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1998
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission File No. 000-24657
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
TEXAS 75-2508900
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 S. ROYAL LANE, SUITE 200
COPPELL, TEXAS 75019
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (972) 471-7400
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
TITLE OF CLASS
--------------
Common Stock, Par Value $0.0001 Per Share
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [ ] NO [X] .
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. [ V ]
THE AGGREGATE MARKET VALUE OF THE 6,833,811 SHARES OF REGISTRANT'S VOTING
STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $73,890,581, BASED ON THE
CLOSING PRICE OF THE REGISTRANT'S COMMON STOCK ON THE NASDAQ NATIONAL MARKET ON
MARCH 24, 1999 OF $10 13/16 PER SHARE.
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S SOLE CLASS OF COMMON
STOCK, PAR VALUE $0.0001 PER SHARE, AS OF MARCH 24, 1999, THE LATEST
PRACTICABLE DATE, WAS 24,076,753.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
<TABLE>
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Page
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PART I
Item 1. Business........................................................................................ 1
General......................................................................................... 1
Industry Overview............................................................................... 2
Operating Strengths............................................................................. 3
Growth Strategy................................................................................. 4
Products........................................................................................ 4
Product Development............................................................................. 5
Product Distribution System..................................................................... 6
Information Technology and Systems.............................................................. 9
Production and Distribution..................................................................... 10
Government Regulation........................................................................... 10
Competition..................................................................................... 14
Employees....................................................................................... 14
Item 2. Properties...................................................................................... 14
Item 3. Legal Proceedings............................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders............................................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters........................... 16
Item 6. Selected Financial Data......................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 18
Overview........................................................................................ 18
Reorganization.................................................................................. 21
Results of Operations........................................................................... 22
Year ended December 31, 1998 compared with the year ended December 31, 1997..................... 22
Year ended December 31, 1997 compared with the year ended December 31, 1996..................... 24
Selected Quarterly Statements of Income......................................................... 26
Liquidity and Capital Resources................................................................. 27
Year 2000....................................................................................... 28
Forward-Looking Statements...................................................................... 29
Impact of Inflation............................................................................. 29
Recent Financial Accounting Standards Board Statements.......................................... 29
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................... 29
Item 8. Financial Statements and Supplementary Data..................................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 30
PART III
Item 10. Directors and Executive Officers of the Registrant.............................................. 31
Directors and Executive Officers................................................................ 31
Committees of the Board of Directors............................................................ 33
Section 16(a) Beneficial Ownership Reporting Compliance......................................... 33
Item 11. Executive Compensation.......................................................................... 34
Stock Option Grants in Last Fiscal Year......................................................... 34
Director Compensation........................................................................... 35
Executive Employment Agreements................................................................. 35
Management Bonus Plan........................................................................... 35
Compensation Committee Interlocks and Insider Participation..................................... 35
Executive Compensation Report of the Board of Directors......................................... 36
Compensation of Chief Executive Officer......................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 38
Item 13. Certain Relationships and Related Transactions.................................................. 39
Partnership Transactions........................................................................ 39
Incentive Compensation Agreements............................................................... 40
</TABLE>
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<TABLE>
<S> <C>
Loans to Officers............................................................................... 40
Transactions with Multi-Venture................................................................. 40
Loans to Agritech Labs, Inc..................................................................... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................ 42
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Mannatech, Incorporated develops and sells proprietary nutritional
supplements and topical products through a network marketing system. The
Company sells its products in the United States, Canada and Australia through a
network consisting of approximately 237,000 active Associates (an "active"
Associate has purchased products from the Company within the last 12 months) as
of February 28, 1999, and is currently planning to expand into the United
Kingdom and Japan, while continuing to assess the potential and risks of
expansion into other foreign markets. Since commencing operations in November
1993, the Company's net sales have grown from approximately $8.4 million in
1994 to approximately $164.9 million in 1998.
The Company was incorporated on November 4, 1993 under the laws of the
State of Texas. In April 1998, the Company formed a wholly-owned subsidiary,
Mannatech Australia Pty Limited, which commenced operations on October 1, 1998,
as a limited service provider. On September 10, 1998 the Company commenced a
direct initial public offering (the "IPO"), in which the Company and certain
selling shareholders sold an aggregate of 3,056,016 shares of the Company's
common stock, par value $0.0001 per share (the "Common Stock"), at a price of
$8.00 per share. The IPO was completed on February 12, 1999. Of the shares sold
in the IPO, 1,500,000 were sold by the Company, yielding net proceeds to the
Company of approximately $9.5 million after deducting (i) deferred offering
costs of approximately $1.9 million, (ii) legal, accounting, printing and other
costs of approximately $308,000, and (iii) the fee to the placement agent
engaged by the Company to assist with the IPO of approximately $389,000. The
remaining 1,556,016 shares were sold by the selling shareholders. Since the IPO,
the Common Stock has been traded on the Nasdaq National Market under the symbol
"MTEX."
The Company is principally engaged in a single business segment; the
development and distribution of nutritional supplements and topical products.
Information for each of the Company's most recent three fiscal years, with
respect to the amounts of revenues from sales, operating profit and
identifiable assets of this segment is set forth under Item 6 of this report.
The Company pursues a two-fold business strategy: (i) to develop a
proprietary line of nutritional supplements having both health benefits and
mass appeal to a general population demanding non-toxic healthcare alternatives
and (ii) to provide an appealing framework for persons interested in the
products to establish a direct sales business. To date, the Company has focused
its development efforts primarily in the area of carbohydrate technology,
creating a proprietary ingredient, Ambrotose(R) Complex, which combines the
naturally occurring sugars required to support optimal cell-to-cell
communication. Additional Company efforts have been focused on developing
products based on scientific advances in the emerging field of phytochemistry,
which has identified certain naturally occurring components of various plants,
known as "phytochemicals," which, while not essential to sustain life, are
fundamental to optimal health.
Ambrotose(R) Complex is the cornerstone of the Company's product
lines. These products are designed to support various systems and functions of
the human body, including (i) the cell-to-cell communication system, (ii) the
immune system, (iii) the endocrine system, (iv) the intestinal system and (v)
the dermal system. The Company also markets products designed to aid in sports
performance and nutritional support. The Company's products, Man-Aloe(R),
Ambrotose(R) and Bulk Ambrotose(R), are designed to support cell-to-cell
communication. For immune system support, the Company offers Phyt-Aloe(R), for
adults, and Phyto-Bears(R), a chewable gummi-bear nutritional supplement
product marketed to children but popular with adults. Other products include
MVP(TM) and Plus for endocrine system support, MannaCleanse(TM) for intestinal
system support and Emprizone(R), Firm and Ambroderm (formerly known as
Naturalizer) for dermal care. The Company offers several products designed to
aid sports performance by enhancing the body's natural recovery process and
supporting lean tissue development, including Em-Pact(TM), Bulk Em-Pact(TM) and
Sport with Ambrotose(R). The Company also markets Profile 1, Profile 2 and
Profile 3, which support the body's nutritional needs.
In March 1998, the Company introduced MannaBAR(TM), a nutritional
supplement bar in two versions that contain the equivalent of the Company's
recommended minimum daily supply of Ambrotose(R) Complex, Phyt-Aloe(R) and
Plus. In September 1998, the Company introduced Manna-C(TM), a nutritional
support for nasal and sinus health
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containing Ambrotose(R) Complex, monosaccharides necessary to the manufacture
of glycoproteins and an herbal blend of Vitamin C and other nutrients which
support most cell functions and, in October 1998, released Ambrostart, a
nutritional support fiber drink containing Ambrotose(R) Complex, and Bulk
Phyt-Aloe(R) an immune support system product. In addition to MannaBAR(TM) and
Manna-C(TM), the Company plans to release additional products as new
nutritional compounds or areas of consumer demand are identified by the
Company. All new products are expected to contain proprietary components.
The Company's products are marketed exclusively through a network
marketing system. The Company believes that its network marketing system is
well suited to its products, which emphasize health and nutrition, because
network marketing allows in-person product education not available through
traditional marketing techniques. The Company's network marketing system
appeals to a broad cross-section of people, particularly those seeking to
supplement family income, start a home-based business or pursue employment
opportunities other than conventional, full-time employment.
The Company's principal executive offices are located at 600 S. Royal
Lane, Suite 200, Coppell, Texas 75019, and the Company's telephone number is
(972) 471-7400. Unless the context otherwise requires, the term "Company" as
used in this report shall mean Mannatech, Incorporated and its subsidiary.
INDUSTRY OVERVIEW
The nutritional supplements industry is highly fragmented and
intensely competitive. It includes companies that manufacture and distribute
products that are generally intended to enhance the body's performance and well
being. Nutritional supplements include vitamins, minerals, dietary supplements,
herbs, botanicals and compounds derived therefrom. Opportunities in the
nutritional supplements industry were enhanced by the enactment of the Dietary
Supplement Health and Education Act of 1994 ("DSHEA"). Under DSHEA, vendors of
dietary supplements are now able to educate consumers regarding the effects of
certain component ingredients.
According to Packaged Facts, an independent consumer market research
firm, the retail market for nutritional supplements has experienced a compound
annual growth rate in the United States of over 15% from 1992 to 1996. Sales in
the principal domestic market in which the Company's products compete totaled
approximately $6.5 billion in 1996. According to the Nutrition Business Journal
Annual Industry Overview, in 1997, dietary supplement sales increased by 13% in
the United States and sales in the principal domestic market in which the
Company's products compete totaled approximately $12.6 billion. The Company
believes that growth in the nutritional supplement market is driven by several
factors, including (i) the general public's heightened awareness and
understanding of the connection between diet and health, (ii) the aging
population, particularly the baby-boomer generation, which is more likely to
consume nutritional supplements, (iii) product introductions in response to new
scientific research and (iv) the nationwide trend toward preventive medicine.
With respect to the planned expansion into the United Kingdom and Japan, the
October/November 1998 Nutrition Business Journal noted that during 1997,
European dietary supplement sales were approximately $11.9 billion, 12% of
which was derived from sales in the nutrition industry. For the Japanese
dietary supplement market in 1997, sales of dietary supplements were
approximately $6.4 billion, 54% of which was derived from direct sales in the
nutrition industry.
Nutritional supplements are sold primarily through (i) mass market
retailers, including mass merchandisers, drug stores, supermarkets and discount
stores, (ii) health food stores, (iii) mail order companies, and (iv) direct
sales organizations. Direct selling, of which network marketing is a
significant segment, has been enhanced in the past decade as a distribution
channel due to advancements in technology and communications resulting in
improved product distribution and faster dissemination of information. The
distribution of products through network marketing has grown significantly in
recent years. The World Federation of Direct Selling Associations (the "WFDSA")
reports that, from 1990 through 1996, worldwide direct distribution of goods
and services to consumers increased approximately 65%, resulting in the sale of
nearly $80 billion of goods and services in 1996. According to the "Survey of
Attitudes toward Direct Selling," commissioned by the Direct Selling
Association (the "DSA"), and conducted and prepared by Wirthlin Worldwide (the
"Wirthlin Report"), among the three categories experiencing the greatest gains
in the direct selling industry since 1976 are food, nutrition and wellness
products.
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According to the Wirthlin Report, approximately 51% of the American
public has purchased products or services from a direct selling company at some
point in the past, with 29% of those having made such a purchase in the last
twelve months. Four in 10 adult Americans have expressed an interest in direct
selling as a method of buying products and services, and 23% of those who have
never purchased products and services from direct selling companies are
interested in direct selling. The Company believes it is positioned to
capitalize on the trends of growth in direct sales and demand for nutritional
supplement products.
OPERATING STRENGTHS
The Company's two-fold business strategy is to (i) develop a
proprietary line of nutritional supplements having both health benefits and
mass appeal to a general population demanding non-toxic healthcare
alternatives, and (ii) provide an appealing framework for persons interested in
the products to establish a direct sales business. The Company believes that it
will be able to continue its growth by capitalizing on the following operating
strengths:
Proprietary Product Offerings. The Company offers an innovative line
of products based upon its proprietary, patent-pending research. The Company
believes that the discovery and development of products containing certain
carbohydrates necessary to optimum health represents an expanding business
opportunity for the Company. The Company recognized the nutritional need for
the eight known monosaccharides to support optimal health, and developed and
filed a patent application on a compound containing these monosaccharides. The
Company includes this compound, Ambrotose(R) Complex, in each of its products.
The Company believes that maintaining a proprietary line of products is
important for two reasons: (i) it is a marketing factor that differentiates the
Company from its competitors; and (ii) the limited availability helps to drive
demand and enables premium pricing.
Research and Development Capability. The Company believes that its
experienced personnel and new research and development facilities will allow it
to develop and market additional new proprietary products. The Company's
research and development efforts are led by two scientists with an aggregate of
35 years of experience designing products based on emerging carbohydrate
technology. In March 1998, the Company completed construction of a
technologically advanced laboratory to be used for both quality assurance and
product development. As a complement to its in-house staff and facilities, the
Company has sought, and will continue to seek, strategic alliances with several
large manufacturers of nutritional supplements. These companies work with the
Company to create, develop and manufacture its proprietary products and lend
additional guidance, which is helpful to the Company's strategic planning. In
addition, the Company works with other smaller product companies to identify
and develop new innovative niche products.
Associate Support Philosophy. The Company is committed to providing
the highest level of support services to its Associates. The Company believes
that it meets the needs of, and builds loyalty with, its Associates through its
highly personalized and responsive customer service. Company-sponsored
Associate events held several times throughout the year provide education and
motivation for thousands of Associates. These conferences feature a schedule of
events that offers information, aids in business development for Associates and
provides a venue for Associates to interact with the leading distributors and
researchers of the Company. In addition, the Company believes it offers one of
the most financially rewarding compensation plans offered to Associates in the
direct selling industry. Commissions as a percentage of net sales were 40.7%,
41.0%, and 40.4% for 1996, 1997 and 1998, respectively.
Flexible Operating Strategy. The Company considers flexibility to be a
key component of its existing and ongoing success. The Company outsources
production and forms strategic alliances to minimize capital expenditure where
practicable. However, the Company maintains control of key operating functions,
including product development and formulation, product warehousing and
distribution, financial and operating functions and proprietary product raw
material sourcing. The Company believes it is positioned to enter international
markets in an efficient and cost-effective manner by leveraging the expertise
and resources of its strategic allies in the areas of distribution and
logistics, call center operations, product registration and export
requirements. Information technology also plays a key role in providing
operating flexibility to the Company. The proprietary technology systems used
by the Company are designed to be quickly and easily adaptable in order to
support expansion into new markets. By developing this technology
infrastructure, the Company believes it has reduced the risks associated with
operational inefficiencies typically encountered by network marketing companies
during periods of rapid growth.
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Experience and Depth of Management Team. The Company's management team
is comprised of experienced individuals drawn from a variety of backgrounds and
expertise in certain fields, including product research and development,
marketing, direct sales, legal and compliance, information technology and
product distribution. All principal managers have substantial business
experience, most with larger concerns, and bring the perspective of traditional
business to the multi-level marketing endeavor of the Company. The goal of the
management team is to provide a sound, systematic, reliable framework within
which each Associate can fit his or her personal style of conducting business.
GROWTH STRATEGY
The Company's primary growth strategy is to increase product sales
through existing distribution channels, to continue to expand operations in
existing markets in the United States, Canada and Australia, expand into new
markets in the United Kingdom and Japan and to continue to assess the potential
and risks of expansion into other international markets. The Company believes
that its growth will be based on the following factors:
Introduce New Products. The Company's product development strategy is
to expand its existing product lines and bring new proprietary and, where
possible, patentable products to market that can be developed into new product
lines. Since its inception, the Company has introduced new products each year.
The Company currently intends to introduce new products each year, expecting
each to contain one or more proprietary components and complement existing
products. The Company believes that its newly enhanced research and development
capabilities will facilitate its ability to develop these new products.
Attract New Associates and Enhance Associate Productivity. The Company
has enjoyed significant growth in the number of Associates by leveraging its
operating strengths and creating a business climate which promotes growth in
the number of Associates qualifying for recognition and increases the
retention, motivation and productivity of high-level Associates. The Company
plans to introduce new Associate achievement levels in part to encourage
greater retention, motivation and productivity. In addition, the Company plans
to encourage growth in the number of Presidential Associates, currently the
highest level of achievement attainable by an Associate, by modifying Associate
events and recognition programs.
Enter New Markets. In October 1998, the Company opened its Australian
headquarters in St. Leonards, Australia and is further exploring the
possibilities for further expansion into the United Kingdom and Japan while
continuing to research several additional countries. By employing its flexible
operating strategy in the international sector, the Company believes it will be
able to enter new markets in a cost-effective and efficient manner. In
addition, the Company will evaluate the following factors in its decision to
expand into new markets: (i) size of market; (ii) anticipated demand; and (iii)
ease of entry. The Company believes that growth potential exists in
international markets.
PRODUCTS
The Company markets a line of quality, proprietary products, including
20 different nutritional products and three topical products. The Company also
offers a variety of sales aids, including enrollment and renewal packs (which
include products), brochures and videotapes, which accounted for approximately
29.3%, 24.7% and 18.9% of net sales in 1996, 1997 and 1998, respectively. The
Company believes its focused product line contributes to efficient distribution
and inventory management. The Company believes that the discovery and use of
certain carbohydrates offers significant potential for nutritional benefits.
Healthy bodies, comprised of many sophisticated components working together,
must have 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
glycoproteins, or molecules found on the surface of all cells, play a key role
in all cell-to-cell communication. The name, glycoprotein, is derived from the
molecules' composition: sugar (glyco) and protein. Because up to 85% of
glycoproteins are composed of specific monosaccharides, the body's need for
these carbohydrates is important.
Harper's Biochemistry, a leading biochemistry reference source, lists
eight monosaccharides commonly found in human glycoproteins, which are known to
be important to the healthy functioning of cell-to-cell communications in
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the human body. These monosaccharides are fucose, galactose, glucose, mannose,
N-acetylgalactosamine, N-acetylglucosamine, N-acetylneuraminic acid and xylose,
and belong to a universe of approximately 200 monosaccharides found in nature.
The Company recognized the human body's need for these monosaccharides
to support optimal health. In response, the Company developed and filed a
patent application on Ambrotose(R) Complex, which is directed at these
monosaccharides and their various uses. By filing this patent application, the
Company seeks to establish a proprietary position in the nutritional supplement
market. This proprietary glyconutritional compound, Ambrotose(R) Complex, is a
component of each of the Company's products.
The following chart lists the Company's products, and the body systems
targeted by each, as of December 31, 1998.
<TABLE>
<CAPTION>
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Cell-to-Cell Immune Endocrine Intestinal Dermal Sports Nutritional
Communication System System System System Performance Needs
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ambroderm(1) X
- -------------------------------------------------------------------------------------------------------------------------
Ambrostart(TM) X X X
- -------------------------------------------------------------------------------------------------------------------------
Ambrotose(R) X
- -------------------------------------------------------------------------------------------------------------------------
Bulk Ambrotose(R) X
- -------------------------------------------------------------------------------------------------------------------------
Bulk Em-Pact(TM) X
- -------------------------------------------------------------------------------------------------------------------------
Em-Pact(TM) X
- -------------------------------------------------------------------------------------------------------------------------
Emprizone(R) X
- -------------------------------------------------------------------------------------------------------------------------
Firm X
- -------------------------------------------------------------------------------------------------------------------------
Man-Aloe(R) X
- -------------------------------------------------------------------------------------------------------------------------
MannaBAR(TM) X X X
Carbohydrate
Formula
- -------------------------------------------------------------------------------------------------------------------------
MannaBAR(TM) X X X
Protein Formula
- -------------------------------------------------------------------------------------------------------------------------
Manna-C(TM) X
- -------------------------------------------------------------------------------------------------------------------------
MannaCleanse(TM) X
- -------------------------------------------------------------------------------------------------------------------------
Mannatonin X
- -------------------------------------------------------------------------------------------------------------------------
MVP(TM) X
- -------------------------------------------------------------------------------------------------------------------------
Bulk Phyt-Aloe(R) X
- -------------------------------------------------------------------------------------------------------------------------
Phyt-Aloe(R) X
- -------------------------------------------------------------------------------------------------------------------------
Phyto-Bears(R) X
- -------------------------------------------------------------------------------------------------------------------------
Plus X
- -------------------------------------------------------------------------------------------------------------------------
Profile 1 X
- -------------------------------------------------------------------------------------------------------------------------
Profile 2 X
- -------------------------------------------------------------------------------------------------------------------------
Profile 3 X
- -------------------------------------------------------------------------------------------------------------------------
Sport with X
Ambrotose(R)
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Formerly Naturalizer.
PRODUCT DEVELOPMENT
The Company's overall product strategy is to develop proprietary
nutritional supplements which capitalize on existing and emerging scientific
knowledge and the growing worldwide interest in alternative healthcare and
optimal health. The Company focuses on bringing new proprietary and, where
possible, patentable products to market that can be developed into new product
lines, while expanding its existing product line. The Company believes it is
well positioned to take advantage of the ability to provide educational
information regarding dietary supplements and the increased development of
nutritional supplements and functional foods resulting from the enactment of
DSHEA.
The Company intends to launch new products each year at its corporate
events. Selection of the products developed will be based on the marketability
and proprietary nature of the product, taking into account regulatory
considerations, the availability of components and the existence of data
supporting claims of functionality. To support and validate the proprietary
nature of the Company's product line, appropriate research is conducted under
the direction of the Company's research and development department both before
and after product launch.
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The following chart indicates the year of introduction of each of the
Company's products:
<TABLE>
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Year Products Introduced
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<S> <C>
1994 Man-Aloe(R), Plus, MVP(TM), Sport, Ambroderm (formerly Naturalizer), Phyt-Aloe(R), Firm
1995 Phyto-Bears(R), Em-Pact(TM), Emprizone(R)
1996 Ambrotose(R), Mannatonin, Profile 1, 2 and 3, Sport with Ambrotose(R)
1997 Bulk Ambrotose(R), Bulk Em-Pact(TM), MannaCleanse(TM)
1998 MannaBAR(TM) Carbohydrate Formula, MannaBAR(TM) Protein Formula, Manna-C(TM), Ambrostart(TM),
Bulk Phyt-Aloe(R)
</TABLE>
PRODUCT DISTRIBUTION SYSTEM
Overview. The foundation of the Company's sales philosophy and
distribution system is network marketing. As with most network marketing
systems, the Company's Associates purchase products for retail sale and
personal consumption. The Company believes network marketing is an effective
vehicle to distribute the Company's products for the following reasons: (i) the
benefits of the Company's products are more readily explained on an individual,
educational basis, which emphasizes the manner in which its products work, and
is more direct than the use of television and print advertisements; (ii) direct
sales allow for actual product testing by a potential consumer; (iii) the
impact of Associate and consumer testimonials is enhanced; and (iv) as compared
to other distribution methods, Associates can provide higher levels of customer
service and attention by, among other things, following up on sales to ensure
proper product usage and customer satisfaction, and encouraging repeat
purchases.
The Company encourages Associates to enroll new Associates with whom
the Associates may have an ongoing relationship as a family member, friend,
business associate, neighbor or otherwise. To become an Associate of the
Company, a person may enroll as a Preferred Customer and subsequently execute
an Associate Application, sponsor new Associates or purchase an Associate
starter pack. Each starter pack includes some combination of nutritional
products, promotional materials and free admission to the Company's events.
Each pack also allows the Associate to purchase products at the Company's
wholesale price. The Company plans to offer a comparable Associate starter pack
in each country in which it does business. All pack prices herein are stated in
United States currency. In May 1998, the Company introduced new starter and
renewal packs for Associates in the United States and Canada priced at $29.00.
Historically, the United States and Canada Associate starter packs could be
purchased at $49.00, $229.00, $339.00, $568.00 and $1,000.00 levels. Beginning
June 1998, the United States and Canada Associate starter packs can be
purchased at $29.00, $49.00, $289.00, $664.00 and $1,000.00 levels. In
Australia, the Associate starter pack is available only at the $31.00 level.
For more detailed information regarding the starter packs, see table in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company also requires an Associate to renew their status each year
by either (i) renewing as a Preferred Customer and continuing to sponsor new
Associates or (ii) by purchasing a renewal pack. Prior to June 1998, Associates
in the United States and Canada were able to renew their Associate status for
$49.00, $229.00 or $568.00. Since the institution, in May 1998, of the $29.00
Preferred Customer Pack, Associates in the United States and Canada have been
able to renew their Associate status for $29.00, $200.00 or $350.00. Associates
choosing not to renew their Associate status may continue to purchase the
Company's products at the wholesale price and resell the products; however,
such a person would not be qualified to earn commissions or bonuses under the
Company's compensation plan.
Associates are also eligible to purchase upgrade packs. Historically,
Associates in the United States and Canada could purchase upgrade packs for
$229.00, $339.00, $568.00 or $1,000.00. Beginning in June 1998, Associates in
the United States and Canada were able to purchase upgrade packs for $289.00,
$375.00, $664.00 or $1,000.00. Australia Associates can purchase upgrade packs
for $262.00, $358.00 or $620.00. Upgrade packs are accounted for as renewal
packs as they renew an Associate's membership for one year from the time of
upgrade.
Total Associate packs sold were 117,688, 174,680 and 175,479 in 1996,
1997 and 1998, respectively. Renewal packs sold were 19,875, 41,219 and 58,476,
respectively, for the same periods. The number of starter packs sold were
97,813, 133,461 and 117,003, respectively, for such periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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The Company believes that Associates will be more likely to remain
with the Company if they are enrolled with the Company by someone with whom
they have an ongoing relationship. The Company also believes that its network
marketing system will continue to build a base of potential consumers for
additional products. The Company encourages, but does not require, Associates
to use the Company's products, nor does the Company require a person to be an
Associate in order to be a consumer of the Company's products. The Company
believes its network marketing system is particularly attractive to prospective
Associates because of the potential for supplemental income and because
Associates are not required to purchase any inventory, have no account
collection issues, have minimal paperwork requirements and have a flexible work
schedule. The sales efforts of Associates are supported through various means,
including Company-sponsored events held periodically throughout the year.
The effectiveness of direct selling as a distribution channel has been
enhanced in the past decade through advancements in communications, including
telecommunications, and the proliferation of the use of videotape players, fax
machines and personal computers. The Company produces high-quality video tapes
and audio tapes for use in product education, demonstrations and sponsoring
sessions that project a desired image for the Company and its product line. The
Company believes that high quality sales aids play an important role in the
success of Associate efforts. The Company is committed to fully utilizing
current and future technological advances to continue to enhance the
effectiveness of direct selling.
Associates pay for products prior to shipment. The Company carries no
accounts receivable from Associates, except for minor amounts owing due to
check returns or other exceptions. Associates pay for products primarily by
credit card, with cash, money orders and checks representing a small portion of
all payments. Associates may automatically order product, on a continuous
basis, and receive a discount. Automatic orders accounted for approximately
36.9% and 44.9% of net sales for the years ended December 31, 1997 and 1998,
respectively.
Associate Development. The Company believes that key contributing
factors to its long-term growth and success are the recruitment of new
Associates and retention of existing Associates. The Company is active in the
development of Associates, including in the areas of recruitment, support,
motivation and compensation.
The Company primarily relies on current Associates to sponsor new
Associates. The sponsoring of new Associates creates multiple levels in the
network marketing structure. Persons whom an Associate sponsors are referred to
as "downline" or "sponsored" Associates. Once a person becomes an Associate, he
or she is able to purchase products directly from the Company at wholesale
prices for resale to consumers or for personal consumption. The Associate is
also entitled to sponsor other Associates in order to build a network of
Associates and product users.
The Company also relies heavily on existing Associates to train new
Associates, utilizing a new training program for Associates ("Accredited
Training") developed using both the expertise of experienced corporate trainers
and the experience of seasoned Associates. While the Company provides
brochures, magazines and other sales materials, Accredited Training is
specially designed to provide systematic and uniform training to Associates
about the Company, its products, methods of doing business and compensation
plan. As of January 1998, only Associates who have participated in Accredited
Training are eligible to receive remuneration for training other Associates.
The Company makes the needs of its Associates a priority, in
accordance with its stated corporate philosophy. The Company provides a high
level of support services tailored to the needs of its Associates, including
motivational meetings, educational and informative conference calls, automated
fax services, ordering and distribution system, personalized customer service
via telephone, the Internet and e-mail, 24-hour, seven days per week access to
certain information through touch-tone phones and a liberal product return
policy. The Company's support system includes a current database of all
Associates and their upline and downline Associates. The Company also provides
business development materials that the Company believes will increase both
product sales and recruitment. The Company believes that enhancing an
Associate's efforts through effective support mechanisms has been and will
continue to be important to the success of the Company.
The Company currently recognizes Associate performance with four
levels of Associate leadership achievement: Regional; National; Executive; and
Presidential. Each leadership level is vested with the opportunity for
additional compensation (excluding generation bonus) ranging from 15% of
commissionable sales at the Regional
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Director level to 9% of commissionable sales at the Presidential level. In
addition, Associates are eligible for the Company's "generation bonus," which
is an additional achievement level specially designed to stimulate continued
production and downline growth by further motivating Associates. The Company
intends to expand its program of Associate recognition as necessary in the
future to express its appreciation for increased levels of performance and to
further motivate Associates.
Associate Compensation. All Associate compensation is paid directly by
the Company and is based on sales of the Company's products, the achievement of
certain leadership levels and the training of other Associates. The Company
offers a compensation plan, which combines aspects of two widely used
multi-level marketing compensation plans. The Company's compensation plan
integrates a single downline, or "unilateral" element, with a multiple
downline, or "binary" element, and adds additional compensation based upon
attainment of certain Associate leadership levels and training performance. The
"unilateral" and "binary" elements of the compensation plan are similar to
other multi-level marketing compensation plans. All commissions are based on a
percentage of the Associate's wholesale prices. Associates may, at their
discretion, determine the resale price of products purchased at wholesale. The
compensation plan includes bonuses or commissions for qualified Associates
ranging from $20.00 to $180.00 earned based on downline growth. Associates who
have completed "accredited training" can receive a commission of $25.00 for
each additional Associate they train. Bonuses or commissions ranging from
$10.00 to $200.00 are also earned on products included in starter or
introductory packs. The result of this "hybrid" structure is to compensate both
Associates in the early stages of building their business and Associates with
more established organizations, by rewarding Associates for breadth as well as
depth in their downline organizations. In addition to the "hybrid" compensation
plan, Associates earn compensation for retail sales of products.
Based upon its knowledge of other industry-related network marketing
compensation plans, the Company believes that its compensation plan is among
the most financially rewarding plans offered in the industry, with commissions
as a percentage of net sales of 40.7%, 41.0% and 40.4% for 1996, 1997 and 1998,
respectively.
The Company, in configuring its international compensation plans, will
not employ its existing compensation plan outside of the United States and
Canada. In the international sector, the Company uses substantially similar
unilateral plans from country to country, which will be tailored to fit the
applicable laws and other considerations governing compensation of Associates
in each country. The Company has seamlessly integrated its international
compensation plans across all markets in which the Company's products are, or
will be, sold. This allows Associates to receive commissions for global product
sales, rather than merely local product sales. Currently, the seamless downline
structure is designed to allow an Associate to build a global network by
creating downlines in international markets. Associates will not be required to
establish new downlines or requalify for higher levels of commissions within
each new country in which they begin to operate. The Company has developed an
international compensation plan designed to pay approximately the same
percentage compensation as in the United States and Canada and which will
stimulate both product sales as well as the development of width and breadth in
downline organizations in accordance with local laws.
Management of Associates. The Company takes an active role in the
management of its Associates. Many multi-level marketing companies encounter
difficulty with regulatory authorities due to lack of oversight of Associate
activities. Any oversight process is complicated by the fact that Associates are
not legally employees of the Company, but are independent contractors. However,
the Company seeks to restrict the statements and conduct of Associates regarding
the Company's business by contractually binding Associates to abide by the
Associate Policies and Procedures (the "Policies and Procedures") promulgated by
the Company. Each Associate receives a copy of the Policies and Procedures which
must be followed in order to maintain the Associate's status in the
organization. Associates are expressly forbidden from making any representation
as to the possible earnings of any Associate, other than through statements of
the Company indicating the range of actual earnings by all Associates and other
required information, prepared in accordance with applicable law. Associates are
also prohibited from creating any marketing literature that has not been
approved by the Company or a qualified attorney. The Company monitors Associate
web sites and Internet conduct on a regular and continuing basis. In March 1999,
the Company introduced Mannapages for its Associates. Mannapages is a personal
Internet website program established by the Company for Associates. For a $49.00
fee, the Company produces an Internet website for an Associate. The Company
hopes Mannapages will assist Associates in their sales efforts and also help the
Company monitor Associate websites on a regular basis.
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The Company enforces the Policies and Procedures through its
disciplinary procedure, which is instituted through the filing of a complaint
against the Associate, followed by a response from the Associate, an
investigation of the facts, and the presentation of the facts to a committee of
corporate managers not within the Company's compliance department (the
"Compliance Department") for determination. The Compliance Department is also
free to evaluate complaints, and, where the conduct complained of is not within
the scope of the Policies and Procedures, refer the complaint to an Associate
Advisory Counsel for intervention to address Associate ethics. The Compliance
Department also has the discretion to intervene with Associates at a lower
level of discipline, while still creating a record of the possible infraction
and educating the Associate through its practice of issuing warning letters.
The Associate is educated as to the nature of the complaint against him or her,
the policy alleged to have been violated, and then, without a finding of
whether the conduct occurred or not, is asked to confirm in writing that he or
she understands the policy in question, agreeing that he or she will thereafter
follow all of the Policies and Procedures of the Company.
The Compliance Department and the Director of Specialized Information
monitor Company-related meetings at various locations and at corporate events,
generating a "report card" for the presenting Associate, offering critiques and
employing the Associate disciplinary process, where necessary. The Compliance
and Legal Departments, in cooperation with the other departments of the
Company, regularly evaluate Associate conduct and the need for new and revised
rule making. The Company also tracks Associate compliance intervention and
communication through a system that allows both corporate personnel and
regulatory officials to review details about Associate compliance intervention,
timing and disposition. The Company believes that the compliance program
reflects positively on the Company, helps in the maintenance of Associate
ethics and aids the Company's recruiting activities.
Product Return Policy. The Company's product return policy provides
that retail customers may return the unused portion of any product to the
selling Associate and receive a full cash refund. Any Associate who provides a
refund to a customer is reimbursed with product by the Company upon providing
proper documentation and the remainder of the product. Historically, product
returns have not been significant. Returns as a percentage of net sales were
1.2%, 1.5% and 1.7% in 1996, 1997 and 1998, respectively.
INFORMATION TECHNOLOGY AND SYSTEMS
The Company believes that maintaining sophisticated and reliable
transaction processing systems is essential to the long-term success of the
Company. The Company's systems are designed to: (i) reduce the time required to
supply an Associate or customer with the products of the Company; (ii) provide
detailed and customized billing information; (iii) respond quickly to Associate
needs and information requests; (iv) provide detailed and accurate information
concerning qualification and downline activity; (v) provide detailed and
customized Associate commission payments; (vi) support the functions of the
Company's Customer Service Department; and (vii) monitor, analyze and report
financial and operating trends. In order to meet these needs and expand
transaction processing systems to accommodate the Company's expected growth,
expenditures for information technology operations and development activities
are expected to be approximately $9.7 million during 1999, of which $4.5
million are expected to be capital expenditures.
The suppliers of computer hardware to the Company are Dell Computer
Corporation, Hewlett-Packard Company, Compaq Computer Corporation and Digital
Equipment Corp. ("DEC"). The DEC hardware systems are linked to provide a high
level of availability for critical business applications. The Company believes
the global presence of these suppliers will be an important factor in
supporting the Company's expansion plans.
The Company's financial software was upgraded at the end of 1996 with
the acquisition of a sophisticated financial system, capable of operating on
several platforms. The system exists in a client-server environment, employs a
graphical interface and has a relational and scaleable database to accommodate
the need for business modifications and growth. In addition, the Company has
purchased a decision-support system, which interfaces with its financial
systems. These systems, used in tandem, enable the Company to track and analyze
financial information and operations efficiently and effectively, as well as
create and produce custom reports. The Company believes that its computer
systems have been developed and operate using products which are Year 2000
compliant.
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The Company believes that its significant investment in software,
hardware and personnel will enable it to (i) respond rapidly to its business
needs for information technology assessment and development, (ii) manage
international growth and its seamless downline structure and (iii) reduce
expenses as a percentage of net sales as revenues increase.
PRODUCTION AND DISTRIBUTION
All of the Company's products are manufactured by outside contractors.
Production outsourcing provides the Company with the production capacity
necessary to respond to fluctuations in sales, and significantly limits
investment in capital equipment. In order to meet the Company's needs,
relationships were developed with three large contractors in 1997. With the
increased capacity, the Company believes that it currently has in place the
manufacturers necessary to meet its volume requirements over the next several
years, including expansion into foreign markets. The Company, however,
continues to identify new quality-driven manufacturers to supply the products
necessary to the Company's success. The Company seeks to obtain cost
efficiencies by reviewing, from time to time, pricing considerations and by
requiring competitive bids from various manufacturers meeting its quality and
performance requirements.
The Company currently acquires ingredients solely from suppliers that
are considered by the Company to be the superior suppliers of such ingredients.
The Company believes it has developed dependable alternative sources for all of
its ingredients except Manapol(R) and arabinogalactan, which are components of
the Company's proprietary raw material. The Company believes that, in the
event, it is unable to source any ingredients from its current suppliers, such
ingredients could be produced by the Company or replaced with substitute
ingredients. However, any delay in replacing or substituting such ingredients
would have a material adverse effect on the Company's business, results of
operations and financial condition.
Two ingredients are proprietary to the Company: (i) Ambrotose(R)
Complex, a glyconutritional dietary supplement consisting of a blend of plant
polysaccharides, which is a component of each of the Company's products and
(ii) Dioscorea Complex, a blend of herbal extracts. The Company eventually
plans to bring the blending of all proprietary formulas in-house, further
protecting the confidential nature and quality standards of its proprietary
formulations. In the meantime, the Company continues to identify high quality
sources of supply for its ingredients. The Company's employees review all
critical contract vendors and suppliers on a semi-annual basis.
In January 1998, the Company's Texas distribution operation relocated
to a new $1.3 million, 75,000 square foot facility in Coppell, Texas. The
facility includes an automated pick-to-light system that the Company believes
will enhance productivity and support order volume growth, and is capable of
processing 18,000 orders per day. The facility also contains a warehouse,
distribution offices and an ingredient mixing area that is currently not being
utilized. The Company also has contract distribution facilities in Canada and
Australia. See "Properties."
In March 1998, the Company completed construction of its
technologically advanced research and development laboratory that includes gas
and liquid chromatographs and mass spectrometers which will be used to maintain
quality standards, support the Company's research and development commitment in
the area of new herbal complexes and support the development of new products as
well as its existing product line.
GOVERNMENT REGULATION
In addition to regulation of its direct selling activities, the
Company, in both the United States and foreign markets, is or will be subject
to and affected by extensive laws, governmental regulations, administrative
determinations, court decisions and similar constraints (as applicable, at the
federal, state and local levels) including, among other things, regulations
pertaining to (i) the formulation, manufacturing, packaging, labeling,
distribution, importation, sale and storage of the Company's products, (ii)
product claims and advertising (including direct claims and advertising by the
Company as well as claims and advertising by Associates, for which the Company
may be held responsible), (iii) the Company's network marketing system, (iv)
transfer pricing and similar regulations that affect the level of foreign
taxable income and customs duties and (v) taxation of Associates, which in some
instances may impose an obligation on the Company to collect the taxes and
maintain appropriate records.
Products. The formulation, manufacturing, packaging, storing,
labeling, advertising, distribution and sale of the Company's products are
subject to regulation by one or more governmental agencies, including the FDA,
the
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Federal Trade Commission ("FTC"), the Consumer Product Safety Commission, the
Department of Agriculture, the Environmental Protection Agency and the Postal
Service. The Company's activities are also regulated by various agencies of the
states, localities and foreign countries in which the Company's products are
manufactured, distributed and sold. The FDA, in particular, regulates the
formulation, manufacture, packaging, storage, labeling, promotion, distribution
and sale of foods, dietary supplements and OTC drugs, such as those distributed
by the Company. FDA regulations require the Company and its suppliers to meet
relevant good manufacturing practice ("GMP") regulations for the preparation,
packing and storage of drugs. The FDA has published a Notice of Advanced Rule
Making for GMPs for dietary supplements, but it has not yet issued a proposal.
DSHEA revised the provisions of the Federal Food, Drug and Cosmetic
Act ("FFDCA") concerning the composition and labeling of dietary supplements
and, the Company believes, is generally favorable to the dietary supplement
industry. The legislation creates a new statutory class of "dietary
supplements." This new class includes vitamins, minerals, herbs, amino acids
and other dietary substances for human use to supplement the diet, and the
legislation grandfathers, with certain limitations, dietary ingredients that
were on the market before October 15, 1994. A dietary supplement which contains
a new dietary ingredient (i.e., one not on the market before October 15, 1994)
will require evidence that the supplement contains only ingredients that have
been present in the food supply in a certain form or evidence of a history of
use or other evidence of safety establishing that it is reasonably expected to
be safe. Manufacturers of dietary supplements which make a "statement of
nutritional support," which is a statement describing certain types of product
performance characteristics, must have substantiation that the statement is
truthful and not misleading, must make a disclaimer in the statement itself and
must notify the FDA of the statement no later than 30 days after it is first
made.
The majority of the products marketed by the Company are classified as
dietary supplements under the FFDCA. In September 1997, the FDA issued
regulations governing the labeling and marketing of dietary supplement
products. The regulations cover: (i) the identification of dietary supplements
and their nutrition and ingredient labeling; (ii) the terminology to be used
for nutrient content claims, health content claims and statements of
nutritional support; (iii) labeling requirements for dietary supplements for
which "high potency" and "antioxidant" claims are made; (iv) notification
procedures for statements on dietary supplements; and (v) premarket
notification procedures for new dietary ingredients in dietary supplements. The
notification procedures became effective in October 1997, while the new
labeling requirements will not become effective until March 23, 1999. The
Company has revised a substantial number of its product labels to reflect the
new requirements prior to the 1999 effective date, although the Company does
not expect the cost or impact of such actions to be material. In addition, the
Company will be required to continue its ongoing program of securing
substantiation of its product performance claims, and of notifying the FDA of
certain types of performance claims made for its products. The Company's
substantiation program involves compiling and reviewing the scientific
literature pertinent to the ingredients contained in the Company's products.
In addition, in certain markets, including the United States, claims
made with respect to dietary supplement, personal care or other products of the
Company may change the regulatory status of the products. In the United States,
for example, it is possible that the FDA could take the position that claims
made for certain of the Company's products make those products new drugs
requiring preliminary approval or place those products within the scope of an
FDA OTC drug monograph. OTC monographs prescribe permissible ingredients,
appropriate labeling language and require the marketer or supplier of the
products to register and file annual drug listing information with the FDA. Of
the products sold by the Company, only Emprizone(R) is labeled as an OTC
monograph drug, and the Company believes that it is in compliance with the
applicable monograph. In the event that the FDA asserted that product claims
for other products caused them to be new drugs or fall within the scope of OTC
monographs, the Company would be required either to file a New Drug
Application, comply with the applicable monographs or change the claims made in
connection with the products.
Dietary supplements are subject to the Nutrition, Labeling and
Education Act ("NLEA"), and regulations promulgated thereunder, which regulates
health claims, ingredient labeling and nutrient content claims characterizing
the level of a nutrient in the product. NLEA prohibits the use of any health
claim for dietary supplements, unless the health claim is supported by
significant scientific agreement and is pre-approved by the FDA.
In foreign markets, prior to commencing operations and prior to making
or permitting sales of its products in the market, the Company may be required
to obtain an approval, license or certification from the country's ministry of
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health or comparable agency. Where a formal approval, license or certification
is not required, the Company will nonetheless seek a favorable opinion of
counsel regarding the Company's compliance with applicable laws. Prior to
entering a new market in which a formal approval, license or certificate is
required, the Company will work with local authorities in order to obtain the
requisite approvals, license or certification. The approval process generally
requires the Company to present each product and product ingredient to
appropriate regulators and, in some instances, arrange for testing of products
by local technicians for ingredient analysis. Such approvals may be conditioned
on reformulation of the Company's products or may be unavailable with respect
to certain products or certain ingredients. The Company must also comply with
product labeling and packaging regulations that vary from country to country.
The FTC, which exercises jurisdiction over the marketing practices and
advertising of all the Company's products, has in the past several years
instituted enforcement actions against several dietary supplement companies for
false and misleading marketing practices and advertising of certain products.
These enforcement actions have resulted in consent decrees and monetary
payments by the companies involved. In addition, the FTC has increased its
scrutiny of the use of testimonials, which are utilized by the Company.
Importantly, the FTC requires substantiation for product claims at the time
that such claims are first made. A failure to have substantiation when product
claims are first made violates the Federal Trade Commission Act. While the
Company has not been the subject of FTC enforcement action for the advertising
of its products, there can be no assurance that the FTC will not question the
Company's advertising or other operations in the future.
Through its manuals, seminars and other training materials and
programs, the Company attempts to educate Associates as to the scope of
permissible and impermissible activities in each market. The Company also
investigates allegations of Associate misconduct. However, Associates are
generally independent contractors, and the Company is not able to monitor
directly all Associate activities. As a consequence, there can be no assurance
that Associates comply with applicable regulations.
The Company is unable to predict the nature of any future laws,
regulations, interpretations or applications, nor can it predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products not able to be reformulated,
imposition of additional recordkeeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling and
scientific substantiation regarding product ingredients, safety or usefulness.
Any or all of such requirements could have a material adverse effect on the
Company's business, results of operations and financial condition.
Network Marketing System. The Company's network marketing system,
which includes its compensation plan, is subject to a number of federal and
state statutes and regulations administered by the FTC and various state
agencies. The legal requirements applicable to network marketing organizations
are generally directed at ensuring that product sales are ultimately made to
consumers and that advancement within such organizations be based on sales of
the organizations' products rather than compensation derived principally from
the recruitment of additional Associates, investments in the organizations or
other non-retail sales related criteria. For instance, in certain markets there
are limits on the extent to which Associates may earn royalties on sales
generated by Associates that were not directly sponsored by the Associate.
Where required by law, the Company will obtain regulatory approval of its
network marketing system or, where such approval is not required, the favorable
opinion of local counsel as to regulatory compliance. The FTC regulates trade
practices related to network marketing systems.
Under a consent decree entered into in February 1997 as a result of
negotiation with the Attorney General of the State of Michigan, the Company has
agreed to monitor product purchases by its Associates in Michigan. The purpose
of the monitoring is to identify and correct any instances of coerced sales.
The Company also conducts a number of random audits of Associates in Michigan
for evidence of stockpiling. To date, the Company has not found evidence of
coerced sales or stockpiling by its Associates in Michigan, and the Company's
commission policies are designed to provide no incentive or reward to
Associates for engaging in such activities.
In Canada, the regulation of the Company's network marketing system is
subject to both federal and provincial law. Under Canada's Federal Competition
Act (the "Competition Act"), the Company must ensure that any representations
relating to Associate compensation to a prospective Associate constitute fair,
reasonable and timely disclosure and that it meets other legal requisites of
the Competition Act. The Company's compensation plan has been
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reviewed by the appropriate Canadian authorities. In addition, all Canadian
provinces and territories other than Ontario have legislation requiring the
registration or licensing of the Company as a direct seller within that
jurisdiction. Licensing is designed to maintain the standards of the direct
selling industry and to protect the consumer. Some provinces require that both
the Company and its Associates be licensed. The Company currently holds the
requisite provincial or territorial direct sellers' licenses.
In Australia, the Company's network marketing system is subject to
both federal and state regulation. The compensation plan employed in Australia
is a unilateral plan, which is designed and disclosed to meet the requisites of
applicable state requirements and the requirements of the Trade Practices Act.
Business and solicitation practices of the Company and its Associates are
regulated by state law and the Trade Practices Act. Claims and representations
relating to products are regulated by both the Trade Practices Act and the
Therapeutic Goods Act.
Other Regulations. The Company is also subject to a variety of other
regulations in various foreign markets, including regulations pertaining to
social security assessments and value added taxes, employment and severance pay
requirements, import/export regulations and antitrust issues. As an example, in
many markets the Company is substantially restricted in the amount and types of
rules and termination criteria that it can impose on Associates without causing
social security assessments to be payable by the Company on behalf of such
Associates and without incurring severance obligations to terminated
Associates. In some countries, the Company may be subject to such obligations
in any event.
In certain countries, including the United States, the Company may
also be affected by regulations applicable to the activities of its Associates
because in some countries the Company is, or regulators may assert that the
Company is, responsible for its Associates' conduct, or such regulators may
request or require that the Company take steps to ensure its Associates'
compliance with regulations. The types of regulated conduct include, among
other things, representations concerning the Company's products, income
representations made by the Company or Associates and sales of products in
markets in which such products have not been approved, licensed or certified
for sale. In certain markets, including the United States, it is possible that
improper product claims by Associates could result in the Company's products
being reviewed or re-reviewed by regulatory authorities and, as a result, being
classified or placed into another category as to which stricter regulations are
applicable. In addition, certain labeling changes might be required.
Compliance Procedures. The Company, its products and its network
marketing system are subject, both directly and indirectly through Associates'
conduct, to numerous federal, state and local regulations both in the United
States and in foreign markets. Beginning in 1997, the Company began to
institute formal regulatory compliance measures by developing a system to
identify specific complaints against Associates and to remedy any violations by
Associates through appropriate sanctions, including warnings, suspensions and,
when necessary, terminations. At the same time, the Company instituted internal
policies for compliance with FDA and FTC rules and regulations.
In order to comply with regulations that apply to both the Company and
its Associates, the Company continues to conduct research into the applicable
regulatory framework prior to entering any new market to identify all necessary
licenses and approvals and applicable limitations on the Company's operations
in that market. The Company will devote substantial resources to obtaining such
licenses and approvals and bringing its operations into compliance with such
limitations. The Company will also research laws applicable to Associate
operations and revise or alter its business system, compensation plan,
Associate requirements and other materials and programs to provide Associates
with guidelines for operating a business, marketing and distributing the
Company's products and similar matters, as required by applicable regulations
in each market. However, the Company is not able to fully monitor its
Associates effectively to ensure that they refrain from distributing the
Company's products in countries where the Company has not commenced operations,
and the Company does not devote significant resources to such monitoring.
COMPETITION
The nutritional supplements industry is large and intensely
competitive. The Company competes directly with companies that manufacture and
market nutritional products in each of the Company's product lines, including
General Nutrition Companies, Inc., Solgar Vitamin and Herb Company, Inc.,
Twinlab Corporation and Weider Nutrition International, Inc. Many of the
Company's competitors in the nutritional supplements market have longer
operating
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histories, greater name recognition and financial resources than the Company.
In addition, nutritional supplements can be purchased in a wide variety of
distribution channels. While the Company believes that consumers appreciate the
convenience of ordering products from home through a sales person, the buying
habits of many consumers accustomed to purchasing products through traditional
retail channels are difficult to change. The Company's product offerings in
each product category are also relatively small compared to the wide variety of
products offered by many other nutritional product companies.
The Company also competes in the nutritional supplements market and
for new Associates with other retail, multi-level marketing and direct selling
companies in the nutritional supplements industry by emphasizing the
proprietary nature, value, proprietary components and the quality of the
Company's products and the convenience of the Company's distribution system.
The Company also competes with other direct selling organizations, many of
which have longer operating histories and greater name recognition and
financial resources than the Company. They include Amway Corporation, Nu Skin
Enterprises, Inc., Body Wise International, Inc., ENVION International,
Herbalife International, Inc., Enrich International, Rexall Showcase
International, Forever Living Products, Inc. and Melaleuca, Inc. The Company
competes for new Associates on the basis of its compensation plan and its
proprietary and quality products. The Company believes that many more direct
selling organizations will enter the marketplace as this channel of
distribution expands over the next several years. The Company also competes for
the commitment of its Associates. Given that the pool of individuals interested
in direct selling tends to be limited in each market, the potential pool of
Associates for the Company's products is reduced to the extent other network
marketing companies successfully recruit these individuals into their
businesses.
EMPLOYEES
As of January 31, 1999, the Company employed approximately 294 people,
of which 280 are employed in the United States and twelve of whom occupy
executive positions. This number does not include Associates, who are
independent contractors rather than employees of the Company. A limited number
of employees are also Associates, having enrolled prior to a policy instituted
in May 1997, which precludes any further enrollment by employees as Associates.
The Company only allows employees to be Associates if they have disclosed their
status to the Company and have executed an agreement not to use their
employment status to assist in building their business as an Associate. The
Company is currently evaluating ways in which existing employee-Associates can
be fairly treated or compensated for the extinguishment of their rights as
Associates. The Company's employees are not unionized, and the Company believes
its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases approximately 110,000 square feet in Coppell, Texas
for its headquarters. The Company leases an additional 75,000 square feet in
Coppell, Texas for its warehouse and distribution center. Each of the leases is
for a term of 10 years, expiring in January 2007 and January 2008,
respectively. The Company also leases approximately 9,000 square feet in St.
Leonards, Australia for its Australian corporate headquarters. The lease term
is for five years, expiring in August 2003. The Company believes these leased
facilities are adequate for operations of the Company for the immediate future.
The United States distribution facility is capable of filling 18,000 orders per
day and is currently operating at 34% of its full capacity. The Canadian
distribution center, located in Calgary, Alberta, is a contract operation
occupying a 6,000 square foot compartment in a 100,000 square foot building and
is capable of filling 3,200 orders per day. The Australian distribution center,
located in Botany, Australia, is a contract operation occupying a 3,000 square
foot compartment in a 100,000 square foot building and is capable of filling
approximately 20,000 orders per day. Currently, the Canadian and Australian
contract facilities are operating at 25% and 2% of their full capacity,
respectively.
ITEM 3. LEGAL PROCEEDINGS
In February 1998, the Company received a demand letter (the "Demand
Letter") from Dr. Joe Glickman, Jr., an Associate of the Company, alleging that
the Company had, among other things, breached various contracts, agreements and
promises, and stating an intention to pursue these claims in the United States
District Court for Montana. In March 1998, the Company commenced arbitration
proceedings against Dr. Glickman individually and as trustee of the Dr. Joe
Glickman, Jr. Phyto Trust d/b/a/ Alotek (collectively, "Alotek"), for the
recovery of certain funds and the cancellation
14
<PAGE> 18
of Associate positions claimed by Alotek. The arbitration is currently set for
April 22, 1999 at which time only the claims against Mr. Glickman will be
heard, unless Mr. Glickman pays the required fee of the American Arbitration
Association to assert his claims. The Company believes that Alotek's claims
are without merit and has sought declaratory relief to that effect. The Company
further believes that it has valid defenses to all allegations raised by
Alotek. Nevertheless, an adverse resolution of this matter would have a
material adverse effect on the Company's business, results of operations,
financial condition and liquidity.
In October 1997, the Company filed an objection to the issuance of a
registered trademark to IntraCell Nutrition, Inc., which had filed a trademark
application for the name, "Manna." In its objection, the Company contended
that, among other things, "Manna" is a general descriptor often applied to
nutritional products, and is accordingly not entitled to trademark protection.
Discovery was completed in this case and briefs filed. The case is now pending
an oral hearing before the Trademark Trial and Appeal Board of the United
States Patent and Trademark Office. The Company believes that there is a
substantial likelihood that the Company will prevail in its objection to the
granting of the tradename and is currently in negotiations to settle this
matter.
In March 1998, Johnnie Hill d/b/a Taylor Enterprises, an Associate of
the Company, filed a lawsuit in the 44th Judicial District Court, Dallas
County, Texas, alleging that the Company breached the contract with Mr. Hill as
an Associate and further alleging that the Company committed fraud, conversion,
conspiracy and that the Company failed to properly account for the payments
owed to Mr. Hill. In May 1998, the suit was ordered into arbitration by the
District court. In March 1999, Mr. Hill filed an arbitration claim with the
American Arbitration Association in Dallas, Texas, alleging the Company engaged
in breach of contract, intentional interference with a business relationship,
civil conversion and fraud, damaging him in the amount of $3.0 million. The
Company believes it has valid defenses to any and all allegations filed by Mr.
Hill. Nevertheless, an adverse resolution of this matter could have a material
adverse effect on the Company's business, results of operations, financial
condition and liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market for the Common Stock. On February 12, 1999, the Company
completed the IPO and on February 16, 1999, the Common Stock began trading on
the Nasdaq National Market under the symbol "MTEX." The high and low closing
prices of the Common Stock subsequent to the IPO were $9 1/2 and $44 1/2,
respectively, from February 16, 1999, through March 24, 1999. Pricing
information for previous quarters and prior to February 16, 1999 is not
available, as the Common Stock was not publicly traded prior to that date. As
of March 24, 1999, there were approximately 6,770 shareholders of record of the
Common Stock and the total number of outstanding shares of the Common Stock was
24,076,753.
Dividends. The shareholders of the Company received dividends totaling
approximately $6,928,547 and $9,936,882 in 1997 and 1998, respectively. The
Company paid approximately $1,326,104 in dividends from January 1, 1999 until
the closing of the IPO on February 12, 1999. The Company does not intend to
continue to pay such dividends after the IPO, however, the Board of Directors
intends, from time-to-time, to reevaluate this policy based on the Company's
consolidated net income and its alternative uses for retained earnings, if any.
Any future payments of dividends will thus be subject of the discretion of the
Board of Directors and subject to certain limitations under the Texas Business
Corporation Act. The timing, amount and form of dividends, if any, will depend,
among other things, on the Company's results of operations, financial condition,
cash requirements and other factors deemed relevant by the Board of Directors.
Sales of Unregistered Securities. The following sets forth information
regarding all sales of unregistered securities by the Company during 1996, 1997
and 1998. All such shares were issued in reliance upon an exemption from
registration under the Securities Act by reason of Section 4(2) or 3(b) of the
Securities Act and/or the rules and regulations promulgated thereunder. In
connection with each of these transactions, the shares were sold to a very
limited number of persons and such persons were provided access either through
employment or other relationships to all relevant information regarding the
Company and/or represented to the Company that they were "sophisticated"
investors. No underwriters were involved in the sales of securities set forth
below. Appropriate legends are affixed to the certificates evidencing such
shares and such persons represented to the Company that the shares were
purchased for investment purposes only and with no view toward distribution.
All of the securities described below are deemed restricted securities for
purposes of the Securities Act.
1. Issuance of an aggregate of 10,000,000 shares of the Common Stock
on June 1, 1997 in exchange for (i) all the outstanding common stock of each of
Eight Point Services, Inc., Triple Gold Business, Inc., Five Small Fry, Inc.
and Beta Nutrient Technology, Inc., held by the individuals listed below, and
(ii) all of the limited partnership interests in Dynamic Eight Partners, Ltd.,
Power Three Partners, Ltd., Beta M. Partners, Ltd. and Eleven Point Partners,
Ltd. held by the individuals listed below.
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Samuel L. Caster............................................................... 3,094,946
William C. Fioretti............................................................ 3,094,946
Charles E. Fioretti............................................................ 2,867,284
Patrick D. Cobb................................................................ 235,706
Dick R. Hankins................................................................ 235,706
Don W. Herndon................................................................. 235,706
Gary L. Watson................................................................ 235,706
</TABLE>
16
<PAGE> 20
2. Issuance of an aggregate of 2,027,571 shares of the Common Stock to
the individuals set forth below on June 1, 1997 in exchange for the
cancellation of certain incentive compensation agreements.
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Ray Robbins.................................................................... 607,333
H. Reginald McDaniel........................................................... 546,600
Bill H. McAnalley, Ph.D........................................................ 303,667
Peter E. Hammer................................................................ 228,206
Charles E. Fioretti............................................................ 227,662
Kim Snyder..................................................................... 114,103
</TABLE>
3. Issuance of 74,167 shares of the Common Stock on March 3, 1998 to
Richard Howard in exchange for the cancellation of his incentive compensation
agreement.
4. The Company granted a warrant to purchase 475,015 shares of the
Common Stock at a price of $1.35 per share. In the IPO, 138,580 shares issued
upon partial exercise of the warrant were sold. On February 22, 1999, the
Company filed a Registration Statement on Form S-8 registering 336,435 shares
of the Common Stock issuable upon the exercise of warrants pursuant to a
consulting agreement. See Note 15 of the Consolidated Financial Statements.
5. The Company has granted options to purchase an aggregate of
2,343,000 shares of the Common Stock at a weighted average exercise price of
$3.53 per share.
Uses of Proceeds from Registered Securities. On January 5, 1999, the
Company's Registration Statement on Form S-1 (File No. 333-63133) registering a
minimum of 2,500,000 and a maximum of 5,295,015 shares of the Common Stock
offered by the Company and certain selling shareholders at a price of $8.00 per
share was declared effective, at which time the offering of such shares in the
IPO commenced. Of the 5,295,015 shares of the Common Stock registered and
offered, 2,200,000 shares were offered by the Company and 3,095,015 shares were
offered by the selling shareholders. The aggregate price of the shares offered
by (i) the Company was $17,600,000 and (ii) the selling shareholders was
$24,760,120. The IPO was conducted on a best-efforts subscription basis, with a
requirement that a minimum of 2,500,000 shares be subscribed for in order for
the IPO to be consummated. The subscription period terminated on February 11,
1999 and, on February 12, 1999, the closing took place. After the closing of the
IPO on February 12, 1999, the unsold portion of the Common Stock (2,238,999
shares) was deregistered by means of a post-effective amendment to the Form S-1.
The total number of shares of the Common Stock subscribed for and sold in the
IPO was 3,056,016, of which 1,500,000 shares were sold by the Company and
1,556,016 shares were sold by the selling shareholders. The aggregate price of
the shares sold for the account of (i) the Company was $12,000,000 and (ii) the
selling shareholders was $12,448,128. After the payment to the placement agent
engaged by the Company to manage the receipt of subscription funds of a fee of
$389,226, net of a reimbursement of $90,774 in expenses by the placement agent,
actual expenses of the IPO of $307,849 and $1,954,220 of deferred offering
costs, net proceeds to the Company were $9,535,788. After payment of $497,925 to
the placement agent, net proceeds to the selling shareholders were $11,950,203.
None of such payments were direct or indirect payments to directors, officers,
affiliates or 10% beneficial owners of the Company. No underwriter was involved
in the IPO.
The net proceeds of the IPO were intended to be used by the Company to
begin its international expansion and fund its current working capital needs.
The Company has used $372,653 of the net proceeds from the IPO to pay for the
Company's expansion in to the United Kingdom and Japan and $5,125,614 of such
net proceeds for its current working capital needs. The $5,125,614 includes
$1,954,220 for the deferred offering costs incurred by the Company in
consummating the IPO.
17
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data set forth below for each of the five years
ended December 31, 1998 have been derived from and should be read in
conjunction with (i) the Company's Consolidated Financial Statements set forth
elsewhere in this report and (ii) "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1994(1) 1995 1996 1997 1998
------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales .................................................. $ 8,445 $ 32,071 $ 86,311 $150,570 $164,933
Gross Profit ............................................... 3,690 14,852 37,750 64,158 71,144
Income (loss) from operations .............................. (488) 2,587 8,240 14,718 16,057
Net income (loss) .......................................... (342) 2,339 7,162 10,622 10,054
EARNINGS (LOSS) PER COMMON SHARE: (2)
Basic ................................................... $ (0.02) $ 0.11 $ 0.35 $ 0.50 $ 0.45
======== ========= =========== ======== ========
Diluted ................................................. $ (0.02) $ 0.11 $ 0.35 $ 0.47 $ 0.42
======== ========= =========== ======== ========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING: (2)
Basic ................................................... 20,627 20,627 20,627 21,449 22,102
======== ========= =========== ======== ========
Diluted ................................................. 20,627 20,627 20,627 22,400 23,659
======== ========= =========== ======== ========
PRO FORMA INFORMATION: (3)
Income (loss) before income taxes, as reported ............. $ (510) $ 2,406 $ 8,356 $ 14,761
Pro forma provision for income tax (benefit) expense ....... (191) 902 3,134 5,683
-------- --------- ----------- --------
Pro forma net income (loss) ................................ $ (319) $ 1,504 $ 5,222 $ 9,078
======== ========= =========== ========
PRO FORMA EARNINGS (LOSS) PER COMMON SHARE: (3)
Basic ................................................... $ (0.02) $ 0.07 $ 0.25 $ 0.42
======== ========= =========== ========
Diluted ................................................. $ (0.02) $ 0.07 $ 0.25 $ 0.41
======== ========= =========== ========
OTHER FINANCIAL DATA:
Capital expenditures(4) .................................... $ 72 $ 769 $ 2,660 $ 9,135 $ 6,098
Dividends declared per common share ........................ $ 1.00(5) $ 1.00(5) $ 10.00(5) $ 0.37 $ 0.39
CONSOLIDATED BALANCE SHEET DATA:
Total assets ............................................... $ 1,577 $ 5,712 $ 11,410 $ 19,558 $ 26,874
Long-term obligations excluding current portion ............ -- 33 -- 110 1,056
</TABLE>
- -----------------------
(1) Statement of Income Data for the year ended December 31, 1994 includes the
period from November 4, 1993 (inception) through December 31, 1994. For
the two months of operations ended December 31, 1993, the Company's
financial data consisted of net sales of $0, selling and administrative
expenses of $43,049, other operating costs of $68,683 and a net loss of
($112,733).
(2) Computed on the basis described in Note 1 in the Notes to Consolidated
Financial Statements.
(3) The pro forma information shows the Company's net income and earnings per
share as if all income earned by the Company and the Partnerships was
taxable at federal and state statutory rates.
(4) Capital expenditures include assets acquired through capital lease
obligations of $397,402 and $1,471,986 in 1997 and 1998, respectively.
(5) Dividends were calculated based upon shares outstanding prior to the Stock
Split and the Reorganization (10,000 shares), each of which took place in
1997. Aggregate dividends declared amounted to $10,000, $10,000 and
$100,000 in 1994, 1995 and 1996, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to assist in understanding the
Company's consolidated financial position and consolidated results of
operations for each year in the three-year period ended December 31, 1998. The
Consolidated Financial Statements and the Notes thereto should be referred to
in conjunction with this discussion.
OVERVIEW
Mannatech develops and sells proprietary nutritional supplements and
topical products through a network marketing system. The Company sells its
products in the United States, Canada and Australia, through a network of
18
<PAGE> 22
approximately 237,000 active Associates as of February 28, 1999. The Company
currently plans to expand into the United Kingdom and Japan, while continuing
to assess the potential of other foreign markets.
Since commencement of operations in November 1993, the Company has
achieved year-to-year growth in net sales. The growth is primarily attributable
to the increase in both existing and new product sales, growth in the number of
Associates and expansion into new geographic markets in the United States,
Canada and, beginning in October 1998, Australia. In 1998, the growth rate of
net sales generated in the United States was lower than prior years, while the
growth rate of net sales generated in Canada and Australia was higher than
prior years.
The Company's revenues are derived primarily from sales of its
products and sales of Associate starter and renewal packs, which include some
combination of products, promotional materials and free admission to Company
events. To become an Associate of the Company, a person may enroll as a
Preferred Customer and subsequently execute an Associate Application, sponsor
new Associates or purchase an Associate starter pack. Each pack also allows the
Associate to purchase product at the Company's wholesale price. The Company
will offer a comparable Associate starter pack in each country in which it does
business. All pack prices herein are stated in United States currency. In May
1998, the Company introduced a new starter and renewal pack for Associates in
the United States and Canada, priced at $29.00. Historically, the starter packs
for Associates in the United States and Canada could be purchased at $49.00,
$229.00, $339.00, $568.00 and $1,000.00 levels. Beginning in June 1998, starter
packs for Associates in the United States and Canada could be purchased at
$29.00, $49.00, $289.00, $664.00 and $1,000.00 levels. In Australia, the
Associate starter pack can be purchased at the $31.00 level only. The
components, purchase price of the pack and wholesale value of the included
items for the periods for which consolidated financial data is presented are
detailed in the table below.
PACKS SOLD PRIOR TO JUNE 1998
<TABLE>
<CAPTION>
Master
Associate
and All
All Star Star All Star New Preferred
Business Training Training Master Associate Customer
Pack Pack Pack Starter Pack Promo Pack Pack
---------- ----------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Associate Cost.................. $ 1,000.00 $ 568.00 $ 339.00 $ 229.00 $ 49.00 $ 29.00
Number of Nutritional Products
Included.................... 27 15 9 6 1 --
Wholesale Value of Nutritional
Products.................... $ 736.00 $ 412.50 $ 253.00 $ 166.00 $ 28.50 $ --
Number of Promotional
Materials Included.......... 108 26 3 23 15 15
Wholesale Value of Promotional
Materials................... $ 345.99 $ 298.04 $ 186.90 $ 111.14 $ 12.59 $ 14.50
Event Admission
Included.................... Yes Yes Yes No No No
Implied Admission Value......... $ 50.00 $ 50.00 $ 50.00 $ -- $ -- $ --
Total Wholesale and Implied
Value....................... $ 1,131.99 $ 760.54 $ 489.90 $ 277.14 $ 41.09 $ 14.50
</TABLE>
19
<PAGE> 23
PACKS SOLD BEGINNING IN JUNE 1998
<TABLE>
<CAPTION>
Master
Associate
and All Australia
All Star Star Master New Preferred Preferred
Business Training Starter Associate Customer Customer
Pack* Pack* Pack* Promo Pack* Pack* Pack
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Associate Cost.................. $ 1,000.00 $ 664.00 $ 289.00 $ 49.00 $ 29.00 $ 31.00
Number of Nutritional Products
Included.................... 26 17 9 1 -- --
Wholesale Value of ..Nutritional
Products.................... $ 750.50 $ 491.00 $ 216.74 $ 28.50 $ -- $ --
Number of Promotional
Materials Included.......... 131 26 23 14 14 12
Wholesale Value of Promotional
Materials................... $ 357.52 $ 276.32 $ 115.37 $ 16.12 $ 16.12 $ 16.12
Event Admission
Included.................... Yes Yes No No No No
Implied Admission Value......... $ 50.00 $ 50.00 $ -- $ -- $ -- $ --
Total Wholesale and Implied
Value....................... $ 1,158.02 $ 817.32 $ 332.11 $ 44.62 $ 16.12 $ 16.12
</TABLE>
*Packs offered only to Associates in the United States and Canada.
The Company views the nutritional product sale included in the $49.00
"New Associate Promo Pack" as a retail sale. Viewed as a retail sale, the value
of the product would be approximately $39.00 and the total value of the pack
would be $51.59. The Company adopted this view as purchasers of the "New
Associate Promo Pack" were often previously retail customers of other
Associates before seeking Associate status themselves.
The Company also requires an Associate to renew their status each year
by either (i) renewing as a Preferred Customer and continuing to sponsor new
Associates or (ii) by purchasing a renewal pack. Prior to June 1998, Associates
in the United States and Canada were able to renew their Associate status for
$49.00, $229.00, or $568.00. Since the institution, in May 1998, of the $29.00
Preferred Customer Pack, Associates in the United States and Canada have been
able to renew their Associate status for $29.00, $200.00 or $350.00. Associates
choosing not to renew their Associate status may continue to purchase the
Company's products at the wholesale price and resell the products; however,
such a person would not be qualified to earn commissions or bonuses under the
Company's compensation plan.
Associates are also eligible to purchase upgrade packs. Historically,
Associates in the United States and Canada could purchase upgrade packs at
approximately $229.00, $339.00, $568.00 and $1,000.00 levels. Beginning in June
1998, Associates in the United States and Canada have had the ability to
purchase upgrade packs at the $289.00, $375.00, $664.00 and $1,000.00 levels.
Australian Associates can purchase upgrade packs at the $262.00, $358.00 and
$620.00 levels. Upgrade packs are accounted for as renewal packs, as they renew
an Associate's membership for one year from the time of upgrade.
Revenues are generally recognized when products or promotional
materials are shipped. The Company's revenues are based primarily on the
wholesale prices of the products sold. The Company defers revenue received from
the sale of promotional packs which is in excess of the wholesale value of the
individual items included in such packs. Revenues from promotional packs are
allocated between products and events admission based on the proportionate fair
value of these items. Allocated event revenues are also deferred. All deferred
revenue is amortized over a 12-month period. Total deferred revenue was
approximately $521,000, $809,000 and $662,000 at December 31, 1996, 1997 and
1998, respectively. The Company currently outsources its entire product
manufacturing needs and all of its ingredients are supplied by outside vendors.
20
<PAGE> 24
As a result of the Company's expansion into Canada, and its change, in
the fourth quarter of 1997, to higher quality manufacturers, the Company has
experienced an increase in cost of sales as a percentage of net sales. Sales of
products in Canada and Australia have also resulted in increased shipping costs
and additional costs to reformulate certain products.
Associates are compensated by commissions, which are directly
correlated to the placement and position of the Associate within the Company's
compensation plan, volume of direct sales and number of new enrolled
Associates. In October 1998, the Company revised portions of its compensation
plan to perfect the global seamless downline compensation concept and ensure
compliance with common international standards of paying commissions. The
commission pool, as a whole, remains unchanged and the Company believes that,
under the Company's existing and revised compensation plan, commissions will
not exceed 42% of net sales.
The Company's selling and administrative expenses consist of human
resource expense, including wages, bonuses and marketing expenses, and are a
mixture of both fixed and variable expenses. Company-sponsored Associate events
held throughout the year also have an effect on its selling and administrative
expenses, as does the Company's continuing commitment to investment in
information technology systems and international expansion.
The increased demand for the Company's products has necessitated
significant investment in infrastructure to support the growth of the Company.
In 1997, the Company invested in its new headquarters building, and in 1998,
its new distribution center and research and development laboratory. The
increase in other operating costs is primarily attributable to the Company's
investment in infrastructure, expansion into Australia, planned expansion into
the United Kingdom and Japan and continued research into other foreign markets.
The Company is subject to taxation in the United States at the federal
statutory tax rates of 34% for 1996 and 1997 and 35% for 1998 and in Australia
at a statutory rate of 36%. The Company is also subject to taxation in various
state jurisdictions at an approximate average statutory tax rate between 3% and
5%. With the continued expected international expansion, a portion of the
Company's income will be subject to taxation in the country in which it
operates; however, the Company may be eligible for foreign tax credits for the
amount of foreign taxes paid in a given period to offset taxes otherwise
payable. The Company may not be able to fully utilize such foreign tax credits
in the United States. The use of the foreign tax credits would be based upon
the proportionate amount of net sales in each country. This could result in the
Company paying a higher overall effective tax rate on its worldwide operations.
Many of the countries in which the Company is considering for expansion during
1999 and beyond have maximum statutory tax rates in excess of the United States
rate.
REORGANIZATION
In December 1994, to achieve certain tax efficiencies and to protect
certain of the Company's proprietary rights, the Company transferred certain
rights and interest in intellectual property, its right to use a supplier's
trademark and its marketing rights to two affiliated partnerships (the "Royalty
Partnership" and the "Marketing Partnership," respectively). The Marketing
Partnership was owned by two affiliated partnerships that also shared common
ownership with the Company (collectively with the Royalty Partnership and the
Marketing Partnership, the "Partnerships"). The respective ownership interests
in the Partnerships were structured with the intention of retaining the same
economic interests among the partners as that of the shareholders of the
Company. In the case of the intellectual property and trademark transferred to
the Royalty Partnership, the Company entered into a 17-year agreement with the
Royalty Partnership to pay a royalty based on sales volume. In the case of the
Marketing Partnership, the Company paid a commission based on a specified
percentage of sales volume. At the time of transfer, the rights and interest in
intellectual property, supplier's trademark and marketing rights had a minimal
basis. During 1994, the Company also entered into separate incentive
compensation agreements with two of its shareholders pursuant to which the
Company agreed to pay commissions based on specified monthly sales volumes and
increases in number of new enrolled Associates. These agreements were designed
to compensate for the differences in ownership in the Partnerships for one of
the principal shareholders and to provide compensation to the other shareholder
in lieu of receiving a Partnership interest.
On June 1, 1997, in order to simplify the Company's ownership
structure and consolidate all operating activities, the Company entered into
agreements to effect the Reorganization through merging with the corporate
21
<PAGE> 25
general partners of the Partnerships in which the Company was the surviving
corporation and exchanging shares of the Common Stock for the entire ownership
interests of the Partnerships. Pursuant to the Reorganization, the Company
issued an aggregate of 10,000,000 shares of the Common Stock to holders of the
general partnership and limited partnership interests. In addition, during May
and June 1997 the Company issued 2,027,571 shares of the Common Stock in
consideration for the cancellation of incentive compensation agreements with
two shareholder-employees and four other employees of the Company, including
626,971 shares issued to cancel incentive compensation agreements that had been
provided in lieu of ownership interests in the Partnerships. See Note 9 to the
Consolidated Financial Statements. The net effect of the foregoing transactions
was to increase the number of shares of the Common Stock outstanding by
12,027,571 while retaining substantially the same relative ownership of the
Company. The only ownership percentage change among the original shareholders
related to 208,024 shares granted to one shareholder in recognition of
significant contributions to the Company, which resulted in minor dilution to
the other original seven shareholders at the time of the exchange. No monetary
consideration changed hands and the changes were designed to reestablish the
original economic characteristics of the Company. Other than the new shares
issued to the four employees to cancel their incentive compensation agreements,
relative ownership interests, as evidenced by retention of economic risks and
benefits, remained virtually the same. After the exchange, the Company
terminated and liquidated the Partnerships at no gain or loss.
RESULTS OF OPERATIONS
The following table summarizes the Company's consolidated operating
results as a percentage of net sales for each of the three years ended December
31, 1998.
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales ............................................ 100.0% 100.0% 100.0%
Cost of sales ........................................ 15.5 16.4 16.5
Commissions .......................................... 40.7 41.0 40.4
--------- --------- ---------
Gross profit .................................... 43.8 42.6 43.1
Operating expenses:
Selling and administrative expenses ............. 20.6 18.5 19.3
Other operating costs ........................... 13.6 12.9 13.6
Cancellation of incentive compensation agreements -- 1.5 --
Write-off of deferred offering costs ............ -- -- 0.5
--------- --------- ---------
Income from operations ............................... 9.6 9.7 9.7
Other (income) expense, net .......................... (0.1) (0.0) 0.2
--------- --------- ---------
Income before income taxes ........................... 9.7 9.7 9.5
Income tax expense ................................... 1.4 2.7 3.4
--------- --------- ---------
Net income ........................................... 8.3% 7.0% 6.1%
========= ========= =========
Number of starter packs sold ......................... 97,813 133,461 117,003
Number of renewal packs sold ......................... 19,875 41,219 58,476
--------- --------- ---------
Total number of packs sold ........................... 117,688 174,680 175,479
========= ========= =========
Total Associates canceling Associate status .......... 2,503 5,163 6,142
========= ========= =========
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1997
Net Sales. Net sales increased 9.5% to $164.9 million in 1998 from
$150.6 million in 1997. This increase was primarily composed of the following:
o A $10.8 million increase from the sale of several new
products introduced during 1998 and from existing products
which were not available for sale during the first nine
months of 1997. Also contributing to the increase was the
opening of Australia in October 1998.
o An increase of $10.8 million in existing product sales, which
increase resulted solely from increases in the volume of
products sold.
22
<PAGE> 26
o A decrease of ($7.3) million due to an overall decrease in
Associate pack sales. A decrease of approximately ($8.6)
million in Associate packs sold related to the enrollment of
new Associates and was partially offset by a $1.3 million
increase in packs sold to Associates renewing their
association with the Company. The Company's fee structure
remained constant throughout this period; however, the
Company added some additional packs to its existing line.
Associate pack sales decreased due to a delay in introducing
the new Associate packs until May 1998. As the new Associate
packs were not available until May 1998, it is not possible
to determine if the overall decrease in Associate pack sales
was indicative of a short-term deferral of such revenue or a
permanent loss. In addition, management believes the slowdown
may partially be due to anticipation by certain Associates of
the pre-opening activities in Australia, resulting in a
decrease in domestic recruiting and pack sales. The Company
is currently exploring new strategies to increase domestic
Associate pack sales and renewals.
Cost of Sales. Cost of sales increased 9.7% to $27.1 million in 1998
from $24.7 million in 1997. As a percentage of net sales, cost of sales
increased to 16.5% for 1998 from 16.4% in 1997. The increase in cost of sales
was due to a $2.7 million increase in sales of finished goods and a slight
increase in the price of raw materials due to the Company using a new vendor.
These increases were partially offset by a ($200,000) decrease in freight due
to a change of vendors and a ($100,000) decrease in normal costs of spoilage
and shrinkage of inventory.
Commissions. Commissions consist of payments to Associates for sales
activity and downline growth. Commissions increased 8.1% to $66.7 million in
1998 from $61.7 million in 1997. As a percentage of net sales, commissions
decreased to 40.4% in 1998 from 41.0% in 1997. The slight decrease as a
percentage of net sales was the direct result of the decrease in the number of
Associate packs sold and of operations beginning in Australia.
Gross Profit. Gross profit increased 10.9% to $71.1 million in 1998
from $64.2 million in 1997. As a percentage of net sales, gross profit
increased to 43.1% in 1998 from 42.6% in 1997. These changes were primarily
attributable to the factors described above.
Selling and Administrative Expenses. Selling and administrative
expenses consist of human resource expenses, including wages, bonuses and
marketing expenses, and are a mixture of both fixed and variable expenses.
Selling and administrative expenses increased 14.5% to $31.9 million in 1998
from $27.8 million in 1997. As a percentage of net sales, selling and
administrative expenses increased to 19.3% in 1998 from 18.5% in 1997. The
dollar amount increase was due primarily to sales increases, $1.0 million
expended on the Company's first large-scale national Associate meeting and
$400,000 related to the opening of the Australian operations.
Other Operating Costs. Other operating costs include utilities,
depreciation, travel, office supplies and printing expenses. Other operating
costs increased 15.2% to $22.4 million in 1998 from $19.4 million in 1997. As a
percentage of net sales, other operating costs increased to 13.6% in 1998 from
12.9% in 1997. The dollar amount increase was primarily due to the $1.5 million
in additional expenses related to the expansion into Australia, research into
the potential expansion into other international markets, a $1.0 million
increase in depreciation expense and a $500,000 increase in rent, repair and
maintenance due to the addition of the laboratory and the relocation of the
Texas distribution center.
Cancellation of Incentive Compensation Agreements. Cancellation of
incentive compensation agreements consists of a one-time charge in 1997
totaling approximately $2.2 million. This charge resulted from the exchange of
the Common Stock for the cancellation of certain incentive compensation
agreements.
Write-off of Deferred Offering Costs. During August 1998, the Company
withdrew its original underwritten institutional/retail offering and recorded a
one-time charge of approximately $847,000. The costs included printing, legal,
accounting and roadshow costs. In September 1998, the Company began the IPO,
which was not underwritten and was completed on February 12, 1999.
Other (Income) Expense, Net. Other (income) expense consists of
interest income, interest expense, royalties from vendors and litigation
settlements. Other (income) expense increased to $260,000 in 1998 from ($43,000)
in 1997. As a percentage of net sales, other (income) expense increased to 0.2%
in 1998 from (0.0%) in
23
<PAGE> 27
1997. The 1998 increase in expense was primarily due to the write-off of
abandoned fixed assets of $250,000 and an increase in interest expense of
$50,000.
Income Tax Expense. Income tax expense increased 38.8% to $5.7 million
in 1998 from $4.2 million in 1997. The effective tax rate increased to 36.4% in
1998 from 28.0% in 1997. The increase in the effective tax rate was primarily
the result of the Company's reorganization, which was effective as of June 1,
1997. Prior to that date, the income from the Partnerships was subject to
income tax only at the individual partners' level.
Net Income. Net income decreased (5.3%) to $10.1 million in 1998 from
$10.6 million in 1997. As a percentage of net sales, net income decreased to
6.1% in 1998 from 7.0% in 1997. The decrease was due to the increase in net
sales offset by the one-time charge of approximately $847,000 for the canceled
initial public offering, costs incurred in connection with the international
expansion, income tax expense and the other factors described above.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH THE YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased 74.4% to $150.6 million in 1997 from
$86.3 million in 1996. This increase was primarily composed of the following:
o An increase of $46.9 million in existing product sales, which
increase resulted solely from increases in the volume of
products sold.
o An increase of $11.1 million in Associate pack sales.
Associate pack sales increased due to the enrollment of new
Associates and the sale of renewal packs to existing
Associates. Approximately $5.9 million of the increase in
Associate pack sales related to the sign-up of new Associates
and $5.2 million related to the renewal of existing
Associates. The Company's fee structure remained constant
throughout this period.
o An increase of $6.3 million due to the introduction in July
1997 of MannaCleanse(TM), an intestinal support product, and
Bulk Ambrotose(R), a cell-to-cell communication support
product.
Cost of Sales. Cost of sales increased 84.3% to $24.7 million in 1997
from $13.4 million in 1996. As a percentage of net sales, cost of sales
increased to 16.4% for 1997 from 15.5% in 1996. The increase in cost of sales
was due to a $10.8 million increase in sales of finished goods, a $600,000
increase in shipping costs due to increased sales volume, a $300,000 increase
in shipping costs for Canadian finished goods and a ($400,000) decrease in
normal costs of spoilage and shrinkage of inventory.
Commissions. Commissions increased 75.4% to $61.7 million in 1997 from
$35.2 million in 1996. As a percentage of net sales, commissions increased to
41.0% for 1997 from 40.7% in 1996.
Gross Profit. Gross profit increased 70.0% to $64.2 million in 1997
from $37.8 million in 1996. As a percentage of net sales, gross profit
decreased to 42.6% in 1997 from 43.8% in 1996. These changes were primarily
attributable to the factors described above.
Selling and Administrative Expenses. Selling and administrative
expenses increased 56.8% to $27.8 million in 1997 from $17.8 million in 1996.
As a percentage of net sales, selling and administrative expenses decreased to
18.5% in 1997 from 20.6% in 1996. The dollar amount increase was primarily
attributable to an increase in bonuses and compensation paid and an increase in
number of employees to support the Company's growth in net sales. The decrease
in the percentage of net sales was primarily attributable to certain
efficiencies achieved by the Company in managing sales growth and reductions in
executive salaries beginning in June 1997 of approximately $600,000. Executive
salaries were reduced to reflect salaries commensurate with those paid by
similar public companies. The Company does not expect increases in executive
salaries in the foreseeable future other than those increases necessary in the
marketplace to recruit, reward and retain qualified executives.
Other Operating Costs. Other operating costs increased 65.2% to $19.4
million in 1997 from $11.7 million in 1996. This increase was primarily due to
costs associated with the Company's relocation of its worldwide headquarters to
its current location in March 1997. As a result of the relocation, the Company
had capital expenditures of
24
<PAGE> 28
approximately $9.1 million, which resulted in an increase in depreciation
expense of approximately $900,000. In addition, other expenses comprised of
supplies, rent and miscellaneous equipment purchases, increased by
approximately $1.8 million. Utility and telephone expense increased by
approximately $2.0 million with the majority of the increase related to
telephone expense. The increase in telephone expense is related to the increase
in sales as the majority of the Company's sales are made by telephone or fax.
The increased sales volume leads to increased telephone usage, which results in
higher costs. As a percentage of net sales, other operating costs decreased to
12.9% in 1997 from 13.6% in 1996. This decrease was primarily attributable to
increased sales volume and the Company achieving certain volume-based
efficiencies due to increased net sales. If sales volumes remain constant,
these volume-based efficiencies are expected to remain constant as they are
directly related to sales volumes.
Cancellation of Incentive Compensation Agreements. Cancellation of
incentive compensation agreements consisted of a one-time charge in 1997
totaling approximately $2.2 million. This charge resulted from the exchange of
the Common Stock for the cancellation of certain incentive compensation
agreements.
Other (Income) Expense, Net. Other (income) expense decreased 62.9% to
($43,000) in 1997 from ($116,000) in 1996. As a percentage of net sales, other
(income) expense decreased to (0.0%) in 1997 from (0.1%) in 1996. The change in
1997 was primarily attributable to the settlement in 1997 of various lawsuits
totaling $110,000 versus settlement expense of $59,000 in 1996.
Income Tax Expense. Income tax expense increased to $4.1 million in
1997 compared to $1.2 million in 1996. The Company's effective tax rate
increased significantly to 28.0% in 1997 from 14.3% in 1996. The increase in
the effective tax rate was primarily the result of the Company's reorganization
as of June 1, 1997. Prior to that date, the Partnerships were subject to income
tax only at the individual partners' level.
Net Income. Net income increased 48.3% to $10.6 million in 1997 from
$7.2 million in 1996. As a percentage of net sales, net income decreased to
7.0% in 1997 from 8.3% in 1996. This decrease was due to the cancellation of
incentive compensation agreements, additional income tax expense, the
reorganization of the Partnerships and the other factors described above.
25
<PAGE> 29
SELECTED QUARTERLY STATEMENTS OF INCOME
The following table sets forth certain unaudited consolidated
quarterly statement of income data. In the opinion of management, this
information has been prepared on the same basis as the audited Consolidated
Financial Statements contained herein and includes all necessary adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary to present fairly this information in accordance with generally
accepted accounting principles. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto appearing
elsewhere in this report. The Company's consolidated operating results for any
one quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997(2) 1997 1997(1) 1998 1998 1998(3) 1998(4)
---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $ 33.4 $ 38.0 $ 39.8 $ 39.5 $ 41.1 $ 42.6 $ 39.1 $ 42.1
Gross profit ..................... 14.2 16.3 17.2 16.4 18.1 18.2 17.0 17.8
Income before income taxes ....... 4.5 1.7 6.3 2.3 5.8 5.5 2.7 1.8
Income tax expense ............... 1.3 0.5 1.8 0.6 2.2 2.2 1.0 0.3
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income ....................... 3.2 1.2 4.5 1.7 3.6 3.3 1.7 1.5
========== ========== ========== ========== ========== ========== ========== ==========
Earnings per share(6)
Basic ........................ $ .16 $ .06 $ .20 $ .08 $ .16 $ .15 $ .08 $ .06
========== ========== ========== ========== ========== ========== ========== ==========
Diluted ...................... $ .16 $ .06 $ .19 $ .07 $ .15 $ .14 $ .07 $ .06
========== ========== ========== ========== ========== ========== ========== ==========
Pro Forma Information: (5)
Income before income taxes, as
reported ..................... $ 4.5 $ 1.7 $ 6.3 $ 2.3
Pro forma provision for income
tax expense .................. 1.7 0.7 2.4 0.9
---------- ---------- ---------- ----------
Pro forma net income ............. $ 2.8 $ 1.0 $ 3.9 $ 1.4
========== ========== ========== ==========
Pro Forma Earnings per share (6)
Basic ........................ $ .01 $ .05 $ .18 $ .06
========== ========== ========== ==========
Diluted ...................... $ .01 $ .05 $ .17 $ .05
========== ========== ========== ==========
Number of starter packs sold ..... 32,547 36,134 34,881 29,899 30,261 29,176 17,183 40,383
Number of renewal packs sold ..... 8,000 10,922 10,675 11,622 13,892 8,636 21,629 14,319
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total number of packs sold ....... 40,547 47,056 45,556 41,521 44,153 37,812 38,812 54,702
========== ========== ========== ========== ========== ========== ========== ==========
Total Associates canceling
Associate status ............. 1,178 1,280 1,187 1,518 1,376 1,597 1,683 1,486
========= ========== ========== ========== ========== ========== ========== ==========
</TABLE>
- ----------------
(1) For the fourth quarter of 1997, cost of sales included an adjustment for
the abnormal conversion of approximately $133,000 of raw materials by a
manufacturer and a write-off of identified obsolete inventory. The Company
now sells raw materials to its manufacturers and repurchases finished
goods, which should prevent future losses on abnormal conversions. Selling
and administrative expenses included accruals for (i) discretionary
bonuses for all employees, (ii) termination expenses and (iii) disputed
freight expenses. Other operating costs increased for the accrual of
various attorney and consulting fees and compensation expenses related to
the issuance of stock options to certain nonemployees.
(2) In June 1997, the Company recorded a one-time charge to operations for the
issuance of the Common Stock in exchange for the cancellation of certain
incentive compensation agreements. An additional incentive compensation
agreement was cancelled in December 1997.
(3) In September 1998, the Company recorded a charge of approximately $941,000
for the write-off of certain deferred offering costs. In December 1998,
$94,000 of these costs were recovered by the Company.
(4) During the fourth quarter of 1998, the Company began operations in
Australia and incurred approximately $1 million in start-up costs. In
addition, the Company expensed $500,000 for ongoing modification costs
associated with its internally developed software.
(5) The pro forma information shows the Company's consolidated net income as
if all income earned by the Company and the Partnerships was taxable at
federal and statutory rates.
(6) Computed on the basis described in Note 1 in the Notes to Consolidated
Financial Statements.
As the table above indicates, the Company has experienced a declining
rate of growth in recent quarters. The decreased rate results primarily from
the increased base on which the growth rate is computed and a shrinking base of
potential new Associates in its existing markets offset by the new Associate
base created from the Company's international expansion. The Company has relied
on its historical growth to provide the operating cash flows used to fund its
current international expansion and its growth in infrastructure, including
equipment and personnel. The Company believes it currently has an
infrastructure capable of supporting its historical growth for the next three
to five years. The Company does not anticipate that future rates of growth will
be equal to historic rates of growth due to the increased base on which the
rate of growth is computed. The Company's inability to maintain its historic
rate of growth
26
<PAGE> 30
is not expected to have an adverse effect on operations due to the relatively
high gross profit margins and current sales base. The Company expects expansion
into international markets to provide expanded growth opportunities. If the
Company is unable to maintain current levels of growth, seasonal declines in
sales revolving around the holiday period in the fourth quarter may become
apparent.
LIQUIDITY AND CAPITAL RESOURCES
In February 1999, the Company raised approximately $9.5 million in net
proceeds from the IPO. In the IPO, the Company sold 1,500,000 shares of the
Common Stock and existing shareholders sold 1,556,016 shares of the Common
Stock at $8.00 per share. In addition, in February 1999, the Company received
an additional $454,187 in proceeds from the exercise of outstanding warrants to
purchase 336,435 shares of the Common Stock. The Company intends to use
approximately $6.2 million of the proceeds for international expansion,
primarily for product registration, initial inventory requirements and similar
items. The remaining $3.3 million will be used to fund working capital and for
general corporate purposes.
The Company's principal capital requirement is to fund working capital
to support its growth. To date, the Company has financed its operations
primarily through cash flows derived from operating activities. Primarily as a
result of the Company's investment in the infrastructure necessary to support
its growth and international expansion, the Company had working capital
deficiencies of $9.2 million and $12.4 million as of December 31, 1997 and
1998, respectively. During 1997 and 1998, the Company invested approximately
$9.1 million and $6.1 million, respectively, in its property and equipment.
These projects were funded primarily from operating cash flow, which negatively
impacted working capital.
The Company also distributed approximately $4.0 million during 1997 to
the Partnerships and approximately $6.9 million and $9.9 million in dividends
to its shareholders in 1997 and 1998, respectively. Additionally, current
liabilities increased due to increased commissions, payables, income taxes and
inventory purchases. These increases are primarily related to increased sales
volume in 1997 and 1998, the IPO which was closed on February 12, 1999,
expansion into Australia and research into future planned expansion into other
international markets. The Company believes its current facilities are
sufficient to support near-term growth. The reduction in capital spending,
combined with the Company's intention to cease future distributions to
shareholders, is expected to reduce or eliminate the Company's working capital
deficiencies in the future.
Pursuant to the terms of an interim lease line-of-credit agreement
that expired in December 1998 (the "Line of Credit"), the Company was allowed
to convert amounts drawn thereunder into capital leases and, in March and
August 1998, the Company converted $631,000 and $840,000, respectively, which
had been drawn on the Line of Credit, into two capital leases (the "Capital
Leases"). The Capital Leases bear interest at 9.3%, are collateralized by the
leased assets, are payable in thirty-six monthly installments and contain
various covenants, one of which the Company was in violation of at December 31,
1998. The Company obtained a waiver from the bank on March 16, 1999 waiving the
violation through the period ended February 28, 1999, at which time the Company
was in compliance with the covenant. In July 1998, the Company entered into a
thirty-six month, unsecured note payable with a finance company to finance its
three-year product liability insurance premium. The initial principal amount of
this note was $435,670, the interest rate is 8.0% and monthly installments are
due through December 2000.
Net cash provided by operating activities was $9.6 million, $19.8
million and $18.2 million in 1996, 1997 and 1998, respectively. Throughout
these years, the Company experienced increases in net sales, which were
partially offset by increases in inventories and expenses related to
international expansion. In 1999, the Company expects to spend up to $4.5
million for start-up costs and $2.6 million for initial inventory for the 1999
planned expansion into the United Kingdom and Japan.
Net cash used in investing activities was $3.2 million, $8.9 million
and $4.5 million in 1996, 1997 and 1998, respectively. These activities
consisted primarily of purchases of property and equipment in connection with
the Company's relocation to its new headquarters facility in April 1997 and the
relocation of the Company's Texas distribution center, the build-out of its
research and development facility and the development and implementation of its
proprietary software program during 1998. The new facilities and software
program should be sufficient for the Company's immediate needs. However, in the
near future, the Company intends to spend up to an estimated $4.5
27
<PAGE> 31
million for additional modifications to the software program for international
expansion, Internet access and additional purchases of property and equipment
for planned international expansion into the United Kingdom and Japan.
Net cash used in financing activities totaled $6.2 million, $11.9
million and $12.9 million in 1996, 1997 and 1998, respectively. In 1996 and
through the reorganization of the Company in June 1997, the Company made
distributions to partners of the Partnerships. Following the reorganization,
the Company has paid dividends on a monthly basis to its shareholders in the
amount of $0.02-$0.06 per share and paid dividends each month until the
consummation of the IPO on February 12, 1999. The Company does not intend to
continue to pay such dividends after the IPO, however, the Board of Directors
may, at its discretion decide to pay dividends after evaluating the Company's
net income and alternative uses of retained earnings.
The Company anticipates that its existing capital resources, including
cash provided by operating activities, bank borrowings, together with the
proceeds from the IPO and suspension of dividend payments to shareholders, will
be adequate to fund the Company's operations for at least the next 12 months.
The Company has no present commitments or agreements with respect to any
acquisitions or purchases of manufacturing capabilities or new technologies.
There can be no assurance that changes will not occur that would consume
available capital resources before such time. The Company's capital
requirements depend on numerous factors, including the timing and pace of the
Company's entry into international markets, growth in the number of Associates
and its research and development efforts. To the extent that the Company's
existing capital resources, together with the net proceeds of the IPO, are
insufficient to meet its capital requirements, the Company will be required to
raise additional funds. There can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all.
YEAR 2000
The Company's management recognizes the need to ensure that its
operations and relationships with vendors, Associates and other third parties
will not be adversely impacted by software processing errors arising from
calculations using the Year 2000 and beyond. Many existing computer programs
and databases use only two digits to identify a year in the date field (i.e.,
98 would represent 1998). If not corrected, many computer systems could fail or
create erroneous results in the year 2000. The Company believes all of its
internal information systems currently in use are Year 2000 ready, largely due
to the short operating history of the Company. The majority of the Company's
critical business applications have been developed internally, in the past two
years, with Year 2000 ready tools. With respect to non-information technology
systems issues, the Company expects to identify, assess and remediate, if
necessary, its building and utility systems for any Year 2000 issues relating
to the functionality of its facilities during the first half of 1999. All
testing and remediation, if necessary, of non-information technology systems is
expected to be completed by the summer of 1999.
The Company has begun communications with its vendors and other third
parties to determine the extent that these related systems may not be Year 2000
ready. Because the Company is still in the initial stages of these
communications, the Company can not determine if such failures are possible
and, if so, the extent that such failures would impact the Company. If one of
the Company's primary suppliers of ingredients were to have Year 2000 problems,
it is possible that these problems could have a material effect on the
Company's operations.
Management expects the total cost associated with Year 2000
identification, remediation and testing to be between $100,000 and $200,000, of
which $20,000 was spent in 1998. The expected cost represents approximately
2-3% of the total information technology budget and includes all costs to be
incurred through the utilization of internal employees only. If the Company has
to outsource any of these costs, the total costs could increase by
approximately $600,000. Currently, the Company does not anticipate having to
outsource any of these costs.
Should any or all of the applications fail to perform properly on
January 1, 2000, the Company will resort to temporary manual processing, which
is not expected to have a material adverse impact on its short-term operations.
Failure to achieve Year 2000 readiness by any of the Company's vendors, while
expected to cause some disruption to operations in the short-term, is not
expected to have a material impact on the Company's operations.
28
<PAGE> 32
FORWARD-LOOKING STATEMENTS
Certain statements in this report, including statements of the
Company's and management's expectations, intentions, plans and beliefs,
including those contained in or implied by "Business," "Properties,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Notes to Consolidated Financial Statements, are
"forward-looking statements," within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are
subject to certain events, risk and uncertainties that may be outside the
Company's control. These forward-looking statements include statements of:
management's plans and objectives for the Company's future operations and of
future economic performance; the Company's capital budget and future capital
requirements; the Company's meeting its future capital needs; the Company's
realization of its deferred tax assets; and the level of future expenditures
and the outcome of regulatory and litigation matters, and the assumptions
described in this report underlying such forward-looking statements. Actual
results and developments could differ materially from those expressed in or
implied by such statements due to a number of factors, including, without
limitation, those described in the context of such forward-looking statements,
future product development and manufacturing costs, timely development and
acceptance of new products, the entrance into new countries and markets, the
impact of competitive products and pricing, the political and economic climate
in which the Company conducts operations and the risk factors described from
time to time in the Company's other documents and reports filed with the
Securities and Exchange Commission (the "Commission").
IMPACT OF INFLATION
The Company believes that inflation historically has not had a
material impact on its operations or profitability. In 1998, the Company
expanded into Australia, in 1999, the Company plans to expand into the United
Kingdom. Revenues and expenses in foreign markets are currently translated
using historical and weighted-average exchange rates; therefore a weakening
United States dollar should have a positive impact whereas a strengthening
United States dollar should have a negative impact on translations of its
foreign operations. The planned expansion into Japan may be adversely affected
by a further economic downturn or fluctuation in Asian currencies. The Company
intends to proceed cautiously with its planned Japanese expansion in order to
help minimize any material impact on its operations or profitability.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
In June 1998, the FASB issued FAS No. 133, "Accounting for
Derivatives, Investments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative financial instruments,
including certain derivative financial instruments imbedded in other contracts
and for hedging activities. FAS No. 133 is effective for fiscal years beginning
after June 15, 1999. As the Company does not have any derivative financial
instruments, this pronouncement is not expected to impact the Company.
In April 1998, the American Institute of Certified Public Accounts
issued Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires companies to expense start-up and
organization costs as incurred. SOP 98-5 broadly defines start-up activities
and provides examples to help entities determine whether certain costs are
within the scope of SOP 98-5. SOP 98-5 will be effective beginning for fiscal
years beginning after December 15, 1998 and its initial application is to be
reported as the cumulative effect of a change in accounting principle.
Currently, the Company does not have any unamortized startup or organizational
costs; however, any future startup costs related to the international expansion
will be expensed as incurred.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company 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 the Company to
certain types of market risk, including interest rate, commodity price or
equity price risk. The Company has issued no debt instruments, entered into no
forward or futures contracts, purchased no options and entered into no swaps.
However, the Company is exposed to certain other market risks,
including variability in currency exchange rates as measured against the United
States dollar. The value of the United States dollar affects the Company's
29
<PAGE> 33
financial results. Changes in exchange rates may positively or negatively
affect the Company's sales (as expressed in United States dollars), gross
margins, operating expenses and retained earnings. When the United States
dollar sustains a strengthening position against currencies in which the
Company sells products or a weakening exchange rate against currencies in which
it incurs costs, its sales or costs may be adversely affected. The Company has
established policies, procedures, and internal processes governing the
management of market risk and the use of any financial instruments to manage
its exposure to such risks. The sensitivity of earnings and cash flows to
variability in currency exchange rate is assessed by applying an appropriate
range of potential rate fluctuations to the Company's assets, obligations and
projected transactions denominated in foreign currency. Based upon the
Company's overall currency rate exposure at December 31, 1998, the Company does
not believe that its exposure to exchange rate fluctuations will have a
material impact on its consolidated financial position or consolidated results
of operations. All statements other than historical information incorporated in
this Item 7A are forward looking statements. The actual impact of future market
changes could differ materially due to, among other things, factors discussed
in this report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements and Supplementary Data of the Company
required by this Item 8 are set forth at the pages indicated in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's executive officers and directors and their ages as of
March 24, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------------------- --- ------------------------------------------------------
<S> <C> <C>
Charles E. Fioretti.......... 52 Chairman of the Board and Chief Executive Officer
Samuel L. Caster............. 48 President and Director
Anthony E. Canale............ 46 Chief Operating Officer
Patrick D. Cobb.............. 46 Vice President, Chief Financial Officer, Secretary and
Director
Deanne Varner................ 46 General Counsel and Vice President of Compliance
Jeffrey P. Bourgoyne......... 37 Vice President of Operations
Peter E. Hammer.............. 44 Vice President of New Business and International
Development
Donald W. Herndon............ 48 Vice President of Marketing
Bill H. McAnalley, Ph.D...... 54 Vice President of Research and Product Development
Ronald D. Norman............. 40 Vice President and Treasurer
Eoin Redmond................. 33 Vice President of Information Technology
Stephen D. Fenstermacher..... 46 Vice President of Accounting and Controller
Steven A. Barker............. 49 Director
Chris T. Sullivan............ 50 Director
</TABLE>
Charles E. Fioretti co-founded the Company in November 1993, has
served as Chairman of the Board and Chief Executive Officer since May 1997 and
as a director since November 1993. His current term as director expires in
2001. Mr. Fioretti served as Chief Operating Officer of the Company from
November 1993 to July 1996. From June 1990 until April 1995, Mr. Fioretti was
an owner and operator of several Outback Steakhouse, Inc. restaurants in
Arizona, Indiana and Kentucky. Prior to his involvement with Outback
Steakhouse, Inc., Mr. Fioretti occupied executive positions with several
national restaurant chains, including Bennigan's, ChiChi's Mexican Restaurants,
El Chico and Steak & Ale. Mr. Fioretti is Peter E. Hammer's brother-in-law.
Samuel L. Caster co-founded the Company in November 1993 and since
then has served as President and as a director of the Company. His current term
as director expires in 2000. From April 1992 until August 1993, Mr. Caster also
served as co-founder, owner and President of Funds-4-Kids, Inc., a multi-level
marketing company that sold healthy alternative candy bars for children. From
January 1990 until April 1992, Mr. Caster served as a consultant for Metabolic
Technologies, Inc., a nutritional supplement multi-level marketing company that
sold metabolic vitamins.
Anthony E. Canale joined the Company in January 1997 and since then
has served as Chief Operating Officer of the Company. From February 1993 until
October 1996, Mr. Canale was President of Canale and Associates, an Outback
Steakhouse, Inc. joint venture partnership. Prior to that time, Mr. Canale
served as Regional Vice President and Vice President of Franchise Operations
and Food/Beverage Development for ChiChi's, Inc., Regional General Manager and
National Director of Operation Services for Kentucky Fried Chicken Corporation
and Executive Vice President and Chief Operating Officer of Kenny Rogers
Roasters Restaurants, Inc., all national restaurant chains. Mr. Canale holds a
B.S. in Management from American International College in Springfield,
Massachusetts.
Patrick D. Cobb joined the Company in August 1994 and since then has
served as Chief Financial Officer and Vice President. Mr. Cobb has served as
Secretary of the Company since February 1997 and as a director since November
1997. His current term as director expires in 2000. From January 1994 until
August 1994, Mr. Cobb was President of Industrial Gasket, Inc., a metal
stamping facility in Oklahoma City. From August 1989 until October 1993, he was
head of a Small Business Management Program with the Oklahoma VO-Tech System.
From May 1981 until October 1993, Mr. Cobb was employed by General Motors
Corporation as a Senior Accountant and Financial Forecaster. Mr. Cobb holds a
B.S. in Finance from the University of Oklahoma and is a Certified Public
Accountant.
31
<PAGE> 35
Deanne Varner joined the Company in January 1996 and since May 1996
has served as General Counsel and Vice President of Compliance. From 1986 until
January 1996, Ms. Varner maintained a law practice in Dallas, Texas focusing on
business law and related transactions. Ms. Varner has over 20 years of
experience in business, corporate and transactional law. Ms. Varner holds a
B.A. in Social Sciences and a J.D. from Southern Methodist University.
Jeffrey P. Bourgoyne joined the Company in December 1996 and since
February 1998 has served as Vice President of Operations. From May 1995 until
December 1996, Mr. Bourgoyne served as facility manager for DSC Logistics,
Inc., a third-party logistics provider. From June 1993 until May 1995, Mr.
Bourgoyne was a Transportation Services Manager for Abbott Laboratories, a
pharmaceutical company. Mr. Bourgoyne holds a B.S. in Management from
University of New Orleans and an M.B.A. from Lake Forest Graduate School of
Management.
Peter E. Hammer joined the Company in March 1995 and since January
1998 has served as Vice President of New Business and International
Development. From November 1991 until February 1995, Mr. Hammer served as the
Vice President and Chief Information Officer of The Network, Inc., a business
abuse solutions company in Atlanta, Georgia. Prior to that, Mr. Hammer worked
for several companies developing and installing complex computer and
information systems. Mr. Hammer holds a B.A. in Liberal Arts from State
University College at Buffalo and an A.A.S. in Electronics from Suffolk
Community College. Mr. Hammer is Charles E. Fioretti's brother-in-law.
Donald W. Herndon joined the Company in November 1993 until December
1996 served as the Vice President of Distribution. Since December 1996 Mr.
Herndon has served as Vice President of Marketing. From January 1993 through
November 1993, Mr. Herndon served as the Vice President of Operations for
Funds-4-Kids, Inc. a multi-level marketing company that sold healthy
alternative candy bars for children. Mr. Herndon is the brother-in-law of Mr.
Samuel L. Caster.
Bill H. McAnalley, Ph.D. joined the Company in July 1996 and has
served as Vice President of Research and Product Development and Chief
Scientific Officer since December 1997. From March 1995 until July 1996, Dr.
McAnalley served as a consultant to the Company. From March 1987 until February
1995, Dr. McAnalley was Vice President of Research and Product Development at
Carrington Laboratories, Inc., a pharmaceutical research, development and
manufacturing company. Dr. McAnalley holds a Ph.D. in Pharmacology and
Toxicology from the University of Texas Health Science Center in Dallas, Texas.
Ronald D. Norman joined the Company in May 1996 and from August 1997
until September 1998 served as Controller. In September 1998, Mr. Norman began
serving as the Treasurer. In June 1998, Mr. Norman was promoted to Vice
President. From September 1994 until April 1996 Mr. Norman was a tax manager
with Belew Averitt LLP, a public accounting firm in Dallas, Texas. From January
1989 until September 1994 Mr. Norman worked for Coopers & Lybrand LLP (now
PricewaterhouseCoopers LLP), an international public accounting firm. Mr. Norman
holds an M.A. in Tax and a B.B.A. in Accounting from Baylor University and is a
Certified Public Accountant.
Eoin Redmond joined the Company in July 1997 and since then has served
as Vice President of Information Technology. From August 1996 through June
1997, Mr. Redmond was employed by the Company as a computer systems consultant.
From October 1995 until August 1996, Mr. Redmond was Head of Client Services
for Tate Bramald Ltd., an accounting software provider. From December 1993
until September 1995, Mr. Redmond was employed as Technology Services
Manager-Europe for SSA Europe Ltd., an industrial software provider. From
October 1987 until October 1993, Mr. Redmond was employed as a Senior Software
Manager for Team Systems Group, Ltd., a reseller of turn-key software systems.
Mr. Redmond matriculated at Presentation College, County Wicklow, Ireland and
subsequently attended AnCo Technology Center, County Dublin, Ireland.
Stephen D. Fenstermacher joined the Company in November 1998 and since
then has served as Vice President of Accounting and Controller. From January
1998 until October 1998, Mr. Fenstermacher was a consultant for Kibel, Green,
ISSA, Inc., a crisis management firm specializing in turnaround strategy and
execution consulting. From April 1995 until October 1997, Mr. Fenstermacher
served as Executive Vice President and Chief Financial Officer for The Johnny
Rockets Group, Inc., from May 1994 until April 1995, as Vice President for
Brinker International, Inc., from September 1991 until May 1994, as Chief
Executive Officer and Chief Financial Officer for On the Border Cafes, Inc.,
all international restaurant chains. Mr. Fenstermacher holds an M.B.A. from the
University of Pittsburgh and a B.A. from the University of Notre Dame.
32
<PAGE> 36
Steven A. Barker became a director of the Company in January 1998. His
current term as director expires in 2002. Dr. Barker has been a full professor
of Physiology, Pharmacology and Toxicology at Louisiana State University since
April 1990. Dr. Barker holds a B.S. and an M.S. in Chemistry and a Ph.D in
Chemistry/Neurochemistry from the University of Alabama-Birmingham.
Chris T. Sullivan became a director of the Company in October 1997.
His current term as director expires in 2001. Mr. Sullivan has been the
Chairman of the Board and Chief Executive Officer of Outback Steakhouse, Inc.
since founding that company in 1988. Mr. Sullivan serves on the executive
committee for The Outback/Gary Koch Pro-Am, the Tampa Bay Devil Rays, the
Employment Policies Institute and the Presidents Conference. Mr. Sullivan holds
a degree in Business and Economics from the University of Kentucky.
The Company has a classified Board of Directors. At each annual
meeting of shareholders, a class of directors will be elected to serve a
three-year term and until his successor is duly elected and qualified. Officers
serve at the discretion of the Board of Directors. Except as described above,
there are no family relationships among the directors and executive officers.
COMMITTEES OF THE BOARD OF DIRECTORS
In February 1999, the Board of Directors established an audit
committee (the "Audit Committee") and a compensation committee (the
"Compensation Committee"). The Audit Committee is comprised solely of the
Company's two independent directors, Messrs. Barker and Sullivan, who are
charged with reviewing the Company's annual audit and meeting with the
Company's independent accountants to review the Company's internal controls and
financial management practices. The Compensation Committee is also comprised
solely of Messrs. Barker and Sullivan. The Compensation Committee is
responsible for establishing salaries, bonuses and other compensation for the
Company's executive officers.
The Board of Directors intends to establish an option committee (the
"Option Committee"). Pursuant to the terms of the 1997 Stock Option Plan and
the 1998 Stock Option Plan, the authority to determine the terms and conditions
of each option to be issued under both the 1997 Stock Option Plan and the 1998
Stock Option Plan and the responsibility for administration of each such plan,
which currently rests with the Board of Directors, will be assumed by the
Option Committee. The Option Committee will be comprised solely of at least two
"Non-Employee Directors," as such term is used in Rule 16b-3 promulgated under
the Exchange Act.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of the Common Stock, to
file with the Commission initial reports of ownership and reports of changes in
ownership of the Common Stock and other equity securities of the Company. Such
persons are required by the Commission's regulations to furnish the Company
with copies of all Section 16(a) reports they file. For the year ended December
31, 1998, such persons were not required to file such reports as the Company
was, prior to the IPO, not subject to the requirements of the Exchange Act.
However, to the Company's knowledge, based solely on its review of the copies
of reports filed in connection with the IPO and subsequently, and upon written
representations that no other reports were required, it is the Company's
opinion that all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners have been complied with.
33
<PAGE> 37
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned for
each of the three years ended December 31, 1998, by each person who served as
the chief executive officer of the Company during 1998 and the four most highly
compensated executive officers of the Company, other than the chief executive
officer, who were serving as executive officers at the end of 1998
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------
NUMBER OF
ANNUAL COMPENSATION SHARES
----------------------- OTHER UNDERLYING
ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTED
- --------------------------- ---- ---------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Charles E. Fioretti(2) 1998 $ 433,517 $ 750,000 $ 9,044(3) --
Chairman of the Board and 1997 403,434 760,000 109,765(3) --
Chief Executive Officer 1996 325,962 1,268,197 110,580(3) --
Samuel L. Caster 1998 433,517 500,000 2,942(4) --
President 1997 403,434 760,000 16,012(4) --
1996 317,374 1,307,200 25,362(4) --
Anthony E. Canale 1998 287,500 326,293 11,925(5) 250,000
Chief Operating Officer 1997 221,978 190,172 -- 250,000
1996 -- -- -- --
Patrick D. Cobb 1998 245,055 250,000 2,077 100,000
Vice President, Chief Financial 1997 214,011 171,666 43,000(6) 100,000
Officer and Secretary 1996 169,712 269,999 -- --
Deanne Varner 1998 225,275 323,793 1,644 228,000
General Counsel and 1997 187,019 159,884 -- 228,000
Vice President of Compliance 1996 120,442 55,500 16,500 --
</TABLE>
- -----------------
(1) Includes the Company's matching contribution to the 401(k) plan.
(2) Mr. Fioretti became Chief Executive Officer of the Company on May 1,
1997.
(3) Represents the amounts paid to Mr. Fioretti under his incentive
compensation agreement.
(4) Represents the amount paid to Mr. Caster under his incentive
compensation agreement.
(5) Represents the amount paid to Mr. Canale for costs of relocation.
(6) Represents the value of a Company vehicle transferred to Mr. Cobb in
1997.
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on options granted to the
Named Executive Officers during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------- POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF STOCK PRICE
SHARES PERCENT OF APPRECIATION FOR
UNDERLYING TOTAL OPTIONS OPTION TERM(2)
OPTIONS GRANTED TO EXERCISE OR BASE EXPIRATION ----------------------
NAME GRANTED(1) EMPLOYEES PRICE ($/SH) DATE 5% 10%
- ----------------------------- --------------- --------------- ----------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Anthony E. Canale............ 250,000 38.9% $8.00 7/31/08 1,257,789 3,187,485
Patrick D. Cobb.............. 100,000 15.6% $8.00 7/31/08 503,116 1,274,994
Deanne Varner................ 228,000 35.5% $8.00 7/31/08 1,147,104 2,906,986
</TABLE>
- ---------------
(1) Options granted become exercisable beginning July 31, 1999, the first
anniversary of the date of grant.
(2) The 5% and 10% assumed annual compound rates of stock appreciation are
mandated by the rules of the Commission and do not represent the
Company's estimate or projection of future prices of the Common Stock.
The actual value realized may be greater or less than the potential
realizable value set forth in the table.
34
<PAGE> 38
The following table sets forth, as of December 31, 1998, the number of
options and the value of unexercised options held by the Named Executive
Officers. As of December 31, 1998, there had been no stock options exercised by
any Named Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Shares Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Fiscal Year Year-End(#) Fiscal Year-End(1)
----------------------------- ---------------------------
Name Exercisable(2) Unexercisable Exercisable Unexercisable
- ---- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Anthony E. Canale.................................... -- 500,000 -- $ 1,662,500
Patrick D. Cobb...................................... -- 200,000 -- 665,000
Deanne Varner........................................ -- 456,000 -- 1,516,200
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock at December
31, 1998. Accordingly, as permitted by the Commission, these values
have been calculated based on the IPO price of $8.00 per share less
the per share exercise prices of $1.35 and $8.00.
(2) Options granted become exercisable 90 days after the completion of an
initial public offering of the Company's securities but in no event
earlier than the date of grant. Options issued in 1998 become
exercisable on July 31, 1999.
DIRECTOR COMPENSATION
Each independent director of the Company who is not an officer or
employee of the Company receives an annual fee of $30,000 for serving on the
Board of Directors. In addition, directors of the Company are reimbursed for
their reasonable out-of-pocket expenses in connection with their travel to and
attendance at meetings of the Board of Directors or committees thereof. Prior
to his appointment as a director, Dr. Barker was a consultant to the Company
and was paid $2,500 in consulting fees in 1997.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with each of Charles E.
Fioretti, Samuel L. Caster, Patrick D. Cobb, Anthony E. Canale, Bill H.
McAnalley and Deanne Varner, effective as of September 1, 1998, which entitle
each such employee to receive their current base salary and bonus compensation
based upon the management bonus plan formula. The agreements have an initial
term of five years and extend automatically each year for one additional year
unless both parties agree to termination prior to the end of any term. If the
Company terminates any such employment agreement for any reason other than
specified events, the executive is entitle to receive an amount equal to the
sum of all salary and bonus which would have been paid in the five years
subsequent to such termination.
MANAGEMENT BONUS PLAN
The executive officers and certain other members of corporate
management are eligible to receive bonuses in addition to their base salaries.
The bonus plan is based upon the attainment by management of certain financial
goals of the Company. The amount of the bonuses paid pursuant to the bonus
plan, prior to the IPO, were reviewed and approved by the Board of Directors.
Post-IPO, amounts to be paid under the bonus plan will be reviewed and approved
by the Compensation Committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the Company had no compensation committee or other
committee of the Board of Directors performing similar functions. Decisions
concerning compensation of executive officers were made by the Board of
Directors, which included Charles E. Fioretti, Samuel L. Caster, Patrick D.
Cobb, Chris T. Sullivan and Steven A. Barker. In February 1999, the Board of
Directors established the Compensation Committee, consisting solely of
independent directors (Messrs. Barker and Sullivan), subsequent to the
consummation of the IPO. The Compensation Committee is now responsible for
decisions regarding compensation of Executive Officers.
35
<PAGE> 39
EXECUTIVE COMPENSATION REPORT OF THE BOARD OF DIRECTORS
Until the formation of the Compensation Committee, consisting of
Messrs. Barker and Sullivan, in February 1999, the Board of Directors performed
the functions of the Compensation Committee, including for the fiscal year
ended December 31, 1998.
Notwithstanding anything to the contrary set forth in any of the
previous filings made by the Company under the Securities Act that might
incorporate future filings, including, but not limited to, this report, in
whole or in part, the following Executive Compensation Report shall not be
deemed to be incorporated by reference into any such future filings.
The Executive Compensation Report discusses the Company's executive
compensation policies and the basis for the compensation paid to the Company's
executive officers, including its Chief Executive Officer, Charles E. Fioretti,
during the fiscal year ended December 31, 1998.
Compensation Policy. The Company's policy with respect to executive
compensation has been designed to:
o Adequately and fairly compensate executive officers in
relation to their responsibilities, capabilities and
contributions to the Company and in a manner that is
commensurate with compensation paid by companies of
comparable size or within the Company's industry;
o Reward the executive officers for the achievement of
short-term operating goals and for the enhancement of the
long-term value of the Company; and
o Align the interests of the executive officers with those of
the Company's shareholders with respect to short-term
operating goals and long-term increases in the price of the
Common Stock.
The components of compensation paid to certain executive officers
consist of: (a) base salary, (b) bonus, (c) other annual compensation and (d)
other long-term compensation. In the absence of a Compensation Committee, the
Board of Directors has been responsible for reviewing and approving cash
compensation paid by the Company to its executive officers and members of the
Company's senior management team, including bonuses and awards made under the
aforementioned compensation, selecting the individuals who will receive such
bonuses and awards and determining the timing and amount of all such bonuses
and awards granted. The Compensation Committee was formed on February 10, 1999.
Components of Compensation. The primary components of compensation
paid by the Company to its executive officers and the relationship of such
components of compensation to the Company's performance are discussed below:
Base Salary. For the fiscal year ended December 31, 1998, the
Board of Directors reviewed and approved the base salary paid by the
Company to its executive officers. At the beginning of each new fiscal
year the Compensation Committee will review the base salaries of the
executive officers to ensure the salaries are based correctly upon a
number of factors. These factors include the Company's performance (to
the extend such performance can fairly be attributed or related to
each executive's officer's performance), as well as the nature of each
executive officer's responsibilities, capabilities, loyalties and
contributions. The Board of Directors believes that base salaries for
the Company's executive officers have been reasonable in relation to
the Company's size and performance in comparison with the compensation
paid by similarly sized companies or companies within the Company's
industry.
Bonus. The executive officers of the Company are eligible to
participate in the Management Bonus Plan. Bonuses paid under this plan
are based upon the attainment by the Company of certain financial
goals. The bonuses paid during the fiscal year ended December 31, 1998
were reviewed and approved by the Board of Directors. Subsequent
bonuses will be paid to the executive officers at least once per year
and will be reviewed and approved annually by the Compensation
Committee. During the fiscal year ended December 31, 1998, the CEO,
36
<PAGE> 40
Charles E. Fioretti, was awarded an additional bonus of $250,000 for
his distinguished efforts in the consummation of the IPO.
Other Annual Compensation. The Company maintains certain
other plans and arrangements for the benefit of its executive officers
and other members of the management team, including participation in
the 401(k) plan, use of a Company vehicle and health, life, automobile
and long-term disability insurance. The Company believes these
benefits are reasonable in relation to the executive compensation
practices of other similarly sized companies or companies within the
Company's industry.
Long-term Compensation. The Company maintains stock option
plans to reward members of management for the obtainment of certain
goals or events. The stock options granted have historically been
reviewed and approved by the Board of Directors. After the IPO, stock
option grants will be reviewed and approved by the Compensation
Committee. During the fiscal year ended December 31, 1998, some of the
executive officers were granted stock options for their efforts in
relation to the IPO. The Company believes these long-term compensation
arrangements are reasonable in relation to the executive compensation
practices of other similarly sized companies or companies within the
Company's industry.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
1998 Chief Executive Officer Compensation. As previously described,
the Board of Directors considers several factors in determining the Chief
Executive Officer's compensation package, with the primary factor being the
Company's performance and the competitive compensation paid to executive
officers with companies of comparable size or within the Company's industry.
Specific actions taken by the Board of Directors regarding Mr. Fioretti's
compensation paid in 1998 are summarized below.
Base Salary. As with the Company's other executive officers,
Mr. Fioretti's 1998 salary was based on a number of factors. These
factors include the Company's performance, overall consolidated
financial results and the nature of his responsibilities,
capabilities, loyalties and contributions to the Company. Effective
July 1, 1998, Mr. Fioretti's salary was increased from $300,000 to
$600,000. This increase reflected the Company's overall performance,
consolidated financial results and Mr. Fioretti's contributions to the
Company.
Bonus. The Chief Executive Officer of the Company is allowed
to participate in the Management Bonus Plan. The bonuses are based
upon the attainment by the Company of certain financial goals. The
Board of Directors approved a $750,000 bonus to Mr. Fioretti for his
contributions related to the Company reaching certain financial goals
and consummating the IPO.
Other Annual Compensation. As with the Company's other
executive officers, the Chief Executive officer may participate in the
401(k) plan, but has elected not to at this time. The Chief Executive
Officer is also provided with a Company-owned vehicle and health,
life, automobile and long-term disability insurance coverage.
$1 Million Pay Deductibility Cap. Under Section 162(m) of the
IRS Code, public companies are precluded from receiving a tax
deduction on compensation paid to executive officers in excess of $1
million, unless the compensation is excluded from the $1 million limit
as a result of being classified performance-based. At this time, the
Company's executive officer cash compensation levels for its Chief
Executive Officer only exceeded the $1 million pay limit due to the
$250,000 bonus paid to Mr. Fioretti for his contributions in
consummating the IPO. The Company does not anticipate exceeded this
limit in the near future. Nonetheless, the Compensation Committee
intends to periodically review its executive pay plans in light of
this regulation.
Conclusion. The Board of Directors believes that the concepts
discussed above further the shareholders' interests and that officer
compensation encourages responsible management of the Company. The Board of
Directors regularly considers the effect of executive compensation on
shareholder interests. In the past the Board of Directors based its review on
the experience of its own members and on information requested from management
personnel. In
37
<PAGE> 41
the future, these factors, reports of the Compensation Committee and
discussions with and information compiled by various independent consultants
retained by the Company will be used in determining executive officer
compensation.
Board of Directors
Charles E. Fioretti
Samuel L. Caster
Patrick D. Cobb
Chris T. Sullivan
Steven A. Barker
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 24, 1999, the number of
shares of the Common Stock and the percentage of the outstanding shares of such
class that are beneficially owned by (i) each person who is the beneficial
owner of more than 5% of the outstanding shares of the Common Stock, (ii) each
of the directors and the Named Executive Officers of the Company, and (iii) all
of the current officers and directors of the Company as a group.
<TABLE>
<CAPTION>
Beneficial Ownership(1)
Number of -----------------------
Shares
Excluding % of Class
Name of Directors and Executive Officers Options Stock Options(2) Total Outstanding(3)
---------------------------------------- ---------- ---------------- --------- --------------
<S> <C> <C> <C> <C>
Samuel L. Caster ................................ 5,713,549 5,713,549 23.7%
c/o Mannatech, Incorporated
600 S. Royal Lane
Suite 200
Coppell, TX 75019
William C. Fioretti(4) .......................... 5,474,407 5,474,407 22.7
c/o Agritech Labs, Inc. ....................
6333 N. St. Highway 161
Suite 350
Irving, TX 75063
Charles E. Fioretti ............................. 5,411,549 5,411,549 22.5
c/o Mannatech, Incorporated
600 S. Royal Lane
Suite 200
Coppell, TX 75019
Chris T. Sullivan(5) ............................ 342,537 100,000 442,537 1.8
Patrick D. Cobb(6) .............................. 300,900 100,000 400,900 1.7
Anthony E. Canale ............................... -- 250,000 250,000 1.0
Deanne Varner ................................... -- 228,000 228,000 *
All executive officers and directors as a ....... 17,732,444 1,182,000 18,914,444 74.9
group (14 persons)
</TABLE>
- ---------------
* Less than one percent.
(1) The information contained in this table with respect to beneficial
ownership reflects "beneficial ownership" as defined in Rule 13d-3
under the Exchange Act. All information with respect to the beneficial
ownership of any shareholder has been furnished by such shareholder
and, except as otherwise indicated or pursuant to community property
laws, each shareholder has sole voting and investment power with
respect to shares listed as beneficially owned by such shareholder.
(2) The directors and executive officers have the right to acquire shares
of the Common Stock shown in this column within 60 days through the
exercise of stock options.
38
<PAGE> 42
(3) Shares of the Common Stock which are not outstanding but the
beneficial ownership of which can be acquired by a person upon
exercise of an option within 60 days of March 24, 1999 are deemed
outstanding for the purpose of computing the percentage of outstanding
shares beneficially owned by such person and by the group of executive
officers and directors. However, such shares are not deemed to be
outstanding for the purpose of computing the percentage of outstanding
shares beneficially owned by any other person.
(4) Includes 1,450,102 shares of the Common Stock held by the Fioretti
Family Partnership, Ltd. of which William C. Fioretti is the general
partner and he, his wife and trusts for the benefit of their children
are the limited partners.
(5) All of these shares of the Common Stock and the option are held by
Multi-Venture Partners, Limited, an investment partnership formed by
Mr. Sullivan and two other partners ("Multi-Venture"). The management
of Multi-Venture is controlled by its sole general partner, SBG
Investments, L.L.C. ("SBG"), which owns a .6% general partnership
interest in Multi-Venture. Mr. Sullivan owns a 27.2% interest in SBG.
Mr. Sullivan shares voting and dispositive power with respect to the
Common Stock owned by Multi-Venture.
(6) Includes 60,000 shares of the Common Stock held by Joni J. Cobb, Mr.
Cobb's spouse, and 10,000 shares held by trusts established for the
benefit of Mr. Cobb's children and stepchildren.
The Company is not aware of any arrangements, including any pledge of
the Company's securities, the operation of which may at a subsequent date
result in a change in control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PARTNERSHIP TRANSACTIONS
Prior to June 1, 1997, certain shareholders of the Company (the
"Partners") directly owned all of the limited partnership interests in three
limited partnerships: Beta M. Partners, Ltd. ("Beta"), Eleven Point Partners,
Ltd. ("Eleven Point") and Power Three Partners, Ltd. ("Power Three"). All of
the limited partnership interests in Beta were owned by Charles E. Fioretti,
Chairman of the Board and Chief Executive Officer of the Company, Samuel L.
Caster, President and director of the Company, and William C. Fioretti, who at
the time was a director of the Company. Messrs. Charles E. Fioretti, Samuel L.
Caster and William C. Fioretti also owned all of the limited partnership
interests in Power Three. The limited partnership interests in Eleven Point
were owned equally by four other shareholders of the Company, including Patrick
D. Cobb, Chief Financial Officer and Secretary, and currently a director, of
the Company. The limited partnership interests in another limited partnership,
Dynamic Eight Partners, Ltd. ("Dynamic" and, collectively with Power Three,
Beta and Eleven Point, the "Partnerships") were all owned by Power Three and
Eleven Point. The corporate general partners of each of the Partnerships were
also owned and controlled by Messrs. Charles E. Fioretti, Samuel L. Caster and
William C. Fioretti.
The Partnerships were formed in 1994 to achieve certain tax
efficiencies and to protect certain of the Company's proprietary rights. In
December 1994, the Company transferred certain of its rights and interests in
intellectual property and the Company's right to use the trademark
"Manapol(TM)," to Beta. The Company then entered into a 17-year agreement to
pay Beta a royalty based on the Company's sales volume for the use of the
intellectual property and trademark. During 1995, 1996 and 1997, the Company,
under this royalty agreement, incurred expenses of approximately $979,000,
$2,554,000 and $1,780,000, respectively. Also in December 1994, the Company
transferred certain marketing rights to Dynamic. The Company paid Dynamic a
commission, based on a specified sales volume, in exchange for marketing and
consulting services. During 1995, 1996 and 1997, the Company, under its
marketing agreement with Dynamic, expensed approximately $1,395,000, $3,295,000
and $2,275,000, respectively, for consulting fees.
On June 1, 1997, the Company entered into a merger agreement with the
corporate general partners of the Partnerships, Eight Point Services, Inc.,
Triple Gold Business, Inc., Five Small Fry, Inc. and Beta Nutrient Technology,
Inc. (collectively, the "General Partners"). Pursuant to the merger agreement,
the General Partners were merged with and into the Company, and the issued and
outstanding shares of common stock of each such entity were converted into the
right to receive a certain number of shares of the Common Stock. On the same
date, the Company entered into an exchange agreement among the Company and the
Partners, pursuant to which the Company acquired all of the Partners' limited
partnership interests in the Partnerships in exchange for the Common Stock. As
a result of these transactions, an aggregate of 10,000,000 shares of the Common
Stock were issued to the Partners, including 3,094,946,
39
<PAGE> 43
3,094,946, 2,867,284 and 235,706 shares issued to Messrs. William C. Fioretti,
Samuel L. Caster, Charles E. Fioretti and Patrick D. Cobb, respectively.
INCENTIVE COMPENSATION AGREEMENTS
In 1994, the Company entered into incentive compensation agreements
with Charles E. Fioretti, the Chairman of the Board and Chief Executive Officer
of the Company, which was provided in lieu of ownership interests in the
Partnerships, Ray Robbins, a shareholder of the Company, which was provided in
part in lieu of ownership interests in the Partnerships, and certain other
employees of the Company. These incentive compensation agreements required the
Company to compensate such shareholders and employees based on the Company
achieving specified monthly sales volumes and certain levels of monthly growth
in the number of new Associates. Pursuant to these agreements, during 1995,
1996 and 1997, the Company paid Mr. Fioretti approximately $21,196, $96,522 and
$93,753, respectively, and, during 1995, 1996 and 1997, the Company paid Mr.
Robbins approximately $144,985, $369,861 and $249,490, respectively. In May and
June 1997, the Company terminated Mr. Fioretti's incentive compensation
agreement in exchange for 227,662 shares of the Common Stock and terminated one
of its incentive compensation agreements with Mr. Robbins in exchange for
607,333 shares of the Common Stock. The Company also issued an aggregate of
1,192,576 shares of the Common Stock to the other employees in exchange for the
termination of their incentive compensation agreements. In March 1998, the
Company terminated another incentive compensation agreement and issued 74,167
shares of the Common Stock to an employee in exchange for the termination of
such agreement. For the remaining incentive compensation agreement with Mr.
Robbins, the Company paid commissions to Mr. Robbins based on a specified
monthly sales volume and admittance of Associates for 1996, 1997 and 1998 of
approximately $141,105, $226,354 and $131,187, respectively.
In 1998, the Company paid Mr. William C. Fioretti, a cousin of Mr.
Charles E. Fioretti, the Company's Chief Executive Officer, approximately
$121,000 in commissions for specified monthly sales volume, of which $30,000
remained unpaid at December 31, 1998. In January 1999, the Company paid the
remainder owed to Mr. Fioretti. In 1998, the Company also paid Mr. William C.
Fioretti $250,000 for various consulting activities related to new product
development.
LOANS TO OFFICERS
Pursuant to an oral agreement to advance certain officers monies for
the payment of taxes due in connection with the cancellation of their incentive
compensation agreements, on December 31, 1997, the Company made loans of
$162,052 to Dr. Bill H. McAnalley, Vice President of Research and Product
Development of the Company, and of $121,782 to Peter E. Hammer, Vice President
of New Business and International Development of the Company. The loans bore no
interest and were due upon the earlier to occur of December 31, 1998 or the
date of a public offering of the Common Stock. The loans were secured by shares
of the Common Stock owned by the officers and stock powers were executed
allowing the Company to transfer such shares in the event the loans were not
repaid. The loans were repaid in February 1999, after the officers received the
proceeds from the sale of their shares of Common Stock in the IPO.
TRANSACTIONS WITH MULTI-VENTURE
In July 1997, in connection with Mr. Chris T. Sullivan's appointment to
the Board of Directors of the Company, Messrs. Charles E. Fioretti, Samuel L.
Caster and William C. Fioretti sold an aggregate of 399,000 shares of the Common
Stock to Multi-Venture for an aggregate consideration of $798,000 ($2.00 per
share). In addition, the Company issued Multi-Venture an option to purchase
100,000 shares of the Common Stock at an exercise price of $2.00 per share.
LOANS TO AGRITECH LABS, INC.
During 1996 and 1997, the Company made advances to Agritech Labs, Inc.
and Agritech Technology, Ltd. (together "Agritech") in the aggregate amount of
approximately $918,000. Over 90% of the capital stock of Agritech is owned by
William C. Fioretti, Charles E. Fioretti,
40
<PAGE> 44
Samuel L. Caster and Patrick D. Cobb. On August 31, 1997, due to concerns about
the ability of Agritech to repay the loans, each of Messrs. William C.
Fioretti, Charles E. Fioretti, Samuel L. Caster and Patrick D. Cobb and another
shareholder of both Agritech and the Company assumed the obligations of
Agritech owed to the Company and issued individual promissory notes to the
Company representing the aggregate amount of approximately $918,000. Each of
the promissory notes bore interest at six percent per annum and was payable on
the earlier of the sale of Agritech or December 31, 1998. The principal amount
outstanding under the notes issued by each of Messrs. William C. Fioretti,
Charles E. Fioretti and Samuel L. Caster at December 31, 1998 was approximately
$275,400 and the principal amount outstanding under the note made by Mr.
Patrick D. Cobb at December 31, 1998 was approximately $45,900. On December 31,
1998, the Company renewed the notes receivable with the shareholders to extend
the due date to December 31, 1999. On February 17, 1999, the Company signed new
notes receivable agreements with each of the shareholders. The new notes
receivable bear interest at six percent, with the first payment due immediately
and the remainder to be paid in annual installments through February 17, 2004.
The principal amount outstanding under the new notes made by Messrs. William C.
Fioretti, Charles E. Fioretti and Samuel L. Caster is approximately $200,000
and the principal amount outstanding under the new note made by Mr. Patrick D.
Cobb is approximately $33,000.
41
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following financial statements and the Report of Independent
Public Accountants are filed as a part of this report on the pages indicated:
<TABLE>
<S> <C>
Report of Independent Accountants................................................................F-2
Independent Auditor's Report.....................................................................F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998.....................................F-4
Consolidated Statements of Income for the Years ended December 31, 1996, 1997
and 1998.......................................................................................F-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years
ended December 31, 1996, 1997 and 1998.........................................................F-6
Consolidated Statements of Cash Flows for the Years ended December 31, 1996,
1997 and 1998..................................................................................F-7
Notes to Consolidated Financial Statements.......................................................F-8
</TABLE>
(a) 2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules have been omitted because they are not
applicable or the information required therein is included elsewhere in the
Consolidated Financial Statements or Notes thereto.
(a) 3. EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
3.1 Amended and Restated Articles of Incorporation of the
Company, incorporated herein by reference to Exhibit
3.1 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
3.2 Amended and Restated Bylaws of the Company,
incorporated herein by reference to Exhibit 3.2 to
the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
3.3 Amendment to the Bylaws of the Company, incorporated
herein by reference to Exhibit 3.3 to the Company's
Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
4.1 Specimen Certificate representing the common stock,
par value $0.0001 per share, of the Company,
incorporated herein by reference to Exhibit 4.1 to
the Company'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
the Company'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 the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.3 Agreement and Plan of Merger dated as of June 1, 1997
among the Company and Eight Point Services, Inc.,
Triple Gold Business, Inc., Five Small Fry, Inc., and
Beta Nutrient Technology, Inc., incorporated herein
by reference to Exhibit 10.3 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.4 Exchange Agreement dated June 1, 1997 among the
Company and the limited partners of Power Three
Partners, Ltd., Eleven Point Partners, Ltd. and Beta
M. Partners, Ltd., incorporated herein by reference
to Exhibit 10.4 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
42
<PAGE> 46
10.5 Plan and Agreement of Reorganization dated June 1,
1997 by and among the Company, Dynamic Eight
Partners, Ltd., Power Three Partners, Ltd., Eleven
Point Partners, Ltd. and Beta M. Partners, Ltd. and
the general and limited partners of the partnerships,
incorporated herein by reference to Exhibit 10.5 to
the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.6 Exchange Agreement by and among Gary Watson, Patrick
Cobb, Samuel Caster, Charles Fioretti and William
Fioretti and the Company dated August 31, 1997,
incorporated herein by reference to Exhibit 10.6 to
the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.7 Option Agreement dated July 1, 1997 with
Multi-Venture Partners, Ltd., incorporated herein by
reference to Exhibit 10.7 to the Company's Form S-1
(File No. 333-63133) filed with the Commission on
September 10, 1998.
10.8 Form of Indemnification Agreement with a schedule of
director signatures, incorporated herein by reference
to Exhibit 10.8 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.9 Letter of Understanding Regarding Development of
Proprietary Information for the Company effective as
of August 1, 1997, as amended, by and between Bill H.
McAnalley, Ph.D. and the Company, incorporated herein
by reference to Exhibit 10.12 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.10 Commercial Lease Agreement dated November 7, 1996
between MEPC Quorum Properties II Inc. and the
Company, 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 the Company's Form S-1
(File No. 333-63133) filed with the Commission on
September 10, 1998.
10.11 Commercial Lease Agreement dated May 29, 1997 between
MEPC Quorum Properties II Inc. and the Company, as
amended by the First Amendment thereto dated November
6, 1997, incorporated herein by reference to Exhibit
10.14 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.12 Assignment of Patent Rights dated October 30, 1997 by
and among Bill H. McAnalley, Ph.D., H. Reginald
McDaniel, D. Eric Moore, Eileen P. Vennum and William
C. Fioretti and the Company, incorporated herein by
reference to Exhibit 10.15 to the Company's Form S-1
(File No. 333-63133) filed with the Commission on
September 10, 1998.
10.13 Supply Agreement effective as of March 31, 1995 by
and between the Company and Caraloe, Inc.,
incorporated herein by reference to Exhibit 10.16 to
the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.14 Supply Agreement effective as of August 14, 1997 by
and between the Company and Caraloe, Inc.,
incorporated herein by reference to Exhibit 10.17 to
the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.15 Trademark License Agreement effective as of March 31,
1995 by and between the Company and Caraloe, Inc.,
incorporated herein by reference to Exhibit 10.18 to
the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.16 Trademark License Agreement effective as of August
14, 1997 by and between the Company and Caraloe,
Inc., incorporated herein by reference to Exhibit
10.19 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.17 Letter of Agreement from the Company to Michael L.
Finney of LAREX, Incorporated dated December 23,
1997, incorporated herein by reference to Exhibit
10.20 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.18 Product Development and Distribution Agreement
effective as of September 15, 1997 between New Era
Nutrition Inc. and the Company, incorporated herein
by reference to Exhibit 10.21 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.19 Severance and Consulting Agreement and Complete
Release dated August 1, 1997 between Ronald E. Kozak
and the Company, incorporated herein by reference to
Exhibit 10.22 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.20 Summary of Management Bonus Plan, incorporated herein
by reference to Exhibit 10.23 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.21 Individual Guaranty of Samuel L. Caster dated January
5, 1998, incorporated herein by reference to Exhibit
10.27 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
43
<PAGE> 47
10.22 Individual Guaranty of Charles E. Fioretti dated
January 5, 1998, incorporated herein by reference to
Exhibit 10.28 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.23 Lease dated September 1, 1998 between Mannatech
Australia Pty Limited and Legal & General Properties
No. 1 Pty Limited, incorporated herein by reference
to Exhibit 10.29 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.24 Form of Employment Agreement to be entered into
between the Company and each of Charles E. Fioretti,
Patrick D. Cobb, Anthony E. Canale, Bill H. McAnalley
and Deanne Varner, incorporated herein by reference
to Exhibit 10.30 to the Company's Amendment No. 1 to
Form S-1 (File No. 333-63133) filed with the
Commission on October 28, 1998.
10.25 Renewal and Extension Promissory Note dated February
17, 1999 in the amount of $33,316.02 made by Patrick
D. Cobb.*
10.26 Renewal and Extension Promissory Note dated February
17, 1999 in the amount of $199,896.10 made by Samuel
L. Caster.*
10.27 Renewal and Extension Promissory Note dated February
17, 1999 in the amount of $199,896.09 made by Charles
E. Fioretti.*
16 Letter of Belew Averitt LLP, former accountants to
the Company, incorporated herein by reference to
Exhibit 16 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
21 List of Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers LLP.*
23.2 Consent of Belew Averitt LLP.*
27 Financial Data Schedule.*
- --------------
* Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
44
<PAGE> 48
MANNATECH, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Annual Financial Statements:
Report of Independent Accountants......................................................................... F-2
Independent Auditor's Report.............................................................................. F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998.............................................. F-4
Consolidated Statements of Income for the Years ended December 31, 1996, 1997 and 1998.................... F-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years ended
December 31, 1996, 1997 and 1998........................................................................ F-6
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1997 and 1998................ F-7
Notes to Consolidated Financial Statements................................................................ F-8
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Mannatech, Incorporated
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in shareholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Mannatech, Incorporated and its subsidiary at December
31, 1997 and 1998, and the results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. 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 generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 19, 1999, except as to Note 6, which is as of
March 16, 1999
F-2
<PAGE> 50
INDEPENDENT AUDITOR'S REPORT
Shareholders and Board of Directors
of Mannatech, Incorporated
We have audited the accompanying consolidated statements of income, of
changes in shareholders' equity (deficit) and of cash flows for the year ended
December 31, 1996 of Mannatech, Incorporated. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe our audit provides a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of operations and
cash flows of Mannatech, Incorporated for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
BELEW AVERITT LLP
Dallas, Texas
August 21, 1997
F-3
<PAGE> 51
MANNATECH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents ....................................... $ 61,148 $ 763,375
Restricted cash ................................................. 199,619 --
Accounts receivable, less allowance for doubtful
accounts of $194,000 and $58,000, respectively ............. 549,904 62,834
Receivable from related parties ................................. 148,888 125,000
Current portion of notes receivable-shareholders ................ 934,929 307,487
Inventories ..................................................... 5,323,056 6,875,044
Prepaid expenses and other current assets ....................... 542,978 446,564
Deferred tax assets ............................................. 399,368 398,000
------------ ------------
Total current assets ....................................... 8,159,890 8,978,304
Property and equipment, net ..................................... 10,583,910 14,103,372
Notes receivable-shareholders, excluding current portion ........ -- 701,042
Other assets .................................................... 470,952 947,489
Deferred offering costs ......................................... 343,672 2,143,743
------------ ------------
Total assets ............................................... $ 19,558,424 $ 26,873,950
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of capital leases and notes payable ............. $ 249,655 $ 854,423
Accounts payable ................................................ 4,287,159 5,480,033
Accrued expenses ................................................ 11,540,577 15,063,237
Dividends payable ............................................... 1,321,654 --
------------ ------------
Total current liabilities .................................. 17,399,045 21,397,693
Capital leases and notes payable, excluding current portion ..... 110,482 1,055,609
Deferred tax liabilities ........................................ 505,000 1,438,000
------------ ------------
Total liabilities .......................................... 18,014,527 23,891,302
------------ ------------
Commitments and contingencies (note 11) ......................... -- --
Redeemable warrants ............................................. 300,000 300,000
------------ ------------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding ............... -- --
Common stock, $.0001 par value, 99,000,000 shares
authorized, 22,101,738 shares issued and outstanding ....... 2,210 2,210
Additional paid-in capital ...................................... 2,632,238 2,632,238
Notes receivable from shareholders .............................. (636,418) (636,418)
Retained earnings (deficit) ..................................... (754,133) 684,618
------------ ------------
Total shareholders' equity ................................. 1,243,897 2,682,648
------------ ------------
Total liabilities, redeemable warrants and shareholders'
equity ................................................... $ 19,558,424 $ 26,873,950
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 52
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net sales .................................................. $ 86,311,972 $ 150,569,843 $ 164,933,261
------------- ------------- -------------
Cost of sales .............................................. 13,406,303 24,735,616 27,139,647
Commissions ................................................ 35,155,231 61,677,103 66,650,001
------------- ------------- -------------
48,561,534 86,412,719 93,789,648
------------- ------------- -------------
Gross profit .......................................... 37,750,438 64,157,124 71,143,613
------------- ------------- -------------
Operating expenses:
Selling and administrative expenses ................... 17,764,415 27,845,502 31,880,442
Other operating costs ................................. 11,746,003 19,402,317 22,359,134
Cancellation of incentive compensation agreements ..... -- 2,191,610 --
Write-off of deferred offering costs .................. -- -- 846,782
------------- ------------- -------------
Total operating expenses .......................... 29,510,418 49,439,429 55,086,358
------------- ------------- -------------
Income from operations ..................................... 8,240,020 14,717,695 16,057,255
Other (income) expense, net ................................ (116,009) (43,170) 259,912
------------- ------------- -------------
Income before income taxes ................................. 8,356,029 14,760,865 15,797,343
Income tax expense ......................................... 1,193,640 4,138,822 5,743,364
------------- ------------- -------------
Net income ................................................. $ 7,162,389 $ 10,622,043 $ 10,053,979
============= ============= =============
Earnings per common share:
Basic ................................................. $ .35 $ .50 $ .45
============= ============= =============
Diluted ............................................... $ .35 $ .47 $ .42
============= ============= =============
Unaudited pro forma data (note 1)
Income before income taxes, as reported ............... 8,356,029 14,760,865
Pro forma provision for income taxes .................. 3,133,511 $ 5,682,933
------------- -------------
Pro forma net income ....................................... $ 5,222,518 $ 9,077,932
============= =============
Pro forma earnings per common share:
Basic ................................................. $ .25 $ .42
============= =============
Diluted ............................................... $ .25 $ .41
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 53
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional Notes Retained Total
---------------------- Paid-in receivable from earnings shareholders'
Shares Par Value Capital shareholders (deficit) equity (deficit)
----------- --------- ------------ --------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ............... 20,626,971 $ 2,063 $ -- $ -- $ (393,500) $ (391,437)
Dividends declared ($10.00 per
share) (1) .......................... -- -- -- -- (100,000) (100,000)
Net income ............................ -- -- -- -- 7,162,389 7,162,389
Distributions to partners ............. -- -- -- -- (5,840,125) (5,840,125)
------------ -------- ------------ ---------- ------------ ------------
Balance at December 31, 1996 ............... 20,626,971 2,063 -- -- 828,764 830,827
Issuance of common stock to cancel
incentive compensation agreements ... 1,474,767 147 2,191,463 -- --
2,191,610
Vesting of nonemployee stock
options ............................. -- -- 155,503 -- -- 155,503
Tax benefit of shares issued for
merger of partnerships .............. -- -- 285,272 -- -- 285,272
Issuance of notes receivable to
shareholders ........................ -- -- -- (636,418) -- (636,418)
Dividends declared ($.37 per
share) .............................. -- -- -- -- (8,150,210) (8,150,201)
Net income ............................ -- -- -- -- 10,622,043 10,622,043
Distributions to partners ............. -- -- -- -- (4,054,739) (4,054,739)
------------ -------- ------------ ---------- ------------ ------------
Balance at December 31, 1997 ............... 22,101,738 2,210 2,632,238 (636,418) (754,133) 1,243,897
Dividends declared ($.39 per
share) .............................. -- -- -- -- (8,615,228) (8,615,228)
Net income ............................ -- -- -- -- 10,053,979 10,053,979
------------ -------- ------------ ---------- ------------ ------------
Balance at December 31, 1998 ............... 22,101,738 $ 2,210 $ 2,632,238 $ (636,418) $ 684,618 $ 2,682,648
============ ======== ============ ========== ============ ============
</TABLE>
(1) Dividends are based on the shares outstanding prior to the
reorganization and the 1000-for-1 stock split (10,000 shares) as
discussed in Notes 1 and 12, respectively.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 54
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 7,162,389 $ 10,622,043 $ 10,053,979
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................... 414,299 1,189,494 2,226,931
Loss on disposal of assets .................................. 3,876 411,202 351,642
Noncash charge for cancellation of incentive compensation
agreements ................................................ -- 2,191,610 --
Vesting of nonemployee stock options and warrants ........... -- 455,503 --
Write-off of deferred offering costs ........................ -- -- 846,782
Write-off of investment ..................................... 115,000 -- --
Deferred income tax expense (benefit) ....................... (136,829) 350,283 934,368
Changes in operating assets and liabilities:
Accounts and notes receivable ............................. (449,899) (1,740,731) 437,358
Refundable income taxes ................................... (455,089) 741,000 --
Inventories ............................................... (1,801,879) (375,719) (1,551,988)
Prepaid expenses and other current assets ................. (50,330) (376,507) 96,414
Other assets .............................................. 70,798 (4,749) 47,798
Accounts payable .......................................... 191,504 1,747,043 1,192,874
Accrued expenses .......................................... 4,531,725 4,555,685 3,522,660
------------ ------------ ------------
Net cash provided by operating activities ............... 9,595,565 19,766,157 18,158,818
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment and construction
in progress ................................................... (2,660,108) (8,737,232) (4,625,849)
Security deposits ............................................... (460,350) -- (88,865)
Deposits of restricted cash ..................................... -- (199,619) 199,619
Other assets .................................................... (40,000) -- --
------------ ------------ ------------
Net cash used in investing activities ................... (3,160,458) (8,936,851) (4,515,095)
------------ ------------ ------------
Cash flows from financing activities:
Distributions to partners ....................................... (5,268,033) (4,054,739) --
Payment of dividends ............................................ (20,000) (6,928,547) (9,936,882)
Repayment of capital lease obligations .......................... -- (37,265) (301,031)
Advances from shareholders and employees ........................ 26,435 61,055 --
Repayments to shareholders and employees ........................ (688,293) (598,527) --
Repayment to an affiliated company .............................. (206,660) -- --
Payment of notes payable ........................................ (71,200) (26,400) (56,730)
Deferred offering costs ......................................... -- (343,672) (2,646,853)
------------ ------------ ------------
Net cash used in financing activities ................... (6,227,751) (11,928,095) (12,941,496)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ............... 207,356 (1,098,789) 702,227
Cash and cash equivalents:
Beginning of year ............................................... 952,581 1,159,937 61,148
------------ ------------ ------------
End of year ..................................................... $ 1,159,937 $ 61,148 $ 763,375
============ ============ ============
Supplemental disclosure of cash flow information:
Income taxes paid ............................................... $ 1,716,100 $ 68,800 $ 3,642,000
============ ============ ============
Interest paid ................................................... $ -- $ 10,885 $ 109,000
============ ============ ============
A summary of non-cash investing and financing activities follows:
Accrued dividends and distributions ............................. $ 672,091 $ 1,321,654 $ --
============ ============ ============
Tax benefit of shares granted for merger of partnerships ........ $ -- $ 285,272 $ --
============ ============ ============
Assets acquired through capital lease obligations ............... $ -- $ 397,402 $ 1,471,986
============ ============ ============
Assets acquired through note payable ............................ $ -- $ -- $ 435,670
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 55
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mannatech, Incorporated (the "Company") was incorporated in the State
of Texas on November 4, 1993, as Emprise International, Inc. Effective October
25, 1995, the Company changed its name to Mannatech, Incorporated. The Company,
located in Coppell, Texas, develops and sells proprietary nutritional
supplements and topical products through a network marketing system. The
Company currently sells its products in the United States, Canada and
Australia. Independent associates ("Associates") purchase products, at
wholesale, for the primary purpose of selling to retail consumers or for
personal consumption. In addition, Associates earn commissions on their sales
volume.
On April 22, 1998, the Company formed a wholly owned subsidiary,
Mannatech Australia Pty Limited for the purpose of conducting business in
Australia. The Australian subsidiary, located in St. Leonards, began operations
on October 1, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and it's wholly owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation.
REORGANIZATION
In December 1994, to achieve certain tax efficiencies and to protect
certain of the Company's proprietary rights, the Company transferred certain of
its rights and interests in intellectual property, the right to use a
supplier's trademark and it's marketing rights to two affiliated partnerships
("Royalty Partnership" and "Marketing Partnership," respectively, or
collectively "the Partnerships"). The Marketing Partnership was owned by two
affiliated partnerships that also shared common ownership with the Company. The
respective ownership interests in the Partnerships were structured with the
intention of retaining the same economic interests among the partners as that
of the shareholders of the Company. In the case of the intellectual property
and trademark transferred to the Royalty Partnership, the Company entered into
a 17-year agreement with the Royalty Partnership to pay a royalty based on
sales volume. In the case of the Marketing Partnership, the Company paid a
commission based on a specified percentage of sales volume. At the time of
transfer, the rights and interest in intellectual property, supplier's
trademark and marketing rights had a minimal basis. During 1994, the Company
also entered into separate incentive compensation agreements with two of its
shareholders pursuant to which the Company agreed to pay commissions based on
specified monthly sales volumes and increases in number of new enrolled
Associates. These agreements were designed to compensate for the differences in
ownership in the Partnerships for one of the principal shareholders and to
provide compensation to a shareholder in lieu of receiving a Partnership
interest.
On June 1, 1997, in order to simplify the Company's ownership
structure and consolidate all operating activities, the Company entered into
agreements to effect a reorganization through merging with the corporate
general partners of the Partnerships (with the Company as the surviving
corporation) and exchanging 10,000,000 shares of the Company's common stock,
par value $0.0001 per share (the "Common Stock"), for the entire ownership
interests of the corporate general partners and the Partnerships and issued
2,027,571 shares of the Common Stock in consideration for the cancellation of
incentive compensation agreements with the two shareholder-employees and four
other employees of the Company. The net effect of the foregoing transactions
was to increase the Company's common shares outstanding by 12,027,571 while
retaining substantially the same relative original ownership of the Company.
The only ownership percentage change among the original shareholders related to
208,024 shares granted to one shareholder in recognition of significant
contributions to the Company, which resulted in minor dilution to the other
original seven shareholders at the time of the exchange. The fair value of
these additional shares was expensed, and included in the cancellation of
incentive compensation agreements in the income statement. No monetary
consideration changed hands and the changes were designed to reestablish the
original economic characteristics of the Company. Aside from the new shares
issued to the four employees to cancel their incentive compensation agreements,
relative ownership interests, as evidenced by retention of economic risks and
benefits, remained virtually the same. After the exchange, the Company
terminated and liquidated the Partnerships at no gain or loss. The accompanying
consolidated financial statements include the accounts of the Partnerships and
the Company as if the merger was consummated on December 31, 1994. The merger
was accounted using the historical basis for each entity, effectively combining
the entities as a pooling of interests.
USE OF ESTIMATES
In preparing consolidated financial statements in conformity with
generally accepted accounting principles, management is required to make
certain estimates and assumptions that may affect the reported amounts of
assets, liabilities, revenues and expenses during the reporting periods. Actual
results may differ from such estimates.
F-8
<PAGE> 56
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
RESTRICTED CASH
At December 31, 1997, $199,619 of cash was held by the Company's
former credit card processor under the terms of the credit card processing
agreement. The restricted funds were released in early 1998.
ACCOUNTS RECEIVABLE ALLOWANCE ACCOUNT
Accounts receivable consists of payments due from vendors for the
purchase of raw material inventories offset by an allowance account for any
amounts that are deemed uncollectible. The balance of the allowance for
doubtful accounts at December 31, 1997 and 1998 was approximately $194,000 and
$58,000, respectively.
INVENTORIES
Inventories consist of raw materials, work-in-progress and finished
goods and are stated at the lower of cost (using the first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation which is computed using the straight-line method over the
estimated useful life of each asset. Expenditures for maintenance and repairs
are charged to expense as incurred. The cost of property and equipment sold or
otherwise retired and the related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in other (income) expense.
Property and equipment are reviewed for impairment whenever an event
or change in circumstances indicates the carrying amount of an asset or group
of assets may not be recoverable. The impairment review includes a comparison
of future cash flows expected to be generated by the asset or group of assets
with their associated carrying value. If the carrying value of the asset or
group of assets exceeds expected cash flows (undiscounted and without interest
charges), an impairment loss is recognized to the extent the carrying amount of
the asset exceeds its fair value.
OTHER ASSETS
Other assets consist primarily of deposits and include a restricted
term deposit of approximately $88,000 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.
DEFERRED OFFERING COSTS
Deferred offering costs are costs incurred in connection with the
public offering of the Common Stock (the "Offering"). Subsequent to year end,
the Offering was consummated and the deferred offering costs were deducted from
the proceeds received.
(Note 15).
ACCOUNTS PAYABLE
The Company records book overdrafts in its cash accounts as accounts
payable. Accounts payable includes book overdrafts of $1,028,676 and $1,309,908
at December 31, 1997 and 1998, respectively.
INCOME TAXES
The Company accounts for income taxes using the asset and liability
approach to financial accounting and reporting for income taxes. In the event
that differences between the financial reporting bases and the tax bases of the
Company's assets and liabilities result in net deferred tax assets, the Company
evaluates the probability of realizing the future benefits indicated by such
assets. A valuation allowance is provided for a portion or all of the net
deferred tax assets when it is more likely than not that such portion, or all
of such deferred tax assets, will not be realized.
Prior to the merger of the Partnerships, the Company and the
Partnerships filed separate tax returns. Prior to June 1, 1997, no provision
for income taxes was necessary in the consolidated financial statements for the
income attributable to the Partnerships
F-9
<PAGE> 57
because, as partnerships, they were not subject to federal income tax because
the tax effect of their activities flowed through directly to the individual
partners. Beginning June 1, 1997, all income earned by the Company became
subject to income tax.
PRO FORMA INFORMATION (UNAUDITED)
Pro forma income tax information has been provided, using the
statutory tax rate of the Company, as if all of the Company's and the
Partnerships' income had been subject to income taxes.
REVENUE RECOGNITION
Revenue is recognized for product sales upon shipment of the products
to the Associates. Revenues are received for starter and renewal packs provided
to Associates, which include nutritional products and sales aids.
The Company defers revenue received from the sale of the starter and
renewal packs, which is in excess of the wholesale value of the individual
items included in such packs. Such deferrals are amortized over a twelve-month
period. Revenues from the packs are allocated between products and event
admission based on the proportionate fair value of these items. Allocated event
revenue from the sales of these packs was approximately $405,000, $906,000 and
$471,000 in 1996, 1997 and 1998, respectively. The allocated event revenues are
amortized over a twelve-month period. Total net deferred revenue was $808,749
and $662,176 at December 31, 1997 and 1998, respectively. Substantially all
product sales are made to Associates at a published wholesale price.
Net sales also reflect product returns and any related refunds.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company uses Statement of Financial Accounting Standards No. 123
("FAS 123"), "Accounting for Stock-Based Compensation," for stock-based
compensation issued to nonemployees. FAS 123 requires that stock-based
compensation be measured by the fair value at the date of grant. The Company
measures the cost of stock-based compensation issued to employees under
Accounting Principles Board Opinion 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and its related interpretations. The Company however,
has provided pro forma disclosures, as required by FAS 123, in note 10 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 $1,475,000, $2,241,000
and $3,821,000 for 1996, 1997 and 1998, respectively. Literature and
promotional items are sold to Associates to support their sales effort. Such
items are included in inventories and charged to cost of sales when sold.
RESEARCH AND DEVELOPMENT COSTS
The Company expenses research and development costs when incurred.
Research and development costs related to specific clinical studies, quality
assurance programs and new product development were approximately $283,000,
$381,000 and $391,000 in 1996, 1997 and 1998,respectively. Research and
development costs related to conceptualizing new products, enhancing existing
products, FDA compliance studies, general supplies, internal salaries and
consulting fees were approximately $1,204,000, $3,008,000 and $3,365,000 in
1996, 1997 and 1998, respectively. All of the research and development costs are
included in other operating expenses in the accompanying consolidated financial
statements.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes qualifying costs relating to the development
of internal use software. Capitalization of qualifying costs begins after the
conceptual formulation stage has been completed, and such costs are amortized
over the estimated useful life of the software, which is estimated at five
years. Capitalized costs totaled $58,000, $1,713,000 and $929,000 in 1996, 1997
and 1998,respectively.
EARNINGS PER SHARE
The Company calculates earnings per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 requires dual presentation of basic and diluted earnings per share ("EPS")
on the face of the consolidated statement of income for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Basic EPS calculations are based on the
weighted-average number of common shares outstanding during the period, while
diluted EPS calculations are based on the weighted-average common shares and
dilutive common share equivalents outstanding during each period.
F-10
<PAGE> 58
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents
and receivables from related parties. The Company utilizes financial
institutions, which the Company considers to be of high credit quality. The
Company believes its receivables from related parties at December 31, 1998 and
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 subsidiary's functional currency is the U.S. dollar.
Nonmonetary assets and liabilities are translated at historical rates, monetary
assets and liabilities are translated at exchange rates in effect at the end of
the year, and income statement accounts are translated at average exchange
rates for the year. During 1998, translation gains and losses of the foreign
subsidiary totaling $16,541 and are included in the consolidated statements of
income.
COMMISSIONS
Commissions to Associates are based on several factors, including
direct and indirect sales, downline growth and training of Associates.
Commissions are accrued when earned and generally paid at various times within
the following month.
SEGMENT INFORMATION
The Company conducts its business within one industry segment. No
Associate accounted for more than 10% of total sales for the years ended
December 31, 1996, 1997 and 1998. Sales to Canadian Associates began in April
1996 and were approximately $7.0 million, $22.7 million and $26.8 million for
1996, 1997 and 1998, respectively. Canadian sales, as a percentage of total
sales were 8.2%, 15.1% and 16.1% in 1996, 1997 and 1998, respectively. Sales to
Australian Associates began in October 1998 and were approximately 1.4% or $2.2
million of consolidated net sales in 1998. There are no long-lived assets in
Canada. Australia had recorded long-lived assets, totaling approximately $.5
million at December 31, 1998.
RECLASSIFICATION
Certain prior years' balances have been reclassified to conform to the
1998 consolidated financial statement presentation.
NOTE 2 INVENTORIES
Inventories at December 31, 1997 and 1998 consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Raw materials.............................................................. $ 1,827,823 $ 3,054,317
Work-in-progress........................................................... -- --
Finished goods............................................................. 3,495,233 3,820,727
------------- -------------
$ 5,323,056 $ 6,875,044
============= =============
</TABLE>
NOTE 3 PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 consist of the
following:
<TABLE>
<CAPTION>
Estimated
Useful Lives 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Office furniture and equipment.............................. 5 to 7 years $ 3,087,775 $ 6,833,690
Computer equipment.......................................... 3 to 5 years 2,724,579 4,776,409
Automobiles................................................. 5 years 298,722 394,806
Leasehold improvements...................................... 10 years 3,162,714 4,845,439
------------- -------------
9,273,790 16,850,344
Less accumulated depreciation and amortization.............. (1,389,233) (3,379,202)
------------- -------------
7,884,557 13,471,142
Construction in progress.................................... 2,699,353 632,230
------------- -------------
$ 10,583,910 $ 14,103,372
============= =============
</TABLE>
F-11
<PAGE> 59
Included in the December 31, 1997 and 1998 balances are capital leases
of $397,402 and $1,869,388, respectively, related to the warehouse equipment
and laboratory. Construction in progress primarily consists of the construction
of a new warehouse facility, a research and development laboratory and the
internal development of a new computer software package.
NOTE 4 ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Commissions payable........................................................ $ 3,801,324 $ 3,706,301
Income taxes payable....................................................... 2,692,248 3,865,000
Accrued royalties and compensation......................................... 1,251,215 2,086,290
Accrued inventory purchases................................................ 1,218,975 1,559,845
Sales and other taxes payable.............................................. 812,368 839,931
Deferred revenue........................................................... 808,749 662,176
Customer deposits.......................................................... 216,436 660,557
Other accrued expenses..................................................... 739,262 1,683,137
------------- -------------
$ 11,540,577 $ 15,063,237
============= =============
</TABLE>
NOTE 5 NOTES PAYABLE
In 1998, the Company entered into an unsecured note payable totaling
$435,670, with a finance company to finance its three-year product liability
insurance premiums. The note bears interest at 8.0% and is payable in monthly
installments of $16,412 through December 2000. The remaining balance at
December 31, 1998 was $378,940 of which $189,718 is reflected as a current
liability.
The Company had an unsecured noninterest bearing promissory note
payable to a former employee, payable in monthly installments of $6,600 through
May 1997. The note was repaid during 1997.
NOTE 6 CAPITAL LEASE OBLIGATIONS
In March and August 1998, the Company entered two lease agreements
totaling $631,000 and $841,000, respectively, with Banc One Leasing Corporation
to fund the purchase of furniture and certain capital equipment in connection
with the relocation to its new warehouse and laboratory facilities. The leases
are collateralized by the leased assets, bear interest at 9.3%, are payable in
thirty-six monthly installments and contain certain covenants which require the
Company to maintain stated levels of debt to tangible net worth and cash flow
coverage. At December 31, 1998, the Company was in violation of the tangible
net worth covenant; however, a satisfactory waiver of this violation was
received from the lender on March 16, 1999 waiving the violation through the
period ended February 28, 1999. As of this date, the Company was in compliance
with this covenant.
The Company also leases certain furniture, equipment and automobiles
under various capital leases agreements of approximately $280,000. These
agreements have terms that range from three to five years and contain either a
bargain purchase option or a buyout provision, which the Company intends to
exercise. Total interest expense, for the years ended December 31, 1997 and
1998 was approximately $11,000 and $109,000, respectively. A summary of future
minimum payments under these capital lease agreements are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
-------------
<S> <C>
1999............................................................................................. $ 701,980
2000............................................................................................. 654,965
2001............................................................................................. 366,078
2002............................................................................................. 28,189
------------
Future minimum lease payments.................................................................... 1,751,212
Less imputed interest (approximately 12%)........................................................ (220,120)
------------
1,531,092
Less current portion of capital lease obligations................................................ (664,705)
------------
Capital lease obligations, excluding current portion............................................. $ 866,387
============
</TABLE>
F-12
<PAGE> 60
NOTE 7 INCOME TAXES
The components of the Company's income tax provision for 1996, 1997
and 1998 were as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
Current provision:
<S> <C> <C> <C>
Federal ....................................................... $ 1,147,481 $ 3,324,855 $ 4,350,762
State ......................................................... 182,988 463,685 430,234
Foreign ....................................................... -- -- 28,000
----------- ----------- -----------
1,330,469 3,788,540 4,808,996
----------- ----------- -----------
Deferred provision:
Federal ....................................................... (124,397) 291,223 853,368
State ......................................................... (12,432) 59,059 81,000
Foreign ....................................................... -- -- --
----------- ----------- -----------
(136,829) 350,282 934,368
----------- ----------- -----------
$ 1,193,640 $ 4,138,822 $ 5,743,364
=========== =========== ===========
</TABLE>
A reconciliation of income tax based on the U.S. federal statutory
rate is summarized as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory income taxes ..................................... 34.0% 35.0% 35.0%
Partnership income ................................................. (23.8) (9.6) --
State income taxes, net of federal benefit ......................... 2.0 2.4 2.1
Difference between U.S. statutory rate and foreign rate ............ 0.0 0.0 (1.4)
Nondeductible expenses ............................................. 3.0 0.5 0.7
Other .............................................................. (0.9) (0.2) --
----------- ----------- -----------
14.3% 28.1% 36.4%
=========== =========== ===========
</TABLE>
Deferred taxes consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Current:
Deferred revenue .......................................... $ 311,368 $ 253,000
Inventory capitalization .................................. 86,000 123,000
Other ..................................................... 2,000 22,000
----------- -----------
Total current deferred tax assets .................... 399,368 398,000
----------- -----------
Noncurrent:
Compensation expense ...................................... 318,000 213,000
Capital loss carryforward ................................. 20,000 19,000
----------- -----------
Total noncurrent deferred tax assets ................. 338,000 232,000
----------- -----------
Total gross deferred tax assets .................. $ 737,368 $ 630,000
=========== ===========
Deferred tax liabilities:
Noncurrent:
Depreciation and amortization ............................. $ 843,000 $ 1,670,000
=========== ===========
</TABLE>
The net deferred tax assets (liabilities) are classified in the
consolidated financial statements as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Current deferred tax assets ........................................ $ 399,368 $ 398,000
Noncurrent deferred tax liabilities ................................ (505,000) (1,438,000)
----------- -----------
Net deferred tax assets (liabilities) .............................. $ (105,632) $(1,040,000)
=========== ===========
</TABLE>
It is the opinion of the Company's management that the deferred tax
assets will more likely than not be realized; therefore, a valuation allowance
is not required.
NOTE 8 TRANSACTIONS WITH RELATED PARTIES AND AFFILIATES
In April 1994, the Company entered into two incentive compensation
agreements with Ray Robbins, a shareholder of the Company. The agreements and
their subsequent amendments required the Company to pay commissions based on a
specified monthly sales volume and admittance of independent Associates. One of
these agreements was subsequently canceled, (Note 9).
F-13
<PAGE> 61
During 1996, 1997 and 1998 the Company paid commissions to Mr. Robbins of
approximately $511,000, $467,000 and $120,000, respectively.
During 1997 and 1998, the Company advanced to funds certain employees,
shareholders and an affiliated company of which $148,888 and $125,000 remained
unpaid at December 31, 1997 and 1998, respectively.
During 1997, the Company converted certain accounts receivable from an
affiliated company to notes receivable from the shareholders of the affiliated
company. These shareholders are also shareholders of the Company. The notes
receivable bear interest at 6.0%, and were due upon the earlier of the sale of
the affiliated company or December 31, 1998. On December 31, 1998, the due date
was extended to December 31, 1999. On February 17, 1999, the Company signed new
notes receivable agreements with each of the shareholders. The new notes bear
interest at 6.0%; first payment is payable immediately and the remaining
installments are due annually through February 17, 2004. The total amount of
such notes outstanding at December 31, 1997 and 1998 was $934,929 and
$1,008,529, respectively. The total amount of interest income recorded during
1997 and 1998 was approximately $106,000 and $92,000, respectively. The future
maturities of notes receivables from shareholders are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
---------------
<S> <C>
1999 ............................................................ $ 307,487
2000 ............................................................ 118,106
2001 ............................................................ 125,241
2002 ............................................................ 132,807
2003 ............................................................ 140,830
Thereafter ...................................................... 184,058
---------------
1,008,529
Less current portion ............................................ (307,487)
---------------
Notes receivable due from shareholders, excluding current portion $ 701,042
===============
</TABLE>
On December 31, 1997, the Company advanced $283,834 to two officers
and $352,584 to two directors of the Company to pay taxes due in connection
with the cancellation of their incentive compensation agreements. These
advances are also evidenced by notes receivable from the shareholders. These
notes are noninterest bearing, collateralized by 203,101 shares of common stock
held by such shareholders and are due upon the earlier of December 31, 1999 or
upon sale of the stock. The total amount of these notes outstanding at December
31, 1997 and 1998 was $636,418, respectively. Subsequent to year end, these
notes were repaid by the shareholders after consummation of the offering.
In 1997 and 1998, the Company incurred commission expenses to a major
shareholder and former executive officer of $14,378 and $121,000, of which
$30,034 remained unpaid at December 31, 1998. During 1998, the Company also
paid to a major shareholder and former executive officer $250,000 for various
consulting activities related to new product development.
NOTE 9 CANCELLATION OF INCENTIVE COMPENSATION AGREEMENTS
Prior to June 1, 1997, the Company paid certain shareholders and
employees commissions which were based on sales volume. During 1997, the
Company issued 2,027,571 shares of the Common Stock to shareholders and
employees to cancel these agreements. These shares included 626,971 of shares
issued to cancel incentive compensation agreements, which had been provided to
two shareholders in lieu of ownership interests in the Partnerships (Note 1).
The shares issued were valued at $1.30 per share, which was based on an
appraisal at the date of the transaction. In December 1997, the Company agreed
to cancel another incentive compensation agreement by issuing 74,167 shares of
the Common Stock valued at $5.00 per share. As a result of these transactions,
during 1997 the Company recognized additional nonrecurring compensation expense
of $2,191,610.
NOTE 10 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 whom have completed three months of service and attained the age of
twenty-one. Employees can contribute up to 15% of their annual compensation.
The Company will match 25% of the first 6% contributed and may also make
discretionary contributions to the Plan, which may not exceed 100% of the first
15% of the employees annual compensation. Company contributions to employees
vest ratably over a five-year period. During 1997 and 1998, the Company
contributed approximately $49,000 and $93,000, respectively to the Plan.
F-14
<PAGE> 62
STOCK OPTION PLANS
In May 1997, the Board of Directors approved the 1997 Stock Option Plan
(the "1997 Stock Option Plan") which provides incentive and nonqualified stock
options to employees and nonemployees, respectively. The Company reserved
2,000,000 shares of common stock for issuance pursuant to the stock options
granted under the 1997 Stock Option Plan. In 1997, 1,600,000 options were
granted under the 1997 plan and become exercisable 90 days after the effective
date of the offering. The remaining 400,000 options were granted in 1998 and
become exercisable beginning July 31, 1999.
In May 1998, the Board of Directors approved the 1998 Stock Option
Plan (the "1998 Stock Option Plan") which provides incentive and nonqualified
stock options to employees and nonemployees, respectively. The Company reserved
1,000,000 shares of common stock for issuance pursuant to the stock options
granted under the 1998 Stock Option Plan. As of December 31, 1998, all 343,000
of the options granted in 1998 were outstanding and become exercisable
beginning July 31, 1999. Stock options outstanding for the 1997 and 1998 Stock
Options Plans, (collectively, "the Stock Option Plans") are as follows:
<TABLE>
<CAPTION>
1997 1998
------------------------ ------------------------
Weighted Weighted
Average Average
Shares Exercise Shares Exercise
(000s) Price (000s) Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year .................... -- $ -- 1,600 $ 1.45
Granted .......................................... 1,600 1.45 743 8.00
Exercised ........................................ -- -- -- --
Canceled ......................................... -- -- -- --
---------- ---------- ---------- ----------
Outstanding at end of year .......................... 1,600 $ 1.45 2,343 $ 3.53
========== ========== ========== ==========
Options exercisable at year-end ..................... -- -- -- --
========== ========== ========== ==========
Weighted-average fair value of options granted during
the year ......................................... $ 1.11 $ 2.20
========== ==========
</TABLE>
The following table summarizes information with respect to options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Number Weighted Weighted Average Weighted
of Average Remaining Average
Shares Exercise Contractual Number Exercise
Exercise Price Range (000s) Price Life (in years) of Shares Price
- --------------------------------- -------- --------- ------------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
$1.35 - $2.00 1,600 $ 1.45 7.6 -- $ --
$8.00 743 3.47 9.6 -- --
------ -------
$1.35 - $8.00 2,343 $ 3.53 8.1 -- $ --
================================= ====== ======== ====== ======= ======
</TABLE>
Under the Stock Option Plans, incentive stock options granted to
employees are valued using the intrinsic method, are nontransferable and are
granted for terms no longer than ten years and at a price which may not be less
than 100% of the fair value of the common stock on the date of grant. During
1997, of the 1,600,000 stock options granted, the Company issued 1,244,000
stock options to employees at a price ranging from $1.35 to $2.00 per share.
During 1998, the Company issued 743,000 stock options to employees at a price
of $8.00 per share. No compensation cost was recognized as the exercise price
of the options was equal to the fair value of the stock at the date of grant.
Had compensation cost for employee stock options been determined based on the
Black-Scholes option-pricing model at the grant date, pro forma consolidated
net income and earnings per share for 1997 and 1998 using the following
weighted-average assumptions would have been as follows:
<TABLE>
<CAPTION>
1997 1998
--------------- ---------------
<S> <C> <C>
Dividend yield............................................................. 4% 4%
Expected volatility........................................................ 0% 0%
Risk-free rate of return................................................... 5.0% 5.4%
Expected life (in years)................................................... 10 6
</TABLE>
F-15
<PAGE> 63
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:
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
Consolidated net income
As reported........................................................... $ 10,622,043 $ 10,053,979
Pro forma............................................................. $ 10,542,364 9,701,349
Basic EPS
As reported........................................................... $ 0.50 $ 0.45
Pro forma............................................................. $ 0.49 $ 0.44
Diluted EPS
As reported........................................................... $ 0.47 $ 0.42
Pro forma............................................................. $ 0.47 $ 0.41
</TABLE>
Under the Stock Option Plans, nonqualified stock options granted to
nonemployees are valued using the fair value method, are nontransferable and
are granted for terms no longer than six years and at a price which may not be
less than 100% of the fair value of the common stock on the date of grant.
During 1997, the Company issued 356,000 nonqualified stock options to
nonemployees at an exercise price of $1.35 per share. No additional stock
options were issued, exercised or cancelled during 1998. Additionally, the
Company issued 100,000 nonqualified stock options in July 1997. These options
are priced at $2.00, vest immediately, exercisable after one year and have a
term of six years.
During 1997, compensation expense of $155,503 was included in other
operating expenses for the nonemployee options. This expense was determined by
calculating the fair value of options granted on the date of grant using the
Black-Scholes option-pricing model and the following weighted-average
assumptions:
<TABLE>
<S> <C>
Dividend yield.......................................................................... 4%
Expected volatility..................................................................... 30%
Risk-free rate of return................................................................ 5.0%
Expected life (in years)................................................................ 6
</TABLE>
During 1997, the Company granted to a consulting firm 475,015 warrants
to purchase the same number of shares of the Company's common stock which are
nontransferable and vested as follows: 178,125 shares at issuance and 26,990
each month through March 1, 1998. The warrants are exercisable at $1.35 per
share and expire on the earlier of May 1, 2003 or thirty-six months after the
warrant shares are registered for public resale under the Securities Act. At
December 31, 1997 and 1998, 394,015 and 475,015, respectively, of the warrants
were vested and none were exercised. Subsequent to December 31, 1998, all of
the warrants were registered and exercised.
As a provision of the warrant agreement, the consulting firm can
require the Company to repurchase the outstanding warrants between May 1998 and
May 1999 for $300,000. Accordingly, it was determined that the fair value of
the warrants as of December 31, 1997 and 1998 was $300,000.
NOTE 11 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 $317,000,
$702,000 and $1,160,000 in 1996, 1997 and 1998, respectively.
Approximate future minimum rental commitments for the operating leases
are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
--------------
<S> <C>
1999............................................................................................. $ 1,000,000
2000............................................................................................. 958,000
2001............................................................................................. 943,000
2002............................................................................................. 991,000
2003............................................................................................. 982,000
Thereafter....................................................................................... 2,738,000
-------------
$ 7,612,000
=============
</TABLE>
Effective September 1, 1998, the Company entered into various
employment agreements with six of its executives. The employment agreements are
for five years with a specified minimum salary and are extended automatically
each year for one additional year unless both parties agree to termination
prior to the end of any term. The agreements can be canceled by either party;
however if canceled, without cause, by the Company, the Company is required to
pay the minimum salary for the life of the agreement. In 1995 and 1996, the
Company entered into various cancelable employment agreements with some of its
key
F-16
<PAGE> 64
employees which provide for minimum annual salaries based on sales volume.
However, in 1997 the Company terminated several of these contracts. As a result
of the terminations, the Company incurred approximately $499,000 in severance
of which $145,000 was accrued at December 31, 1997 and paid in 1998.
The Company has a commitment with a supplier to purchase approximately
$6.8 million of raw materials over the remaining nineteen month period ended
August 2000.
The Company utilizes royalty agreements with individuals or entities
to provide compensation for items such as reprints of articles or speeches
relating to the Company; sales of promotional videos featuring sports
personalities and promotional efforts in product sales or attracting new
Associates. In addition, the Company pays a monthly fee of $20,000 to a
research foundation for promoting and conducting health studies of Associates.
This fee was discontinued in August 1998. The total expenses for all of these
agreements were approximately $1,345,000, $1,568,000 and $933,000 in 1996, 1997
and 1998, respectively.
The Company is in the final stages of a sales tax audit with a certain
state comptroller. The State Comptroller has proposed certain adjustments to
the Company's April 1994 through April 1998 sales tax returns. As a result, the
Company has accrued $295,000 for any possible assessment, including any
applicable interest by the state agency. The expense is included in general and
administrative expenses.
NOTE 12 STOCK SPLIT
On May 14, 1997, the Board of Directors declared a 1,000-for-1 stock
split of the Company's common stock. The Board also approved a change in the
stated par value of common shares from $.01 per share to $.0001 per share, and
increased the number of authorized shares to 100,000,000. All share and per
share data have been retroactively adjusted for this split.
On April 8, 1998, the Company amended its Articles of Incorporation to
reduce the number of authorized shares of common stock from 100,000,000 to
99,000,000. Additionally, the Company has authorized 1,000,000 shares of
preferred stock with a par value of $0.01 per share.
NOTE 13 LITIGATION
In 1995, the Company entered into a settlement and mutual release
agreement related to the termination of a former employee. Under the terms of
the agreement, the Company agreed to pay the former employee $83,000 in cash
and issued a $97,600 promissory note (Note 5). In 1996, the Company paid an
additional $59,000 to the former employee related to this lawsuit. The
settlement is recorded in other (income) expense, net in the accompanying
consolidated financial statements.
The Company has several pending claims incurred in the normal course
of business which, in the opinion of management, can be resolved without
material affect on the Company's consolidated results of operations or
consolidated financial condition.
NOTE 14 EARNINGS PER SHARE
The following data show the amounts used in computing earnings per
share and the effect on the weighted-average number of shares of dilutive
common stock. The number of shares used in the calculations for 1996 reflects
the 1,000-for-1 stock split on April 15, 1997.
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------------- ----------------------------------- -----------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available
to common
shareholders ....... $ 7,162,389 20,626,971 $ 0.35 $10,622,043 21,448,551 $ 0.50 $10,053,979 22,101,738 $ 0.45
=========== =========== ========= =========== ============ ========= =========== ========== ========
Effect of dilutive
securities:
Stock options .... -- -- -- 770,018 -- 1,293,481
Stock warrants ... -- -- -- 181,815 -- 263,703
----------- ----------- ----------- ----------- ----------- ----------
Diluted EPS
Net income available
to common
shareholders plus
assumed conversions..$ 7,162,389 20,626,971 $ 0.35 $10,622,043 22,400,384 $ 0.47 $10,053,979 23,658,922 $ 0.42
=========== =========== ========= =========== ============ ========= =========== ========== ========
</TABLE>
NOTE 15 SUBSEQUENT EVENTS
On February 11, 1999, the Company issued 1,638,580 shares of common
stock to investors at $8 per share, resulting in net cash proceeds of
approximately $9.5 million. The 1,638,580 consisted of 1,500,000 new common
shares and 138,580 of the outstanding warrants being exercised and sold. On
February 22, 1999, the Company filed a Registration Statement on Form S-8,
registering the remaining 336,436 of the outstanding warrants, which were
exercised and sold as new shares of the Company's common stock, resulting in
additional net cash proceeds to the Company of approximately $455,000.
F-15
<PAGE> 65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas on March 31, 1999.
MANNATECH, INCORPORATED
By: /s/ CHARLES E. FIORETTI
---------------------------------------
Charles E. Fioretti
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on March 31, 1999,
on behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ CHARLES E. FIORETTI Chairman of the Board and Chief Executive Officer
- ------------------------------------------ (principal executive officer)
Charles E. Fioretti
/s/ SAMUEL L. CASTER President and Director
- ------------------------------------------
Samuel L. Caster
/s/ PATRICK D. COBB Vice President, Chief Financial Officer and Director
- ------------------------------------------ (principal financial officer)
Patrick D. Cobb
/s/ STEPHEN D. FENSTERMACHER Vice President of Accounting and Controller
- ------------------------------------------ (principal accounting officer)
Stephen D. Fenstermacher
/s/ CHRIS T. SULLIVAN Director
- ------------------------------------------
Chris T. Sullivan
/s/ STEVEN A. BARKER Director
- ------------------------------------------
Steven A. Barker
</TABLE>
S-1
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of
the Company, incorporated herein by reference to
Exhibit 3.1 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
3.2 Amended and Restated Bylaws of the Company,
incorporated herein by reference to Exhibit 3.2
to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
3.3 Amendment to the Bylaws of the Company,
incorporated herein by reference to Exhibit 3.3
to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
4.1 Specimen Certificate representing the common stock,
par value $0.0001 per share of the Company,
incorporated herein by reference to Exhibit 4.1 to
the Company'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 the Company'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 the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.3 Agreement and Plan of Merger dated as of June 1, 1997
among the Company and Eight Point Services, Inc.,
Triple Gold Business, Inc., Five Small Fry, Inc., and
Beta Nutrient Technology, Inc., incorporated herein
by reference to Exhibit 10.3 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.4 Exchange Agreement dated June 1, 1997 among the
Company and the limited partners of Power Three
Partners, Ltd., Eleven Point Partners, Ltd. and Beta
M. Partners, Ltd., incorporated herein by reference
to Exhibit 10.4 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.5 Plan and Agreement of Reorganization dated June 1,
1997 by and among the Company, Dynamic Eight
Partners, Ltd., Power Three Partners, Ltd., Eleven
Point Partners, Ltd. and Beta M. Partners, Ltd. and
the general and limited partners of the
partnerships, incorporated herein by reference to
Exhibit 10.5 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.6 Exchange Agreement by and among Gary Watson, Patrick
Cobb, Samuel Caster, Charles Fioretti and William
Fioretti and the Company dated August 31, 1997,
incorporated herein by reference to Exhibit 10.6
to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.7 Option Agreement dated July 1, 1997 with
Multi-Venture Partners, Ltd., incorporated herein by
reference to Exhibit 10.7 to the Company's Form S-1
(File No. 333-63133) filed with the Commission on
September 10, 1998.
10.8 Form of Indemnification Agreement with a schedule of
director signatures, incorporated herein by reference
to Exhibit 10.8 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.9 Letter of Understanding Regarding Development of
Proprietary Information for the Company effective as
of August 1, 1997, as amended, by and between Bill H.
McAnalley, Ph.D. and the Company, incorporated herein
by reference to Exhibit 10.12 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.10 Commercial Lease Agreement dated November 7, 1996
between MEPC Quorum Properties II Inc. and the
Company, 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 the Company's Form S-1
(File No. 333-63133) filed with the Commission on
September 10, 1998.
10.11 Commercial Lease Agreement dated May 29, 1997
between MEPC Quorum Properties II Inc. and the
Company, as amended by the First Amendment thereto
dated November 6, 1997, incorporated herein by
reference to Exhibit 10.14 to the Company's Form S-1
(File No. 333-63133) filed with the Commission on
September 10, 1998.
10.12 Assignment of Patent Rights dated October 30, 1997
by and among Bill H. McAnalley, Ph.D., H. Reginald
McDaniel, D. Eric Moore, Eileen P. Vennum and
William C. Fioretti and the Company, incorporated
herein by reference to Exhibit 10.15 to the Company's
Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.13 Supply Agreement effective as of March 31, 1995 by
and between the Company and Caraloe, Inc.,
incorporated herein by reference to Exhibit 10.16
to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
</TABLE>
<PAGE> 67
<TABLE>
<S> <C>
10.14 Supply Agreement effective as of August 14, 1997 by
and between the Company and Caraloe, Inc.,
incorporated herein by reference to Exhibit 10.17 to
the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.15 Trademark License Agreement effective as of March 31,
1995 by and between the Company and Caraloe, Inc.,
incorporated herein by reference to Exhibit 10.18 to
the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.16 Trademark License Agreement effective as of August
14, 1997 by and between the Company and Caraloe,
Inc., incorporated herein by reference to Exhibit
10.19 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.17 Letter of Agreement from the Company to Michael L.
Finney of LAREX, Incorporated dated December 23,
1997, incorporated herein by reference to Exhibit
10.20 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.18 Product Development and Distribution Agreement
effective as of September 15, 1997 between New Era
Nutrition Inc. and the Company, incorporated herein
by reference to Exhibit 10.21 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.19 Severance and Consulting Agreement and Complete
Release dated August 1, 1997 between Ronald E. Kozak
and the Company, incorporated herein by reference to
Exhibit 10.22 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.20 Summary of Management Bonus Plan, incorporated herein
by reference to Exhibit 10.23 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.21 Individual Guaranty of Samuel L. Caster dated January
5, 1998, incorporated herein by reference to Exhibit
10.27 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.22 Individual Guaranty of Charles E. Fioretti dated
January 5, 1998, incorporated herein by reference to
Exhibit 10.28 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.23 Lease dated September 1, 1998 between Mannatech
Australia Pty Limited and Legal & General Properties
No. 1 Pty Limited, incorporated herein by reference
to Exhibit 10.29 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
10.24 Form of Employment Agreement to be entered into
between the Company and each of Charles E. Fioretti,
Patrick D. Cobb, Anthony E. Canale, Bill H. McAnalley
and Deanne Varner, incorporated herein by reference
to Exhibit 10.30 to the Company's Amendment No. 1 to
Form S-1 (File No. 333-63133) filed with the
Commission on October 28, 1998.
10.25 Renewal and Extension Promissory Note dated February
17, 1999 in the amount of $33,316.02 made by Patrick
D. Cobb.*
10.26 Renewal and Extension Promissory Note dated February
17, 1999 in the amount of $199,896.10 made by Samuel
L. Caster.*
10.27 Renewal and Extension Promissory Note dated February
17, 1999 in the amount of $199,896.09 made by Charles
E. Fioretti.*
16 Letter of Belew Averitt LLP, former accountants to
the Company, incorporated herein by reference to
Exhibit 16 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10,
1998.
21 List of Subsidiaries.*
23.1 Consent of PricewaterhouseCoopers LLP.*
23.2 Consent of Belew Averitt LLP.*
27 Financial Data Schedule.*
</TABLE>
- --------------
* Filed herewith.
<PAGE> 1
EXHIBIT 10.25
RENEWAL AND EXTENSION PROMISSORY NOTE
Dallas County, Texas Date: February 17, 1999 $33,316.02
For value received, the undersigned, Patrick D. Cobb ("Maker"),
promises to pay to the order of Mannatech, Incorporated ("Payee"), whose
business house is located in Dallas County, Texas, in lawful money of the United
States of America, together with interest from the date hereof on the principal
amount from time to time remaining unpaid, at the rate per annum hereinafter
described. All past due principal hereof and interest thereon shall bear
interest from the maturity of such principal, and both principal and interest
shall be payable to Payee at 600 S. Royal Lane, Coppell, Dallas County, Texas,
or such other place in Dallas County, Texas as Payee may designate in writing.
This Note shall bear interest at six percent (6%) per annum.
This principal and interest shall be payable as follows:
On February 17, 2000 the Maker shall pay an installment of principal
and interest to the Payee in the amount of $7,917.95; on February 17, 2001 the
Maker shall pay an installment of principal and interest to the Payee in the
amount of $7,917.95; on February 17, 2002 the Maker shall pay an installment of
principal and interest to the Payee in the amount of $7,917.95; on February 17,
2003 the Maker shall pay an installment of principal and interest to the Payee
in the amount of $7,917.95; on February 17, 2004 the Maker shall pay a final
installment of principal and interest to the Payee in the amount of $7,917.95
together with any and all amounts unpaid, due and owing under this Note.
<PAGE> 2
Maker may prepay the obligations of this Note in whole or in part,
without any premium or penalty therefor, the principal amount then remaining
unpaid, together with all accrued interest payable thereon, and interest shall
cease to run from the date of payment of such part or all of the principal
amount hereof as shall so be prepaid. Any such prepayment hereunder shall be
applied first to accrued interest and the balance to principal, but no part of
prepayment shall, until this Note is fully paid and satisfied, affect the
obligations to continue to pay the regular installments required hereunder until
the entire indebtedness has been paid.
If Maker shall file a voluntary petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for Maker any arrangement, composition, readjustment, or similar relief
under any present or future statute, law or regulation, or shall file any answer
admitting the material allegations of a petition filed against Maker in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee or receiver, on all or any substantial part of the properties of Maker,
or if a decree or order by a court having jurisdiction in the premises shall
have been entered adjudging the Maker to be bankrupt or insolvent under the
federal bankruptcy laws or any applicable law of the United States of America or
any state law, or appointing a receiver or trustee or assignee in bankruptcy or
insolvency of Maker or any of Maker's properties, and such decree or order shall
have continued undischarged or unstayed for a period of sixty (60) days; or if
Maker shall make an assignment for the benefit of creditors, or if Maker shall
fail to pay this note or any installment hereof, whether principal or interest,
when due, then Payee shall have the option, to the extent permitted by
applicable law, to declare this Note due and payable, whereupon the entire
unpaid principal balance of this note and all accrued unpaid interest thereon
shall at once mature and become due and payable without presentment, demand,
protest or
<PAGE> 3
notice of any kind (including, but not limited to, notice of intention to
accelerate or notice of acceleration), all of which are hereby expressly waived
by Maker. The time of payment of this note is also subject to acceleration in
the same manner provided in this paragraph in the event Maker defaults or
otherwise fails to discharge its obligations under any of the instruments
securing payment hereof or relating hereto.
Maker and any and all sureties, guarantors and endorsers of this Note
and all other parties now or hereafter liable hereon, severally waive grace,
demand, presentment for payment, protest, notice of any kind (including, but not
limited to, notice of dishonor, notice of protest, notice of intention to
accelerate and notice of acceleration) and diligence in collecting and bringing
suit against any party hereto and agree (i) to all extensions and partial
payments, with or without notice, before or after maturity, (ii) to any
substitution, exchange or release of any security now or hereafter given for
this note, (iii) to the release of any party primarily or secondarily liable
hereon, and (iv) that it will not be necessary for Payee, in order to enforce
payment of this Note, to first institute or exhaust Payee's remedies against
Maker or any other party liable therefor or against any security for this Note.
If this Note is not paid at maturity, however, and such maturity is
brought about and is placed in the hands of an attorney for collection, or if
collected through any legal proceedings including but not limited to probate,
insolvency or bankruptcy proceedings, or if suit is brought on the same, Makers
agree to pay a reasonable amount of attorneys' fees and expenses of collection.
If Maker shall fail to pay this Note or any installment hereof, whether
principal or interest, when due, and if Makers shall not have cured such default
in the payment of principal and interest, or either, within ten (10) days after
Makers shall have received from the Payees written notice of such Payee's intent
to accelerate the maturity of this Note, then Payees may, at their option,
without
<PAGE> 4
further demand, notice or presentment, all of which are hereby severally waived
by Makers, and by any and all sureties, guarantors, and endorsers of this Note,
accelerate the maturity of this Note, upon which the entire unpaid balance of
the principal hereof together with all accrued but unpaid interest thereon shall
be at once due and payable.
As used in this Note, the term "Maker" shall be deemed to include
Patrick D. Cobb, and any of his successors in interest or assignees.
As used in this Note, the term "Payee" shall be deemed to include
Mannatech, Incorporated, and any subsequent holders hereof.
<PAGE> 5
This Note shall be governed by and construed under the laws of the
State of Texas and the laws of the United States of America.
/s/ Patrick D. Cobb
------------------------------------
Patrick D. Cobb, Maker
------------------------------------
Payee
<PAGE> 1
EXHIBIT 10.26
RENEWAL AND EXTENSION PROMISSORY NOTE
Dallas County, Texas Date: February 17, 1999 $199,896.09
For value received, the undersigned, Samuel L. Caster ("Maker"),
promises to pay to the order of Mannatech, Incorporated ("Payee"), whose
business house is located in Dallas County, Texas, in lawful money of the United
States of America, together with interest from the date hereof on the principal
amount from time to time remaining unpaid, at the rate per annum hereinafter
described. All past due principal hereof and interest thereon shall bear
interest from the maturity of such principal, and both principal and interest
shall be payable to Payee at 600 S. Royal Lane, Coppell, Dallas County, Texas,
or such other place in Dallas County, Texas as Payee may designate in writing.
This Note shall bear interest at six percent (6%) per annum.
On February 17, 2000 the Maker shall pay an installment of principal
and interest to the Payee in the amount of $47,507.70; on February 17, 2001 the
Maker shall pay an installment of principal and interest to the Payee in the
amount of $47,507.70; on February 17, 2002 the Maker shall pay an installment of
principal and interest to the Payee in the amount of $47,507.70; on February 17,
2003 the Maker shall pay an installment of principal and interest to the Payee
in the amount of $47,507.70; on February 17, 2004 the Maker shall pay a final
installment of principal and interest to the Payee in the amount of $47,507.70
together with any and all amounts unpaid, due and owing under this Note.
<PAGE> 2
Maker may prepay the obligations of this Note in whole or in part,
without any premium or penalty therefor, the principal amount then remaining
unpaid, together with all accrued interest payable thereon, and interest shall
cease to run from the date of payment of such part or all of the principal
amount hereof as shall so be prepaid. Any such prepayment hereunder shall be
applied first to accrued interest and the balance to principal, but no part of
prepayment shall, until this Note is fully paid and satisfied, affect the
obligations to continue to pay the regular installments required hereunder until
the entire indebtedness has been paid.
If Maker shall file a voluntary petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for Maker any arrangement, composition, readjustment, or similar relief
under any present or future statute, law or regulation, or shall file any answer
admitting the material allegations of a petition filed against Maker in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee or receiver, on all or any substantial part of the properties of Maker,
or if a decree or order by a court having jurisdiction in the premises shall
have been entered adjudging the Maker to be bankrupt or insolvent under the
federal bankruptcy laws or any applicable law of the United States of America or
any state law, or appointing a receiver or trustee or assignee in bankruptcy or
insolvency of Maker or any of Maker's properties, and such decree or order shall
have continued undischarged or unstayed for a period of sixty (60) days; or if
Maker shall make an assignment for the benefit of creditors, or if Maker shall
fail to pay this note or any installment hereof, whether principal or interest,
when due, then Payee shall have the option, to the extent permitted by
applicable law, to declare this Note due and payable, whereupon the entire
unpaid principal balance of this note and all accrued unpaid interest thereon
shall at once mature and become due and payable without presentment, demand,
protest or notice of any kind (including, but not limited to, notice of
intention to accelerate or notice of acceleration), all of which are hereby
expressly waived by Maker. The time of payment of this note
<PAGE> 3
is also subject to acceleration in the same manner provided in this paragraph in
the event Maker defaults or otherwise fails to discharge its obligations under
any of the instruments securing payment hereof or relating hereto.
Maker and any and all sureties, guarantors and endorsers of this Note
and all other parties now or hereafter liable hereon, severally waive grace,
demand, presentment for payment, protest, notice of any kind (including, but not
limited to, notice of dishonor, notice of protest, notice of intention to
accelerate and notice of acceleration) and diligence in collecting and bringing
suit against any party hereto and agree (i) to all extensions and partial
payments, with or without notice, before or after maturity, (ii) to any
substitution, exchange or release of any security now or hereafter given for
this note, (iii) to the release of any party primarily or secondarily liable
hereon, and (iv) that it will not be necessary for Payee, in order to enforce
payment of this Note, to first institute or exhaust Payee's remedies against
Maker or any other party liable therefor or against any security for this Note.
If this Note is not paid at maturity, however, and such maturity is
brought about and is placed in the hands of an attorney for collection, or if
collected through any legal proceedings including but not limited to probate,
insolvency or bankruptcy proceedings, or if suit is brought on the same, Makers
agree to pay a reasonable amount of attorneys' fees and expenses of collection.
If Maker shall fail to pay this Note or any installment hereof, whether
principal or interest, when due, and if Makers shall not have cured such default
in the payment of principal and interest, or either, within ten (10) days after
Makers shall have received from the Payees written notice of such Payee's intent
to accelerate the maturity of this Note, then Payees may, at their option,
without further demand, notice or presentment, all of which are hereby severally
waived by Makers, and by any and all sureties, guarantors, and endorsers of this
Note, accelerate the maturity of this Note,
<PAGE> 4
upon which the entire unpaid balance of the principal hereof together with all
accrued but unpaid interest thereon shall be at once due and payable.
As used in this Note, the term "Maker" shall be deemed to include
Samuel L. Caster, and any of his successors in interest or assignees.
As used in this Note, the term "Payee" shall be deemed to include
Mannatech, Incorporated, and any subsequent holders hereof.
<PAGE> 5
This Note shall be governed by and construed under the laws of the
State of Texas and the laws of the United States of America.
/s/ Samuel L. Caster
--------------------------------
Samuel L. Caster, Maker
-------------------------------
Payee
<PAGE> 1
EXHIBIT 10.27
RENEWAL AND EXTENSION PROMISSORY NOTE
Dallas County, Texas Date: February 17, 1999 $199,896.10
For value received, the undersigned, Charles E. Fioretti ("Maker"),
promises to pay to the order of Mannatech, Incorporated ("Payee"), whose
business house is located in Dallas County, Texas, in lawful money of the United
States of America, together with interest from the date hereof on the principal
amount from time to time remaining unpaid, at the rate per annum hereinafter
described. All past due principal hereof and interest thereon shall bear
interest from the maturity of such principal, and both principal and interest
shall be payable to Payee at 600 S. Royal Lane, Coppell, Dallas County, Texas,
or such other place in Dallas County, Texas as Payee may designate in writing.
This Note shall bear interest at six percent (6%) per annum.
This principal and interest shall be payable as follows:
On February 17, 2000 the Maker shall pay an installment of principal
and interest to the Payee in the amount of $47,507.70; on February 17, 2001 the
Maker shall pay an installment of principal and interest to the Payee in the
amount of $47,507.70; on February 17, 2002 the Maker shall pay an installment of
principal and interest to the Payee in the amount of $47,507.70; on February 17,
2003 the Maker shall pay an installment of principal and interest to the Payee
in the amount of $47,507.70; on February 17, 2004 the Maker shall pay a final
installment of principal and interest to the Payee in the amount of $47,507.70
together with any and all amounts unpaid, due and owing under this Note.
<PAGE> 2
Maker may prepay the obligations of this Note in whole or in part,
without any premium or penalty therefor, the principal amount then remaining
unpaid, together with all accrued interest payable thereon, and interest shall
cease to run from the date of payment of such part or all of the principal
amount hereof as shall so be prepaid. Any such prepayment hereunder shall be
applied first to accrued interest and the balance to principal, but no part of
prepayment shall, until this Note is fully paid and satisfied, affect the
obligations to continue to pay the regular installments required hereunder until
the entire indebtedness has been paid.
If Maker shall file a voluntary petition in bankruptcy, or shall be
adjudicated a bankrupt or insolvent, or shall file any petition or answer
seeking for Maker any arrangement, composition, readjustment, or similar relief
under any present or future statute, law or regulation, or shall file any answer
admitting the material allegations of a petition filed against Maker in any such
proceeding, or shall seek or consent to or acquiesce in the appointment of any
trustee or receiver, on all or any substantial part of the properties of Maker,
or if a decree or order by a court having jurisdiction in the premises shall
have been entered adjudging the Maker to be bankrupt or insolvent under the
federal bankruptcy laws or any applicable law of the United States of America or
any state law, or appointing a receiver or trustee or assignee in bankruptcy or
insolvency of Maker or any of Maker's properties, and such decree or order shall
have continued undischarged or unstayed for a period of sixty (60) days; or if
Maker shall make an assignment for the benefit of creditors, or if Maker shall
fail to pay this note or any installment hereof, whether principal or interest,
when due, then Payee shall have the option, to the extent permitted by
applicable law, to declare this Note due and payable, whereupon the entire
unpaid principal balance of this note and all accrued unpaid interest thereon
shall at once mature and become due and payable without presentment, demand,
protest or notice of any kind (including, but not limited to, notice of
intention to accelerate or notice of
<PAGE> 3
acceleration), all of which are hereby expressly waived by Maker. The time of
payment of this note is also subject to acceleration in the same manner provided
in this paragraph in the event Maker defaults or otherwise fails to discharge
its obligations under any of the instruments securing payment hereof or relating
hereto.
Maker and any and all sureties, guarantors and endorsers of this Note
and all other parties now or hereafter liable hereon, severally waive grace,
demand, presentment for payment, protest, notice of any kind (including, but not
limited to, notice of dishonor, notice of protest, notice of intention to
accelerate and notice of acceleration) and diligence in collecting and bringing
suit against any party hereto and agree (i) to all extensions and partial
payments, with or without notice, before or after maturity, (ii) to any
substitution, exchange or release of any security now or hereafter given for
this note, (iii) to the release of any party primarily or secondarily liable
hereon, and (iv) that it will not be necessary for Payee, in order to enforce
payment of this Note, to first institute or exhaust Payee's remedies against
Maker or any other party liable therefor or against any security for this Note.
If this Note is not paid at maturity, however, and such maturity is
brought about and is placed in the hands of an attorney for collection, or if
collected through any legal proceedings including but not limited to probate,
insolvency or bankruptcy proceedings, or if suit is brought on the same, Makers
agree to pay a reasonable amount of attorneys' fees and expenses of collection.
If Maker shall fail to pay this Note or any installment hereof, whether
principal or interest, when due, and if Makers shall not have cured such default
in the payment of principal and interest, or either, within ten (10) days after
Makers shall have received from the Payees written notice of such Payee's intent
to accelerate the maturity of this Note, then Payees may, at their option,
without further demand, notice or presentment, all of which are hereby severally
waived by Makers, and by
<PAGE> 4
any and all sureties, guarantors, and endorsers of this Note, accelerate the
maturity of this Note, upon which the entire unpaid balance of the principal
hereof together with all accrued but unpaid interest thereon shall be at once
due and payable.
As used in this Note, the term "Maker" shall be deemed to include
Charles E. Fioretti, and any of his successors in interest or assignees.
As used in this Note, the term "Payee" shall be deemed to include
Mannatech, Incorporated, and any subsequent holders hereof.
<PAGE> 5
This Note shall be governed by and construed under the laws of the
State of Texas and the laws of the United States of America.
/s/ Charles E. Fioretti
---------------------------------
Charles E. Fioretti, Maker
---------------------------------
Payee
<PAGE> 1
EXHIBIT 21
List of Subsidiaries
Mannatech Australia Pty Limited - incorporated in April 1998 in Australia and
currently operating in St. Leonards, Australia.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-72767) of our report dated February 19,
1999, except as to Note 6 which is as of March 16, 1999, appearing on page F-2
of Mannatech, Incorporated's Annual Report on Form 10-K for the year ended
December 31, 1998.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 31, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-72767) of our report dated August 21,
1997, appearing on page F-3 of Mannatech, Incorporated's Annual Report on
Form 10-K for the year ended December 31, 1998.
/s/ Belew Averitt LLP
- ------------------------------------
Belew Averitt LLP
Dallas, Texas
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 763
<SECURITIES> 0
<RECEIVABLES> 1,254
<ALLOWANCES> 58
<INVENTORY> 6,875
<CURRENT-ASSETS> 8,978
<PP&E> 17,483
<DEPRECIATION> 3,379
<TOTAL-ASSETS> 26,874
<CURRENT-LIABILITIES> 21,398
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 2,681
<TOTAL-LIABILITY-AND-EQUITY> 26,874
<SALES> 164,933
<TOTAL-REVENUES> 164,933
<CGS> 27,140
<TOTAL-COSTS> 27,140
<OTHER-EXPENSES> 121,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53
<INCOME-PRETAX> 15,797
<INCOME-TAX> 5,743
<INCOME-CONTINUING> 10,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,054
<EPS-PRIMARY> .45
<EPS-DILUTED> .42
</TABLE>
