customer service;
o distribution of products;
o commission processing,
o cash receipts and payments; and
o financial reporting.
If Mannatech's information technology system fails, Mannatech may not be
able to conduct its day-to-day business. Depending upon the severity and
duration of the failure and the ability to remedy the cause, Mannatech's
business could be hurt; however, Mannatech has developed a comprehensive
service continuity plan to address any disruption of its business.
If provisions of Mannatech's articles of incorporation, bylaws and laws in the
state of Texas relating to purchases or sales of large amounts of common stock
or assets are triggered, the price investors might be willing to pay for
Mannatech's common stock in the future could be limited.
Provisions of Mannatech's current articles of incorporation, bylaws and
the Texas Business Corporation Act may discourage unsolicited proposals to
acquire Mannatech, even if the proposal is beneficial to its shareholders. In
addition, Mannatech's bylaws provide for classes of directors on its board of
directors with members of each class serving staggered terms of three years.
Additionally, Mannatech's board of directors is authorized, without shareholder
approval, to issue up to 1,000,000 shares of preferred stock having such
rights, preferences and privileges as the board of directors designates.
Moreover, the Texas Business Corporation Act restricts, subject to exceptions,
business combinations with any "affiliated shareholder." These provisions may
delay, deter or prevent a takeover of Mannatech and could limit the price
investors might be willing to pay for Mannatech's common stock in the future.
24
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) ................... 2,000 2 years March 2003
Tokyo, Japan (Japanese headquarters) (3) ..................... 6,000 2.3 years 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. ceased operations in December 2000 and
Mannatech is subleasing this facility through April 2002.
(3) The Japan headquarters' lease will expire in April 2002 and is currently
being renegotiated.
Mannatech also contracts with several third party contractors for
distribution and fulfillment operations and believes all of its leased
facilities are adequate for its current and projected operations. Mannatech's
third party contract distribution operations include the following:
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 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 twelve-month period.
Item 4. Submission of Matters to a Vote of Security Holders
None.
25
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 20,
2002 the total number of outstanding shares of its common stock was 25,134,840
and the closing price on such date was $2.65. 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, 2000 and 2001:
High Low
----------- -----------
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
First Quarter 2001 ........... $1.375 $1.000
Second Quarter 2001 .......... $1.480 $0.910
Third Quarter 2001 ........... $1.150 $0.880
Fourth Quarter 2001 .......... $4.290 $1.070
Holders. As of March 20, 2002, there were approximately 5,020 shareholders
of record who held Mannatech's common stock directly and approximately 126
security brokers and dealers who held approximately 47.4% of Mannatech's common
stock on behalf of approximately 8,200 shareholders.
Dividends. Mannatech did not pay any dividends in 2000 and 2001 and does
not intend to pay any dividends in 2002. Mannatech's board of directors
continues, 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.
On September 28, 2001, Mannatech agreed to sell in a private sale, 815,009
shares of its $0.0001 par value common stock held in treasury to Mr. Ray
Robbins, at $1.00 per share. Mr. Robbins is a company co-founder, director,
associate and 9.0% shareholder. The shares are considered restricted securities
under Rule 144 of the Securities Act and are restricted from being transferred
or sold in the open market for one year.
Uses of Proceeds from Registered Securities
None.
26
Item 6. Selected Financial Data
The Selected Financial Data set forth below for each of the five years
ended December 31, 2001 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," set forth in
Item 7 of this report.
Year ended December 31,
-----------------------------------------------------------------
1997 1998 1999 2000 2001
------------- ------------- ------------- ----------- -----------
(in thousands, except per share amounts)
Consolidated Statement of Income Data:
Net sales ........................................... $ 150,570 $ 164,933 $ 179,730 $150,006 $128,736
Gross profit ........................................ 64,158 71,143 77,033 61,175 53,218
Income (loss) from operations ....................... 14,718 16,057 16,081 (8,439) (3,924)
Income (loss) before cumulative effect of
accounting change .................................. 10,622 10,054 10,788 (7,139) (3,660)
Cumulative effect of accounting change (1) .......... -- -- -- (210) --
Net income (loss) ................................... 10,622 10,054 10,788 (7,349) (3,660)
Earnings (loss) per common share--basic:
Before cumulative effect of accounting change $ 0.50 $ 0.45 $ 0.45 $ (0.29) $ (0.15)
Cumulative effect of accounting change (1) .......... -- -- -- (0.01) --
--------- --------- --------- -------- --------
Net ................................................ $ 0.50 $ 0.45 $ 0.45 $ (0.30) $ (0.15)
========= ========= ========= ======== ========
Earnings (loss) per common share--diluted:
Before cumulative effect of accounting change $ 0.47 $ 0.42 $ 0.43 $ (0.29) $ (0.15)
Cumulative effect of accounting change (1) .......... -- -- -- (0.01) --
--------- --------- --------- -------- --------
Net ................................................ $ 0.47 $ 0.42 $ 0.43 $ (0.30) $ (0.15)
========= ========= ========= ======== ========
Weighted average common and common
equivalent shares outstanding:
Basic .............................................. 21,449 22,102 24,133 24,946 24,730
========= ========= ========= ======== ========
Diluted ............................................ 22,400 23,659 25,224 24,946 24,730
========= ========= ========= ======== ========
Pro Forma Information: (2)
Income before income taxes, as reported ............ $ 14,761
Pro forma provision for income tax expense ......... 5,683
---------
Pro forma net income ............................... $ 9,078
=========
Pro forma earnings per common share: (2)
Basic .............................................. $ 0.42
=========
Diluted ............................................ $ 0.41
=========
Other Financial Data:
Capital expenditures (3) ........................... $ 9,135 $ 6,098 $ 3,243 $ 4,109 $ 1,316
Dividends declared per common share ................ $ 0.37 $ 0.39 $ 0.06 $ -- $ --
Consolidated Balance Sheet Data:
Total assets ....................................... $ 19,558 $ 26,874 $ 44,779 $ 38,902 $ 33,143
Long-term obligations excluding current
portion ........................................... $ 110 $ 1,056 $ 325 $ 527 $ 950
- ------------
(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.
(3) Capital expenditures include assets acquired through capital lease
obligations of $397,402 and $1,471,986 in 1997 and 1998, respectively.
27
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, 2001. This discussion should be read in conjunction
with the Consolidated Financial Statements and related Notes in Item 14. of this
report, beginning on page F-1.
Company Overview and Critical Accounting Policies and Estimates
Mannatech develops innovative, high-quality, proprietary nutritional
supplements, topical products and weight-management products that are sold
through a global network-marketing system throughout the United States, Canada,
Australia, the United Kingdom and Japan. Currently, Mannatech operates as a
single segment and primarily sells its products through a network of
approximately 192,000 active associates and members. Mannatech defines an
"active associate" as an associate or member who has purchased Mannatech
products within the last twelve months.
Mannatech's significant accounting policies are described in Note 1 to its
Consolidated Financial Statements and related Notes in Item 14. of this report.
In response to SEC Release No. 33-8040, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies," Mannatech has identified certain of its
policies as being of particular importance to the portrayal of its financial
position and results of operations and which require the application of
significant judgment by Mannatech's management. Mannatech analyzes its
estimates including inventory write-downs, tax valuation allowances,
contingencies and litigation and bases, its estimates on Mannatech's historical
experience and various other assumptions that may be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. Mannatech's critical accounting policies include the
following:
o Inventory write-downs are established when Mannatech determines that the
market value of any inventory item is less than the cost of such item.
The determination is based on assumptions about future sales and
disposition plans. If actual sales are less favorable then those
projected by management, additional inventory write-downs may be
required.
o 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 projected cash flows 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.
o Mannatech evaluates the probability of realizing the future benefits of
any net deferred tax assets and records a valuation allowance 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, may not be
realized. Mannatech has established a valuation allowance totaling $2.6
million for the net deferred tax asset related to the net operating
losses of its Japan operations.
o Mannatech adopted Staff Accounting Bulletin No. 101 "Revenue Recognition
in Financial Statements" ("SAB 101") in the fourth quarter of 2000. Under
SAB 101, Mannatech recognizes revenue for product sales upon the receipt
of the products by the associate or member. Beginning in 2000, Mannatech
defers all of its revenues until the associate or member receives the
shipment.
o Mannatech also defers a portion of the revenue received from the sale of
starter and renewal packs when the revenue exceeds the total average
wholesale value of all individual items included in such packs and
amortizes such deferrals over a twelve-month period. Some of the more
expensive packs also contain an event admission pass, which allows an
associate free admission to a corporate sponsored event. Revenues from
these packs are allocated between products and event admission based on
the proportionate average fair value of products and the allocated event
admission. The allocated event admission revenue contained in these pack
sales is also amortized over a twelve-month period. Total net deferred
revenue was $691,000 and $433,000 at December 31, 2000 and 2001,
respectively.
o Mannatech 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 are three to five years.
28
General Summary
Mannatech's net sales consist of sales from products sold, starter and
renewal packs sold and shipping fees. Substantially all product sales are made
to associates at published wholesale prices and are sold to members at a
discount from suggested retail pricing. Starter and renewal packs consist of
various combinations of products and promotional materials. Mannatech tries to
offer a comparable associate starter pack in each country in which it does
business; however, because each country has different regulatory guidelines
that must be followed, not all of Mannatech's packs are offered in all
countries. Mannatech defers the recognition of revenue for product sales until
its associates or members receive the products. In 2001, Mannatech increased
the sale prices of certain of its products and shipping fees. 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 are as follows:
United United
Year ended December 31, States Canada Australia Kingdom Japan Total
- ------------------------- ---------- ---------- ----------- --------- ----------- -----------
2001 .................... 77.1% 14.1% 3.4% 1.0% 4.4% 100.0%
2000 .................... 77.0% 13.5% 5.7% 1.3% 2.5% 100.0%
1999 .................... 76.7% 14.3% 8.8% 0.2% --(*) 100.0%
- ------------
(*) Mannatech began operations in Japan in June 2000.
Net sales decreased in all other countries in 2001 except for its Japan
operations, which reported an increase in net sales in 2001 as compared to the
same period in 2000, which was the result of operating in Japan for a full
year. Mannatech believes the decrease in net sales for 2001 is due to a number
of factors including:
o general economic conditions;
o associates' continuing to focus on the proposed changes to the global
incentive plan, which is projected to be implemented in mid 2002;
o associates concerns about the decline of Mannatech's stock price.
To help stimulate net sales, Mannatech introduced three new products in
2001 and plans to improve some of its products to ensure they maintain
high-quality levels. The new products introduced in 2001 included the
following:
o GLYCO-BEARS[RegTM], introduced in March 2001, a children's multivitamin
especially formulated for children between the ages of 4 to 14 that help
to provide 26 essential vitamins, minerals and other vital nutrients;
o Glycentials(TM) Vitamin, Ambroglycin(TM) Mineral and Antioxidant Formula,
introduced in August 2001, a dietary supplement that helps provide a
balanced food matrix of vitamins, chelated minerals, trace minerals,
antioxidant co-factors and Ambrotose[RegTM] complex; and
o CardioBALANCE(TM) Heart Care Formula, introduced in October 2001, a
dietary supplement that helps provide a wide range of specific
nutritional benefits designed to aid in keeping an already healthy
cardiovascular system strong and well.
Costs of sales primarily consist of cost of products purchased from
third-party manufacturers, costs of promotional materials sold to Mannatech's
associates and write-downs of inventory. As the mix of products and promotional
material shifts, costs of sales and gross profit may fluctuate due to the
different margins on each product sold.
Mannatech's most significant expense is commissions. When Mannatech
expanded internationally, it integrated the majority of its associate's global
incentive plan across all markets in which its products were sold, thereby
allowing all of its existing associates to receive commissions for direct and
indirect global product sales. This global structure allows associates to build
their global networks by expanding their existing downlines into newly-formed
international markets rather than having to establish new downlines to
requalify for higher levels of commissions within each new country. Mannatech
pays its associates various commissions and incentives based upon the
associates' direct and indirect product sales and expansion of their downlines.
29
In late 2001, Mannatech outlined its overall plans to change its global
associate incentive plan to eliminate the commission paid only in the United
States and Canada, which rewards associates for building their network and
increases the payout of all other existing commissions paid in order to
concentrate commission payments on product sales and network development.
Currently, commissions and incentives are paid to associates based on the
following:
o associates' placement and position within the incentive plan;
o volume of their direct and indirect commissionable sales;
o number of newly-enrolled associates; and
o achievement of certain levels to qualify for various incentive programs.
Operating expenses consist primarily of selling and administrative
expenses and other operating costs. Selling and administrative expenses are a
combination of both fixed and variable expenses and include compensation,
shipping and freight and marketing expenses. Other operating costs include
utilities, depreciation, travel, consulting, professional fees, office
expenses, printing expenses and miscellaneous operating expenses.
Income taxes include both domestic and foreign taxes. In 2000 and 2001,
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 30%. Mannatech expects
to pay taxes in Japan at a statutory tax rate ranging between 42% and 48%;
however, since its inception Mannatech has only reported net operating losses
in Japan. 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. Mannatech
records a valuation allowance for any expected net operating losses, which may
not be able to be realized in the future.
Mannatech reported loss per share of ($0.15) in 2001 as compared to
($0.30) per share in 2000. The loss per share was the result of the following:
o a decrease in net sales of $21.3 million;
o recording severance charges of approximately $3.4 million relating to
various former executive officers; partially offset by
o a reduction in total selling and administrative expenses and other
operating expenses of $13.9 million.
30
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,
----------------------------------------
1999 2000 2001
----------- ------------ -----------
Net sales .................................................. 100.0% 100.0% 100.0%
Cost of sales .............................................. 16.2 18.0 18.3
Commissions ................................................ 40.9 41.2 40.4
------- ------- -------
Gross profit ............................................. 42.9 40.8 41.3
Operating expenses:
Selling and administrative expenses ...................... 19.4 24.0 23.9
Other operating costs .................................... 14.5 21.1 17.8
Write-off of fixed asset ................................. -- 0.6 --
Severance expenses related to former executives .......... -- 0.7 2.7
------- ------- -------
Income (loss) from operations .............................. 9.0 (5.6) (3.1)
Interest income ............................................ 0.4 0.5 0.2
Interest expense ........................................... (0.1) (0.1) --
Other expense, net ......................................... (0.1) (0.4) --
------- ------- -------
Income (loss) before income taxes and cumulative effect of
accounting change ......................................... 9.2 (5.6) (2.9)
Income tax (expense) benefit ............................... (3.2) 0.8 0.1
------- ------- -------
Income (loss) before cumulative effect of accounting change,
net of tax ................................................ 6.0 (4.8) (2.8)
Cumulative effect of accounting change ..................... -- (0.1) --
------- ------- -------
Net income (loss) .......................................... 6.0% (4.9)% (2.8)%
======= ======= =======
Number of starter packs sold ............................... 140,521 107,763 65,986
Number of renewal packs sold ............................... 66,119 63,930 44,530
------- ------- -------
Total number of packs sold ................................. 206,640 171,693 110,516
======= ======= =======
Total associates canceling associate status ................ 5,972 5,952 4,521
======= ======= =======
Year ended December 31, 2001 compared with the year ended December 31, 2000
Net sales. Net sales decreased (14.2%) to $128.7 million in 2001 from
$150.0 million in 2000 primarily due to a 19.0% decrease in active associates,
which was partially offset by a $2.0 million increase in net sales by its Japan
subsidiary due to a full year of operations and the introduction of the
following three new products: GLYCO-BEARS[RegTM], Glycentials(TM) Vitamin,
Ambroglycin(TM) Mineral and Antioxidant Formula and CardioBALANCE.(TM)
Cost of sales. Cost of sales decreased (13.3%) to $23.5 million in 2001
from $27.1 million in 2000. As a percentage of net sales, cost of sales
slightly increased to 18.3% in 2001 from 18.0% in 2000. The increase in cost of
sales as a percentage of net sales was primarily due to the establishment of
inventory reserves totaling $1.2 million for inventory write-downs. The
write-down is the result of the remaining start-up inventories in Mannatech's
foreign operations approaching expiration dates.
Commissions. Commissions decreased (15.7%) to $52.0 million in 2001 from
$61.7 million in 2000. As a percentage of net sales, commissions decreased to
40.4% in 2001 from 41.2% in 2000. The decrease as a percentage of sales was the
result of a decrease in commissionable sales as a percentage of total sales.
The dollar decrease was the direct result of a decrease in net sales reflecting
a decline in the number of active associates, which was partially offset by the
introduction of two new associate incentive programs, including the power plan
and team plan bonuses.
Gross profit. Gross profit decreased (13.1%) to $53.2 million in 2001 from
$61.2 million in 2000. As a percentage of net sales, gross profit increased to
41.3% in 2001 from 40.8% in 2000. These changes were primarily attributable to
the factors described above.
Selling and administrative expenses. Selling and administrative expenses
decreased (14.2%) to $30.8 million in 2001 from $35.9 million in 2000. As a
percentage of net sales, selling and administrative expenses slightly decreased
to 23.9% in 2001 from 24.0% in 2000. The dollar decrease was primarily due to
the following:
31
o a ($2.1) million decrease in compensation, including wages and contract
labor due primarily to the termination of various highly paid executives
during 2001, partially offset by compensation related to the replacement
of some of these executives;
o a ($1.1) million decrease in freight costs related to the decrease in net
sales;
o a ($1.7) million decrease in expenses related to various
corporate-sponsored events that were held in 2000 relating to Mannatech's
international expansion, including the Japan grand opening event; and
o a ($200,000) decrease in various marketing expenses.
Other operating costs. Other operating costs decreased (27.8%) to $22.9
million in 2001 from $31.7 million in 2000. As a percentage of net sales, other
operating costs decreased to 17.8% in 2001 from 21.1% in 2000. The dollar
decrease was primarily due to the following:
o a ($5.7) million decrease for travel, accounting, rent, third party
contractors and consulting services related to the international
expansion;
o a ($1.5) million decrease in telephone, postage and credit card fees,
which directly relate to the decrease in net sales;
o an ($800,000) decrease in operating expenses as a result of the reduction
of property taxes and miscellaneous operating expenses; and
o an ($800,000) decrease from canceling various other contracts in 2000
related to Internet Health Group, Inc.
Write-off of a fixed asset. In the second quarter of 2000, Mannatech
determined its Internet subsidiary, Internet Health Group, Inc. fixed asset
with a book value of $870,000, was impaired and should be written-off. The
write-off was a result of the continuation of the poor performance of the
subsidiary, which discontinued operations as of December 29, 2000. During 2001,
Mannatech did not write-off any assets.
Severance Charges. In the second quarter of 2001, Mannatech accrued
various severance charges totaling $3.4 million for various executive officers.
The severance charges are due at various times through 2004.
Interest income. Interest income decreased (59.8%) to $275,000 in 2001
from $684,000 in 2000. As a percentage of net sales, interest income decreased
to 0.2% in 2001 from 0.5% in 2000. The decrease was primarily due to Mannatech
using its cash to fund current year operations, including the funding of its
international markets.
Interest expense. Interest expense decreased (53.6%) to $32,000 in 2001
from $69,000 in 2000. As a percentage of net sales, interest expense decreased
to 0.0% in 2001 from 0.1% in 2000. The dollar decrease was primarily due to the
repayment of existing capital leases and the repayment of a note payable to a
finance company for insurance premiums.
Other expense, net. Other expense, net consists of foreign currency
translation adjustments related to Mannatech's United Kingdom and Australia
operations and miscellaneous non-operating items. Other expense, net decreased
(85.1%) to $83,000 in 2001 from $558,000 in 2000. As a percentage of net sales,
other expense, net decreased to 0.0% in 2001 from 0.4% in 2000. In 2001, other
expense, net primarily consisted of currency translation exchange losses. In
2000, other expense, net consisted primarily of currency translation exchange
losses, sales tax payments and tax penalties.
Income tax (expense) benefit. Income tax (expense) benefit decreased to
$104,000 in 2001 from $1.2 million in 2000. Mannatech's effective tax rate
decreased to 2.8% in 2001 from 14.8% in 2000. Mannatech's effective tax rate
decreased primarily as a result of the increase of its valuation allowance for
the net operating losses from its Japan subsidiary.
Cumulative effect of accounting change, net of tax. In the fourth quarter
of 2000, Mannatech adopted Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"), which resulted in a one-time
charge of $210,000, net of tax of $126,000 for the cumulative effect of the
accounting change. SAB 101 requires Mannatech to defer recognition of revenues
until associates receive products.
Net income (loss). Net income (loss) decreased to ($3.7) million in 2001
from ($7.3) million in 2000. As a percentage of net sales, net income (loss)
decreased to (2.8%) in 2001 from (4.9%) in 2000. The dollar decrease was
primarily the result of the 19.0% decrease in active associates and recording
$3.4 million in severance charges relating to former executives.
32
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 primarily due to an 11.9% decrease in active associates
that was partially offset by a $3.7 million increase in net sales from opening
operations in Japan on June 26, 2000 and the introduction of two new products,
IMMUNOSTART(TM) and OPTIMAL HEALTH PACK.(TM)
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 an inventory write-off of
Internet Health Group, Inc. and a change in product mix of finished goods sold.
The dollar decrease was primarily due to the write-off of approximately
$837,000 for inventory of Internet Health Group, Inc., a $300,000 write-off of
obsolete sales aids and a decrease in volume of finished goods sold.
Commissions. 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 two new incentive programs during 2000, including
the car bonus and "fast-start" programs. The dollar decrease was the direct
result of a decrease in the number of active associates, which was partially
offset by the introduction of two new associate incentive 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
increased 2.9% to $35.9 million in 2000 from $34.9 million in 1999. As a
percentage of net sales, selling and administrative expenses increased to 24.0%
in 2000 from 19.4% in 1999 due to Mannatech's inability to reduce some of its
fixed and semi-variable expenses. The dollar increase was primarily due to the
following:
o a $1.3 million increase in compensation, including wages and contract
labor, primarily due to various pay raises, an increase in personnel for
operations in the United Kingdom and Japan and the hiring of a new Chief
Executive Officer and a new Chief Information Officer;
o a ($1.0) million decrease in freight costs;
o a $1.7 million increase in expenses related to hosting various events
related to international expansion; and
o a ($1.0) million decrease in management bonuses.
Other operating costs. 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:
o a $4.6 million increase for travel, accounting, rent and consulting
services related to its international expansion;
o recording $600,000 for the settlement of the Gryphon Advisors L.L.C.
lawsuit; and
o paying $350,000 to Mr. Samuel L. Caster, the former President for
seven-months of consulting services related to his consulting agreement.
Write-off of a fixed asset. In the second quarter of 2000, Mannatech
determined its Internet subsidiary, Internet Health Group, Inc's, fixed asset
with a book value of $870,000, was impaired and should be written-off. The
write-off was a result of the continuation of the poor performance of the
subsidiary, which discontinued operations as of December 29, 2000.
Severance charges. In the fourth quarter of 2000, Mannatech accrued
various severance charges, totaling $1.2 million related to the resignation of
its Chief Operating Officer of International Operations and various other
executives.
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
its investments to fund current year operations, including the funding of 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 1999, respectively. The
33
dollar decrease was primarily due to the partial repayment of existing capital
leases and partial repayment of a note payable to a finance company for
insurance premiums.
Other expense, net. Other expense, net consists of foreign currency
translation adjustments related to the United Kingdom and Australia operations
and miscellaneous non-operating items. Other expense, net increased 389.5% to
$558,000 in 2000 from $114,000 in 1999. As a percentage of net sales, other
expense, net increased to 0.4% in 2000 from 0.1% in 1999. In 2000, other
expense, net consisted primarily of currency translation exchange losses, sales
tax payments and tax penalties. In 1999, other expense, net primarily consisted
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, net of tax. In the fourth quarter
of 2000, Mannatech adopted Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements" ("SAB 101"), which resulted in a one-time
charge of $210,000, net of tax of $126,000 for the cumulative effect of the
accounting change. SAB 101 requires Mannatech to defer recognition of revenues
until the associates receive products.
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 (loss)
decreased to (4.9%) in 2000 from 6.0% in 1999. The dollar decrease was a direct
result of the 11.9% decrease in active associates and recording expenses
related to its international expansion, severance packages and discontinuing
operations of Internet Health Group, Inc.
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:
o the timing of the introduction of new products;
o the recruiting and retention of associates;
o the general overall economic outlook;
o the general industry and network-marketing industry conditions; and
o 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 trends 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.
The following table sets forth the unaudited consolidated quarterly
statement of operations 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. The reader 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.
34
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
2000 2000(2) 2000(3) 2000(4) 2001 2001(5) 2001 2001(6)
----------- ---------- ----------- ---------- ---------- ---------- ----------- -----------
(in millions, except per share and pack information)
Net sales ........................ $ 39.7 $ 39.0 $ 37.4 $ 33.9 $ 34.2 $ 32.5 $ 30.3 $ 31.7
Gross profit ..................... 16.3 16.7 15.3 12.9 14.7 14.2 12.5 11.8
Loss before income taxes and
cumulative effect ............... ( 1.0) ( 0.9) ( 1.6) ( 4.9) ( 0.5) ( 2.2) ( 0.1) ( 1.0)
Income tax (expense) benefit ..... 0.4 0.2 0.4 0.2 0.2 0.2 ( 0.2) ( 0.1)
Cumulative effect of accounting
change (1) ...................... ( 0.2) -- -- -- -- -- -- --
Net loss ......................... $ (0.8) $ (0.7) $ (1.2) $ (4.6) $ (0.3) $ (2.1) $ (0.3) $ (1.0)
Loss per share (7) ...............
Basic ......................... $ (0.03) $ (0.03) $ (0.05) $ (0.19) $ (0.01) $ (0.08) $ (0.01) $ (0.05)
======== ======== ======== ======== ======== ======== ======== ========
Diluted ....................... $ (0.03) $ (0.03) $ (0.05) $ (0.19) $ (0.01) $ (0.08) $ (0.01) $ (0.05)
======== ======== ======== ======== ======== ======== ======== ========
Number of starter packs sold ..... 32,438 31,135 24,493 19,697 16,582 16,599 16,095 16,710
Number of renewal packs sold ..... 18,337 14,227 16,215 15,151 13,986 9,424 10,816 10,304
-------- -------- -------- -------- -------- -------- -------- --------
Total number of packs sold ....... 50,775 45,362 40,708 34,848 30,568 26,023 26,911 27,014
======== ======== ======== ======== ======== ======== ======== ========
Total associates canceling
associate status ................ 2,496 1,225 1,182 1,049 1,217 1,149 1,174 981
======== ======== ======== ======== ======== ======== ======== ========
- ------------
(1) The first three quarters of 2000 have been adjusted for the adoption of
Staff Accounting Bulleting No. 101 "Revenue Recognition in Financial
Statements," which was adopted in the fourth quarter of 2000.
(2) 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
related to the impairment of the fixed asset related to Internet Health
Group, Inc. and incurring $1.0 million related to its Internet
subsidiary's on-going operations.
(3) For the third quarter of 2000, income before income taxes was reduced by
$800,000 related to operating Internet Health Group, Inc. and $1.3 million
related to the startup of Japan's operations.
(4) For the fourth quarter of 2000, income before taxes was reduced by $1.2
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 cessation of operations of Internet Health
Group, Inc.
(5) For the second quarter of 2001, income before taxes was reduced by $3.4
million for severance expenses related to various executives.
(6) For the fourth quarter of 2001, gross profit was reduced by $1.2 million
related to recording various inventory write-downs for start-up inventory
located at its foreign operations.
(7) Computed on the basis described in Note 1 in the Notes to the Consolidated
Financial Statements.
35
Liquidity and Capital Resources
Historically, Mannatech has funded its business objectives, working
capital and operations through its cash flows from operations. Mannatech's
working capital and cash flow are as follows:
For the year ended December 31,
--------------------------------------------------
Provided by (used in) 2001 2000 1999
- ------------------------ ---------------- ---------------- ----------------
Working capital $5.9 million $7.3 million $11.7 million
Operating activities $7.4 million ($4.6 million) $4.8 million
Investing activities ($1.2 million) ($1.7 million) ($4.6 million)
Financing activities ($2.0 million) $0.6 million $10.6 million
Working capital. In 2001, Mannatech's working capital decreased as a
result of a decrease in net sales, funding $1.8 million in severance payments
to various former executives and reducing its inventories. In 2000, Mannatech's
working capital was reduced by a decrease in net sales, funding approximately
$4.4 million for expansion into Japan and $4.1 million for operating its
Internet subsidiary, Internet Health Group, Inc. Mannatech made the decision to
cease this subsidiary's operations effective December 29, 2000. In 1999,
Mannatech's working capital increased as a result of Mannatech's public
offering, partially offset by funding approximately $600,000 for its expansion
into the United Kingdom and paying approximately $1.3 million in dividends to
its shareholders at the beginning of 1999 related to private operations prior
to the offering. Mannatech believes it can continue to fund its business
objectives, working capital and operations primarily through its current cash
flows from operations.
Operating activities. In 2001, operating activities consisted of a
decrease in various working capital net assets of $7.4 million primarily
related to the reduction of inventory and a refund from income taxes and
recording various non-cash items including depreciation, write-offs and taxes
of $3.7 million, which was partially offset by recording a ($3.7) million net
loss. In 2000, operating activities primarily consisted of its current year net
loss of ($7.3) million, as well as recording various non-cash items including
depreciation, asset write-offs and taxes of $5.5 million. This was partially
offset by a decrease in various working capital net assets of ($2.7) million,
which primarily related to the increase in income tax receivable and the
decrease in accrued expenses. In 1999, operating activities consisted of a
decrease in various working capital net assets of ($12.2) million offset by
recording net income of $10.8 million and various non-cash items of $6.1
million, which primarily included depreciation and a tax benefit related to the
exercising of various nonqualified stock options during the year.
Investing activities. In 2001, investing activities consisted of ($1.3)
million in capital asset additions related to computer hardware and software,
which included the development costs for Success Tracker,[TM] its database
management tool for its associates, partially offset by the repayment of the
notes receivable due from certain shareholders/affiliates. In 2000, investing
activities consisted of ($4.1) million in capital asset additions related to
computer hardware and software enhancements and the build out of its Japan
facility, which was partially offset by the maturing of investments of $2.3
million and the partial repayment of the notes receivable due from certain
shareholders/affiliates. The investments were primarily used to fund current
operations and to open its Japan subsidiary. In 1999, investing activities
consisted of ($3.2) million in capital asset additions related to certain
enhancements to its computer database system and expansion into Australia and
the United Kingdom and investing ($2.3) million of proceeds from its initial
public offering into various investments. This amount was partially offset by
the $0.9 million repayment received from certain shareholders/affiliates related
to the modification and extension of the notes receivable due from
shareholders/affiliates. The modification of the note formalized the notes,
required the affiliates to pay one-third of the balance owed and then extended
the note for five years. As of December 31, 2001, Mr. Gary Watson, a
shareholder, had not made his annual payment of $7,918. As of March 20, 2002,
the combined annual payments aggregating to $55,426 had not been paid by both
Mr. Gary Watson and Mr. William C. Fioretti. As of December 31, 2001, the
remaining balance owed to Mannatech by these two shareholders totaled $164,680.
Financing activities. In 2001, financing activities consisted of the
repayment of book overdrafts of ($1.5) million and the repurchase of 590,000
share of Mr. Charles E. Fioretti's common stock totaling ($583,333) as agreed
to per the repurchase agreement, with Mr. Fioretti. This agreement was
terminated in September 2001. In addition, financing activities included
($814,000) related to the repayment of notes payable and capital leases,
partially offset by the sale of treasury stock totaling $815,009. In 2000,
financing activities consisted of book overdrafts of $1.5 million and proceeds
of approximately $0.4 million from the exercise of 260,700 stock options, at
prices per share ranging from $1.35 to $2.00 per share, partially offset by the
repayment of various capital leases and notes payable totaling ($730,000). In
1999, financing activities consisted of $12.0
36
million in proceeds from Mannatech's public offering partially offset by $0.6
million in deferred offering costs associated with the offering, proceeds of
approximately $786,000 from the exercise of 564,000 stock options at prices per
share ranging form $1.35 to $2.00 per share and proceeds of $641,000 for the
exercise of 475,015 warrants at a price of $1.35 per share. These net increases
in financing activities were partially offset by the ($853,000) repayment for
various notes payable and capital leases.
Mannatech believes that its existing liquidity and cash flows from
operations, including current cash on hand of $9.9 million, capital resources
and finance company's borrowings, including an operating lease line-of-credit
totaling $250,000, coupled with the continuation of the suspension of dividend
payments to shareholders, should be adequate to fund its business operations and
commitments for the next twelve-months. However, if existing capital resources
or cash flows become insufficient to meet Mannatech's business plans and
existing capital requirements, Mannatech would be required to raise additional
funds, which it cannot assure will be available on favorable terms, if at all.
Existing commitments and obligations include the following:
o funding payments totaling $2.6 million related to the resignations of
former executives in 2001. Under the terms of the various separation
agreements, Mannatech is required to pay an aggregate amount of $2.6
million, of which $1.7 million will be paid over the next twelve-months.
o funding payments of its annual insurance premiums, totaling approximately
$0.3 million, which were financed with a finance company and due in
monthly installments through July 2002. Subsequent to year end, Mannatech
entered into another note payable with another finance company to finance
additional insurance premiums totaling approximately $0.3 million. The
notes are due in monthly installments through July 2002.
o funding various marketing promotional incentives estimated at $3.2
million.
o purchase commitment with its only supplier of Manapol[RegTM], one of the
key ingredients used in Mannatech's proprietary
compound--Ambrotose[RegTM] complex. The purchase commitment requires
Mannatech to purchase Manapol[RegTM] totaling $3.7 million in 2002 and
$2.5 million in 2003.
The approximate future maturities of notes payable, capital leases,
severance payments to executives, purchase commitment and minimum rental
commitments related to various non-cancelable operating leases are as follows
(in thousands):
For the year ended December 31,
------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter
-------- -------- ------ ------ ------ -----------
Notes payable and financing ......... $ 648 $ -- $ -- $ -- $ -- $ --
Capital leases ...................... 40 11 11 -- -- --
Severance payments to former
executives .......................... 1,676 800 150 -- -- --
Purchase commitment ................. 3,675 2,450 -- -- -- --
Minimum rental commitment
related to noncancelable operating
leases .............................. 1,362 1,021 808 745 738 303
------ ------ ---- ---- ---- ----
Totals .............................. $7,401 $4,282 $969 $745 $738 $303
====== ====== ==== ==== ==== ====
Mannatech has no present commitments or agreements with respect to any
acquisitions or purchases of any manufacturing facilities. Mannatech believes
any unanticipated future changes in its operations could consume available
capital resources faster than anticipated. Mannatech also believes that its
existing capital requirements depend on its ability to refine and introduce
high-quality products to attract new associates and to retain and expand its
current associate and member base.
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.
37
In March and August 1998, Mannatech entered into two capital leases with
principal totaling $1.5 million. These capital leases contained various
financial covenants, accrued interest at 9.3%, collateralized by certain leased
assets and were payable in thirty-six monthly installments. In July 1998,
Mannatech also entered into a thirty-six month, unsecured note payable with a
finance company to finance a three-year product liability insurance premium. The
initial principal amount of this note was $0.4 million, with interest at 8.0%
and was due in monthly installments through December 2000. All of these capital
leases and the note were paid in full during 2001. During 2001, Mannatech
entered into various financing agreements to finance insurance premiums totaling
$0.8 million. The notes required a 25% down payment, accrue interest at 9.15%
and are due in eight monthly payments through July 2002.
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 currency from its
foreign operations.
Recent Financial Accounting Standards Board Statements
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations"
and No. 142 ("SFAS 142") "Goodwill and Other Intangibles Assets." SFAS 141
supercedes Accounting Principles Board Opinion No. 16 "Business Combinations."
The most significant changes made by SFAS 141 are that it requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, establishes specific criteria for recognition of certain
intangible assets separately from goodwill and requires the immediate write-off
of unallocated negative goodwill.
SFAS 142 supercedes Accounting Principles Board Opinion No. 17 "Intangible
Assets." SFAS 142 is effective for fiscal years beginning after December 15,
2001. SFAS 142 prohibits goodwill and indefinite lived intangible assets from
being amortized and requires them to be annually tested for impairment at each
reporting unit level. In addition, SFAS 142 removes the limitation of forty
years for the useful lives of finite intangible assets.
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 143 ("SFAS 143") "Accounting for Asset
Retirement Obligations" and in October 2001, issued No. 144 ("SFAS 144")
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 143
amends SFAS 19, "Financial Accounting and Reporting by Oil and Gas Producing
Companies" and is effective for fiscal years beginning after June 15, 2002.
This statement requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be determined. In addition, SFAS 143
requires the associated asset retirement costs to be capitalized as part of the
carrying amount of the long-lived asset.
SFAS 144 supercedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Accounting
Principles Board Opinion No. 30 "Reporting Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 is effective for
fiscal years beginning after December 15, 2001. SFAS 144 requires that impaired
long-lived assets be measured at the lower of carrying amount or fair value
less costs to sell. In addition, discontinued operations should no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. Finally, SFAS 144 broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
on-going operations of the entity in a disposal transaction.
Mannatech believes the above pronouncements will have no significant
effect on its consolidated financial positions, results of operations or cash
flows.
38
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. Although
Mannatech has investments, there has not been any material change in its
exposure to interest rate risk. 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,
which it believes will help monitor any significant market risks. Currently,
Mannatech does not use any financial instruments to manage its exposure to such
risks. The sensitivity of earnings and cash flows to variability in currency
exchange rates is assessed by applying an appropriate range of potential rate
fluctuations to Mannatech's assets, obligations and projected transactions
denominated in foreign currency. Mannatech cannot predict with any certainty
its future exposure to such currency exchange rate fluctuations or the impact,
if any, such fluctuations may have on its future business, product pricing,
consolidated financial position, results of operations or cash flows. However,
Mannatech believes it closely monitors current fluctuations for exposure to
such market risk. Currently, the foreign currencies in which Mannatech has
exposure to foreign currency exchange rate risk include Canada, Australia, the
United Kingdom and Japan. The high and low currency exchange rates to the
United States dollar, for each of these countries, for the year ended December
31, 2001 are as follows:
Country/Currency High Low
---------------- ---- ----
Canada/Dollar . ......................... $0.67140 $0.62270
Australia/Dollar . ...................... $0.57270 $0.47730
United Kingdom/British Pound . .......... $1.51090 $1.36770
Japan/Yen ............................... $0.00881 $0.00757
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.
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, 2002.
39
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, 2000 and 2001 ....................... F-3
Consolidated Statements of Operations for the Years ended December 31, 1999, 2000
and 2001 .......................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years ended
December 31, 1999, 2000 and 2001 .................................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 2000
and 2001 .......................................................................... F-6
Notes to Consolidated Financial Statements ......................................... F-7
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.
40
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 Fourth Amended and Restated Bylaws of Mannatech dated April 27, 2001, incorporated herein by
reference to Exhibit 99.1 to Mannatech's Form 8-K (File No. 000-24657) filed with the Commission on
August 22, 2001.
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
10.5 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 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.
41
10.13 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.
10.14 License Agreement effect October 12, 2000 between Mannatech and Lactoferrin Products Company,
incorporated herein by reference to Exhibit 10.1 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on May 15, 2001.
10.15 Fulfillment Services Agreement effective July 22, 2000 between Mannatech and Marcus B. Gohlke,
incorporated herein by reference to Exhibit 10.2 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on May 15, 2001.
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 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.
10.18 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.
10.19* First Amendment to the Employment Agreement between Mannatech and Mr. Terry L. Persinger, dated
January 1, 2002.
10.20 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.
10.21* First Amendment to the Employment Agreement between Mannatech and Mr. Robert M. Henry, dated
April 1, 2000.
10.22* Second Amendment to the Employment Agreement between Mannatech and Mr. Robert M. Henry dated
January 1, 2002.
10.23 Employment Agreement dated September 21, 2000, entered into between Mannatech and Mr. Charles
E. Fioretti, incorporated herein by reference to Exhibit 10.22 to Mannatach's Form 10-K (File No. 000-
24657) filed with the Commission on April 2, 2001.
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 and Full and Final Release dated June 4, 2001 between Mannatech and Mr. Charles
E. Fioretti, incorporated herein by reference to Exhibit 99.1 to Mannatech's Form 8-K (File No. 000-
24657) filed with the Commission on June 11, 2001.
42
10.30 Release Agreement dated September 24, 2001 between Mannatech and Mr. Charles E. Fioretti,
incorporated herein by reference to Exhibit 10.2 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on November 14, 2001.
10.31 Separation Agreement dated February 28, 2001 with Mr. Anthony E. Canale, incorporated herein by
reference to Exhibit 10.29 to Mannatech's Form 10-K (File No. 000-24657) filed with the Commission
on April 2, 2001.
10.32 Separation Agreement dated may 2, 2001 between Mannatech and Ms. Deanne Varner, incorporated
herein by reference to Exhibit 10.5 to Mannatech's Form 10-Q (File No. 000-24657) filed with the
Commission on May 15, 2001.
10.33 Separation Agreement and General Release dated June 26, 2001 between Mannatech and Mr. Patrick D.
Cobb, incorporated herein by reference to Exhibit 99.1 to Mannatech's Form 8-K (File No. 000-24657)
filed with the Commission on June 26, 2001.
10.34 Purchase Agreement dated September 28, 2001, by and between Mannatech, Incorporated and Mr. Ray
Robbins, incorporated by reference to Exhibit 10.5 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on November 14, 2001.
10.35 Agreement dated September 28, 2001 between Mannatech and Mr. Marlin Ray Robbins, incorporated
herein by reference to Exhibit 10.5 to Mannatech's Form 10-Q (File No. 000-24657) filed with the
Commission on November 14, 2001.
10.36* Agreement and Final Release dated February 1, 2002 between Mannatech and Mr. Marlin Ray Robbins.
10.37 Royalty Agreement dated September 10, 2001 between Mannatech and Jett, incorporated herein by
reference to Exhibit 10.4 to Mannatech's Form 10-Q (File No. 000-24657) filed with the Commission
on November 14, 2001.
10.38 Employment Agreement dated October 1, 2001 between Mannatech and Ms. Bettina S. Simon,
incorporated herein by reference to Exhibit 10.3 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on November 14, 2001.
10.39 Consulting Agreement dated October 1, 2001 between Mannatech and Mr. J. Stanley Fredrick,
incorporated herein by reference to Exhibit 10.1 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on November 14, 2001.
21* List of Subsidiaries
23* Consent of PricewaterhouseCoopers LLP
* Filed herewith.
(b) Reports on Form 8-K.
None.
43
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 1, 2002.
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 1, 2002, 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 accounting officer)
Stephen D. Fenstermacher
/s/ SAMUEL L. CASTER Chairman of the Board
- ----------------------------
Samuel L. Caster
/s/ JULES ZIMMERMAN Vice-Chairman of the Board
- ----------------------------
Jules Zimmerman
/s/ STEVEN A. BARKER PH.D. Director
- ----------------------------
Steven A. Barker Ph. D.
/s/ ROGER BEUTNER Director
- ----------------------------
Roger Beutner
/s/ James M. Doyle, Jr. Director
- ----------------------------
James M. Doyle, Jr.
/s/ J. STANLEY FREDRICK Director
- ----------------------------
J. Stanley Fredrick
/s/ MARLIN RAY ROBBINS Director
- ----------------------------
Marlin Ray Robbins
44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Annual Financial Statements:
Report of Independent Accountants ........................................................ F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001 ............................ F-3
Consolidated Statements of Operations for the Years ended December 31, 1999, 2000 and
2001 ................................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years ended
December 31, 1999, 2000 and 2001 ...................................................... F-5
Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 2000 and
2001 ................................................................................... 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, changes in shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Mannatech, Incorporated and its subsidiaries at December 31, 2000 and 2001,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2001, 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,
in 2000, 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 22, 2002
F-2
MANNATECH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
December 31,
-------------------------
2000 2001
----------- -----------
ASSETS
Cash and cash equivalents ............................................... $ 5,736 $ 9,926
Accounts receivable, less allowance for doubtful accounts of $58 in 2000. 692 613
Income tax receivable ................................................... 2,300 --
Current portion of notes receivable--shareholders ....................... 187 119
Inventories ............................................................. 13,326 8,386
Prepaid expenses and other current assets ............................... 745 1,064
Deferred tax assets ..................................................... 1,201 1,535
-------- --------
Total current assets ................................................ 24,187 21,643
Property and equipment, net ............................................. 13,324 10,448
Notes receivable--shareholders, excluding current portion ............... 390 334
Other assets ............................................................ 1,001 718
-------- --------
Total assets ........................................................ $ 38,902 $ 33,143
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of capital leases and notes payable ..................... $ 301 $ 315
Accounts payable ........................................................ 4,309 509
Accrued expense ......................................................... 11,750 13,165
Current portion of accrued severance .................................... 538 1,732
-------- --------
Total current liabilities ........................................... 16,898 15,721
Capital leases and notes payable, excluding current portion ............. 27 --
Accrued severance, excluding current portion ............................ 500 950
Deferred tax liabilities ................................................ 1,752 380
-------- --------
Total liabilities ................................................... 19,177 17,051
-------- --------
Commitments and contingencies (Note 12) ................................. -- --
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,
25,051,301 shares issued and 24,929,173 outstanding in 2000; 25,162,541
issued and 25,134,840 outstanding in 2001 .............................. 3 3
Additional paid-in capital .............................................. 17,949 18,204
Note receivable from shareholder ........................................ (167) --
Retained earnings (accumulated deficit) ................................. 2,798 (1,407)
Accumulated other comprehensive loss--foreign currency translation
adjustment ............................................................. (321) (608)
-------- --------
20,262 16,192
Less treasury stock, at cost, 122,128 shares and a commitment to purchase
common stock of $1,000 in 2000 and 27,701 shares in 2001 ............... (1,537) (100)
-------- --------
Total shareholders' equity .......................................... 18,725 16,092
-------- --------
Total liabilities, commitment to repurchase common stock and
shareholders' equity ............................................... $ 38,902 $ 33,143
======== ========
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,
---------------------------------------
1999 2000 2001
---------- ------------ -----------
Net sales ........................................................... $179,730 $150,006 $128,736
Cost of sales ....................................................... 29,117 27,088 23,523
Commissions ......................................................... 73,580 61,743 51,995
-------- -------- --------
102,697 88,831 75,518
-------- -------- --------
Gross profit ..................................................... 77,033 61,175 53,218
-------- -------- --------
Operating expenses: .................................................
Selling and administrative expenses .............................. 34,861 35,926 30,816
Other operating costs ............................................ 26,091 31,655 22,906
Write-off of fixed asset ......................................... -- 870 --
Severance expenses related to former executives .................. -- 1,163 3,420
-------- -------- --------
Total operating expenses ...................................... 60,952 69,614 57,142
-------- -------- --------
Income (loss) from operations ....................................... 16,081 (8,439) (3,924)
Interest income ..................................................... 713 684 275
Interest expense .................................................... (150) (69) (32)
Other expense, net .................................................. (114) (558) (83)
-------- -------- --------
Income (loss) before income taxes and cumulative effect of
accounting change .................................................. 16,530 (8,382) (3,764)
Income tax (expense) benefit ........................................ (5,742) 1,243 104
-------- -------- --------
Income (loss) before cumulative effect of accounting change ......... 10,788 (7,139) (3,660)
Cumulative effect of accounting change, net of tax of $126 .......... -- (210) --
-------- -------- --------
Net income (loss) ................................................... $ 10,788 $ (7,349) $ (3,660)
======== ======== ========
Earnings (loss) per common shares--Basic:
Before cumulative effect of accounting change .................... $ 0.45 $ (0.29) $ (0.15)
Cumulative effect of accounting change ........................... -- (0.01) --
-------- -------- --------
Net .............................................................. $ 0.45 $ (0.30) $ (0.15)
======== ======== ========
Earnings (loss) per common share--Diluted:
Before cumulative effect of accounting change .................... $ 0.43 $ (0.29) $ (0.15)
Cumulative effect of accounting change ........................... -- (0.01) --
-------- -------- --------
Net .............................................................. $ 0.43 $ (0.30) $ (0.15)
======== ======== ========
Weighted-average common shares outstanding:
Basic ............................................................ 24,133 24,946 24,730
======== ======== ========
Diluted .......................................................... 25,224 24,946 24,730
======== ======== ========
Dividends declared per common share ................................. $ 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, 1999, 2000 AND 2001
(in thousands, except per share information)
Note
Common stock Additional receivable
---------------------- paid in from
Shares Par value capital shareholder
---------- ----------- ------------ -------------
Balance at December 31, 1998 ................... 22,102 $ 2 $ 2,632 $ (636)
Dividends declared ($0.06 per share) .......... -- -- -- --
Repayment of notes receivable--
shareholders ................................. -- -- -- 636
Net proceeds from offering .................... 1,500 -- 9,241 --
Exercise of warrants . ........................ 475 -- 941 --
Tax benefit from exercise of warrants
and stock options ............................ -- -- 3,543 --
Tender of common stock for exercise of
stock options ................................ 133 -- 204 --
Proceeds from stock option exercises .......... 564 -- 786 --
Comprehensive income:
Net income ................................... -- -- -- --
------ --- ------- ------
Balance at December 31, 1999 ................... 24,774 2 17,347 --
Proceeds from stock option exercises .......... 261 1 362 --
Tax benefit from exercise of warrants
and stock options ............................ -- -- 240 --
Issuance of note receivable--
shareholders ................................. -- -- -- (500)
Repayment of note receivable from
shareholder .................................. (106) -- -- 333
Commitment to repurchase common
stock from shareholder ....................... -- -- -- --
Comprehensive loss:
Foreign currency translation
adjustment .................................. -- -- -- --
Net loss ..................................... -- -- -- --
------ --- ------- ------
Balance at December 31, 2000 ................... 24,929 3 17,949 (167)
Proceeds from stock option exercises .......... 37 -- 82 --
Tax benefit from exercise of warrants
and stock options ............................ -- -- 19 --
Accounting charge related to stock
options granted .............................. -- -- 54 --
Repayment of note receivable from
shareholder .................................. (53) -- -- 167
Repurchase of common stock per
shareholder agreement ........................ (590) -- -- --
Release of commitment to repurchase
common stock from shareholder ................ -- -- -- --
Repurchase of common stock from
separation agreement ......................... (50) -- -- --
Sale of treasury stock to a related party ..... 815 -- -- --
Tender of common stock for exercise of
stock options ................................ 47 -- 100 --
Comprehensive loss:
Foreign currency translation
adjustment .................................. -- -- -- --
Net loss ..................................... -- -- -- --
------ --- ------- ------
Balance at December 31, 2001. . ................ 25,135 $ 3 $18,204 $ --
====== === ======= ======
Retained Accumulated Treasury
earnings other stock Total
(accumulated comprehensive -------------------- shareholders
deficit) income (loss) Shares Amounts equity
-------------- --------------- -------- ----------- -------------
Balance at December 31, 1998 ................... $ 685 $ -- -- $ -- $ 2,683
Dividends declared ($0.06 per share) .......... (1,326) -- -- -- (1,326)
Repayment of notes receivable--
shareholders ................................. -- -- -- -- 636
Net proceeds from offering .................... -- -- -- -- 9,241
Exercise of warrants . ........................ -- -- -- -- 941
Tax benefit from exercise of warrants
and stock options ............................ -- -- -- -- 3,543
Tender of common stock for exercise of
stock options ................................ -- -- 16 (204) --
Proceeds from stock option exercises .......... -- -- -- -- 786
Comprehensive income:
Net income ................................... 10,788 -- -- -- 10,788
-------- ------ -- --------- --------
Balance at December 31, 1999 ................... 10,147 -- 16 (204) 27,292
Proceeds from stock option exercises .......... -- -- -- -- 363
Tax benefit from exercise of warrants
and stock options ............................ -- -- -- -- 240
Issuance of note receivable--
shareholders ................................. -- -- -- -- (500)
Repayment of note receivable from
shareholder .................................. -- -- 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 ................... 2,798 (321) 122 (1,537) 18,725
Proceeds from stock option exercises .......... -- -- -- -- 82
Tax benefit from exercise of warrants
and stock options ............................ -- -- -- -- 19
Accounting charge related to stock
options granted .............................. -- -- -- -- 54
Repayment of note receivable from
shareholder .................................. -- -- 53 (167) --
Repurchase of common stock per
shareholder agreement ........................ -- -- 590 -- --
Release of commitment to repurchase
common stock from shareholder ................ -- -- -- 417 417
Repurchase of common stock from
separation agreement ......................... -- -- 50 (73) (73)
Sale of treasury stock to a related party ..... (545) -- (815) 1,360 815
Tender of common stock for exercise of
stock options ................................ -- -- 27 (100) --
Comprehensive loss:
Foreign currency translation
adjustment .................................. -- (287) -- -- (287)
Net loss ..................................... (3,660) -- -- -- (3,660)
-------- ------ ---- --------- --------
Balance at December 31, 2001. . ................ $ (1,407) $ (608) 27 $ (100) $ 16,092
======== ====== ==== ========= ========
See accompanying notes to consolidated financial statements.
F-5
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Year Ended December 31,
------------------------------------------
1999 2000 2001
---------- ------------ --------------
Cash flows from operating activities:
Net income (loss) .......................................................... $ 10,788 $ (7,349) $(3,660)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................. 2,969 3,738 3,916
Write-down of inventories ................................................. -- -- 1,235
Write-off of fixed asset software ......................................... -- 870 --
Loss on disposal of assets ................................................ 287 157 146
Tax benefit from exercise of stock options exercised ...................... 3,543 240 19
Accounting charge related to stock options granted ........................ -- -- 54
Write-off of receivable from related party ................................ 125 -- --
Cumulative effect of accounting change, net of tax ........................ -- 210 --
Deferred income tax expense (benefit) ..................................... (790) 298 (1,706)
Changes in operating assets and liabilities:
Accounts receivable ..................................................... (212) (428) 15
Income tax receivable ................................................... -- (2,174) 2,300
Inventories ............................................................. (6,443) 82 3,541
Prepaid expenses and other current assets ............................... (281) (23) 458
Other assets ............................................................ (283) 230 273
Accounts payable ........................................................ (3,589) 981 (2,293)
Accrued expenses ........................................................ (1,342) (1,393) 3,115
-------- -------- -------
Net cash provided by (used in) operating activities .................... 4,772 (4,561) 7,413
-------- -------- -------
Cash flows from investing activities:
Acquisition of property and equipment ..................................... (3,243) (4,109) (1,316)
Repayment by shareholders/related parties ................................. 944 124 124
(Purchase) Maturities of investments and restricted cash .................. (2,294) 2,293 1
-------- -------- -------
Net cash used in investing activities ................................... (4,593) (1,692) (1,191)
-------- -------- -------
Cash flows from financing activities:
Book overdrafts ........................................................... -- 1,451 (1,451)
Payment of dividends ...................................................... (1,326) -- --
Proceeds from the initial public offering ................................. 12,000 -- --
Proceeds from stock options exercised ..................................... 786 363 82
Proceeds from sale of treasury stock ...................................... -- -- 815
Proceeds from warrants exercised .......................................... 641 -- --
Repurchase of common stock from shareholder ............................... -- -- (656)
Repayment of capital lease obligations .................................... (663) (541) (298)
Advances to shareholder ................................................... -- (500) --
Payment of notes payable .................................................. (190) (189) (516)
Deferred offering costs ................................................... (615) -- --
-------- -------- -------
Net cash provided by (used in) financing activities 10,633 584 (2,024)
-------- -------- -------
Effect of exchange rate changes on cash and cash equivalents ............... -- (171) (8)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents ....................... 10,812 (5,840) 4,190
Cash and cash equivalents: .................................................
Beginning of year ......................................................... 764 11,576 5,736
-------- -------- -------
End of year ............................................................... $ 11,576 $ 5,736 $ 9,926
======== ======== =======
Supplemental disclosure of cash flow information:
Income taxes paid ......................................................... $ 3,091 $ 200 $ --
======== ======== =======
Interest paid ............................................................. $ 150 $ 69 $ 32
======== ======== =======
Summary of non-cash investing and financing activities follows:
Assets acquired through financing ......................................... $ -- $ -- $ 801
======== ======== =======
Commitment (cancellation of commitment) to repurchase common stock
from shareholder ........................................................ $ -- $ 1,000 $ (417)
======== ======== =======
Treasury shares received for the payment of note receivable--shareholder .. $ -- $ 333 $ 167
======== ======== =======
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
develops high-quality, innovative, proprietary nutritional supplements, topical
products and weight-management products that are sold though a global
network-marketing system throughout the United States, Canada, Australia, the
United Kingdom and Japan. Independent associates ("associates") purchase the
Company's products at wholesale prices for the primary purpose of selling to
retail consumers or for personal consumption while independent members
("members") purchase products at a discount from retail prices. Associates are
eligible to 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 name Date incorporated Location of subsidiary Date operations began
- --------------------------------- ------------------- ----------------------------- ----------------------
Mannatech Australia Pty Limited April 22, 1998 St. Leonards, Australia October 1, 1998
Mannatech Limited December 1, 1998 Republic of Ireland No operations
Mannatech Ltd. November 18, 1998 Basingstoke, Hampshire U.K. November 15, 1999
Mannatech Payment
Services Incorporated April 11, 2000 Coppell, Texas June 26, 2000
Mannatech Foreign Sales
Corporation * May 1, 1999 Barbados May 1, 1999
Internet Health Group, Inc. * May 7, 1999 Coppell, Texas December 20, 1999
Mannatech Japan, Inc. January 21, 2000 Tokyo, Japan June 26, 2000
Mannatech Limited February 14, 2000 New Zealand No operations
*Subsidiary ceased operations on December 29, 2000.
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 and 2001, accounts receivable consisted of the
overpayment of consumption tax paid in Japan, a refund of value added tax from
the United Kingdom and payments due from manufacturers for the purchase of raw
material inventories. At December 31, 2000, accounts receivable were partially
offset by an allowance account for amounts that were 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. The Company writes-down inventories for any slow-moving or obsolete
items.
F-7
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 projected cash flows 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 related to its Internet subsidiary's fixed asset software.
Other Assets
Other assets consist primarily of deposits for building leases and a
restricted term deposit in an Australian bank. 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.
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 sold to associates at a published wholesale price and are sold to members
at a discount. The Company also records a product return reserve related to any
refunds in net sales. The Company records the product return reserve based on
historical experience in net sales.
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 associate or member. 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 defers all revenues until the associate or member receives the
shipment. The Company believes that the change in accounting method would not
have had a material effect on the 1999 Statements of Operations if adopted in
that period.
The Company also defers a portion of the revenue received from the sale of
the starter and renewal packs when the revenue exceeds the excess of the total
average wholesale value of all of the individual items included in such packs
and amortizes such deferrals over a twelve-month period. Some of the higher
dollar packs also contain an event admission pass, which allows an associate
free admission to a corporate sponsored event. Revenues from these packs are
allocated between products and event admission based on the proportionate
average fair value of products and the allocated event admission. The allocated
event admission revenue contained in these pack sales are also amortized over a
twelve-month period.
F-8
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Shipping and Handling Cost
The Company records freight and shipping revenues collected from
associates and members as revenue. The Company records in-bound freight and
shipping costs as a part of cost of sales and records shipping and handling
costs associated with shipping products to its associates and members as
selling and administrative expenses in the accompanying consolidated financial
statements. Total shipping and handling costs included in selling and
administrative expense was approximately $9.1 million, $6.6 million and $5.8
million for 1999, 2000 and 2001, 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 requires that stock-based compensation be
measured by the fair value at the date of grant. The Company measures the cost
of stock-based compensation issued to employees and directors under Accounting
Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB
25"), and its related interpretations. The Company has provided pro forma
disclosures as required by FAS 123 in Note 11 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 $3.6 million, $5.3
million and $3.4 million for 1999, 2000 and 2001, respectively. Literature and
promotional items, called sales aids, are sold to associates to support their
sales efforts and are included in inventories and charged to cost of sales when
sold.
Research and Development Costs
The Company expenses research and development costs when incurred.
Internal research and development costs related to specific clinical studies
and product testing were approximately $439,000, $392,000 and $97,000 in 1999,
2000 and 2001, respectively. Research and development costs related to
conceptualizing new products, enhancing existing products, Food and Drug
Administration compliance studies, general supplies, internal salaries, third
party contractors and consulting fees were approximately $3.6 million, $4.4
million and $3.4 million in 1999, 2000 and 2001, 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 are three to five years.
Capitalized costs were approximately $1.7 million, $681,000 and $677,000 in
1999, 2000 and 2001, respectively. Amortization expense related to capitalized
software was approximately $528,000, $712,000 and $873,000 in 1999, 2000 and
2001, 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.
F-9
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 ($176,000), $345,000 and $86,000 in 1999,
2000 and 2001 respectively, and are included in other expense in the
consolidated statements of operations.
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 its
functional currency. Its Japan 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 except
those resulting from investments by owners and distributions to owners.
Commissions
Associates are paid commissions that are based on direct and indirect
commissionable sales, downline growth and training of associates. Commissions
are accrued when earned and generally paid at various times within the
following month.
Reclassification
Certain amounts reported in the prior year balances have been reclassified
to conform with the current year presentation.
NOTE 2 INITIAL PUBLIC OFFERING
On February 12, 1999, the Company completed its 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.
F-10
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 3 INVENTORIES
Inventories at December 31, 2000 and 2001 consist of the following (in
thousands):
2000 2001
--------- ---------
Raw materials ...................................... $ 6,587 $4,311
Finished goods less inventory write-down of $166, in
2000 and $1,235 in 2001 ........................... 6,739 4,075
------- ------
$13,326 $8,386
======= ======
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2000 and 2001 consist of the
following (in thousands):
Estimated
useful lives 2000 2001
--------------- ----------- ------------
Office furniture and equipment ......... 5 to 7 years $ 5,732 $ 5,726
Computer equipment ..................... 3 to 5 years 11,247 11,941
Automobiles ............................ 5 years 28 28
Leasehold improvements ................. 2 to 10 years 5,636 5,531
-------- ---------
22,643 23,226
Less accumulated depreciation .......... (9,319) (13,006)
-------- ---------
13,324 10,220
Construction in progress ............... -- 228
-------- ---------
$ 13,324 $ 10,448
======== =========
Gross capital leased assets relating to various warehouse and laboratory
equipment totaled $1.7 million at December 31, 2000 and $153,000 at December
31, 2001. During 2001, $1.5 million of the leased assets were paid and title to
these assets was transferred to the Company. In 2001, construction in progress
consisted of internally developed software.
NOTE 5 ACCRUED EXPENSES
Accrued expenses at December 31, 2000 and 2001 consisted of the following
(in thousands):
2000 2001
--------- ---------
Commissions payable ......................... $ 3,598 $ 5,222
Accrued inventory purchases ................. 1,024 2,665
Sales and other taxes payable ............... 776 1,363
Income taxes payable ........................ -- 909
Accrued royalties and compensation .......... 1,336 830
Customer deposits ........................... 1,219 599
Accrued legal and accounting ................ 1,522 553
Deferred revenue ............................ 691 433
Other accrued expenses ...................... 1,584 591
------- -------
$11,750 $13,165
======= =======
F-11
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 6 NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
In 2001, the Company entered into various finance agreements totaling
$801,000, to finance its product liability, directors and officers and
international insurance premiums. The notes bear interest at 9.15% and are
payable in monthly installments of approximately $81,000 through July 2002.
In March and August 1998, the Company entered into 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 were collateralized by the
leased assets, bore interest at 9.3% were payable in thirty-six monthly
installments and were fully paid in August 2001.
The Company leases certain equipment under various capital leases
agreements of approximately $153,000. These agreements are for five-years,
expire in September 2002 and contain either a bargain purchase option or a
buyout provision that the Company intends to exercise.
NOTE 7 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):
1999 2000 2001
---------- ------------ ------------
United States .......... $16,316 $ (4,054) $ (484)
Foreign ................ 214 (4,328) (3,280)
------- -------- --------
$16,530 $ (8,382) $ (3,764)
======= ======== ========
The components of the Company's income tax provision for 1999, 2000 and
2001 were as follows:
1999 2000 2001
--------- ------------ -----------
Current provision:
Federal .......... $6,284 $ (1,827) $ 1,522
State ............ 276 213 --
Foreign .......... (28) 73 80
------ -------- --------
6,532 (1,541) 1,602
------ -------- --------
Deferred provision:
Federal .......... (674) 451 (1,721)
State ............ (116) (153) 15
------ -------- --------
(790) 298 (1,706)
------ -------- --------
$5,742 $ (1,243) $ (104)
====== ======== ========
A reconciliation of the Company's effective tax rate and the U.S. federal
statutory rate is summarized as follows for the years ended December 31:
1999 2000 2001
---------- ---------- ----------
Federal statutory income taxes ...................... 35.0% 35.0% 34.0%
State income taxes, net of federal benefit .......... 1.0 (0.1) (0.3)
Difference between U.S. statutory rate and
foreign rate ....................................... (1.0) (7.8) 13.2
Effect of valuation allowance ....................... -- (11.0) (44.6)
Nondeductible expenses .............................. 0.7 (1.0) (1.4)
Other ............................................... (1.0) (0.3) 1.9
---- ----- -----
34.7% 14.8% 2.8%
==== ===== =====
F-12
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
At December 31, 2000, the Company recorded an estimated income tax refund
of $2.3 million, which primarily related to federal tax net operating losses
that were carried back. The Company also has state tax net operating losses
that are eligible to be carried forward and will begin to expire in various tax
years.
Deferred taxes consisted of the following at December 31 (in thousands):
2000 2001
---------- -----------
Deferred tax assets:
Current:
Deferred revenue .................................. $ 255 $ 165
Inventory capitalization .......................... 327 195
Accrued expenses related to Internet Health
Group Inc. ....................................... 322 --
Inventory reserve ................................. 61 215
State tax net operating loss carryforward ......... 193 27
Accrued expenses .................................. -- 441
Current portion of severance expenses ............. -- 463
Other ............................................. 43 29
------ --------
Total current deferred tax assets ............... 1,201 1,535
------ --------
Noncurrent:
Net operating loss carryforward for the Japan
subsidiary .......................................... 924 2,603
Compensation expense and severance expenses,
net of current portion .............................. 58 400
Capital loss carryforward ............................ 18 19
------ --------
Total noncurrent deferred tax assets ............... 1,000 3,022
------ --------
Total gross deferred tax assets .................... 2,201 4,557
Valuation allowance ................................ (924) (2,603)
------ --------
Total net deferred tax assets ...................... $1,277 $ 1,954
====== ========
Deferred tax liabilities:
Noncurrent:
Depreciation and amortization ....................... $1,828 $ 760
Other ............................................... -- 39
------ --------
$1,828 $ 799
====== ========
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):
2000 2001
----------- ---------
Current deferred tax assets .................... $ 1,201 $1,535
Noncurrent deferred tax liabilities ............ (1,752) (380)
-------- ------
Net deferred tax assets (liabilities) .......... $ (551) $1,155
======== ======
F-13
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 8 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 Company agreed to modify the terms of
Mr. Charles E. Fioretti's note receivable as part of his separation and release
agreement. Under the terms of the modified agreement dated June 4, 2001, Mr.
Fioretti's remaining principal balance of $127,121 will continue to accrue
interest and will be due on the earlier of February 17, 2011 or thirteen days
after the date in which Mr. Fioretti no longer owns at least 100,000 shares of
the Company's common stock. The total amount of all such notes outstanding at
December 31, 2000 and 2001 was approximately $577,000 and $453,000,
respectively. The future maturities of notes receivables due from shareholders
are as follows (in thousands):
Year ending
December 31,
-------------
2002 .................................................................. $ 119
2003 .................................................................. 100
2004 .................................................................. 234
------
453
Less current portion .................................................. (119)
------
Notes receivable due from shareholders, excluding current portion ..... $ 334
======
In 1999, 2000 and 2001, the Company accrued commission expenses to a
former major shareholder and executive officer, Mr. William C. Fioretti, of
approximately $453,000, $181,000 and $117,000 of which $27,000 and $16,000
remained unpaid at December 31, 2000 and 2001, respectively. Mr. William C.
Fioretti is the cousin of Mr. Charles E. Fioretti, who was the Company's former
Chairman and Chief Executive Officer.
On August 8, 2000, the Company loaned Mr. Charles E. Fioretti $500,000.
The loan was collateralized by 174,570 shares of Mr. Fioretti's stock and was
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. Fioretti exchanged 105,820 shares of his stock to reduce the
loan to him by $333,000. During 2001, Mr. Fioretti exchanged 52,910 shares of
his stock to pay the remaining balance of his loan.
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 up to $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. On September 24,
2001, the Company amended this agreement with Mr. Fioretti to release him from
his lockup and repurchase agreement so that Mr. Fioretti could sell 3,500,000
of his common shares to Mr. J. Stanley Fredrick and transfer all of his voting
rights associated with his remaining shares to Mr. Fredrick. In addition, Mr.
Fredrick has the right of first refusal to acquire Mr. Fioretti's remaining
690,848 shares. During 2001, the Company purchased 589,971 shares from Mr.
Fioretti valued at $583,333 relating to the lockup and repurchase agreement.
On September 28, 2001, the Company entered into an agreement with Mr. Ray
Robbins, a high-level associate, shareholder, board member and Company
co-founder, to sell him 815,009 shares of the Company's treasury stock at $1.00
per share.
On October 1, 2001, the Company entered into a two-year consulting and
lockup agreement with Mr. Fredrick. This agreement automatically renews
annually unless thirty-day written notice is given to all parties. Under the
terms of this agreement, Mr. Fredrick will provide advice and perform various
functions for the board of directors for which the Company will pay Mr.
Fredrick a total of $185,000 per year. In addition, under this agreement, Mr.
Fredrick is prohibited from selling his shares. During 2001, the Company paid
Mr. Fredrick $46,250 related to this consulting agreement.
F-14
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 9 EMPLOYMENT AGREEMENTS
Effective September 1, 1998, the Company entered into a five-year
employment agreement with Mr. Bill H. McAnalley Ph.D., Chief Scientific Officer
and Senior Vice President of Research and Development. The employment agreement
specifies a minimum salary and is extended automatically each year for one
additional year unless both parties agree to termination prior to the end of
any term. If the Company cancels the employment agreement, without cause, the
Company is required to pay the minimum salary for the remaining duration of the
agreement.
On November 1, 1999, the Company entered into a three-year employment
agreement with Mr. Terry L. Persinger, Chief Operating Officer. The employment
agreement specifies a minimum salary and either party can cancel the agreement;
however, if the Company cancels the employment agreement without cause, the
Company is required to pay the minimum salary for the duration of the
agreement. On November 1, 2001, the Company amended this employment agreement
to extend the term to December 31, 2004 and to increase the minimum salary,
beginning on January 1, 2002.
On April 1, 2000, the Company entered into a three-year employment
agreement with Mr. Robert M. Henry, Chief Executive Officer. The employment
agreement specifies a minimum salary and either party can cancel the agreement;
however, if the Company cancels the employment agreement without cause, the
Company is required to pay the minimum salary for the duration of the
agreement. On August 15, 2000, the Company amended this employment agreement to
include reimbursement of various moving and relocation expenses. On November 1,
2001, the Company amended this employment agreement again to extend the term to
December 31, 2004 and to increase the minimum salary, beginning on January 1,
2002.
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 leases insurance and other expenses. During 2000 and
2001, the Company incurred expenses related to the agreement of approximately
$312,000 and $628,000 of which $50,000 remained unpaid at December 31, 2000 and
2001, respectively. On March 5, 2002, the board of directors elected Mr. Caster
as Chairman of the Board and agreed to hire him as an employee through December
31, 2004 with the same terms as his consulting agreement. Under the terms of
his employment, Mr. Caster will be paid an annual salary and will be eligible
for all benefits available to other Company executives. In the event of
termination, Mr. Caster will be paid, as severance, $300,000 plus $25,000 a
month for twelve-months.
On June 4, 2001, Mr. Charles E. Fioretti resigned as Chairman of the board
of directors and as an employee and the Company entered into a separation
agreement and full and final release agreement with Mr. Fioretti. Under the
terms of the separation agreement, the Company agreed to purchase 50,000 shares
of Mr. Fioretti's common stock valued at $1.45 per share and pay Mr. Fioretti
$600,000 on June 11, 2001 and $600,000 on June 11, 2002. At December 31, 2001,
the final payment of $600,000 remained payable to Mr. Fioretti.
On December 29, 2000, the Company entered into a separation agreement with
Mr. Anthony Canale, who resigned as Chief Operating Officer of International
Operations as of February 28, 2001. The Company agreed to pay Mr. Canale
$400,000 on March 1, 2001, $250,000 on February 28, 2002 and $250,000 on
February 28, 2003 and to continue to pay the lease payments for his car. In
addition, the Company agreed to grant Mr. Canale a total of 213,333 fully
vested warrants on March 1, 2001 at an exercise price ranging from $1.75 to
$4.00 per share and are exercisable for seven years. On March 1, 2001, Mr.
Canale began receiving $2,500 for each board of director's meeting he attended
and was reimbursed for any expenses related to the meetings. On June 4, 2001,
Mr. Canale resigned as a board member.
In the second quarter of 2001, the Company recorded a severance charge of
$3.4 million related to severance agreements with several former officers of
the Company including, among others, Ms. Deanne Varner and Mr. Patrick Cobb.
Under the terms of their agreements, the executives are bound by certain
non-compete and confidentiality clauses and the Company agreed to pay them an
aggregate amount of $817,000 in 2001, $776,000 in 2002, $550,000 in 2003 and
$150,000 in 2004. The payments consist of various charges including
compensation related to the cancellation of their employment agreements,
accrued vacation, health insurance and automobile expenses. The Company also
agreed to grant Ms. Varner a total of 163,333 stock options and Mr. Patrick
Cobb a total of 60,000 stock options, all at exercise prices ranging from $1.75
to $4.00 per share. The stock options vested on the date they were granted and
are exercisable for ten years.
F-15
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 10 CANCELLATION OF INCENTIVE COMPENSATION AGREEMENTS
In April 1994, the Company entered into an incentive compensation agreement
with Mr. Ray Robbins, an associate, shareholder, board member and co-founder of
the Company. The agreement required the Company to pay compensation based on the
increase in the admittance of new independent associates. In June 1999, this
incentive agreement was canceled by paying Mr. Robbins $750,000 and agreeing to
grandfather two of his associate positions to the highest level. Of this amount,
$500,000 was paid at the time the agreement was canceled. The remaining $250,000
was payable in monthly installments of $10,000 over two years. The $750,000
charge is included in other operating expenses in the 1999 consolidated
financial statements. In 2000, Mr. Robbins disputed some of the terms of the
cancelled incentive agreement and as a result, the Company agreed to pay Mr.
Robbins an additional $200,000 related to this cancelled incentive agreement. On
February 1, 2002, the Company entered into a final agreement with Mr. Robbins to
pay him approximately $61,000 related to various modifications to the original
agreement. During 1999, 2000 and 2001, the Company paid Mr. Robbins
approximately $618,000, $320,000 and $70,000, respectively related to the
cancellation of this incentive agreement. Mr. Robbins also receives commissions
from the Company as an associate for his product sales and downline growth.
NOTE 11 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 1999, 2000 and 2001, the Company
contributed approximately $150,000, $177,000 and $185,000, respectively, to the
Plan.
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. No options granted under this plan will remain exercisable later than ten
years after the date of grant. At December 31, 2001, the 1997 Stock Option Plan
had 94,693 shares available for grant by the board of directors.
In May 1998, the board of directors approved the 1998 Stock Option Plan
(the "1998 Stock Option Plan"), which provides incentive and non-incentive
stock options to employees. 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. At December 31, 2001, the 1998
Stock Option Plan had 76,500 shares available for grant by the board of
directors.
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. No options granted under this plan
will remain exercisable later than ten years after the date of grant. At
December 31, 2001, the 2000 Stock Option Plan had 380,000 shares available for
grant by the board of directors.
F-16
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Stock options outstanding for the 1997, 1998 and 2000 Stock Option Plans,
(collectively, "the Stock Option Plans") are as follows:
1999 2000 2001
--------------------- --------------------- -----------------------
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
(000s) price (000s) price (000s) price
-------- ---------- -------- ---------- ----------- ---------
Outstanding at beginning of year ............. 2,343 $ 3.53 2,256 $ 5.39 3,553 $ 4.44
Granted ................................... 677 $ 7.81 1,795 $ 2.62 1,060 $ 2.55
Exercised ................................. (714) $ 1.38 (261) $ 1.39 (111) $ 1.53
Canceled .................................. (50) $ 8.00 (237) $ 3.12 (1,139) $ 5.30
----- ----- ------
Outstanding at end of year ................... 2,256 $ 5.39 3,553 $ 4.44 3,363 $ 3.65
----- ----- ------
Options exercisable at year-end .............. 1,422 $ 4.33 1,833 $ 6.14 1,199 $ 4.64
----- ----- ------
Weighted-average fair value of options granted
during the year ............................. $ 3.03 $ 1.81 $ 2.04
====== ====== ======
The following table summarizes information with respect to options
outstanding and exercisable at December 31, 2001:
Options outstanding Options exercisable
------------------------------- -----------------------
Number Weighted Weighted average Weighted
of average remaining Number average
shares exercise contractual of shares exercise
Exercise Price Range (000s) price life (in years) (000s) price
- -------------------------- -------- ---------- ------------------ ----------- ---------
$1.35 - $2.00 ......... 420 $ 1.53 7.4 220 $ 1.60
$2.01 - $2.69 ......... 2,094 $ 2.64 9.0 475 $ 2.63
$3.98 - $4.00 ......... 150 $ 3.99 9.6 -- $ --
$7.00 - $8.00 ......... 699 $ 7.86 7.6 504 $ 7.87
----- ---
$1.35 - $8.00 ......... 3,363 $ 3.65 8.5 1,199 $ 4.64
===== =====
During 1999, the Board of Directors of the Company's wholly-owned
subsidiary, Internet Health Group, Inc. ("IHG"), approved the 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. The weighted-average fair value of options granted
during 1999 was $0.15 per share. As of December 31, 2001, none of the IHG
options were exercised and 858,500 options had been canceled.
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):
1999 2000 2001
------------ ------------ ------------
Consolidated net income (loss)
As reported ............... $ 10,788 $ (7,349) $ (3,660)
Pro forma ................. $ 10,042 $ (8,184) $ (4,764)
Basic EPS
As reported ............... $ 0.45 $ (0.29) $ (0.15)
Pro forma ................. $ 0.42 $ (0.33) $ (0.19)
Diluted EPS
As reported ............... $ 0.43 $ (0.29) $ (0.15)
Pro forma ................. $ 0.40 $ (0.33) $ (0.19)
F-17
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The fair value of each option granted was estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions during 1999, 2000 and 2001:
1999 2000 2001
--------- --------- ---------
Dividend yield ................... 0% 0% 0%
Expected volatility .............. 47.7% 68.0% 94.0%
Risk-free rate of return ......... 6.3% 5.8% 4.8%
Expected life (in years) ......... 6 7 7
Under the various 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 at an exercise price of
$2.00 per share, which vest immediately, are exercisable after one-year and
have a term of six years. During 2000 and 2001, 230,000 and 14,000 of these
nonqualified options were exercised at an exercise price of $1.35 per share,
respectively.
During 2001, the Company reissued 213,333 warrants and 223,333 stock
options to former executives as part of the severance agreements with these
individuals. The stock options and warrants are exercisable immediately at
prices ranging from $1.75 up to $4.00 per share and have a term of ten years.
Some of the stock options and warrants require variable accounting and the
Company is required to record a compensation charge equal to the difference
between the fair market price and the exercise price of these options each
quarter. In 2001, the Company recorded compensation related to these stock
options totaling $53,680.
NOTE 12 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 $1.6 million,
$2.4 million and $2.1 million in 1999, 2000 and 2001, respectively.
Approximate future minimum rental commitments for the operating leases are
as follows (in thousands):
Year ending
December 31,
-------------
2002 ............... $1,362
2003 ............... 1,021
2004 ............... 808
2005 ............... 745
2006 ............... 738
Thereafter ......... 303
------
$4,977
======
The Company maintains a purchase commitment with a supplier to purchase
raw materials. In February 2001, the Company modified the agreement to reduce
the purchase commitment and in December 2001, extended the reduced purchase
commitment with this supplier through August 2003. The purchase commitment with
this supplier is approximately $3.7 million and $2.5 million, for 2002 and
2003, 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 used for product sales or attracting new
associates. The total expenses for all of these agreements were approximately
$416,000, $459,000 and $396,000 in 1999, 2000 and 2001, respectively.
F-18
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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. In September 2001, the Company amended its agreement to further clarify
that the Company would no longer pay a set monthly fee but rather pay this
associate a royalty of $5.00 for each specific promotional materials sold by
the Company, up to a maximum of $1.6 million. Total expenses relating to this
agreement were approximately $206,000, $850,000 and $470,000 in 1999, 2000 and
2001, respectively.
NOTE 13 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 in order to exercise 133,766 of their stock options. In 2001,
one of the three shareholders tendered an additional 27,701 shares of his
common stock to the Company, at the current market price on the date of
transfer in order to exercise 74,074 of his stock options.
During 2000, the Company loaned Mr. Charles E. Fioretti $500,000 that was
repaid by Mr. Fioretti tendering 158,730 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 14 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 twelve-month period, which was accrued in
2000.
The Company has several other pending claims incurred in the normal course
of business which, in the opinion of management, can be resolved without
material affect on the Company's consolidated results of operations or
consolidated financial condition.
F-19
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE 15 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).
1999 2000
---------------------------------------- -----------------------------------------
Per Per
Income Shares share Loss Shares share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount
------------- --------------- ---------- ------------- --------------- -----------
Basic EPS:
Net income (loss)
available to Common
shareholders ................ $10,788 24,133 $ 0.45 ($7,349) 24,946 $(0.30)
Effect of dilutive
securities:
Stock options ................ -- 1,091 (0.02) -- -- --
Stock warrants ............... -- -- -- -- -- --
------- ------ ------ ------ ------ -------
Diluted EPS:
Net income (loss)
available to common
shareholders plus
assumed conversions ......... $10,788 25,224 $ 0.43 ($7,349) 24,946 $(0.30)
======= ====== ====== ======= ====== =======
2001
-----------------------------------------
Per
Loss Shares share
(Numerator) (Denominator) amount
------------- --------------- -----------
Basic EPS:
Net income (loss)
available to Common
shareholders ................ ($3,660) 24,730 $(0.15)
Effect of dilutive
securities:
Stock options ................ -- -- --
Stock warrants ............... -- -- --
------- ------ -------
Diluted EPS:
Net income (loss)
available to common
shareholders plus
assumed conversions ......... ($3,660) 24,730 $(0.15)
======= ====== =======
At December 31, 2000, all 3.6 million common stock options were excluded
from the dilutive EPS calculation and at December 31, 2001 all 3.4 million
common stock options were excluded from the dilutive EPS calculation, as their
effect was antidilutive.
NOTE 16 ASSET IMPAIRMENT LOSS
In 2000, 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's., fixed asset software
provided no future benefit.
NOTE 17 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, 1999, 2000 and 2001.
Long-lived assets by country for the years ended December 31, 1999, 2000
and 2001 were as follows (in millions):
Country 2000 2001
- --------------------------- --------- ---------
Canada .................. $ -- $ --
Australia ............... $ 0.6 $ 0.5
United Kingdom .......... $ 0.4 $ 0.3
Japan ................... $ 1.2 $ 1.0
United States ........... $12.5 $ 9.7
----- -----
$14.7 $11.5
===== =====
Net sales (in millions and as a percentage of net sales) by country for
the years ended December 31, 1999, 2000 and 2001 were as follows:
Year United States Canada Australia United Kingdom Japan
- --------------- ---------------------- --------------------- -------------------- ------------------- ------------------
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%
2001 .......... $ 99.3 77.1% $18.1 14.1% $ 4.4 3.4% $1.2 1.0% $5.7 4.4%
F-20
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 Fourth Amended and Restated Bylaws of Mannatech dated April 27, 2001, incorporated herein by
reference to Exhibit 99.1 to Mannatech's Form 8-K (File No. 000-24657) filed with the Commission on
August 22, 2001.
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
10.5 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 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.
1
10.13 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.
10.14 License Agreement effect October 12, 2000 between Mannatech and Lactoferrin Products Company,
incorporated herein by reference to Exhibit 10.1 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on May 15, 2001.
10.15 Fulfillment Services Agreement effective July 22, 2000 between Mannatech and Marcus B. Gohlke,
incorporated herein by reference to Exhibit 10.2 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on May 15, 2001.
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 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.
10.18 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.
10.19* First Amendment to the Employment Agreement between Mannatech and Mr. Terry L. Persinger, dated
January 1, 2002.
10.20 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.
10.21* First Amendment to the Employment Agreement between Mannatech and Mr. Robert M. Henry, dated
April 1, 2000.
10.22* Second Amendment to the Employment Agreement between Mannatech and Mr. Robert M. Henry dated
January 1, 2002.
10.23 Employment Agreement dated September 21, 2000, entered into between Mannatech and Mr. Charles E.
Fioretti, incorporated herein by reference to Exhibit 10.23 to Mannatach's Form 10-K (File No. 000-24657)
filed with the Commission on April 1, 2001.
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 and Full and Final Release dated June 4, 2001 between Mannatech and Mr. Charles
E. Fioretti, incorporated herein by reference to Exhibit 99.1 to Mannatech's Form 8-K (File No. 000-24657)
filed with the Commission on June 11, 2001.
2
10.30 Release Agreement dated September 24, 2001 between Mannatech and Mr. Charles E. Fioretti,
incorporated herein by reference to Exhibit 10.2 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on November 14, 2001.
10.31 Separation Agreement dated February 28, 2001 with Mr. Anthony E. Canale, incorporated herein by
reference to Exhibit 10.29 to Mannatech's Form 10-K (File No. 000-24657) filed with the Commission
on April 1, 2001.
10.32 Separation Agreement dated may 2, 2001 between Mannatech and Ms. Deanne Varner, incorporated herein
by reference to Exhibit 10.5 to Mannatech's Form 10-Q (File No. 000-24657) filed with the Commission
on May 15, 2001.
10.33 Separation Agreement and General Release dated June 26, 2001 between Mannatech and Mr. Patrick D.
Cobb, incorporated herein by reference to Exhibit 99.1 to Mannatech's Form 8-K (File No. 000-24657)
filed with the Commission on June 26, 2001.
10.34 Purchase Agreement dated September 28, 2001, by and between Mannatech, Incorporated and Mr. Ray
Robbins, incorporated by reference to Exhibit 10.5 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on November 14, 2001.
10.35 Agreement dated September 28, 2001 between Mannatech and Mr. Marlin Ray Robbins, incorporated
herein by reference to Exhibit 10.5 to Mannatech's Form 10-Q (File No. 000-24657) filed with the
Commission on November 14, 2001.
10.36* Agreement and Final Release dated February 1, 2002 between Mannatech and Mr. Marlin Ray Robbins.
10.37 Royalty Agreement dated September 10, 2001 between Mannatech and Jett, incorporated herein by
reference to Exhibit 10.4 to Mannatech's Form 10-Q (File No. 000-24657) filed with the Commission on
November 14, 2001.
10.38 Employment Agreement dated October 1, 2001 between Mannatech and Ms. Bettina S. Simon,
incorporated herein by reference to Exhibit 10.3 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on November 14, 2001.
10.39 Consulting Agreement dated October 1, 2001 between Mannatech and Mr. J. Stanley Fredrick,
incorporated herein by reference to Exhibit 10.1 to Mannatech's Form 10-Q (File No. 000-24657) filed
with the Commission on November 14, 2001.
21* List of Subsidiaries
23* Consent of PricewaterhouseCoopers LLP
* Filed herewith.
3