<PAGE>
As filed with the Securities and Exchange Commission on May 13, 1999
File No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
Texas 2833 75-2508900
(State or other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Identification No.)
Incorporation or Classification Code
Organization) Number)
600 S. Royal Lane, Suite 200
Coppell, Texas 75019
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Charles E. Fioretti
Chairman of the Board and Chief Executive Officer
Mannatech, Incorporated
600 S. Royal Lane, Suite 200
Coppell, Texas 75019
(Name, and address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copy To:
J. Kenneth Menges, Jr., P.C.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
1700 Pacific, Suite 4100
Dallas, Texas 75201
(214) 969-2800
---------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
---------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of Securities to be Offering Price Offering Registration
to be Registered Registered Per Share(1) Price(1) Fee
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<S> <C> <C> <C> <C>
Common stock, par value
$0.0001
per share ............... 1,519,542 $18.25 $27,731,642 $7,710
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</TABLE>
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933 and calculated on the basis
of the average of the high and low sales prices of the common stock on May
7, 1999, as reported on the Nasdaq National Market System.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. The +
+shareholders may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus is not an offer to sell these securities and it is not soliciting +
+an offer to buy these securities in any state where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion dated May , 1999
PROSPECTUS
1,519,542 Shares
[LOGO OF MANNATECH INCORPORATED APPEARS HERE]
Common Stock
-----------
Shareholders of Mannatech, Incorporated are offering 1,519,542 shares of our
common stock for sale.
Our common stock is traded on the Nasdaq National Market System under the
symbol "MTEX."
Investing in these shares involves risks.
See "Risk Factors" beginning on page 7.
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<TABLE>
<CAPTION>
Price to Number of Proceeds to Selling
Public(1) Shares Offered Shareholders(1)
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<S> <C> <C> <C>
Per Share..........................
Total..............................
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</TABLE>
-----------
(1) Shares will be sold at the market price available on the date of sale on
the Nasdaq National Market System. These amounts are based on the closing
price for our common stock on the Nasdaq National Market System on ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
-----------
, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
Forward-Looking Statements............................................... 19
Dividend Policy.......................................................... 20
Price Range of Common Stock.............................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Our Business............................................................. 39
Management............................................................... 59
Certain Transactions..................................................... 68
Principal and Selling Shareholders....................................... 70
Description of Capital Stock............................................. 72
Shares Eligible for Future Sale.......................................... 76
Plan of Distribution..................................................... 78
Legal Matters............................................................ 79
Experts.................................................................. 79
Additional Information................................................... 79
Index to Consolidated Financial Statements............................... F-1
</TABLE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from or
additional to that contained in this prospectus. The selling shareholders are
offering to sell shares of our common stock and seeking offers to buy shares of
our common stock only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of
any sale of our common stock.
Until , 1999, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments.
Trademarks
The tradename Mannatech(TM) and our logo are Texas trademarks of Mannatech.
Product names used in this prospectus are, in certain cases, trademarks, and in
certain instances registered trademarks, and are also our property, including:
Ambroderm(TM); Ambrostart(TM); Ambrotose(R); Bulk Ambrotose(R); Bulk
Em.Pact(TM); Em.Pact(TM); Bulk Phyt.Aloe(R); Man.Aloe(R); Manna-C(TM);
MannaBAR(TM) (carbohydrate formula); MannaBAR(TM) (protein formula); MVP(TM);
Phyt.Aloe(R); Phyto.Bears(R); MannaCleanse(TM); Emprizone(R); Firm(TM);
Mannatonin(TM); Plus(TM); Profile 1(TM); Profile 2(TM); Profile 3(TM); and
Sport with Ambrotose(R). Manapol(R) is a registered trademark of Carrington
Laboratories, Inc. All other tradenames and trademarks appearing in this
prospectus are the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
The following summary does not contain all the information that may be
important to you. You should read this entire prospectus carefully, especially
"Risk Factors" and the consolidated financial statements and related notes
included elsewhere in this prospectus, before deciding to invest in shares of
our common stock. This prospectus contains forward-looking statements that are
based upon the beliefs of our management and upon information currently
available to our management, but involve risks and uncertainties. Our actual
results or experience could differ significantly from the results discussed in
the forward-looking statements.
Mannatech
Mannatech develops and sells nutritional supplements and topical products
through a network marketing system of approximately 244,000 active independent
distributors, known as "associates." We currently sell our products in the
United States, Canada and Australia. We plan to expand into the United Kingdom
in 1999 and Japan in 2000. We are currently evaluating whether to expand into
other foreign markets.
From our incorporation on November 4, 1993, marking the start of our
operations, our net sales have grown from approximately $8.4 million in 1994 to
approximately $164.9 million in 1998. We attribute much of our growth to our
business strategy, which involves:
. developing a line of nutritional supplements having both health
benefits and mass appeal to the increasing number of people who are
becoming more health conscious; and
. providing an opportunity for people interested in our products to
establish a direct sales business.
Our product development efforts have focused on creating a company-owned
ingredient, Ambrotose(R)Complex, which we include in our products.
Ambrotose(R)Complex is made from naturally-occurring sugars. We believe it
improves the way the human body works and feels by improving cell-to-cell
communication. We also make products using ingredients derived from various
plants, known as "phytochemicals" which we believe are fundamental to optimal
health.
We market our products exclusively through our network of associates. Our
associates may sell our products to retail customers and recruit other
individuals to become associates. This marketing method has proven successful
because it allows our associates to personally educate our customers on the
health and nutritional benefits of our products. This marketing method is also
popular with a broad cross-section of people because it is flexible and it
provides a means to supplement family income or start a home-based business.
3
Prospectus Summary
<PAGE>
Our Address/How to Contact Us
Our principal executive office is located at 600 S. Royal Lane, Suite 200,
Coppell, Texas 75019 and our telephone number is (972) 471-7400. Our main
website address is www.mannatech-inc.com.
The Offering
<TABLE>
<S> <C>
Common stock offered by the selling shareholders.............. 1,519,542 shares
Common stock outstanding after the offering................... 24,076,753 shares
Nasdaq National Market System Symbol.......................... MTEX
</TABLE>
Recent Developments
In April 1999 we formed a new subsidiary, Mannatech Ltd., under the laws of
the United Kingdom, as a first step in our expansion into the United Kingdom.
On May 1, 1999, we formed another new subsidiary, Mannatech Foreign Sales
Corporation, under the laws of Barbados, to act as a "foreign sales
corporation" as defined in the United States Internal Revenue Code. On May 7,
1999, we formed a third new subsidiary, Internet Health Group, Inc., a Texas
corporation, in order to take advantage of the growth in Internet commerce.
This new subsidiary will market our proprietary products, specially-developed
nutritional supplements and sports nutrition products over the Internet. These
new subsidiaries are in addition to Mannatech Australia Pty, Limited, our
limited service provider subsidiary operating in Australia.
4
Prospectus Summary
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
(unaudited)
--------------------
Three Months Ended
Year Ended December 31, March 31,
-------------------------------------------------- --------------------
1994(1) 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Income Data:
Net sales............... $ 8,445 $32,071 $86,311 $150,570 $164,933 $ 41,088 $ 42,616
Cost of sales........... 1,499 4,880 13,406 24,735 27,139 6,060 6,893
Commissions............. 3,256 12,339 35,155 61,677 66,650 16,884 17,316
------- ------- ------- -------- -------- --------- ---------
Gross profit........... 3,690 14,852 37,750 64,158 71,144 18,144 18,407
------- ------- ------- -------- -------- --------- ---------
Operating expenses:
Selling and
administrative
expenses.............. 2,063 7,012 17,764 27,846 31,881 7,684 8,472
Other operating costs.. 2,115 5,253 11,746 19,402 22,359 4,696 5,354
Cancellation of
incentive compensation
agreements............ -- -- -- 2,192 -- -- --
Writeoff of deferred
offering costs........ -- -- -- -- 847 -- --
------- ------- ------- -------- -------- --------- ---------
Total operating
expenses.............. 4,178 12,265 29,510 49,440 55,087 12,380 13,826
------- ------- ------- -------- -------- --------- ---------
Income (loss) from
operations............. (488) 2,587 8,240 14,718 16,057 5,764 4,581
Other (income) expense,
net.................... 22 181 (116) (43) 260 (62) (22)
------- ------- ------- -------- -------- --------- ---------
Income (loss) before
income taxes........... (510) 2,406 8,356 14,761 15,797 5,826 4,603
Income tax (benefit)
expense................ (168) 67 1,194 4,139 5,743 2,209 1,701
------- ------- ------- -------- -------- --------- ---------
Net income (loss)....... $ (342) $ 2,339 $ 7,162 $ 10,622 $ 10,054 $ 3,617 $ 2,902
======= ======= ======= ======== ======== ========= =========
Earnings (loss) per
common share:(2)
Basic.................. $ (0.02) $ 0.11 $ 0.35 $ 0.50 $ 0.45 $ 0.16 $ 0.13
======= ======= ======= ======== ======== ========= =========
Diluted................ $ (0.02) $ 0.11 $ 0.35 $ 0.47 $ 0.42 $ 0.15 $ 0.12
======= ======= ======= ======== ======== ========= =========
Weighted average common
and common equivalent
shares outstanding:(2)
Basic.................. 20,627 20,627 20,627 21,449 22,102 22,102 23,114
======= ======= ======= ======== ======== ========= =========
Diluted................ 20,627 20,627 20,627 22,400 23,659 23,705 24,480
======= ======= ======= ======== ======== ========= =========
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:(2)
Basic.................. $ (0.02) $ 0.07 $ 0.25 $ 0.42
======= ======= ======= ========
Diluted................ $ (0.02) $ 0.07 $ 0.25 $ 0.41
======= ======= ======= ========
Other Financial Data:
Depreciation and
amortization........... $ 4 $ 75 $ 414 $ 1,189 $ 2,227 $ 399 $ 733
Capital
expenditures(4)........ $ 72 $ 769 $ 2,660 $ 9,135 $ 6,098 $ 1,813 $ 411
Dividends declared per
common share........... $ 1.00(5) $ 1.00(5) $ 10.00(5) $ 0.37 $ 0.39 $ 0.12 $ 0.06
Balance Sheet Data:
Total assets............ $ 1,577 $ 5,712 $11,410 $ 19,558 $ 26,874 $ 22,783 $ 33,048
Long-term obligations
excluding current
portion................ $ -- $ 33 $ -- $ 110 $ 1,056 $ 105 $ 879
</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, our 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).
5
Prospectus Summary
<PAGE>
(2) Computed on the basis described in Note 1 in the notes to consolidated
financial statements.
(3) The pro forma information shows our net income and earnings per share as if
all income earned by us and related partnerships, which no longer exist,
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, and
$910,041 for the three months ended March 31, 1998.
(5) Dividends were calculated based upon the 10,000 shares that were
outstanding prior to our 1000-to-1 stock split and the reorganization of
our corporate structure, 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.
6
Prospectus Summary
<PAGE>
RISK FACTORS
The shares of common stock being offered involve a high degree of risk. You
should carefully consider the following risk factors and all other information
contained in this prospectus before you buy shares of our common stock.
If the price of our common stock continues to fluctuate significantly, you
could lose all or part of your investment.
The market price of our common stock has fluctuated significantly since the
initial public offering in response to various factors, some of which are
beyond our control, including:
. broad market fluctuations, as well as general economic conditions, in
the United States or internationally;
. quarterly fluctuations in our financial results;
. our earnings;
. financial and business announcements by us and our competitors;
. the overall economy; and
. the condition of the financial markets.
The table below illustrates the volatility of our stock price since the
initial public offering.
<TABLE>
<CAPTION>
Percentage change
Date Closing price from previous date listed
---- ------------- -------------------------
<S> <C> <C>
February 12, 1999 $ 8.00* N/A
February 17, 1999 $31.750 Increase 297%
March 2, 1999 $10.500 Decrease 67%
April 13, 1999 $23.875 Increase 127%
April 27, 1999 $15.250 Decrease 36%
</TABLE>
--------
* initial public offering price.
If our operating results and quarterly revenues fluctuate, the price of our
common stock may be volatile.
Our operating results and revenues are likely to vary significantly from
quarter to quarter. Factors likely to cause these variations include:
. the timing of our company-sponsored associate events;
. new product introductions;
. the timing and cost of opening new product and geographic markets and
our level of success in doing so;
. the timing of holidays, especially in the summer months and the fourth
quarter, which may reduce the amount of time associates spend selling
our products or recruiting new associates;
7
Risk Factors
<PAGE>
. the adverse effect of our associates' or our failure, and allegations
of their failure, to comply with applicable government regulations;
. the negative impact of changes in or interpretations of regulations
that may limit or restrict the sale of any of our products;
. the operation of our network marketing system;
. the introduction of our products into each market;
. the recruitment and retention of associates;
. our inability to introduce new products or the introduction of new
products by our competitors;
. general conditions in the nutritional supplement and personal care
industries or the network marketing industry; and
. consumer perceptions of our operations and the safety, quality and
effectiveness of our products.
Accordingly, our quarterly results could vary significantly in the future and
investors should not rely on period-to-period comparisons as an indication of
future performance. We may not be able to increase our revenues in future
periods or sustain our level of revenue or rate of revenue growth on a
quarterly or annual basis. Our rate of growth has been decreasing in recent
periods and we expect this trend to continue as we mature. We cannot assure you
that our revenue growth rate in new markets where operations have not commenced
will follow this pattern. As a result of the factors discussed above, our
future operating results could be below the expectations of public market
analysts and investors, which could cause the market price of our common stock
to decline severely. Although complete financial results for the second quarter
of 1999 have not yet been compiled, it is the opinion of our management that
financial results for the second quarter of 1999 will be below the level of
financial results attained in the comparable period in 1998. Our management
expects this trend to reverse in the third and fourth quarters of 1999.
If our international expansion is not successful, our business may suffer.
As a part of our growth we must expand into new geographical markets,
especially international markets. We may experience problems entering new
international markets because of greater or different legal and regulatory
barriers in foreign countries. We may also experience difficulties in adapting
to foreign cultures and business customs. If we do not adequately address these
problems, our international expansion may not add as much revenue or as many
new associates as we anticipate, and this would hurt our overall business. Our
international operations and future expansion plans are subject to political,
economic and social uncertainties, including, among other things:
. inflation;
. the risk of renegotiation or modification of (1) existing agreements
or (2) arrangements with governmental authorities;
. transportation difficulties;
8
Risk Factors
<PAGE>
. increases in tariffs;
. changes and limits in export controls;
. government regulations and laws;
. trademark availability and registration issues;
. changes in exchange rates;
. restrictions on our ability to exchange foreign currencies for U.S.
dollars;
. adverse changes in taxation;
. wars and other hostilities;
. confiscation of our property; and
. perception of or changes in the direct selling business.
Any changes related to these factors could have a material adverse effect on
our business, profitability and growth prospects. Further, we may spend large
amounts of time and money in distributing and selling our products in
international markets, which will be lost if these efforts are not successful.
If a substantial amount of our common stock is sold in the public market, our
stock price could sharply decline.
Sales of a substantial number of shares of our common stock in the public
market, or the anticipation of such sales, could cause a sharp decline in the
market price of our common stock. There are currently 24,076,753 shares of our
common stock outstanding and 24,051,753 of these shares are currently able to
be sold in the open market, all under and subject to (1) the restrictions
contained in Rules 144 and 701 under the Securities Act of 1933 and (2) the
terms of agreements between us and the holders of our common stock and stock
options described below. For more information on these rules, please refer to
"Shares Eligible for Future Sale" on page 76.
We have granted options to purchase 2,518,000 shares of our common stock,
50,000 of which were later cancelled, leaving 2,468,000 outstanding as of the
date of this prospectus. An additional 582,000 shares are available for future
option grants under the 1998 Incentive Stock Option Plan. The outstanding
options we have granted become exercisable as follows:
. 1,540,000 on May 13, 1999;
. 80,000 on May 14, 1999;
. 578,000 on July 31, 1999;
. 15,000 in equal portions over a three-year period with the first one-
third vesting on July 31, 1999;
. 100,000 in equal portions over a three-year period with the first one-
third vesting on November 25, 1999;
. 75,000 in equal portions over a three-year period with the first one-
third vesting on January 31, 2000; and
. 80,000 on May 14, 2000.
9
Risk Factors
<PAGE>
We recently registered 642,000 shares of our common stock issuable upon the
exercise of options issued under the 1997 Stock Option Plan. These 642,000
shares will be eligible for sale on the open market on May 13, 1999. We intend
to register, on Form S-8 under the Securities Act of 1933, the offering and
sale of the remaining shares of our common stock issuable under our stock
option plans as soon as practicable. For more information on our stock option
plans, please refer to "Stock Option Plans" on page 65.
Assuming we receive the necessary approvals from all Canadian jurisdictions,
several of our major shareholders are planning to sell up to 900,000 shares of
our common stock to our Canadian associates at a price of $8.00 per share. We
currently anticipate that any shares sold to Canadian associates will not be
transferable for 180 days after they are purchased. However, at the end of this
180-day period, we plan to register these shares for sale under the United
States' securities laws. All of such shares will then be freely tradeable in
the public market. We will pay for the costs of the sale of the shares to
Canadian associates and the subsequent registration of the shares.
We have entered into agreements with each option holder and each person
holding shares of our common stock that are not registered under the Securities
Act of 1933 prohibiting these individuals from selling or otherwise disposing
or agreeing to dispose of any of their shares until August 11, 1999. We have
the authority to waive the provisions of some or all of these agreements prior
to that time.
If we are unable to attract and retain associates, our business may suffer.
Our success depends largely upon our ability to attract, maintain, motivate
and retain a large base of associates, who, in turn, recruit additional
associates to purchase and sell our products. We cannot assure you that the
number or productivity of our associates will be sustained at current levels or
increase in the future. Several factors affect our ability to retain a
sufficient number of associates, including:
. the motivation of our associates;
. general economic conditions;
. changes in the amount of commissions we pay;
. public perception of us and our products;
. the limited number of people who are interested in pursuing direct
selling as a business; and
. competition in recruiting and retaining associates from other direct
selling organizations.
Competition by other direct selling companies for new associates interested
in direct selling is intense. We expect that competition will continue to
intensify as direct selling becomes more popular and more direct selling
organizations enter the marketplace. The pool of individuals interested in
direct selling tends to be limited in each market. Every time another network
marketing company successfully recruits an individual, our potential pool of
associates is reduced.
10
Risk Factors
<PAGE>
Our sales and profits could suffer if:
. we are unable to attract and retain a sufficient number of associates;
. we find it necessary to terminate a significant number of associates
or those associates who play a key role in our distribution system;
. other network marketing companies recruit our existing associates; or
. other network marketing companies deplete the pool of potential
associates in a given market.
If we incur substantial liability from litigation, complaints or enforcement
actions resulting from associate misconduct, our financial condition could
suffer.
Although we have policies and procedures in place to govern the conduct of
our associates, it is still difficult to detect and correct all instances of
associate misconduct. Violations of policies and procedures by our associates
can lead to litigation, formal or informal complaints and enforcement actions,
and inquiries by various federal, state or foreign regulatory authorities. As
we expand to additional foreign countries, we are faced with the challenge and
risk of coordinating our existing associate policies and procedures to conform
to the legal requirements of a growing number of countries. Litigation,
complaints or enforcement actions involving us and our associates could consume
considerable amounts of money and other corporate resources and generally have
a negative impact on our business, profitability and growth prospects.
If government regulations regarding network marketing systems are changed,
interpreted or enforced in a manner adverse to our business, we may be subject
to enforcement actions and material limitations on our business operations.
Our network marketing system is subject to extensive governmental regulation,
including federal and state regulation regarding network marketing plans and
the offer and sale of business franchises, business opportunities and
securities. Any change in legislation and regulations may hurt our business.
Further, significant penalties may be imposed upon us if we or our associates
do not comply with existing statutes or regulations. Violations may result
from:
. misconduct by associates;
. the ambiguous nature of statutes;
. regulations and related court decisions;
. the considerable discretion granted to regulatory authorities and the
courts with regard to interpreting and enforcing laws; and
. regulations affecting our business.
If we are unable to manage our rapid growth effectively, our business may
suffer.
Over the past few years, our business has grown rapidly and we have expanded
our operations to accommodate this growth. This expansion places a significant
strain on our personnel, management, operating systems and other resources. Our
management has had
11
Risk Factors
<PAGE>
limited experience in managing this type of growth and this could hurt our
business. If our current resources are inadequate to support further growth,
our management may not be able to identify, manage and capitalize on existing
and potential market opportunities successfully.
If we are unable to successfully compete in the nutritional supplements market,
our business may suffer.
Competition in the nutritional supplements market is very intense. We compete
with numerous companies that have longer operating histories, more products and
greater name recognition and financial resources than we do. Our competitors
may be able to devote greater resources to marketing, promotional and pricing
campaigns that may influence our existing and potential customers to buy their
products rather than ours.
Our primary competitors include:
. General Nutrition Companies, Inc.;
. Herbalife International, Inc.;
. Nu Skin Enterprises, Inc.;
. Rexall Showcase International;
. Rexall Sundown;
. Solgar Vitamin and Herb Company, Inc.;
. Twinlab Corporation; and
. Weider Nutrition International, Inc.
These companies market nutritional supplements in a wide variety of
distribution channels. Although many consumers appreciate the convenience of
ordering products from their homes through a salesperson, we may have
difficulty attracting consumers accustomed to purchasing products in the
traditional retail setting. Our business, profitability and growth prospects
could be hurt if we are unable to compete successfully against our competitors.
If our business or our products are subject to adverse publicity, our business
may suffer.
We are very dependent upon our associates' perception of the overall
integrity of our business, as well as the safety and quality of our products
and similar products distributed by other companies. The number and motivation
of our associates could decline and our business could suffer as a result if we
or our products are subject to adverse publicity regarding:
. the nutritional supplement industry;
. our competitors;
. the legality of network marketing systems generally or our network
marketing system specifically;
. the safety and quality of our products and product ingredients;
. the safety and quality of our competitors' products and product
ingredients;
12
Risk Factors
<PAGE>
. regulatory investigations of Mannatech or our products;
. regulatory investigations of our competitors and their products;
. the actions of our associates;
. our management of our associates;
. the public's perception of our associates; and
. the direct selling business.
Our products contain vitamins, minerals, herbs and other ingredients that are
generally regarded as safe when taken as directed, and that many scientific
studies have suggested may offer health benefits. We try to avoid negative
publicity by conducting quality control testing on our products and by
conducting or sponsoring scientific studies from time-to-time that relate to
the benefits of our products.
If we lose our key associates, our business may suffer.
Because of the design of our network marketing distribution system, the loss
of a key associate together with a related group of leading associates could
adversely affect sales of our products and impair our ability to attract new
associates. Our compensation plan allows associates to sponsor new associates,
which creates multiple associate levels in the network marketing structure.
Under a network marketing distribution system, associates develop relationships
with other associates. If we lose a high-level sponsoring associate, we may
also lose a sizable number of other associates within the high-level
associate's downline network, which could adversely affect our business,
profitability and growth prospects.
If we lose our key personnel, or cannot recruit additional qualified personnel,
our business may suffer.
We depend substantially on the continued services and performance of our
senior management. Our business may be hurt if one or more of our senior
management or key employees leave Mannatech. Although we have employment
agreements with initial terms of five years with several members of our
management team, this does not guarantee that they will remain with us for the
entire term. If we lose the services of any of these executive officers or
other key employees, we may not be able to attract and retain additional
qualified personnel to fill their positions in the future.
If our outside manufacturers fail to supply our products in sufficient
quantities and in a timely fashion, our business may suffer.
All of our products are manufactured by outside manufacturers. Our profit
margins and ability to deliver our products on a timely basis are dependent
upon the ability of our outside manufacturers to supply quality products in a
timely and cost-efficient manner. Three large manufacturers produce
substantially all of our products. Our ability to enter new markets and sustain
satisfactory levels of sales in each market is dependent upon the ability of
these or other suitable outside manufacturers to reformulate existing products,
if necessary to comply with local regulations or market environments. Further,
the development of new products in
13
Risk Factors
<PAGE>
the future will depend in part on these outside manufacturers. The failure of
any manufacturer to supply the products or ingredients of products that we
require could have an adverse effect on our business, profitability and growth
prospects.
We believe we have dependable alternative suppliers for all our ingredients
except Manapol(R) and arabinogalactan, which are components of our proprietary
raw material. We believe that we can produce or replace any of our ingredients
if our current suppliers are unable to supply our ingredients. However, any
delay in replacing or substituting such ingredients could also hurt our
business.
If we are unable to protect our proprietary rights to our ingredients, our
business may suffer.
Proprietary rights are important to our success and our competitive position.
Our success largely depends on our ability to protect and promote our
proprietary rights for two of our ingredients:
. Ambrotose(R)Complex, a glyconutritional dietary supplement consisting
of a blend of plant polysaccharides, which is a component of each of
our products; and
. Dioscorea Complex, a blend of herbal extracts.
We have filed a composition of matter and use patent application for
Ambrotose(R)Complex and have entered into confidentiality agreements with its
manufacturers and suppliers to protect our proprietary rights. Nevertheless, we
face the risks of (1) not being granted a patent for Ambrotose(R)Complex, (2)
being granted a patent much narrower in scope than we requested and (3) that we
have not properly protected our proprietary rights. Our business, profitability
and growth prospects will be hurt if we fail to protect our proprietary rights.
If we violate various government regulations and do not obtain necessary
regulatory approvals, our business will be hurt.
We are subject to and affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar constraints at the
federal, state and local level in both our United States and foreign markets.
These regulations involve, among other things:
. the formulation, manufacturing, packaging, labeling, distribution,
importation, sale and storage of our products;
. health and safety and food and drugs;
. trade practice laws and direct selling laws;
. product claims and advertising by us and by our associates for which we
may be held responsible;
. our network marketing system;
. restrictions on pricing in transactions with our foreign subsidiaries
or other related parties and similar regulations that affect our level
of foreign taxable income;
14
Risk Factors
<PAGE>
. the amount of customs duties we may have to pay;
. taxation of associates, which in some cases may obligate us to collect
the taxes and maintain appropriate records; and
. import restrictions.
New regulations could be adopted or existing regulations may change at any time
in a manner that could severely restrict our ability to continue to operate our
business in the same manner as we have in the past and would hurt our business.
We may experience complications regarding health and safety and food and drug
regulations for nutritional products. Our products may need to be reformulated
to comply with local requirements. In some foreign countries, nutritional
products may be considered foods, while other countries may consider them
drugs. Present or future health and safety or food and drug regulations could
delay or prevent our introduction of new products or suspend or prohibit the
sale of existing products into a given country or marketplace. As we expand
into foreign markets, we will be affected by the general stability of foreign
governments and the regulatory environment relating to network marketing
generally, and nutritional supplements and our other products, specifically.
If our products are subject to high customs duties, our sales and competitive
position may suffer as compared to locally produced goods. In addition, import
restrictions in certain countries and jurisdictions will limit our ability to
import products from the United States.
If our direct selling activities do not comply with government regulations, our
business may suffer.
Our direct selling activities are regulated by various governmental agencies.
If a government agency determines that we violated a law or regulation
governing our direct selling activities, our business, profitability and growth
prospects will be hurt. These laws and regulations are generally intended to
prevent fraudulent or deceptive schemes, often referred to as "pyramid" or
"chain sales" schemes, that promise quick rewards for little or no effort or
risk, require high entry costs, use high pressure recruiting methods and/or do
not involve legitimate products. We could be in violation of existing
regulations as a result of, among other things, the considerable interpretive
and enforcement discretion given to regulators or misconduct by our associates.
In addition, the adoption of new laws or regulations, changes in the
interpretation of existing laws or regulations and inquiries by government
agencies into our operations could generate negative publicity, which could
have a negative impact on the motivation and recruitment of associates and on
our business.
If we are exposed to product liability claims, we may be liable for damages and
expenses which could hurt our financial condition.
We face financial exposure to product liability claims if the use of our
products results in an allegation of loss or injury. To date, we have not been
the subject of significant product liability claims. We may be exposed to
future product liability claims, including, among other things, that our
products contain contaminants or include inadequate instructions
15
Risk Factors
<PAGE>
regarding use or inadequate warnings concerning side effects and interactions
with other substances. Although we maintain product liability insurance,
potential product liability claims may exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of the policy, which
could hurt our financial condition.
One of our products, MVP(TM), contains country mallow, a plant that contains
an ephedra. Products containing ephedrine have been the subject of adverse
publicity in the United States and other countries relating to alleged harmful
effects, including the deaths of several individuals. The Food and Drug
Administration is proposing regulations that, if adopted, would subject MVP(TM)
to its labeling requirements and possibly require it to be reformulated. Any
negative publicity or product liability claims that stem from this product
could hurt our business. Moreover, depending on claims made for MVP(TM), the
Food and Drug Administration could regulate it as a drug, thus requiring
product approval prior to marketing. Our sales of MVP(TM) were $3.8 million,
$5.5 million, $5.9 million and $4.9 million in 1995, 1996, 1997 and 1998,
respectively.
If our newly-introduced products and ingredients have harmful side effects or
do not have the healthful effects intended, our business may suffer.
Although many of the ingredients in our products are vitamins, minerals,
herbs and other substances that have been consumed by individuals for many
years, some of our products contain newly-introduced ingredients or
combinations of ingredients. We believe all of our products are safe when taken
as directed by Mannatech, but there may be little long-term experience with
individuals consuming our newly-introduced product ingredients or combinations
of ingredients in concentrated form. We perform research and tests when we
formulate and produce our products and we occasionally conduct or sponsor
clinical studies, but we cannot assure you that our products, even when used as
directed, will have the healthful effects intended or will not have harmful
effects to you. If any of our products were shown to be harmful or negative
publicity resulted from an individual who was allegedly harmed by one of our
products, it could hurt our business, profitability and growth prospects.
If our officers and directors continue to own the majority of our common stock,
they will have the ability to significantly influence our business.
At the end of this offering, Charles E. Fioretti, Samuel L. Caster and our
other directors and officers, together with members of their families and
affiliates, will beneficially own approximately 50.9% of the common stock
outstanding. As a result, these individuals will be able to significantly
influence our company, including the election of a majority of the board of
directors and approval of significant corporate transactions. As a result,
various transactions may be delayed, deferred or prevented without the approval
of these shareholders, including:
. another company or other individuals taking control of Mannatech;
. mergers and acquisitions;
. tender offers; and
. proxy contests.
16
Risk Factors
<PAGE>
If this happens, our shareholders may not have the opportunity to sell their
shares for more than the then-prevailing market price of our common stock and
the market price of our common stock may decline. For more information
regarding beneficial ownership of our common stock, please refer to "Principal
and Selling Shareholders" on page 70.
If the board of directors authorizes preferred stock, the rights and market
price of our common stock may be adversely affected.
The board of directors has the authority to issue one or more classes or
series of preferred stock without shareholder approval. The board of directors
may also change the number of shares constituting any series of preferred stock
and may fix and determine the designation and preferences, limitations and
relative rights, including voting rights, of these shares of preferred stock,
in each case without shareholder approval. Accordingly, preferred stock may be
given preference over the common stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of common stock. Undesignated preferred stock may
enable the board of directors to discourage a change in control by means of a
tender offer, proxy contest, merger or otherwise, and thereby protect our
management, which may adversely affect the market price and rights of holders
of our common stock.
If our information technology systems fail, our operations could suffer.
Our business is very dependent upon information technology and its related
systems to manage and operate many of our key business functions, including:
. order processing;
. customer service;
. distribution of products;
. commission processing; and
. cash receipts and payments.
If our information technology system fails, we would not be able to conduct our
day-to-day business. Depending upon the severity and duration of the failure
and our ability to remedy the cause, our business could be hurt.
We recently implemented an internally developed computer software system,
which could create problems with our operations. There have and will continue
to be:
. periods when the software system does not perform well and is not
efficient while adjustments and corrections are made to the software;
. diminished access to significant business information and reports; and
. natural resistance to change among operators of the system.
During this period of transition, we may have to revert to alternate or manual
methods, such as written ordertaking and computation, which would substantially
decrease the efficiency and possibly increase the costs of our operations.
17
Risk Factors
<PAGE>
If provisions of our articles of incorporation, bylaws and Texas law relating
to the purchase or sale of a large amount of our common stock or assets are
triggered, the price investors might be willing to pay for your common stock in
the future could be limited.
Provisions of our current articles of incorporation, our current bylaws and
the Texas Business Corporation Act may discourage unsolicited proposals to
acquire Mannatech, even if the proposal is beneficial to our shareholders. Our
bylaws provide for a classified board of directors, serving staggered terms of
three years. Additionally, our board of directors is authorized, without
shareholder approval, to issue up to 1,000,000 shares of preferred stock having
such rights, preferences and privileges as the board of directors designates.
Moreover, the Texas Business Corporation Act restricts, subject to exceptions,
business combinations with any "affiliated shareholder." These provisions may
delay, deter or prevent a takeover of Mannatech and could limit the price
investors might be willing to pay for our common stock in the future.
If we do not adequately address Year 2000 issues, our business may suffer.
The risks posed by Year 2000 issues could hurt our business in a number of
significant ways. Our information technology system is designed to comply with
Year 2000 consideration. Our information technology system could be
substantially impaired or cease to operate due to Year 2000 problems if
unforeseen or unpreventable circumstances occur. Additionally, we rely on the
information technology of our vendors, associates and other third parties,
which may not be Year 2000 compliant. Year 2000 problems experienced by us, our
associates, our vendors or other third parties could hurt our business.
We are evaluating our building and utility systems for any Year 2000 issues
and will test and remediate these systems if necessary. If significant
remediation is necessary, the costs related to Year 2000 compliance could be
significant. If any or all of our applications fail to perform on January 1,
2000, we will resort to temporary manual processing which would disrupt our
operations and decrease our efficiency.
We have begun contacting our vendors and other third parties to ascertain
their Year 2000 status. Failure to achieve Year 2000 readiness by any of our
vendors or other third parties could disrupt our operations and hurt our
business. For more information on our risks, preparations and status relating
to Year 2000 issues, please see "Year 2000" on page 37.
18
Risk Factors
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Our Business" and elsewhere in this prospectus constitute
"forward-looking statements" within the meaning of Section 21E of the
Securities Exchange Act of 1934, that are subject to certain events, risk and
uncertainties that may be outside our control. These forward-looking statements
include statements of:
. management's plans and objectives for our future operations and future
economic performance;
. our capital budget and future capital requirements;
. meeting our future capital needs;
. realization of our deferred tax assets;
. the level of future expenditures; and
. the outcome of regulatory and litigation matters, and the assumptions
described in this prospectus 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;
. our entry into new countries and markets;
. the impact of competitive products and pricing;
. the political and economic climate in which we conduct operations; and
. the risk factors described from time to time in our other documents and
reports filed with the Securities and Exchange Commission.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of such terms and other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the
date of this prospectus.
19
Forward-Looking Statements
<PAGE>
DIVIDEND POLICY
Before the completion of our initial public offering, we paid dividends to
our shareholders, including $6,928,547 and $9,936,882 in 1997 and 1998,
respectively and $1,326,104 from January 1, 1999 until February 11, 1999. We
have not paid dividends since the completion of the initial public offering. In
the future, our board of directors intends to reevaluate this policy based on
our operating results, financial condition, cash requirements and other factors
they consider important. Any future payments of dividends will be based on the
judgement of the board of directors and limited by the Texas Business
Corporation Act.
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market System under
the symbol "MTEX" since February 16, 1999, the first trading day after the
completion of our initial public offering. For the first quarter of 1999, the
high and low closing prices of our common stock on the Nasdaq National Market
System were $31.75 and $10.50, respectively.
On May 7, 1999, the closing price of our common stock on the Nasdaq National
Market System was $16.938 per share. As of May 7, 1999, there were
approximately 5,740 record holders of our common stock.
20
Dividend Policy . Price Range of Common Stock
<PAGE>
SELECTED FINANCIAL DATA
The Selected Financial Data below for each of the five years ended December
31, 1998 are drawn from our consolidated financial statements. The consolidated
financial statements for 1997 and 1998 were audited by PricewaterhouseCoopers
LLP and for 1994, 1995 and 1996 by Belew Averitt LLP. The reports of these two
independent public accounting firms appear elsewhere in this prospectus. The
Selected Financial Data below for the three months ended March 31, 1998 and
1999 are drawn from our unaudited consolidated financial statements. We believe
these unaudited financial statements are prepared on the same basis as the
audited statements, including all adjustments, consisting of normally recurring
adjustments necessary for a fair presentation of our financial position and
results of operations. You should read this table in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," beginning on page 23, and the consolidated financial statements
and related notes beginning on page F-1 of this prospectus.
<TABLE>
<CAPTION>
(unaudited)
--------------------
Three Months Ended
Year Ended December 31, March 31,
--------------------------------------------------- --------------------
1994(1) 1995 1996 1997 1998 1998 1999
------- ------- ------- -------- -------- --------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income
Data:
Net sales............... $8,445 $32,071 $86,311 $150,570 $164,933 $ 41,088 $ 42,616
Cost of sales........... 1,499 4,880 13,406 24,735 27,139 6,060 6,893
Commissions............. 3,256 12,339 35,155 61,677 66,650 16,884 17,316
------ ------- ------- -------- -------- --------- ---------
Gross profit........... 3,690 14,852 37,750 64,158 71,144 18,144 18,407
------ ------- ------- -------- -------- --------- ---------
Operating expenses:
Selling and
administrative
expenses............... 2,063 7,012 17,764 27,846 31,881 7,684 8,472
Other operating costs.. 2,115 5,253 11,746 19,402 22,359 4,696 5,354
Cancellation of
incentive compensation
agreements............. -- -- -- 2,192 -- -- --
Writeoff of deferred
offering costs......... -- -- -- -- 847 -- --
------ ------- ------- -------- -------- --------- ---------
Total operating
expenses.............. 4,178 12,265 29,510 49,440 55,087 12,380 13,826
------ ------- ------- -------- -------- --------- ---------
Income (loss) from
operations............. (488) 2,587 8,240 14,718 16,057 5,764 4,581
Other (income) expense,
net.................... 22 181 (116) (43) 260 (62) (22)
------ ------- ------- -------- -------- --------- ---------
Income (loss) before
income taxes........... (510) 2,406 8,356 14,761 15,797 5,826 4,603
Income tax (benefit)
expense................ (168) 67 1,194 4,139 5,743 2,209 1,701
------ ------- ------- -------- -------- --------- ---------
Net income (loss)....... $ (342) $ 2,339 $ 7,162 $ 10,622 $ 10,054 $ 3,617 $ 2,902
====== ======= ======= ======== ======== ========= =========
Earnings (loss) per
common share:(2)
Basic.................. $(0.02) $ 0.11 $ 0.35 $ 0.50 $ 0.45 $ 0.16 $ 0.13
====== ======= ======= ======== ======== ========= =========
Diluted................ $(0.02) $ 0.11 $ 0.35 $ 0.47 $ 0.42 $ 0.15 $ 0.12
====== ======= ======= ======== ======== ========= =========
Weighted average common
and common equivalent
shares outstanding:(2)
Basic.................. 20,627 20,627 20,627 21,449 22,102 22,102 23,114
====== ======= ======= ======== ======== ========= =========
Diluted................ 20,627 20,627 20,627 22,400 23,659 23,705 24,480
====== ======= ======= ======== ======== ========= =========
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:(2)
Basic.................. $(0.02) $ 0.07 $ 0.25 $ 0.42
====== ======= ======= ========
Diluted................ $(0.02) $ 0.07 $ 0.25 $ 0.41
====== ======= ======= ========
Other Financial Data:
Depreciation and
amortization........... $ 4 $ 75 $ 414 $ 1,189 $ 2,227 $ 399 $ 733
Capital
expenditures(4)........ $ 72 $ 769 $ 2,660 $ 9,135 $ 6,098 $ 1,813 $ 411
Dividends declared per
common share........... $ 1.00(5) $ 1.00(5) $ 10.00(5) $ 0.37 $ 0.39 $ 0.12 $ 0.06
</TABLE>
21
Selected Financial Data
<PAGE>
<TABLE>
<CAPTION>
(unaudited)
December 31, -----------
------------------------------------------- March 31,
1994 1995 1996 1997 1998 1999
------ ------- ------- ------- -------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 283 $ 953 $ 1,160 $ 61 $ 763 $ 8,380
Working capital......... (423) (1,228) (2,580) (9,239) (12,419) 4,193
Total assets............ 1,577 5,712 11,410 19,558 26,874 33,048
Total liabilities....... 1,928 6,103 10,579 18,015 23,891 15,966
Redeemable warrants..... -- -- -- 300 300 --
Total shareholders'
equity (deficit)....... (351) (391) 831 1,244 2,683 17,082
</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, our 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 our net income and earnings per share as if
all income earned by us and related partnerships, which no longer exist,
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, and
$910,041 for the three months ended March 31, 1998, respectively.
(5) Dividends were calculated based upon the 10,000 shares outstanding prior to
our 1,000-to-1 stock split and the reorganization of our corporate
structure, 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.
22
Selected Financial Data
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with the consolidated
financial statements and related notes beginning on page F-1 of this
prospectus. Unless we state otherwise, all financial information presented
below and in the consolidated financial statements and related notes includes
Mannatech and all of our subsidiaries on a consolidated basis.
Overview
Since beginning operations in November 1993, we have achieved year-to-year
growth in net sales. Our growth is mainly attributable to increases 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. Although complete financial results for the second quarter of 1999 have
not yet been compiled, it is the opinion of our management that financial
results for the second quarter of 1999 will be below the level of financial
results attained in the comparable period in 1998. Our management expects this
trend to reverse in the third and fourth quarters of 1999.
We receive revenues primarily from sales of our products and sales of
associate starter and renewal packs, which include some combination of
products, promotional materials and free admission to our events. To become an
associate, a person may enroll as a Preferred Customer and later execute an
associate application, sponsor new associates or purchase an associate starter
pack. Each pack also allows the associate to purchase products at wholesale
prices. We will offer a comparable associate starter pack in each country in
which we do business. All pack prices stated in this prospectus are in United
States currency.
23
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
In May 1998, we 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, only one
associate starter pack is available and is priced at $31.00. The items included
in a particular pack, purchase price of the pack and wholesale value of the
included items for the periods for which 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 Master Associate Preferred
Business Training Training Starter Promo Customer
Pack Pack Pack Pack 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>
Packs Sold Beginning in June 1998
<TABLE>
<CAPTION>
Master
Associate
and All Australia
All Star Star Master Associate Preferred Preferred
Career Training Starter Promo Customer Customer
Pack*(1) Pack* Pack*(2) 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
Average Number of
Nutritional Products
Included............... 24 17 8 1 -- --
Average Wholesale Value
of Nutritional
Products............... $ 767.75 $491.00 $224.81 $28.50 $ -- $ --
Average Number of
Promotional Materials
Included............... 236 26 41 14 14 12
Average Wholesale Value
of Promotional
Materials.............. $ 321.08 $276.32 $ 98.00 $16.12 $16.12 $16.12
Event Admission
Included............... Yes Yes No No No No
Implied Admission
Value.................. $ 50.00 $ 50.00 $ -- $ -- $ -- $ --
Average Total Wholesale
and Implied Value...... $1,138.83 $817.32 $322.81 $44.62 $16.12 $16.12
</TABLE>
24
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
- --------
* Packs offered only to associates in the United States and Canada. Some of
the packs offer our associates a choice of different combinations of
products and promotional materials to be included in the purchased pack.
Therefore, the average between the lowest and highest number of products
and promotional items to be included was used to show the average wholesale
value of the packs.
(1) Prior to March 22, 1999, we sold the Career Pack as the All Star Business
Pack. For the All Star Business Pack, the associate cost remained the same;
however, the number of nutritional products included in the Business Pack
was 26 at a wholesale value of $750.50. The number of promotional materials
included in the Business Pack was 131 at a wholesale value of $357.52 for a
total wholesale and implied value of $1,158.02.
(2) Prior to March 22, 1999, we sold the Master Pack at the same associate
cost; however, the number of nutritional products included in the Master
Pack was 9 at a wholesale value of $216.74. The number of promotional
materials included in the Master Pack was 23 at a wholesale value of
$115.37 for a total wholesale and implied value of $332.11.
We also require associates to renew their status each year by either (1)
renewing as a Preferred Customer and continuing to sponsor new associates; (2)
purchasing a renewal pack; or (3) earning enough personal points volume from
product sales to automatically renew their associate status for one year. Prior
to June 1998, associates in the United States and Canada could renew their
associate status for $49.00, $229.00 or $568.00. Since the introduction of the
$29.00 Preferred Customer Pack in May 1998, associates in the United States and
Canada have been able to renew their associate status for $29.00, $200.00 or
$350.00. Associates who do not renew their associate status may continue to
purchase our products at the wholesale price and resell the products; however,
they would not be allowed to earn commissions under our 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 been able 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.
We generally recognize revenues when products or promotional materials are
shipped. Our revenues are based primarily on the wholesale prices of the
products sold. We defer revenue received from the sale of promotional packs to
the extent that it is greater than the wholesale value of the individual items
included in such packs. Revenues from promotional packs are allocated between
products and events admission based on the proportionate fair value of these
items. Allocated event revenues are also deferred. All deferred revenue is
amortized over a 12-month period. Total deferred revenue was approximately
$521,000, $809,000 and $662,000 at December 31, 1996, 1997 and 1998,
respectively, and was $695,000 for the three-month period ended March 31, 1999.
All of our products are made by outside manufacturers and all of our
ingredients are supplied by outside vendors.
25
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
As a result of our expansion into Canada and Australia, we have 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 related to
their placement and position within our compensation plan, volume of direct
sales and number of new enrolled associates. In October 1998, we revised
portions of our 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
we believe that, under our existing and revised compensation plan, commissions
will not exceed 42% of commissionable net sales.
The increased demand for our products has necessitated significant investment
in improvements to our facilities, furniture and computers to support our
growth. In the first quarter of 1998, we invested in our new distribution
center and research and development laboratory. The increase in other operating
costs is primarily attributable to our:
. purchases of assorted office equipment and supplies;
. expansion into Australia;
. planned expansion into the United Kingdom in 1999;
. planned expansion into Japan in 2000; and
. continued research into other foreign markets.
Our United States federal statutory tax rate was 34% for 1997 and prior
years, and 35% beginning in 1998. We pay taxes in Australia at a statutory tax
rate of 36%. We pay taxes in various state jurisdictions at approximate average
statutory tax rates of between 3% and 5%. As our international expansion
continues, a portion of our income will be subject to taxation in the countries
in which we operate.We may receive foreign tax credits that would reduce the
amount of U.S. taxes we owe, based upon the amount of foreign taxes paid. We
may not be able to use all of such foreign tax credits in the United States.
The use of the foreign tax credits would be based upon the proportionate amount
of net sales in each country. This could result in our paying a higher overall
effective tax rate on our worldwide operations. Many of the countries that we
may expand to during 1999 and beyond have maximum statutory tax rates higher
than the United States rate.
26
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
Results of Operations
The following table summarizes our consolidated operating results as a
percentage of net sales for each of the periods indicated:
<TABLE>
<CAPTION>
(unaudited)
--------------
Three Months
Ended
Year Ended December 31, March 31,
------------------------- --------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales....................... 15.5 16.4 16.5 14.8 16.2
Commissions......................... 40.7 41.0 40.4 41.1 40.6
------- ------- ------- ------ ------
Gross profit...................... 43.8 42.6 43.1 44.1 43.2
Operating expenses:
Selling and administrative
expenses......................... 20.6 18.5 19.3 18.7 19.8
Other operating costs............. 13.6 12.9 13.6 11.4 12.6
Cancellation of incentive
compensation agreements.......... -- 1.5 -- -- --
Write-off of deferred offering
costs............................ -- -- 0.5 -- --
------- ------- ------- ------ ------
Income from operations.............. 9.6 9.7 9.7 14.0 10.8
Other (income) expense, net......... (0.1) (0.0) 0.2 (0.2) 0.0
------- ------- ------- ------ ------
Income before income taxes.......... 9.7 9.7 9.5 14.2 10.8
Income tax expense.................. 1.4 2.7 3.4 5.4 4.0
------- ------- ------- ------ ------
Net income.......................... 8.3% 7.0% 6.1% 8.8% 6.8%
======= ======= ======= ====== ======
Number of starter packs sold........ 97,813 133,461 117,003 30,261 32,530
Number of renewal packs sold........ 19,875 41,219 58,476 13,892 14,604
------- ------- ------- ------ ------
Total number of packs sold.......... 117,688 174,680 175,479 44,153 47,134
======= ======= ======= ====== ======
Total associates cancelling
associate status................... 2,503 5,163 6,142 1,376 1,448
======= ======= ======= ====== ======
</TABLE>
Three months ended March 31, 1999 compared with the three months ended March
31, 1998
Net Sales. Net sales increased 3.7% to $42.6 million for the three months
ended March 31, 1999 from $41.1 million for the comparable period in 1998. This
increase was primarily composed of the following:
. A $4.6 million increase from the sale of several new products
introduced after March 31, 1998, and available during the first three
months of 1999, and from existing products which were not available for
sale in Canada during the first three months of 1998.
. A decrease of ($2.5) million in existing product sales, which primarily
resulted from decreases in the volume of products sold in the United
States, which was
27
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
partially offset by an increase in existing product sales in Canada and
the opening of Australia in October 1998.
. A decrease of ($600,000) due to a change in the mix of associate packs
sold. Of this ($600,000) decrease, approximately ($500,000) resulted
from a change in the mix of associate packs sold to new associates and
($100,000) resulted from a change in the mix of associate renewal packs
sold. The wholesale prices of our associate packs did not change
throughout this period; however, we changed the contents of some of our
associate packs. We are currently exploring new strategies to increase
associate pack sales and renewal pack sales.
Cost of Sales. Cost of sales increased 13.8% to $6.9 million for the three
months ended March 31, 1999 from $6.1 million for the comparable period in
1998. As a percentage of net sales, cost of sales increased to 16.2% for the
three months ended March 31, 1999 from 14.8% for the comparable period in
1998. The increase in cost of sales was due to a net increase of $400,000
related to the increased volume and the product mix of finished goods sold,
and a net increase of $200,000 in the normal costs of spoilage and shrinkage
of inventory. For the first three months of 1998, we recorded $160,000 for
recovery of inventory which was written off in December 1997 after we
discovered that the manufacturer had improperly converted some of our
inventory held by the manufacturer for another customer.
Commissions. Commissions consist of payments to associates for sales
activity and downline growth. Commissions increased 2.6% to $17.3 million for
the three months ended March 31, 1999 from $16.9 million for the comparable
period in 1998. As a percentage of net sales, commissions decreased to 40.6%
for the three months ended March 31, 1999 from 41.1% for the comparable period
in 1998. The slight decrease as a percentage of net sales was the direct
result of a decrease in the amount of revenue from associate packs sold and
the start up of our operations in Australia in October 1998.
Gross Profit. Gross profit increased 1.5% to $18.4 million for the three
months ended March 31, 1999 from $18.1 million for the comparable period in
1998. As a percentage of net sales, gross profit decreased to 43.2% for the
three months ended March 31, 1999 from 44.1% for the comparable period in
1998. These changes resulted from 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 10.2% to $8.5 million for the three months
ended March 31, 1999 from $7.7 million for the comparable period in 1998. As a
percentage of net sales, selling and administrative expenses increased to
19.8% for the three months ended March 31, 1999 from 18.7% for the comparable
period in 1998. The dollar amount increase was due primarily to a $1.2 million
increase in wages and contract labor expenses resulting from pay raises for
corporate officers and the hiring of personnel for the Australian operations.
This $1.2 million increase was partially offset by a ($500,000) decrease in
expenses related to our national associate event.
28
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
Other Operating Costs. Other operating costs include utilities, depreciation,
travel, office supplies and printing expenses. Other operating costs increased
14.0% to $5.4 million for the three months ended March 31, 1999 from $4.7
million for the comparable period in 1998. As a percentage of net sales, other
operating costs increased to 12.6% for the three months ended March 31, 1999
from 11.4% for the comparable period in 1998. The dollar amount increase was
primarily due to a $350,000 increase in depreciation expense caused by the
opening of Australia and relocation of our Texas distribution facility,
$200,000 for consulting services related to our international expansion and
$200,000 for additional clinical studies related to the opening of our new
laboratory facility.
Other Income, Net. Other income, net, consists of interest income, interest
expense, royalties from vendors and litigation settlements. Other income, net,
decreased (64.5%) to $22,000 for the three months ended March 31, 1999 from
$62,000 for the comparable period in 1998. As a percentage of net sales, other
income, net, decreased to 0.0% for the three months ended March 31, 1999 from
0.2% for the comparable period in 1998. For the three months ended March 31,
1999, other income, net, consisted of $133,000 of interest income and $53,000
of interest expense compared to $89,000 of interest income and $12,000 of
interest expense for the three months ended March 31, 1998.
Income Tax Expense. Income tax expense decreased (22.9%) to $1.7 million for
the three months ended March 31, 1999 from $2.2 million for the comparable
period in 1998. Our effective tax rate decreased to 36.9% for the three months
ended March 31, 1999 from 37.9% for the comparable period in 1998. Because our
international sales, which are not subject to state income taxes averaging 3%,
increased, our overall tax expense decreased.
Net Income. Net income decreased (19.7%) to $2.9 million for the three months
ended March 31, 1999 from $3.6 million for the comparable period in 1998. As a
percentage of net sales, net income decreased to 6.8% for the three months
ended March 31, 1999 from 8.8% for the comparable period in 1998. This decrease
occurred because the amounts we spent in connection with our international
expansion were only partially offset by the increase in net sales and the
decrease in income tax expense, in addition to the other factors described
above.
Year ended December 31, 1998 compared with the year ended December 31, 1997
Net sales. Net sales increased 9.5% to $164.9 million in 1998 from $150.6
million in 1997. This increase was primarily composed of the following:
. A $10.8 million increase from the sale of several new products
introduced during 1998 and from existing products which were not
available for sale during the first nine months of 1997. Also
contributing to the increase was the opening of our Australian
operation in October 1998.
. An increase of $10.8 million in existing product sales. This increase
resulted solely from increases in the volume of products sold.
29
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
. A decrease of ($7.3) million due to an overall decrease in associate
pack sales. A decrease of approximately ($8.6) million in associate
pack sales related to the enrollment of new associates and was
partially offset by a $1.3 million increase in packs sold to associates
renewing their association with us. The wholesale prices of our
associate packs changed in May and June 1998 as we added some
additional packs to our 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, we believe the slowdown was caused by associates
focusing on the pre-opening activities in Australia, resulting in a
decrease in domestic recruiting and pack sales. We are currently
exploring new strategies to increase 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 net sales of finished goods and a slight increase in
the price of raw materials due to using a new vendor. These increases were
partially offset by a ($200,000) decrease in freight due to a change in vendors
and a ($100,000) decrease in normal costs of spoilage and shrinkage of
inventory.
Commissions. Commissions consist of payments to associates for sales activity
and downline growth. Commissions increased 8.1% to $66.7 million in 1998 from
$61.7 million in 1997. As a percentage of net sales, commissions decreased to
40.4% in 1998 from 41.0% in 1997. The slight decrease as a percentage of net
sales was the direct result of a decrease in the number of associate packs sold
and of our operations beginning in Australia.
Gross profit. Gross profit increased 10.9% to $71.1 million in 1998 from
$64.2 million in 1997. As a percentage of net sales, gross profit increased to
43.1% in 1998 from 42.6% in 1997. These changes resulted from the factors
described above.
Selling and administrative expenses. Selling and administrative expenses
consist of human resource expenses, including wages, bonuses and marketing
expenses, and are a mixture of both fixed and variable expenses. Selling and
administrative expenses increased 14.5% to $31.9 million in 1998 from $27.8
million in 1997. As a percentage of net sales, selling and administrative
expenses increased to 19.3% in 1998 from 18.5% in 1997. The dollar amount
increase was a result of increased labor costs due to sales volume increases,
$1.0 million spent on our first large-scale national associate meeting and
$400,000 related to the opening of our Australian operations.
Other operating costs. Other operating costs include utilities, depreciation,
travel, office supplies and printing expenses. Other operating costs increased
15.2% to $22.4 million in 1998 from $19.4 million in 1997. As a percentage of
net sales, other operating costs increased to 13.6% in 1998 from 12.9% in 1997.
The dollar amount increase was primarily due to the $1.5 million in additional
expenses related to our expansion into Australia,
30
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
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 our new laboratory and the
relocation of our Texas distribution center.
Cancellation of incentive compensation agreements. Cancellation of incentive
compensation agreements consists of a one-time charge in 1997 totalling
approximately $2.2 million. This charge resulted from the exchange of shares of
our common stock for the cancellation of certain incentive compensation
agreements.
Write-off of deferred offering costs. During August 1998, we withdrew our
original underwritten institutional/retail offering and expensed $847,000
related to the offering, which included printing, legal, accounting and
roadshow costs. In September 1998, we began the initial public offering, 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 1997. The 1998 increase in expense was primarily due to our
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. Our effective tax rate increased to 36.4% in
1998 from 28.0% in 1997. The increase in our effective tax rate was primarily
the result of reorganizing our corporate structure, effective as of June 1,
1997. Prior to that date, the income from partnerships related to Mannatech was
subject to income tax only at the individual partners' level.
Net income. Net income decreased (5.3%) to $10.1 million in 1998 from $10.6
million in 1997. As a percentage of net sales, net income decreased to 6.1% in
1998 from 7.0% in 1997. The decrease was due to the increase in net sales
offset by a one-time charge of approximately $847,000 for the cancelled 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:
. An increase of $46.9 million in existing product sales. This increase
resulted solely from increases in the volume of products sold.
. An increase of $11.1 million in associate pack sales. Approximately
$5.9 million of the increase in associate pack sales related to the
enrollment of new associates and $5.2 million related to the renewal of
existing associates. The wholesale prices of our associate packs did
not change throughout this period.
31
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
. 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 net 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 resulted from 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 resulted from an
increase in bonuses and compensation paid and an increase in number of
employees to support our growth in net sales. The decrease in the percentage of
net sales resulted from cutting labor costs, including reducing executive
salaries beginning in June 1997 by approximately $600,000. Executive salaries
were reduced to the level paid by similar public companies. We do not expect
increases in executive salaries in the near future other than those increases
necessary 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 relocating our worldwide headquarters to its current location
in March 1997. We had capital expenditures related to the relocation of
approximately $9.1 million resulting 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 because
increased sales volumes lead to increased telephone usage resulting 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 resulted from sales volumes rising
rapidly without causing us to have similar increases in costs.
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 shares of
our common stock for the cancellation of certain incentive compensation
agreements.
32
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
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. In 1997 we
settled various lawsuits for a total of $110,000 compared to settlement
expenses 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. Our effective tax rate increased
significantly to 28.0% in 1997 from 14.3% in 1996. The increase in our
effective tax rate was primarily the result of reorganizing our corporate
structure effective as of June 1, 1997. Prior to that date, the income from
partnerships related to Mannatech 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
these related partnerships and the other factors described above.
33
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
Selected Quarterly Statements of Income
The following table sets forth unaudited quarterly statement of income data
for the periods indicated. In our opinion, this information has been prepared
on the same basis as the audited consolidated financial statements set forth in
this prospectus and includes all necessary adjustments, consisting only of
normal recurring adjustments, that we consider necessary to present fairly this
information in accordance with generally accepted accounting principles. You
should read this information in conjunction with the consolidated financial
statements and related notes beginning on page F-1 of this prospectus. Our
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, Mar. 31,
1997 1997(1) 1997 1997(2) 1998 1998 1998(3) 1998(4) 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(in millions)
<S> <C> <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 $ 42.6
Gross profit............ 14.2 16.3 17.2 16.4 18.1 18.2 17.0 17.8 18.4
Income before income
taxes.................. 4.5 1.7 6.3 2.3 5.8 5.5 2.7 1.8 4.6
Income tax expense...... 1.3 0.5 1.8 0.6 2.2 2.2 1.0 0.3 1.7
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income.............. $ 3.2 $ 1.2 $ 4.5 $ 1.7 $ 3.6 $ 3.3 $ 1.7 $ 1.5 $ 2.9
====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per share(5)
Basic.................. $ 0.16 $ 0.06 $ 0.20 $ 0.08 $ 0.16 $ 0.15 $ 0.08 $ 0.06 $ 0.13
====== ====== ====== ====== ====== ====== ====== ====== ======
Diluted................ $ 0.16 $ 0.06 $ 0.19 $ 0.07 $ 0.15 $ 0.14 $ 0.07 $ 0.06 $ 0.12
====== ====== ====== ====== ====== ====== ====== ====== ======
Pro Forma
Information:(6)
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(5)
Basic.................. $ 0.01 $ 0.05 $ 0.18 $ 0.06
====== ====== ====== ======
Diluted................ $ 0.01 $ 0.05 $ 0.17 $ 0.05
====== ====== ====== ======
Number of starter packs
sold................... 32,547 36,134 34,881 29,899 30,261 29,176 17,183 40,383 32,530
Number of renewal packs
sold................... 8,000 10,922 10,675 11,622 13,892 8,636 21,629 14,319 14,604
------ ------ ------ ------ ------ ------ ------ ------ ------
Total number of packs
sold................... 40,547 47,056 45,556 41,521 44,153 37,812 38,812 54,702 47,134
====== ====== ====== ====== ====== ====== ====== ====== ======
Total associates
cancelling associate
status................. 1,178 1,280 1,187 1,518 1,376 1,597 1,683 1,486 1,448
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) In June 1997, we recorded a one-time charge to operations for the issuance
of our common stock in exchange for the cancellation of certain incentive
compensation agreements. An additional incentive compensation agreement was
cancelled in December 1997.
(2) 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 obsolete inventory. We now sell raw
materials to our manufacturers and repurchase finished goods, which should
prevent future losses on abnormal conversions. Selling and administrative
expenses included accruals for (1) discretionary bonuses for all employees,
(2) termination expenses and (3) 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 and warrants
to non-employees.
34
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
(3) In September 1998, we recorded a charge of approximately $941,000 for the
write-off of various deferred offering costs. In December 1998, we
recovered $94,000 of these costs.
(4) During the fourth quarter of 1998, we began operations in Australia and
incurred approximately $1.0 million in start-up costs. In addition, we
expensed $500,000 for ongoing modification costs associated with our
internally developed software.
(5) Computed on the basis described in Note 1 in the notes to the consolidated
financial statements.
(6) The pro forma information shows our net income as if all income earned by
us and the partnerships was taxable at federal and statutory rates.
The following table sets forth certain unaudited quarterly results of
operations expressed as a percentage of net sales for each of the nine quarters
ending with the period ended March 31, 1999.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............ 42.5 42.8 43.2 41.5 44.0 42.7 43.4 42.2 43.2
Income before income
taxes.................. 13.4 4.5 16.0 5.8 14.3 13.0 7.0 4.2 10.8
Income tax expense...... 3.8 1.2 4.4 1.6 5.3 5.0 2.7 0.7 4.0
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income.............. 9.6% 3.3% 11.6% 4.2% 9.0% 8.0% 4.3% 3.5% 6.8%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Liquidity and Capital Resources
In February 1999, we received approximately $9.2 million in net proceeds from
the sale of our common stock in the initial public offering. In the initial
public offering, we sold 1,500,000 shares of our common stock and existing
shareholders sold 1,556,016 shares of their common stock at $8.00 per share. In
addition, in February 1999, we received $187,083 from the exercise of 138,580
outstanding warrants for 138,580 shares of our common stock at $1.35 per share.
Also in late February 1999, we received $454,188 in proceeds from the exercise
of the remaining 336,435 outstanding warrants for 336,435 shares of our common
stock at $1.35 per share. We intend to use approximately $6.3 million of the
proceeds of the initial public offering for international expansion, primarily
for product registration, initial inventory requirements and similar items. The
remaining $2.9 million was used to fund working capital and for general
corporate purposes.
Our primary capital requirement is to fund working capital to support our
growth. In the past, we financed our operations mostly through cash flows from
operating activities and capital leases. As a result of our expenditures on the
facilities, equipment and personnel necessary to support our growth and
international expansion, we had working capital deficiencies of $9.2 million
and $12.4 million as of December 31, 1997 and 1998, respectively, compared to
working capital of $4.2 million at March 31, 1999. We invested approximately
$9.1 million, $6.1 million and $400,000 during 1997, 1998 and the first three
months of 1999, respectively, in our leased properties and equipment. These
projects were funded primarily through capital leases and operating cash flows,
which decreased working capital.
35
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
We distributed approximately $4.0 million during 1997 to our related
partnerships, which no longer exist. We paid approximately $6.9 million, $9.9
million and $1.3 million in dividends to our shareholders in 1997, 1998 and the
first three months of 1999, respectively. In 1997 and 1998, current liabilities
increased due to an increase in payables, income taxes and inventory purchases.
These increases are primarily related to increased sales volume in 1997 and
1998, the costs of the initial public offering, our expansion into Australia
and research into future planned expansion into other international markets.
For the three months ended March 31, 1999, current liabilities decreased due to
the reduction in accounts payable and accrued expenses and an income tax
benefit related to the exercise of the warrants. These decreases are primarily
related to the receipt of proceeds from the initial public offering and
increases in sales volume. We believe our current facilities are sufficient to
support our near-term growth.
In March and August 1998, we entered into two capital leases with principal
amounts of $631,000 and $841,000, respectively. These capital leases bear
interest at 9.3%, are collateralized by the leased assets and are payable in
thirty-six monthly installments. In July 1998, we entered into a thirty-six
month, unsecured note payable with a finance company to finance our three-year
product liability insurance premium. The initial principal amount of this note
was $435,670, the interest rate is 8.0% and monthly installments are due
through December 2000.
Net cash provided by (used in) operating activities was $9.6 million, $19.8
million, $18.2 million and ($5.3) million in 1996, 1997, 1998 and the three
months ended March 31, 1999, respectively. Throughout these periods, we
increased net sales, which were partially offset by increases in inventories,
expenses from international expansion and a decrease in income tax payable of
approximately $2.0 million related to the income tax benefit resulting from the
exercise of the warrants. In 1999, we expect to spend up to $4.5 million for
start-up costs and $2.6 million for initial inventory for our planned expansion
into the United Kingdom in 1999 and Japan in 2000.
Net cash provided by (used in) investing activities was ($3.2) million,
($8.9) million, ($4.5) million and $500,000 in 1996, 1997, 1998 and the three
months ended March 31, 1999, respectively. In 1997 these activities consisted
primarily of purchases of equipment and build-out of leased facilities in
connection with our relocation to our new headquarters facility, and in 1998,
the relocation of our Texas distribution center, the build-out of our research
and development facility and the development and implementation of our
proprietary software program. The new facilities and software program should be
sufficient for our immediate needs. However, in the near future, we intend to
spend up to an estimated $3.8 million for additional modifications to the
software program for international expansion, Internet access and additional
purchases of equipment and build-out of leased facilities for our planned
international expansion into the United Kingdom in 1999 and Japan in 2000. In
1999, certain shareholders repaid notes receivable due to us of approximately
$974,000.
Net cash provided by (used in) financing activities totaled ($6.2) million,
($11.9) million, ($12.9) million and $12.5 million in 1996, 1997, 1998 and the
three months ended
36
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
March 31, 1999, respectively. In 1996 and through the reorganization of our
corporate structure in June 1997, we made distributions to the partners of the
partnerships. Following the reorganization, we paid dividends on a monthly
basis to our shareholders in the amount of $0.02-$0.06 per share and paid
dividends each month until the completion of the initial public offering on
February 12, 1999. Our board of directors intends, from time-to-time, to
reevaluate this policy after considering relevant factors, including the level
of our net income and alternative uses of retained earnings. In February 1999,
the gross initial public offering proceeds of approximately $12.0 million were
received and we also recorded an income tax benefit of approximately $2.0
million from the exercise of the warrants.
Our existing capital resources, including cash provided by operating
activities, bank borrowings, together with the proceeds from the initial public
offering and suspension of dividend payments to shareholders, should be
adequate to fund our operations for at least the next 12 months. We have no
present commitments or agreements with respect to any acquisitions or purchases
of manufacturing facilities or new technologies. Changes could occur that would
consume available capital resources faster than anticipated. Our capital
requirements depend on numerous factors, including:
. the timing and pace of our entry into international markets;
. growth in the number of associates; and
. our research and development efforts.
If our existing capital resources, together with the net proceeds of the
initial public offering, are insufficient to meet our capital requirements, we
will be required to raise additional funds. We cannot assure you that
additional funding, if necessary, will be available on favorable terms, if at
all.
Year 2000
We recognize the need to ensure that our 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., 99 would represent 1999). If not
corrected, many computer systems could fail or create erroneous results in the
year 2000. We believe all of our internal information systems currently in use
are Year 2000 ready, largely due to our short operating history. The majority
of our 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, we expect to identify and modify, if necessary, any
of our building and utility systems for Year 2000 issues during the first half
of 1999. We expect all testing and necessary modifications of non-information
technology systems to be completed by the summer of 1999.
We have begun contacting our vendors and other third parties to determine the
extent to which these related systems may not be Year 2000 ready. Because we
are still in the initial stages of these communications, we cannot determine if
Year 2000-related failures are
37
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
possible and, if so, the extent that such failures would impact us. If one of
our primary suppliers of ingredients were to have Year 2000 problems, it is
possible that these problems could have a serious, negative effect on our
operations.
We expect the total cost associated with Year 2000 identification, testing
and modifications to be between $100,000 and $200,000, of which $30,000 was
spent during 1998 and the first three months of 1999. The expected cost
represents approximately 2-3% of the total information technology budget and
includes all costs to be incurred if we use only our own employees. If we have
to use outside vendors to perform these tasks, the total costs could increase
by approximately $600,000. Currently, we do not anticipate having to use
outside vendors.
We have not developed a Year 2000-specific contingency plan. If any or all of
our applications fail to perform properly on January 1, 2000, we will resort to
temporary manual processing. Depending upon the severity and duration of the
failure, and our ability to remedy the cause, our business could be hurt by
such a failure. We do not expect failure to achieve Year 2000 readiness by any
of our vendors to have a material adverse impact on our operations, although
such a failure may cause some disruption to operations in the short-term.
Impact of Inflation
We believe that inflation historically has not had a material impact on our
operations or profitability. In 1998, we expanded into Australia, in 1999, we
plan to expand into the United Kingdom and in 2000, we plan to expand into
Japan. Revenues and expenses in foreign markets are currently translated using
historical and weighted-average currency exchange rates; therefore a weakening
United States dollar should have a positive impact whereas a strengthening
United States dollar should have a negative impact on translations of our
foreign operations. The planned expansion into Japan may not proceed as planned
if there is a further economic downturn or fluctuation in Asian currencies. We
intend to proceed cautiously with the Japanese expansion in order to help
minimize any material impact on our operations or profitability.
Recent Financial Accounting Standards Board Statements
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard 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.
Financial Accounting Standard No. 133 is effective for fiscal years beginning
after June 15, 1999. As we do not have any derivative financial instruments,
this pronouncement is not expected to impact us.
38
Management's Discussion and Analysis of Financial
Condition and Results of Operations
<PAGE>
OUR BUSINESS
Industry Overview
The nutritional supplements industry includes manufacturers and distributors
of products that are generally intended to enhance the body's performance and
well being. Nutritional supplements include:
. vitamins;
. minerals;
. dietary supplements;
. herbs;
. botanicals; and
. compounds derived from the above.
The nutritional supplements industry has experienced substantial growth since
the adoption of the Dietary Supplement Health and Education Act of 1994. This
act allows vendors of dietary supplements to educate consumers regarding the
effects of certain ingredients. According to the Nutrition Business Journal
Annual Industry Overview, 1997 dietary supplement sales in the United States
increased by 13% and totaled approximately $12.6 billion. With respect to our
planned expansion into the United Kingdom, the October/November 1998 Nutrition
Business Journal noted that 1997 European dietary supplement sales were
approximately $11.9 billion, of which 12% was derived from sales in the
nutrition industry. Further, with respect to our planned expansion into Japan,
the Nutrition Business Journal noted that Japanese dietary supplement sales
were approximately $6.4 billion, of which 54% was derived from direct sales in
the nutrition industry. We believe the growth in the nutritional supplement
market is driven by several factors, including:
. the general public's heightened awareness and understanding of diet and
health;
. the aging population, particularly the baby-boomer generation, is more
likely to consume nutritional supplements;
. product introductions in response to new scientific research; and
. the nationwide trend toward preventive medicine.
Nutritional supplements are sold primarily through:
. mass market retailers, including drug stores, supermarkets and discount
stores;
. health food stores;
. mail order companies; and
. direct sales organizations.
In the past decade, direct selling has grown as a means to distribute products
due to advancements in technology and communications. Network marketing is a
type of direct selling. The distribution of products through network marketing
has grown significantly in
39
Our Business
<PAGE>
recent years. According to the "Survey of Attitudes toward Direct Selling,"
prepared by Wirthlin Worldwide, food, nutrition and wellness products are among
the three categories experiencing the greatest gains in the direct selling
industry since 1976. According to this survey, approximately 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. Further, four in ten 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. We believe we can
take advantage of growth in both direct sales and the demand for nutritional
supplement products.
Operating Strengths
We attribute much of our success to our two-fold business strategy:
. to develop a line of nutritional supplements having both health
benefits and mass appeal to the increasing number of people who are
becoming more health conscious; and
. to provide an opportunity for people interested in our products to
establish a direct sales business.
We believe this business strategy will enable us to continue our growth by
capitalizing on our following strengths:
Proprietary product offerings. We offer an innovative line of products based
upon our proprietary, patent-pending research. We believe that the discovery
and development of products containing the carbohydrates necessary to optimum
health represents an expanding business opportunity for Mannatech. We
recognized the nutritional need for the eight known monosaccharides to support
optimal health and developed and filed a patent application on a compound,
Ambrotose(R) Complex, which contains these monosaccharides. We include this
compound in each of our products. We believe that maintaining a proprietary
line of products is important for two reasons: (1) it is a marketing factor
that differentiates us from our competitors; and (2) the limited availability
helps drive demand and allows premium pricing.
Research and development capability. We believe that our experienced
personnel and new research and development facilities will allow us to develop
and market additional new proprietary products. Our research and development
efforts are led by two scientists with an aggregate of 35 years of experience
designing products based on emerging carbohydrate technology. In March 1998, we
completed construction of our new laboratory, which is equipped with gas and
liquid chromatographs and mass spectrometers. The laboratory will be used to:
. maintain quality standards;
. support our research and development commitment in the area of new
herbal complexes; and
. support the development of both new and existing products.
40
Our Business
<PAGE>
To complement our in-house staff and facilities, we have sought, and will
continue to seek, strategic alliances with several large manufacturers of
nutritional supplements. These companies work with us to create, develop and
manufacture our proprietary products and lend additional guidance, which is
helpful to our strategic planning. We also work with other smaller companies to
identify and develop new innovative products.
Associate support philosophy. We are committed to providing the highest level
of support services to our associates. We believe that we meet the needs of,
and build loyalty with, our associates through our highly personalized and
responsive customer service. We sponsor several associate events throughout the
year to provide education and motivation for thousands of associates. These
events offer information, aid in business development and are a venue for
associates to interact with the leading distributors and researchers of
Mannatech.
Flexible operating strategy. Flexibility is a key part of our existing and
ongoing success. We outsource our production and form strategic alliances to
minimize capital expenditures where practicable. We believe we can enter
international markets in an efficient and cost-effective manner by using the
expertise and resources of our strategic allies in the areas of distribution
and logistics, call center operations, product registration and export
requirements. Information technology also plays a key role in our operating
flexibility. Our proprietary technology systems can be adapted to support
expansion into new markets. By developing this operating strategy, we believe
we reduce the operational problems typically encountered by network marketing
companies during periods of rapid growth.
Experience and depth of management team. Our management team consists of
experienced individuals drawn from a variety of backgrounds and having
expertise in various fields, including:
. product research and development;
. marketing;
. direct sales;
. legal and compliance;
. information technology; and
. product distribution.
All of our principal managers have substantial business experience, most with
larger businesses. These managers are able to bring the perspective of
traditional business to our network marketing system. Our management team's
goal is to provide a sound, systematic and reliable framework within which each
associate can fit his or her personal style of conducting business.
Growth Strategy
Our primary growth strategy is to:
. increase associate product sales;
. continue to expand operations in existing markets;
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Our Business
<PAGE>
. expand into new markets; and
. continue to evaluate whether to expand into additional foreign markets.
We believe that our future growth will be based on the following factors:
Introduce new products. Since our inception, we have and currently intend to
continue to introduce new products each year. We expect each new product to
contain one or more proprietary components and to complement existing products.
We believe that our new laboratory will help us develop these new products.
Attract new associates and enhance associate productivity. We have enjoyed
significant growth in our number of associates by focusing on our operating
strengths and creating a business climate which recognizes associates for their
achievements. This strategy increases the retention, motivation and
productivity of associates. We plan to continue to introduce new associate
achievement levels in part to encourage greater retention, motivation and
productivity. In addition, we will continue to modify associate events and
recognition programs to encourage growth in the number of associates.
Enter new markets. We believe that growth potential exists in international
markets. In October 1998, we opened our Australian headquarters in St.
Leonards, Australia. We are planning further expansion into the United Kingdom
in 1999 and Japan in 2000 and continue to evaluate whether to expand into
several additional countries. By employing our flexible operating strategy in
the international sector, we believe we will be able to enter new markets in a
cost-effective and efficient manner. We will base our decision to expand into
new markets on, (1) size of the market, (2) anticipated demand, and (3) ease of
entry.
Products
We market a line of quality, proprietary products, including 20 different
nutritional products and three topical products. We also offer a variety of
sales aids, including enrollment and renewal packs, brochures and videotapes.
These sales aids accounted for approximately 29.3%, 24.7% and 18.9% of net
sales in 1996, 1997 and 1998, respectively. We believe our focused product line
contributes to efficient distribution and inventory management.
We believe that the discovery and use of certain carbohydrates offers
significant potential for nutritional benefits. Healthy bodies, comprised of
many sophisticated components working together, must have accurate internal
communication to function at an optimal level. In its most basic form, this
communication occurs at the cellular level and is referred to by molecular
biologists as cell-to-cell communication. To maintain a healthy body, cells
must "talk" to other cells. Scientists have learned that certain molecules
found on the surface of all cells called glycoproteins, play a key role in all
cell-to-cell communication. The name, glycoprotein, is derived from the
molecules' composition of sugar, known as glyco, and protein. The body's need
for these carbohydrates is important because up to 85% of glycoproteins are
composed of specific monosaccharides that are necessary to support optimal
health.
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Our Business
<PAGE>
Harper's Biochemistry, a leading biochemistry reference source, lists eight
known monosaccharides commonly found in human glycoproteins, which are
important to the healthy functioning of cell-to-cell communications in the
human body. These known monosaccharides are:
. fucose;
. galactose;
. glucose;
. mannose;
. N-acetylgalactosamine;
. N-acetylglucosamine;
. N-acetylneuraminic acid; and
. Xylose.
Ambrotose(R)Complex is composed of these monosaccharides. These monosaccharides
belong to a universe of approximately 200 monosaccharides found in nature.
43
Our Business
<PAGE>
The following chart lists our products, and the body systems targeted by
each, as of April 30, 1999.
<TABLE>
<CAPTION>
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(TM)(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(TM) X
- -------------------------------------------------------------------------------------------------
Man.Aloe(R) X
- -------------------------------------------------------------------------------------------------
MannaBAR(TM)
Carbohydrate Formula X X X
- -------------------------------------------------------------------------------------------------
MannaBAR(TM)
Protein Formula X X X
- -------------------------------------------------------------------------------------------------
Manna-C(TM) X
- -------------------------------------------------------------------------------------------------
MannaCleanse(TM) X
- -------------------------------------------------------------------------------------------------
Mannatonin(TM) X
- -------------------------------------------------------------------------------------------------
MVP(TM) X
- -------------------------------------------------------------------------------------------------
Bulk PhytAloe(R) X
- -------------------------------------------------------------------------------------------------
Phyt.Aloe(R) X
- -------------------------------------------------------------------------------------------------
PhytoBears(R) X
- -------------------------------------------------------------------------------------------------
Plus(TM) X
- -------------------------------------------------------------------------------------------------
Profile 1(TM) X
- -------------------------------------------------------------------------------------------------
Profile 2(TM) X
- -------------------------------------------------------------------------------------------------
Profile 3(TM) X
- -------------------------------------------------------------------------------------------------
Sport with
Ambrotose(R) X
</TABLE>
(1) Formerly Naturalizer.
Product Development
Our overall product strategy is to develop proprietary nutritional
supplements that capitalize on existing and emerging scientific knowledge and
the growing worldwide interest in alternative healthcare and optimal health. We
focus on bringing new proprietary and, where possible, patentable products to
market that can be developed into new product lines, while expanding our
existing product lines. Research and development costs related to
44
Our Business
<PAGE>
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 designing new
products, enhancing existing products, Food and Drug Administration 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.
Our product launches typically occur at our corporate events. We will base
our selection of the products developed on:
. the marketability and proprietary nature of the product,
. regulatory considerations,
. the availability of ingredients, and
. the existence of data supporting claims of functionality.
To support and validate the proprietary nature of our products, our research
and development department conducts appropriate research both before and after
product launch.
We introduced the following new products in 1998:
. MannaBAR(TM), a nutritional supplement bar in two versions containing
the equivalent of our recommended minimum daily supply of
Ambrotose(R)Complex, Phyt.Aloe(R) and Plus(TM);
. Manna-C(TM), a nutritional support for nasal and sinus health
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
. Ambrostart(TM), a nutritional support fiber drink containing
Ambrotose(R)Complex, and Bulk Phyt.Aloe(R).
The following chart indicates the year that our products were introduced:
<TABLE>
<CAPTION>
Year Products Introduced
---- -------------------
<C> <S>
1994 Man.Aloe(R), Plus(TM), MVP(TM), Sport, Ambroderm(TM) (formerly
Naturalizer), Phyt.Aloe(R), Firm(TM)
1995 PhytoBears(R), Em.Pact(TM), Emprizone(R)
1996 Ambrotose(R), Mannatonin(TM), Profile 1(TM), Profile 2(TM), Profile
3(TM), 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>
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Our Business
<PAGE>
Product Distribution System
Overview. The foundation of our sales philosophy and distribution system is
network marketing. We believe network marketing is an effective vehicle to
distribute our products for the following reasons:
. it is easier to explain the benefits of our products in a person-to-
person, educational setting;
. it is more direct than television and print advertisements;
. direct sales allow potential consumers to actually test our products;
. there is greater impact on the consumer from associate and consumer
testimonials;
. continues to build a base of potential consumers for additional
products;
. associates can provide high levels of customer service and attention by
following up on sales to ensure proper product usage and customer
satisfaction; and
. associates' contact with customers generates repeat purchases.
We encourage, but do not require, associates to use our products, nor do we
require a person to be an associate in order to purchase our products. We
believe our network marketing system is particularly attractive to prospective
associates for the following reasons:
. the potential for supplemental income;
. no requirement to purchase inventory;
. no need to collect money from customers;
. there is very little paperwork involved in our sales process; and
. a flexible work schedule.
We suggest associates enroll new associates with whom the associates have
relationships: family members; friends; business associates; neighbors or
otherwise. We believe that associates will be more likely to remain with us if
they are enrolled by someone with whom they have an ongoing relationship.
Associates pay for products prior to shipment. We carry no accounts
receivable from our associates, except for minor amounts owing due to check
returns or other exceptions. Associates generally pay for products 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.
Advancements in communications, including telecommunications, and the
increasing use of videotape players, fax machines and personal computers have
enhanced the effectiveness of direct selling as a distribution channel in the
past decade. We produce high-quality video tapes and audio tapes for use in
product education, demonstrations and sponsoring sessions. We believe that
these sales aids play an important role in the success of associate efforts. We
are committed to using current and future technological advances to enhance the
effectiveness of direct selling.
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Our Business
<PAGE>
Associate development. We believe the key contributing factors to our long-
term growth and success are the recruitment of new associates and retention of
existing associates. We are active in the development of associates, including
in the areas of recruitment, support, motivation and compensation.
We primarily rely on existing associates to enroll new associates. The
enrollment of new associates creates multiple levels in the network marketing
structure. These new associates are referred to as "downline" or "sponsored"
associates. Associates can purchase products directly from us at wholesale
prices and can sponsor other associates in order to build a network of
associates and product users.
We also rely heavily on existing associates to train new associates. Master
Associate training course, an advanced training program for associates, was
developed using both the expertise of experienced corporate trainers and the
experience of seasoned associates. While we provide brochures, magazines and
other sales materials, advanced training is specially designed to provide
systematic and uniform training to associates about us, our products, our
methods of doing business and our compensation plan. As of January 1998, only
those associates who have participated in advanced training are eligible to
receive compensation for training other associates.
The needs of our associates are a priority and we believe that providing a
high level of support for our associate's efforts has been and will continue to
be important to our success. We provide a large number of support services
tailored to the needs of our associates, including:
. motivational meetings;
. educational and informative conference calls;
. automated fax services;
. ordering and distribution system;
. personalized customer service via telephone, the Internet and e-mail;
. 24-hour, seven days per week access to information through touch-tone
phones;
. a liberal product return policy;
. a current database of all associates and their upline and downline
associates; and
. business development materials that we believe will increase product
sales and recruitment.
We currently recognize associate performance with four levels of associate
leadership achievement: (1) Regional; (2) National; (3) Executive; and (4)
Presidential. Each leadership level provides the opportunity for additional
compensation, excluding generation bonus, ranging from 15% of commissionable
sales at the regional director level to 9% of commissionable sales at the
presidential level. In addition, associates are eligible for a "generation
bonus," which is an additional achievement level specially designed to motivate
sales and downline growth. The additional achievement levels are available to
the associates once the associate has achieved Presidential leadership status.
The associate can then achieve four levels of Presidential status: (1) Bronze;
(2) Silver; (3) Gold; and (4) Platinum. Each of
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<PAGE>
these achievement levels provides associates with the opportunity for
additional compensation. We intend to expand our program of associate
recognition as necessary in the future to reward increased levels of
performance and to further motivate associates.
Associate compensation. All associate compensation is paid directly by us and
is based on: (1) product sales; and (2) the achievement of certain leadership
levels. We offer a compensation plan that combines the aspects of two widely
used multilevel marketing compensation plans. Our compensation plan pays
commissions based on a percentage of the associate's wholesale prices and also
pays additional compensation based upon attainment of certain associate
leadership levels. The elements of our compensation plan are similar to other
multilevel marketing compensation plans. 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 advanced training can receive $25.00 for each eligible associate they
train. Bonuses or commissions ranging from $10.00 to $200.00 are also earned on
products included in starter or introductory packs. Our compensation plan is
designed 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 compensation plan discussed above, associates can earn
compensation for retail sales of products and educating other associates.
Based upon our knowledge of other industry-related network marketing
compensation plans, we believe that our compensation plan is among the most
financially rewarding plans offered in the industry. Commissions as a
percentage of net sales were 40.7%, 41.0%, 40.4% and 41.1% for 1996, 1997, 1998
and the three months ended March 31, 1999, respectively.
Mannatech does not employ its existing compensation plan outside of the
United States and Canada. In the international sector, we use a similar plan
with regard to product sales, but each plan is tailored to fit the laws and
considerations governing compensation of associates in each country and
includes compensation for the attainment of leadership levels. We have
integrated our international compensation plans across all markets in which our
products are, or will be, sold, thereby allowing associates to receive
commissions for global product sales, rather than merely local product sales.
We refer to this as our "global seamless downline structure" and we hope it
will allow associates to build global networks 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. Our international compensation plan is designed
to pay approximately the same percentage compensation as in the United States
and Canada. We expect this compensation plan to stimulate both product sales as
well as the development of width and breadth in downline organizations.
Management of associates. We take an active role in the management of our
associates. Many multilevel marketing companies encounter difficulties with
regulatory
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authorities due to lack of oversight of associate activities. Any oversight
process is complicated because our associates are independent contractors and
not legally employees of Mannatech. However, we seek to restrict the statements
and conduct of associates regarding our business by contractually binding
associates to abide by our associate policies and procedures. Each associate
receives a copy of the policies and procedures that must be followed in order
to maintain the associate's status with us. Associates are expressly forbidden
from making any representation as to the possible earnings of any associate,
other than through statements of Mannatech indicating the range of actual
earnings by all associates. Associates are also prohibited from creating any
marketing literature that has not been approved by Mannatech or a qualified
attorney. We also monitor associate websites and Internet conduct on a regular
and continuing basis. In March 1999, we introduced Mannapages, a personal
Internet website program established for our associates, whereby we produce an
Internet website for an associate for a $49.00 fee. We hope Mannapages will not
only assist associates in their sales efforts but also help us monitor
associate websites on a regular basis.
We have established, and enforce as much as possible, a compliance program
for disciplining associates who do not comply with our policies and procedures.
We have developed formal steps for proceeding if a complaint is filed against
an associate. Our primary goal is to educate the associate to ensure that he or
she understands the policy or procedure in question and will follow all of our
policies and procedures in the future. Also, our compliance and legal
departments, in cooperation with our other departments, regularly evaluate
associate conduct and the need for new and revised rule making. We believe that
the compliance program reflects positively on Mannatech, helps in the
maintenance of associate ethics and aids our recruiting activities.
Product return policy. Our product return policy provides that retail
customers may return the unused portion of any product to the selling associate
and receive a full cash refund. Any associate who provides a refund to a
customer is reimbursed with product by Mannatech upon providing proper
documentation and the remainder of the product. Our product return policy for
associates is to refund 90% of the cost for any returned, unopened, restockable
products and any up-to-date corporate literature that is in good, usable
condition. Historically, product returns have not been significant. Returns as
a percentage of net sales were 1.2%, 1.5%, 1.7% and 1.1% in 1996, 1997, 1998
and the three months ended March 31, 1999, respectively.
Information Technology and Systems
We believe that maintaining sophisticated and reliable transaction processing
systems is essential to our long-term success. Our systems are designed to:
. reduce the time required to supply an associate or customer with our
products;
. provide detailed and customized billing information;
. respond quickly to associate needs and information requests;
. provide detailed and accurate information concerning qualification and
downline activity;
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. provide detailed and customized associate commission payments;
. support our customer service department; and
. monitor, analyze and report financial and operating trends.
In order to meet these needs and expand transaction processing systems to
accommodate our expected growth, expenditures for information technology
operations and development activities are expected to be approximately $9.1
million during 1999, of which $3.8 million are expected to be capital
expenditures. We believe that our significant investment in software, hardware
and personnel will enable us to:
. respond rapidly to our business needs for information technology
assessment and development;
. manage international growth and our seamless downline structure; and
. reduce expenses as a percentage of net sales as revenues increase.
Our suppliers of computer hardware are Dell Computer Corporation, Hewlett-
Packard Company, Compaq Computer Corporation, and Digital Equipment Corp.
Digital Equipment Corp.'s hardware systems are linked to provide a high level
of availability for critical business applications. We believe the global
presence of these suppliers will be an important factor in supporting our
expansion plans.
Our financial software was upgraded at the end of 1996 with the acquisition
of a sophisticated financial system capable of operating on several platforms.
We have also purchased a report writing system, which interfaces with our
financial systems. These systems, used together, enable us to track and analyze
financial information and operations, as well as create and produce custom
reports.
Production and Distribution
All of our products are manufactured by outside contractors, providing us
with the production capacity necessary to respond to fluctuations in sales and
limiting our investment in capital equipment. We believe that we currently have
in place the manufacturers necessary to meet our inventory requirements over
the next several years, including expansion into foreign markets. Nonetheless,
we continue to identify new quality-driven manufacturers to supply the products
necessary to our success. We also seek to save money by periodically reviewing
pricing considerations and by requiring competitive bids from various
manufacturers meeting our quality and performance requirements.
We currently acquire our ingredients solely from suppliers that we consider
to be the superior suppliers of such ingredients. We believe we have developed
dependable alternative sources for all of our ingredients except Manapol(R) and
arabinogalactan, which are components of Ambrotose(R)Complex. We believe that
we could produce or replace these ingredients if we cannot purchase ingredients
from our current suppliers.
We have two proprietary ingredients: (1) Ambrotose(R) Complex and (2)
Dioscorea Complex. We eventually plan to bring the blending of all proprietary
formulas in-house, further protecting the confidential nature and quality
standards of our proprietary formulations. In the meantime, we continue to seek
high-quality suppliers for our ingredients.
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In January 1998, our Texas distribution operation relocated to a new $1.3
million, 75,000 square foot facility in Coppell, Texas. The facility includes
an automated system capable of processing 18,000 orders per day. We believe
this system will enhance our productivity and support sales volume growth. The
facility also contains a warehouse, distribution offices and an ingredient
mixing area that is currently not being utilized. We also have contract
distribution facilities in Canada and Australia. For further information on
these contract facilities see "Properties" on page 57.
Government Regulation
In addition to regulation of our direct selling activities, we are controlled
by a large number of laws, governmental regulations, administrative
determinations, court decisions and similar legal requirements at the federal,
state and local levels in both our United States and foreign markets. These
regulations address, among other things:
. our network marketing system;
. transfer pricing and similar regulations affecting the amount of
foreign taxes and customs duties we pay;
. taxation of associates, which requires us to collect taxes and maintain
appropriate records;
. how we make, package, label, distribute, import, sell and store our
products:
. what we put in our products;
. what we claim our products do for the human body;
. how we advertise; and
. the degree to which we can be liable for associates' claims about our
products.
Products. One or more of these governmental agencies regulate our business or
our products:
. Food and Drug Administration;
. Federal Trade Commission;
. Consumer Product Safety Commission;
. Department of Agriculture;
. Environmental Protection Agency;
. Postal Service; and
. various agencies of the states, localities and foreign countries in
where products are manufactured, distributed and sold.
The Food and Drug Administration regulates the formulation, manufacture,
packaging, storage, labeling, promotion, distribution and sale of the foods,
dietary supplements and over-the-counter drugs distributed by us. Food and Drug
Administration regulations require both our suppliers and us to meet good
manufacturing practice regulations for the preparation, packing and storage of
our products. The Food and Drug Administration has published a Notice of
Advanced Rule Making for good manufacturing practices for dietary supplements,
but it has not yet issued a proposed rule.
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The Dietary Supplement Health and Education Act of 1994 revised the
provisions of the Federal Food, Drug and Cosmetic Act concerning the
composition and labeling of dietary supplements. We believe this act is
generally favorable to the dietary supplement industry. The legislation creates
a new class, by statute, of "dietary supplements." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet. This legislation grandfathers, with certain
limitations, dietary ingredients that were on the market before October 15,
1994. A dietary supplement which contains a dietary ingredient that was not on
the market before October 15, 1994 must provide evidence establishing that the
supplement is reasonably expected to be safe. Manufacturers of dietary
supplements which make a "statement of nutritional support," thereby describing
certain types of product performance characteristics, must:
. have evidence that the statement is truthful and not misleading;
. make a disclaimer in the statement itself; and
. notify the Food and Drug Administration of the statement no later than
30 days after the statement is first made.
The majority of the products that we market are classified as dietary
supplements under the Federal Food, Drug and Cosmetic Act. In September 1997,
the Food and Drug Administration issued regulations governing the labeling and
marketing of dietary supplement products. These regulations cover:
. the identification of dietary supplements and their nutrition and
ingredient labeling;
. the wording used for claims about nutrients, health claims and
statements of nutritional support;
. labeling requirements for dietary supplements for which "high potency"
and "antioxidant" claims are made;
. notification procedures for statements on dietary supplements; and
. premarket notification procedures for new dietary ingredients in
dietary supplements.
The notification procedures became effective in October 1997, while the new
labeling requirements did not become effective until March 23, 1999. We revised
our product labels as necessary to reflect the new requirements prior to the
effective date. In addition, we will be required to continue our ongoing
program of providing evidence for our product performance claims, and of
notifying the Food and Drug Administration of certain types of performance
claims made for our products. Our substantiation program involves compiling and
reviewing the scientific literature pertinent to the ingredients contained in
our products.
In certain markets, including the United States, claims made with respect to
dietary supplements, personal care or any of our other products may change the
regulatory status of the products. For example, in the United States, the Food
and Drug Administration could possibly take the position that claims made for
some of our products make those products new drugs requiring preliminary
approval. The Food and Drug Administration could also place those products
within the scope of a Food and Drug Administration over-the-counter
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drug monograph. Over-the-counter monographs dictate permissible ingredients,
appropriate labeling language and require the marketer or supplier of the
products to register and file annual drug listing information with the Food and
Drug Administration. Emprizone(R) is the only product we sell that is labeled
as an over-the-counter monograph drug. If the Food and Drug Administration
asserts that product claims for our other products caused them to be new drugs
or fall within the scope of over-the-counter monographs, we would be required
to either file a New Drug Application, comply with the applicable monographs or
change the claims made in connection with the products.
Dietary supplements are subject to the Nutrition, Labeling and Education Act
which regulates health claims, ingredient labeling and nutrient content claims
characterizing the level of a nutrient in the product. This Act prohibits the
use of any health claim for dietary supplements unless the health claim is
supported by significant scientific agreement and is pre-approved by the Food
and Drug Administration.
We may be required to obtain an approval, license or certification from a
foreign country's ministry of health or comparable agency prior to entering a
new foreign market. We will work with local authorities in order to obtain the
requisite approvals, license or certification before entering such market. The
approval process generally requires us 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 our products or may be
unavailable with respect to certain products or certain ingredients. We must
also comply with product labeling and packaging regulations that are different
from country to country. In markets where a formal approval license or
certification is not required we will rely upon the advice of local counsel to
make sure that we comply with the law. We will use our resources to gain
required licenses and approvals to operate our business legally.
The Federal Trade Commission regulates the marketing practices and
advertising of all our products. In the past several years, the Federal Trade
Commission instituted enforcement actions against several dietary supplement
companies for false and misleading marketing practices and advertising of
certain products. These enforcement actions have resulted in consent decrees
and monetary payments by the companies involved. The Federal Trade Commission
has increased its review of the use of testimonials, which we use in our
business. The Federal Trade Commission requires reasonable evidence proving
product claims at the time that such claims are first made. The failure to have
this evidence when product claims are first made violates the Federal Trade
Commission Act. Although the Federal Trade Commission has never threatened an
enforcement action against us for the advertising of our products, we cannot
assure you that the Federal Trade Commission will not question our advertising
or other operations in the future.
We cannot predict the content of any future laws, regulations,
interpretations or applications, nor can we predict how new or different
governmental regulations or orders could hurt our business in the future. These
regulations could, however:
. require us to change the contents of our products;
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. make us keep additional records;
. make us increase the available documentation of the properties of our
products; or
. make us increase or use different labeling and scientific proof of
product ingredients, safety or usefulness.
Any or all of such requirements could be a burden and cost us more money.
Network marketing system. Our network marketing system, which includes our
compensation plan, is controlled by a number of federal and state statutes and
regulations, and administered by the Federal Trade Commission and various state
agencies. The legal requirements controlling network marketing organizations
are in part directed to make certain that product sales are ultimately made to
consumers. In addition, achievement within these organizations must be based on
sales of products rather than compensation from the recruitment of additional
associates, investments in the organizations or other non-retail sales related
criteria. For instance, various markets limit how much associates may earn from
commission on sales of associates who were not directly sponsored by the
associate. We have and will continue to obtain regulatory approval of our
network marketing system in jurisdictions that require such approval. If
regulatory approval is not required we will rely on the advice of local counsel
to ensure our regulatory compliance.
We entered into a consent decree in February 1997 as a result of negotiation
with the Attorney General of the State of Michigan. Under the consent decree,
we agreed to monitor product purchases by our associates in Michigan. The
purpose of the monitoring is to identify and correct any instances of coerced
sales. We also conduct a number of random audits of associates in Michigan for
evidence of stockpiling. To date, we have not found evidence of coerced sales
or stockpiling by our associates in Michigan. Further, our associate policies
and procedures are designed to provide no incentive or reward to associates for
engaging in such activities.
In Canada, our network marketing system is regulated by both federal and
provincial law. Under Canada's Federal Competition Act, we must make sure that
any representations relating to associate compensation to prospective
associates constitute fair, reasonable and timely disclosure and that it meets
other legal requirements of the Federal Competition Act. Our compensation plan
has been reviewed and a positive opinion was received from the appropriate
Canadian authorities. All Canadian provinces and territories other than Ontario
have legislation requiring that we register or license as a direct seller
within that province. Licensing is designed to maintain the standards of the
direct selling industry and to protect the consumer. Some provinces require
that both Mannatech and our associates be licensed. We currently hold any
required provincial or territorial direct sellers' licenses.
In Australia, our network marketing system is subject to both federal and
state regulation. Our compensation plan in Australia is designed to meet state
requirements and the requirements of Australia's Trade Practices Act. Business
and trade practices of Mannatech and our 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 Australia's Therapeutic Goods
Act.
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Other regulations. We are also subject to a variety of other regulations in
various foreign markets, including:
. social security assessments and taxes;
. value added taxes;
. goods and services taxes;
. sales taxes;
. customs duties;
. employee/independent contractor issues;
. employment and severance pay requirements;
. import/export regulations; and
. antitrust issues.
For example, in many markets we are restricted in the amount and types of rules
and termination criteria that we can contractually impose on our associates. If
we do not comply with these restrictions, we may be required to pay social
security or other tax or tax-type assessments on behalf of associates and we
may incur severance obligations to the terminated associates. In some
countries, we may be subject to such taxes or payment requirements in any
event.
In some countries, including the United States, we may also be governed by
regulations concerning the activities of our associates. In some countries we
are, or regulators may find that we are, responsible for our associates'
conduct. Regulators may request or require that we take steps to make certain
that our associates comply with these regulations. The types of conduct
governed by regulations include, in part:
. claims made about our products;
. promises of income by us or our associates; and
. sales of products in markets where the products have not been approved,
licensed or legally allowed for sale.
In some markets, including the United States, improper product claims by our
associates could cause our products to be reviewed or re-reviewed by regulatory
authorities. This kind of review could result in our products being classified
or placed into another category with stricter regulations or requiring labeling
changes.
Compliance procedures. To comply with the many regulations that apply to our
business, we have developed formal compliance measures, including:
. our associate disciplinary procedures; and
. internal policies for compliance with Food and Drug Administration and
Federal Trade Commission rules and regulations.
We continue to conduct research into the specific foreign laws and
regulations before entering any new international market. We will continue to
use our resources to operate
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legally. We will also research laws governing associate conduct and revise or
alter our business system, compensation plan, associate requirements and other
materials and programs as required by laws and regulations in each market. We
attempt to educate associates about acceptable business conduct in each market
through our policies, procedures, manuals, seminars and other training
materials and programs. We are not able to fully monitor our associates
effectively to make certain that they comply with existing policies, procedures
and regulations, and that they do not distribute our products in countries
where we have not commenced operations. We do not devote great resources to
monitoring and cannot promise you that associates comply with existing
policies, procedures and regulations.
Competition
The nutritional supplements industry is large and intensely competitive. We
compete directly with companies that manufacture and market nutritional
products in each of our product lines, including:
. Rexall Showcase International;
. Rexall Sundown;
. General Nutrition Companies, Inc.;
. Solgar Vitamin and Herb Company, Inc.;
. Twinlab Corporation; and
. Weider Nutrition International, Inc.
Many of our competitors in the nutritional supplements market have longer
operating histories, are more well-known and have greater financial resources
than us. Also, nutritional supplements are offered for sale in a wide variety
of ways. While we believe that consumers appreciate the convenience of ordering
products from home through a sales person, the buying habits of many consumers
who are used to purchasing products through traditional retail methods are
difficult to change. The number of our products in each product category is
also relatively small compared to the wide variety of products offered by many
other nutritional product companies.
We also compete for new associates with other retail, multilevel marketing
and direct selling companies in the nutritional supplements industry. Many of
these direct selling organizations have longer operating histories and are more
well-known and have greater financial resources than us. These competitors
include:
. Amway Corporation;
. Nu Skin Enterprises, Inc.;
. Body Wise International, Inc.;
. ENVION International;
. Herbalife International, Inc.;
. Enrich International;
. Rexall Showcase International;
. Rexall Sundown;
. Forever Living Products, Inc.; and
. Melaleuca, Inc.
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We compete for new associates by stressing the ease of our delivery system,
the superiority of our compensation plan and our proprietary and quality
products. We believe that many more direct selling organizations will enter the
market as the number of direct sellers expands over the next several years.
Because the pool of individuals interested in direct selling is limited in each
market, the potential pool of associates for our products is reduced when other
network marketing companies successfully recruit these people into their
businesses.
Employees
As of April 30, 1999, we employed 294 people in the United States, twelve of
whom occupy executive positions, and 10 people in Australia. This number does
not include associates, who are independent contractors and not employees of
Mannatech. Our employees are not unionized and we believe we have a good
relationship with our employees.
Properties
We lease approximately 110,000 square feet in Coppell, Texas for our
headquarters. We lease an additional 75,000 square feet in Coppell, Texas for
our warehouse and distribution center. Each lease is for a term of 10 years,
expiring in January 2007 and January 2008, respectively. We also lease
approximately 9,000 square feet in St. Leonards, Australia for our Australian
corporate headquarters. The lease term is for five years, expiring in August
2003. We believe these leased facilities are adequate for our operations in 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 6,000 square feet of 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 3,000 square
feet of 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.
Legal Proceedings
In February 1998, we received a demand letter from Dr. Joe Glickman, Jr., one
of our associates, stating that we had, among other things, breached various
contracts, agreements and promises. Dr. Glickman stated an intention to pursue
these claims in the United States District Court for Montana. In March 1998, we
started arbitration proceedings against Dr. Glickman individually and as
trustee of the Dr. Joe Glickman, Jr. Phyto Trust d/b/a/ Alotek, for the
recovery of funds and the cancellation of associate positions claimed by
Alotek. The arbitration is currently pending while the American Arbitration
Association decides whether to waive or delay payment of Dr. Glickman's
arbitration fee as he has requested. We believe that Alotek's claims are
without value and have asked the arbitrator to make a legal decision. We also
believe that we have valid defenses to all claims made by Alotek. Nevertheless,
a decision against the company in this matter would hurt our business,
profitability, growth prospects and ready cash.
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In October 1997, we filed an objection to the issuance of a registered
trademark being issued to IntraCell Nutrition, Inc., which had filed a
trademark application for the name, "Manna." In our objection, we state that,
among other things, "Manna" is a general descriptive term often applied to
nutritional products, and is for that reason not entitled to trademark
protection. Discovery was completed in this case and briefs were filed. The
case is now pending an oral hearing before the Trademark Trial and Appeal Board
of the United States Patent and Trademark Office. We believe that we have a
substantial likelihood of prevailing in our objection to the granting of the
tradename.
In March 1998, Johnnie Hill d/b/a Taylor Enterprises, one of our associates,
filed a lawsuit in the 44th Judicial District Court, Dallas County, Texas,
alleging that we breached the contract with Mr. Hill as an associate. Mr. Hill
further alleges that we committed fraud, conversion, conspiracy and that we
failed to properly account for the payments owed to him. In May 1998, the suit
was ordered into arbitration by the District Court. In March 1999, Mr. Hill
filed an arbitration claim with the American Arbitration Association in Dallas,
Texas, alleging that we breached our contract with him, interfered with his
business relationships, did not pay him money owed to him, and committed fraud,
damaging him in the amount of $3.0 million. We believe we have valid defenses
to any and all claims filed by Mr. Hill. A decision against Mannatech in this
matter could hurt our business.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors and their ages as of April 30, 1999 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Charles E. Fioretti....... 52 Chairman of the Board and Chief Executive
Officer
Samuel L. Caster.......... 48 President and Director
Anthony E. Canale......... 46 Executive Vice President and 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... 55 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......... 51 Director
</TABLE>
Charles E. Fioretti is one of our founders, has been our Chairman of the
Board and Chief Executive Officer since May 1997, and has been a director since
November 1993. His current term as director expires in 2001. Mr. Fioretti was
our Chief Operating Officer from November 1993 to July 1996. From June 1990
until April 1995, Mr. Fioretti was an owner and operator of several Outback
Steakhouse, Inc. restaurants in Arizona, Indiana and Kentucky. Mr. Fioretti is
Peter E. Hammer's brother-in-law and William C. Fioretti's cousin.
Samuel L. Caster is one of our founders and has served as our President and
as a director since November 1993. His current term as director expires in
2000. From April 1992 until August 1993, Mr. Caster served as co-founder, owner
and President of Funds-4-Kids, Inc., a multilevel marketing company that sold
healthy candy bars for children. Mr. Caster is Donald W. Herndon's brother-in-
law.
Anthony E. Canale joined us in January 1997 and since then has served as our
Executive Vice President and Chief Operating Officer. From February 1993 until
October 1996, Mr. Canale was President of Canale and Associates, an Outback
Steakhouse, Inc. joint venture partnership. Before that, 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 received
a B.S. in Management from American International College in Springfield,
Massachusetts.
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Management
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Patrick D. Cobb joined us in August 1994 and since then has served as Chief
Financial Officer and Vice President. Mr. Cobb has served as our corporate
Secretary 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 received a B.S. in Finance
from the University of Oklahoma and is a Certified Public Accountant.
Deanne Varner joined us in January 1996 and since May 1996 has served as our
General Counsel and Vice President of Compliance. From 1986 until January 1996,
Ms. Varner maintained a law practice in Dallas, Texas focusing on business law
and related transactions. Ms. Varner has over 20 years of experience in
business, corporate and transactional law. Ms. Varner received a B.A. in Social
Sciences and a J.D. from Southern Methodist University.
Jeffrey P. Bourgoyne joined us in December 1996 and since February 1998 has
served as Vice President of Operations. From May 1995 until December 1996, Mr.
Bourgoyne served as facility manager for DSC Logistics, Inc., a third-party
logistics provider. From June 1993 until May 1995, Mr. Bourgoyne was a
Transportation Services Manager for Abbott Laboratories, a pharmaceutical
company. Mr. Bourgoyne received a B.S. in Management from University of New
Orleans and an M.B.A. from Lake Forest Graduate School of Management.
Peter E. Hammer joined us in March 1995 and since January 1998 has served as
our Vice President of New Business and International Development. From November
1991 until February 1995, Mr. Hammer served as the Vice President and Chief
Information Officer of The Network, Inc., a business solutions company in
Atlanta, Georgia. Mr. Hammer received a B.A. in Liberal Arts from State
University College at Buffalo and an A.A.S. in Electronics from Suffolk
Community College. Mr. Hammer is Charles E. Fioretti's brother-in-law.
Donald W. Herndon joined us in November 1993 and until December 1996 served
as our Vice President of Distribution. Since December 1996 Mr. Herndon has
served as our 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 multilevel 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 us in July 1996 and has served as our Vice
President of Research and Product Development and Chief Scientific Officer
since December 1997. From March 1995 until July 1996, Dr. McAnalley served us
as a consultant. From March 1987 until February 1995, Dr. McAnalley was Vice
President of Research and Product Development at Carrington Laboratories, Inc.,
a pharmaceutical research, development and manufacturing company. Dr. McAnalley
received a Ph.D. in Pharmacology and Toxicology from the University of Texas
Health Science Center in Dallas, Texas.
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Management
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Ronald D. Norman joined us in May 1996 and from August 1997 until September
1998 served as Controller. In September 1998, Mr. Norman began serving as our
Treasurer. In June 1998, Mr. Norman was promoted to Vice President. From
September 1994 until April 1996 Mr. Norman was a tax manager with Belew Averitt
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 received an M.A. in Tax and a B.B.A. in Accounting from Baylor
University and is a Certified Public Accountant.
Eoin Redmond joined us in July 1997 and since then has served as our Vice
President of Information Technology. From August 1996 through June 1997, Mr.
Redmond was employed by us 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 us in November 1998 and since then has served
as our 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 received an M.B.A. from the
University of Pittsburgh and a B.A. from the University of Notre Dame.
Steven A. Barker became one of our directors in January 1998. His current
term as director expires in 2002. Dr. Barker has been a full professor of
Physiology, Pharmacology and Toxicology at Louisiana State University since
April 1990. Dr. Barker received a B.S. and an M.S. in Chemistry and a Ph.D in
Chemistry/Neurochemistry from the University of Alabama-Birmingham.
Chris T. Sullivan became one of our directors in October 1997. His current
term as director expires in 2001. Mr. Sullivan has been the Chairman of the
Board and Chief Executive Officer of Outback Steakhouse, Inc. since founding
that company in 1988. Mr. Sullivan serves on the executive committee for The
Outback/Gary Koch Pro-Am, the Tampa Bay Devil Rays, the Employment Policies
Institute and the Presidents Conference. Mr. Sullivan received a degree in
Business and Economics from the University of Kentucky.
61
Management
<PAGE>
Classes of our Board of Directors
Our board of directors is divided into three classes that serve staggered
three-year terms expiring at the annual meeting of shareholders as follows:
<TABLE>
<CAPTION>
Class Expiration Member
----- ---------- ------
<S> <C> <C>
Class I...................................... 2000 Caster, Cobb
Class II..................................... 2001 Fioretti, Sullivan
Class III.................................... 2002 Barker
</TABLE>
Committees of the Board of Directors
Our board of directors has three committees: (1) the audit committee; (2) the
compensation committee; and (3) the option commitee. Each committee is composed
solely of our two independent directors, Messrs. Barker and Sullivan. The audit
committee is charged with reviewing our annual audit and meeting with our
independent accountants to review our internal controls and financial
management practices. The compensation committee is responsible for
establishing salaries, bonuses and other compensation for our executive
officers. The option committee has the authority to determine the terms and
conditions of each option to be issued under our stock option plans and the
responsibility for administration of each such plan.
Director Compensation
Each of our independent directors who is not an officer or employee receives
an annual fee of $30,000 for serving on our board of directors. In addition,
our directors are reimbursed for their reasonable out-of-pocket expenses in
connection with their travel to and attendance at meetings of our board of
directors or its committees.
62
Management
<PAGE>
Executive Compensation
The following table summarizes the amount of compensation we paid, for each
of the three years ended December 31, 1998, to each person who served as our
chief executive officer during 1998 and our four most highly compensated
executive officers, other than the chief executive officer, who were serving as
executive officers at the end of 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Number of
Annual Compensation Shares
------------------- Other Underlying
Name And Principal Annual Options
Position Year Salary Bonus Compensation(1) Granted
------------------ ---- -------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Charles E. Fioretti(2).. 1998 $433,517 $ 750,000 $ 9,044 --
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 --
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
Executive Vice President
and 1997 221,978 190,172 -- 250,000
Chief Operating Officer 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 our matching contribution to the 401(k) plan.
(2) Mr. Fioretti became our Chief Executive Officer 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-owned vehicle transferred to Mr. Cobb in
1997.
63
Management
<PAGE>
The following table provides information on options granted to the executive
officers named in the Summary Compensation Table above during the fiscal year
ended December 31, 1998.
Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Individual Grants Value at Assumed
----------------------------------------------- Annual Rates of
Number of Stock Price
Shares Percent of Appreciation
Underlying Total Options Exercise or for Option Term (2)
Options Granted to Base Price Expiration -------------------
Name Granted(1) Employees ($/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) These options can be exercised beginning July 31, 1999, the first
anniversary of the date of grant.
(2) The 5% and 10% assumed annual compound rates of stock value increases are
required by the rules of the Securities and Exchange Commission and are not
our estimate or projection of future prices of our common stock. The actual
value for which any stock from these options may be sold may be greater or
less than the potential realizable value set forth in the table.
The following table sets forth, as of December 31, 1998, the number of
options and the value of unexercised options held by the executive officers
named in the Summary Compensation Table above. As of December 31, 1998, no
stock options had been exercised by any of our executive officers.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at 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 our common stock at December 31,
1998. Accordingly, as permitted by the Securities and Exchange Commission,
these values have been calculated based on the initial public offering
price of $8.00 per share less the per share exercise price of $1.35 per
share. 508,000 of the total unexercised options are not considered to be
in-the-money because the public offering price and per share exercise price
equal $8.00 per share.
(2) These options become exercisable on July 31, 1999.
64
Management
<PAGE>
Executive Employment Agreements
We entered into employment agreements with each of Charles E. Fioretti,
Patrick D. Cobb, Anthony E. Canale, Bill H. McAnalley and Deanne Varner, as of
September 1, 1998. These agreements provide that these officers will 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 terminate the contract before the end of any term. If we terminate any
of these employment agreements for any reason other than reasons specified in
the agreements, the officer is entitled to receive an amount equal to the sum
of all salary and bonus which would have been paid in the five years after such
termination.
Management Bonus Plan
Executive officers and some other members of corporate management are
eligible to receive bonuses in addition to their base salaries. Our
compensation committee is now responsible for reviewing and approving bonuses
for these officers.
Compensation Committee Interlocks and Insider Participation
During 1998, we had no compensation committee or other committee of the Board
of Directors performing similar functions. Decisions concerning amounts paid to
executive officers were made by the full board of directors. In February 1999,
after the completion of the initial public offering, our board of directors
established the compensation committee. The compensation committee is now
responsible for decisions regarding compensation of our executive officers.
Stock Option Plans
The 1997 Stock Option Plan was adopted by our board of directors and approved
by our shareholders on May 14, 1997. The 1998 Incentive Stock Option Plan was
adopted by the Board of Directors on April 8, 1998 and was amended on September
4, 1998 to increase the number of shares reserved for issuance. Both stock
option plans are intended to encourage investment by our officers, employees,
non-employee directors and consultants in shares of our common stock so that
they will have an increased interest in and greater concern for the welfare of
Mannatech.
Options granted under either stock option plan may either be incentive stock
options or options that do not qualify for treatment as incentive stock options
under Section 422 of the Internal Revenue Code of 1986. Options granted under
the 1998 Incentive Stock Option Plan may only be granted to our officers and
employees.
Incentive stock options may be granted under stock option plans to any person
who is one of our officers or other employees (including officers and employees
who are also
65
Management
<PAGE>
directors) or any parent or subsidiaries that may exist in the future. The
exercise price of incentive stock options must be at least the fair market
value of a share of our common stock on the date of grant.
The following table sets forth information regarding our stock option plans
as of May 13, 1999:
Stock Option Plan Information
<TABLE>
<CAPTION>
Weighted # vested # of shares
# of shares average and available
authorized # of options granted exercise price exercisable for grant
----------- -------------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1997 Stock Option Plan.. 2,000,000 2,000,000 $2.75 1,540,000 0
1998 Incentive Stock
Option Plan............ 1,000,000 418,000 $8.00 0 582,000
</TABLE>
The option committee has full and final authority in its discretion, subject
to the stock option plans' provisions, to determine, among other things:
. the individuals to whom options shall be granted;
. whether the option granted shall be an incentive stock option or a non-
qualified stock option;
. the number of shares of our common stock covered by each option;
. the time or times at which options will be granted;
. the option vesting schedule;
. the exercise price of the options;
. the duration of the options granted;
. prescribe, amend and rescind rules and regulations relating to the
stock option plans;
. accelerate or defer (with the consent of the optionee) the exercise
date of any option; and
. authorize any person to execute on our behalf any instrument required
to effectuate the grant of an option previously granted by our board of
directors.
The option committee also has the power to decide upon and make rules that
control the stock option plans and make decisions and take all actions
necessary for the proper administration of the stock option plans. The stock
option plans may be changed or cancelled by our board of directors at any time
without the approval of our shareholders, with a few exceptions. However, they
may not take action that affects options previously granted under the stock
option plan.
401(k) Plan
Starting May 9, 1997, we adopted a 401(k) Pre-tax Savings Plan. All employees
who have been employed by us for at least 90 days at the beginning of a quarter
and are at least
66
Management
<PAGE>
21 years of age are eligible to participate. Employees may contribute to the
401(k) Plan up to 15% of their current compensation, up to a statutorily
prescribed annual limit. Under the 401(k) Plan, we will make regular matching
contributions to the 401(k) Plan in the amount of $0.25 for each $1.00
contributed by a participating employee, up to 6% of a particpating employee's
annual compensation, including overtime. The 401(k) Plan also provides that if
we want to we can make profit-sharing contributions to the plan each year based
upon our profit. Employee contributions and our matching contributions are paid
to a corporate trustee and invested as directed by the participating employee.
Our contribution in the 401(k) Plan vests over five years or earlier if the
participating employee retires at age 65, becomes disabled or if the
participating employee dies or is terminated. Payments to participating
employees may also be made in the case of a financial hardship. Payments may be
made in a lump sum. The 401(k) Plan is intended to qualify under Section 401 of
the Internal Revenue Code of 1986, so that contributions made by employees or
by us to the 401(k) Plan, and income earned on these contributions, are not
taxable to employees until withdrawn from the 401(k) Plan.
67
Management
<PAGE>
CERTAIN TRANSACTIONS
Incentive Compensation Agreements
In 1994, we entered into incentive compensation agreements with various
shareholders and employees that required us to pay these individuals amounts
based on Mannatech's monthly sales volumes and growth in the number of new
associates. In 1998, William C. Fioretti, a major shareholder and a cousin of
Charles E. Fioretti, our chief executive officer, earned approximately $121,000
in commissions, which was paid in 1998 and early 1999.
Loans to Officers
We orally agreed to advance certain officers money to pay the taxes caused by
the cancellation of their incentive compensation agreements. On December 31,
1997, we made loans of $162,052 to Dr. Bill H. McAnalley Ph.D., our vice
president of research and product development, and of $121,782 to Peter E.
Hammer, our vice president of new business and international development. The
non-interest bearing loans were collateralized by shares of our common stock
owned by these officers. The loans were repaid in February 1999 after the
officers received the proceeds from the sale of their shares of common stock in
the initial public offering.
Loans to Agritech Labs, Inc.
During 1996 and 1997, we made cash advances to Agritech Labs, Inc. and
Agritech Technology, Ltd. totalling approximately $918,000. William C.
Fioretti, Charles E. Fioretti, Samuel L. Caster and Patrick D. Cobb own over
90% of the capital stock of these Agritech companies. Because we were concerned
about the ability of these Agritech companies to repay the loans, each of
Messrs. William C. Fioretti, Charles E. Fioretti, Samuel L. Caster, Patrick D.
Cobb, another shareholder of both Agritech companies and Mannatech agreed to
pay the obligations that these Agritech companies owed Mannatech. Each of these
individuals gave promissory notes to us totalling approximately $918,000. Each
promissory note bore interest at six percent per year and was payable on the
earlier of the sale of the Agritech companies or December 31, 1998. The
principal amount outstanding under the notes issued by each of Messrs. William
C. Fioretti, Charles E. Fioretti and Samuel L. Caster at December 31, 1998 was
approximately $275,400 and the principal amount outstanding under the note made
by Mr. Patrick D. Cobb at December 31, 1998 was approximately $45,900. On
December 31, 1998, we renewed the notes with an extended due date of December
31, 1999. On February 17, 1999, we signed new notes with each of the
shareholders. The new notes bear interest at six percent per year, 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 each of 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.
68
Certain Transactions
<PAGE>
Consultant's Fees
On October 20, 1998, we paid William C. Fioretti $250,000 for consulting
services he performed for us over the course of 1998 in sports marketing and
product development issues. Mr. Fioretti is one of our founders, a major
shareholder and the cousin of Charles E. Fioretti, our chairman of the board
and chief executive officer.
69
Certain Transactions
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of May 13, 1999, and as adjusted to reflect
the sale by the selling shareholders of 1,519,542 shares of our common stock in
this offering, the number of shares of our common stock and the percentage of
the outstanding shares of such class that are beneficially owned by (1) each
person who is the beneficial owner of more than 5% of the outstanding shares of
our common stock, (2) each of our directors, (3) the executive officers named
in the Summary Compensation Table on page 63, (4) each selling shareholder and
(5) the executive officers and directors named on page 59 as a group.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Beneficially
Owned Prior to Owned After
Offering(1) # of Offering(1)(2)
------------------ Shares ------------------
Name and Address Number Percent Offered Number Percent
---------------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C>
Samuel L. Caster............. 5,713,549 23.7% 325,000 5,388,549 22.4
c/o Mannatech, Incorporated
600 S. Royal Lane, Suite 200
Coppell, Texas 75019
William C. Fioretti(3)....... 5,474,407 22.7 325,000(4) 5,149,407 21.4
c/o Agritech Labs, Inc.
6333 N. St. Highway 161,
Suite 350
Irving, Texas 75063
Charles E. Fioretti.......... 5,411,549 22.5 325,000 5,086,549 21.1
c/o Mannatech, Incorporated
600 S. Royal Lane, Suite 200
Coppell, Texas 75019
H. Reginald McDaniel......... 504,800 2.1 40,000 464,800 1.9
Chris T. Sullivan(5)......... 442,537 1.8 50,000 392,537 1.6
Donald W. Herndon............ 421,585 1.8 50,000 371,585 1.5
Bill H. McAnalley(6)......... 421,296 1.7 40,000 381,296 1.6
Patrick D. Cobb(7)........... 400,900 1.7 100,000 300,900 1.3
Gary Watson(8)............... 377,630 1.6 50,000 327,630 1.4
Dick Hankins, Jr............. 307,845 1.3 50,000 257,845 1.1
Anthony E. Canale(9)......... 250,000 1.0 -- 250,000 1.0
Phillip P. Brous............. 250,000 1.0 50,000 200,000 *
Deanne Varner(10)............ 228,000 * -- 228,000 *
Peter E. Hammer.............. 196,630 * 50,000 146,630 *
Kim Snyder................... 98,532 * 25,000 73,532 *
Samuel A. Tancredi........... 30,000 * 10,000 20,000 *
Kathy Schiffer(11)........... 73,542 * 17,542 56,000 *
Gregory and Candace Ross..... 12,000 * 12,000 -- *
All executive officers and
directors as a group
(14 persons)................ 13,750,046 54.6 940,000 12,810,046 50.9
</TABLE>
- --------
* Less than 1%.
70
Principal and Selling Shareholders
<PAGE>
(1) The information contained in this table with respect to beneficial
ownership reflects "beneficial ownership" as defined in Rule 13d-3 under
the Securities Exchange Act of 1934. 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.
Pursuant to the rules of the Securities and Exchange Commission, each
person is deemed to beneficially own shares subject to options or warrants
exercisable within 60 days of the date of this prospectus and those shares
are deemed outstanding for purposes of calculating the percentage of
outstanding shares owned by such person, but shares subject to options or
warrants owned by others (even if exercisable within 60 days) are deemed
not to be outstanding for purpose of this calculation. In calculating the
percentage of outstanding shares held by the executive officers and
directors as a group, option and warrants exercisable within 60 days held
by any such person are deemed outstanding.
(2) Assumes all shares offered are sold.
(3) Includes 1,450,102 shares of our common stock held by the Fioretti Family
Partnership, Ltd. of which William C. Fioretti is the general partner and
he, his wife and trusts for the benefit of their children are the limited
partners. Mr. Fioretti was a director of Mannatech until he resigned on
December 1, 1997.
(4) Of the 325,000 shares offered by William C. Fioretti 216,668 are held of
record by William C. Fioretti and 108,332 are held of record by The
Fioretti Family Partnership, Ltd.
(5) Includes 100,000 shares subject to stock options exercisable within 60 days
of the date of this prospectus. All of these shares of our common stock and
the options are held by Multi-Venture Partners, Limited, an investment
partnership. The management of Multi-Venture is controlled by its sole
general partner, SBG Investments, L.L.C., which owns a 0.6% general
partnership interest in Multi-Venture. Mr. Sullivan owns a 27.2% interest
in SBG Investments, L.L.C. Mr. Sullivan shares voting and dispositive power
with respect to our common stock owned by Multi-Venture.
(6) Includes 15,000 shares held by Dr. McAnalley's children. Also includes
160,000 shares subject to stock options exercisable within 60 days of the
date of this prospectus.
(7) Includes 60,000 shares 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. Also includes 100,000 shares subject to stock options
exercisable within 60 days of the date of this prospectus.
(8) Includes 100,000 shares subject to stock options exercisable within 60 days
of the date of this prospectus.
(9) Includes 250,000 shares subject to stock options exercisable within 60 days
of the date of this prospectus.
(10) Includes 228,000 shares subject to stock options exercisable within 60
days of the date of this prospectus.
(11) Includes 56,000 shares subject to stock options exercisable within 60 days
of the date of this prospectus.
71
Principal and Selling Shareholders
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
As of the date of this prospectus, our authorized capital stock consists of
99,000,000 shares of common stock, par value $0.0001 per share, and 1,000,000
shares of preferred stock, par value $0.01. The following description is a
summary and is subject to and qualified in its entirety by reference to the
provisions of our articles of incorporation and our bylaws, which are filed as
exhibits to the registration statement of which this prospectus forms a part.
Common Stock
Prior to this offering and as of May 7, 1999, there were 24,076,753 shares of
common stock outstanding, held by approximately 5,740 holders of record. The
same number will be issued and outstanding following this offering. Holders of
our common stock:
. are allowed one vote per share in all shareholder votes, including the
election of directors;
. do not have cumulative voting rights;
. may receive dividends if declared by our board of directors;
. would share ratably in the net assets of Mannatech if a liquidation
occurred;
. have no preemptive rights to purchase shares of our stock;
. are not subject to having their shares redeemed by us; and
. are not able to convert the shares of our common stock into other
securities of Mannatech.
All outstanding shares of our common stock are, and the shares of common
stock to be issued pursuant to this offering will be, fully paid and
nonassessable.
Preferred Stock
Following this offering, 1,000,000 shares of preferred stock will be
authorized and no shares will be outstanding. The board of directors has the
authority to issue one or more classes or series of preferred stock without
shareholder approval. The board of directors also has the authority to change
the number of shares constituting any series and fix and determine the
designation and preferences, limitations and relative rights, including voting
rights, of the shares of any series of preferred stock without any action or
vote by the shareholders. We have no current plans to issue any shares of
preferred stock of any class or series.
Undesignated preferred stock may enable the board of directors to discourage
an attempt to obtain control of Mannatech by means of a tender offer, proxy
contest, merger or otherwise, and thereby protect our management. The issuance
of preferred stock may have a negative affect on the rights of our common stock
shareholders. For example, preferred stock issued by Mannatech may be given
preference over common stock as to (1) dividend rights;
72
Description of Capital Stock
<PAGE>
(2) liquidation preference or both; (3) may have full or limited voting rights;
and (4) may be convertible into shares of our common stock. Accordingly, the
issuance of shares of preferred stock may discourage bids for our common stock
or may otherwise adversely affect the trading price of our common stock.
Certain Effects of Authorized but Unissued Stock
Under our articles of incorporation, upon completion of this offering there
will be 74,923,247 shares of our common stock available for future issuance
without shareholder approval. These additional shares may be utilized for a
variety of corporate purposes, including future public offerings to raise
additional capital or facilitate acquisitions. We do not currently have any
plans to issue additional shares of our common stock, other than shares of
common stock that may be issued upon the exercise of options and warrants that
have been granted or may be granted in the future.
Special Provisions of our Articles, our Bylaws and Texas Law
The Texas Miscellaneous Corporation Laws Act authorizes corporations to limit
or eliminate the personal liability of directors to corporations and their
shareholders for monetary damages for breach of their fiduciary duty as
directors. The liability of a director is not limited or eliminated if the
director:
. breaches such director's duty of loyalty to Mannatech or our
shareholders;
. engages in an act or omission that is not in good faith or that
involves intentional misconduct or a knowing violation of laws;
. engages in a transaction from which the director receives an improper
personal benefit; or
. engages in an act or omission for which the liability of the director
is expressly provided by an applicable statute.
Our articles of incorporation limit the liability of our directors, but only in
their capacity as directors, to Mannatech or our shareholders to the fullest
extent permitted by any applicable law. The inclusion of this provision in our
articles of incorporation may reduce the likelihood of derivative litigation
against our directors. This provision may also discourage or deter shareholders
from suing directors for breach of their duty of care, even though such an
action, if successful, might otherwise benefit Mannatech and our shareholders.
We have included this provision in our articles of incorporation, together with
a similar indemnification provision in our bylaws, to enable us to attract
qualified persons to serve as directors who might otherwise be reluctant to do
so. The Securities and Exchange Commission has taken the position that personal
liability of directors for violations of the federal securities laws cannot be
limited and that indemnification by the issuer for such violations is
unenforceable.
We have entered into separate indemnification agreements with each of our
directors. These agreements may require us to indemnify our directors against
certain liabilities that may arise in their capacity as directors to the
maximum extent permitted under the Texas
73
Description of Capital Stock
<PAGE>
Business Corporation Act. In addition, we may be required to advance their
expenses incurred as a result of any proceeding against them for which they
could be indemnified, obtain directors' and officers' insurance or maintain
self-insurance.
Under the Texas Business Corporation Act, the board of directors of a
corporation has the power to amend and repeal the corporation's bylaws unless:
(1) the corporation's articles of incorporation reserve the power exclusively
to the shareholders or (2) a particular bylaw expressly provides that the board
of directors may not amend or repeal the bylaw. Our bylaws give our board of
directors the power to alter, amend or repeal our bylaws or adopt new bylaws.
Our bylaws also provide that the number of directors shall be fixed from time
to time by resolution of our board of directors. These provisions, in addition
to the existence of authorized but unissued capital stock, may have the effect,
either alone or in combination with each other, of discouraging an acquisition
of Mannatech deemed undesirable by the board of directors.
Anti-Takeover Considerations
Anti-takeover statute. On September 1, 1997, we became subject to newly
enacted Part 13 of the Texas Business Corporation Act. Part 13 prohibits a
Texas corporation from engaging in any "business combination" with an
"affiliated shareholder" for three years following the date that such
shareholder became an affiliated shareholder, unless: (1) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction that resulted in the shareholder becoming an
affiliated shareholder; or (2) the business combination is authorized at a
meeting of shareholders called more than six months after such date by the
affirmative vote of at least two-thirds of the outstanding voting shares not
owned by the affiliated shareholder.
For purposes of Part 13 of the Texas Business Corporation Act, a "business
combination" includes, among other things, a merger or conversion involving us
and the affiliated shareholder and the sale of 10% or more of our assets to the
affiliated shareholder. In general, Part 13 defines an "affiliated shareholder"
as any entity or person beneficially owning 20% or more of the outstanding
voting stock of Mannatech and any entity or person affiliated with or
controlling or controlled by such entity or person. The provisions of Part 13
could have the effect of delaying, deferring or preventing a change of control
of Mannatech even if the change of control is in our shareholders' interests.
Classified board of directors. Our bylaws provide for our board of directors
to be divided into three classes serving staggered three-year terms. At each
annual meeting of shareholders, the class of directors to be elected at such
meeting will be elected for a three-year term and the directors in the other
two classes will continue in office. The term of office of the first class of
directors will expire at the 2000 annual meeting of shareholders, the term of
office of the second class will expire at the 2001 annual meeting of
shareholders and the term of office of the third class will expire at the 2002
annual meeting of shareholders. The staggered terms for directors may affect
our shareholders' ability to change control of us even if a change of control
is in our shareholders' interests.
74
Description of Capital Stock
<PAGE>
Shareholder action. As permitted by the Texas Business Corporation Act, our
articles of incorporation provide that any action that normally would be taken
at an annual or special meeting of the shareholders may be taken without a
meeting, without prior notice and without a vote so long as the required number
of shareholders consent in writing. This provision could cause shareholders to
approve proposals in a more expeditious manner, which at times could be
detrimental to minority shareholders.
Transfer Agent And Registrar
The transfer agent and registrar for our common stock is First Chicago Trust
Company of New York.
75
Description of Capital Stock
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Mannatech will have 24,076,753 shares of
common stock outstanding and 24,051,753 of these shares are currently eligible
for sale in the open market, all under and subject to (1) the restrictions
contained in Rules 144 and 701 under the Securities Act of 1933 and (2) the
terms of the lock-up agreements described below. The common stock sold in this
offering will be freely tradeable without restriction or further registration
under the Securities Act of 1933, unless purchased by an "affiliate" of
Mannatech, as that term is defined in Rule 144, as described below.
Sales of Restricted Shares
Upon completion of this offering, 19,488,737 restricted shares of our common
stock will be outstanding, subject to the restrictions in Rule 144. In general,
under Rule 144, a person or persons whose shares are aggregated, who has
beneficially owned restricted shares for at least one year is entitled to sell,
within any three-month period, a number of such shares that does not exceed the
greater of (1) one percent of the then- outstanding shares of common stock,
which will be approximately 240,767 shares immediately after this offering or
(2) the average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of such sale is filed. Sales
under Rule 144 are also subject to certain requirements concerning availability
of public information, manner of sale and notice of sale. In addition,
affiliates must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period requirement, in order to sell shares of
common stock which are not restricted securities. Under Rule 144(k), a person
who is not an affiliate and has not been an affiliate for at least three months
prior to the sale and who has beneficially owned restricted shares for at least
two years may resell such shares without complying with the foregoing
requirements. In meeting the one- and two-year holding periods described above,
a holder of restricted shares can include the holding periods of a prior owner
who was not an affiliate. The one- and two-year holding periods described above
do not begin to run until the full purchase price or other consideration is
paid by the person acquiring the restricted shares from the issuer or an
affiliate.
Lock-up Agreements
We have entered into agreements with each of our shareholders and option
holders prohibiting these individuals from selling or otherwise disposing or
agreeing to dispose of any of their shares of common stock until August 11,
1999. After August 11, 1999, the shares subject to these agreements will not,
absent registration, be freely tradeable, but will become eligible for sale
under Rule 144 on various dates in the future. We have the authority to waive
the application of some or all of these agreements prior to August 11, 1999.
Options
Rule 701 promulgated under the Securities Act of 1933 provides that the
shares of common stock acquired upon the exercise of currently outstanding
options issued under our
76
Shares Eligible for Future Sale
<PAGE>
stock plans may be resold by persons, other than affiliates, subject only to
the manner of sale provisions of Rule 144. Such shares may also be resold by
affiliates under Rule 144, without complying with its one-year minimum holding
period, subject to limitations.
We have granted options to purchase 2,518,000 shares of our common stock,
50,000 of which were later cancelled leaving 2,468,000 outstanding. An
additional 582,000 shares are available for future option grants under the 1998
Incentive Stock Option Plan. The outstanding options we have granted become
exercisable as follows:
. 1,540,000 on May 13, 1999;
. 80,000 on May 14, 1999;
. 578,000 on July 31, 1999;
. 15,000 in equal portions over a three-year period with the first one-
third vesting on July 31, 1999;
. 100,000 in equal portions over a three-year period with the first one-
third vesting on November 25, 1999;
. 75,000 in equal portions over a three-year period with the first one-
third vesting on January 31, 2000; and
. 80,000 on May 14, 2000.
We recently registered 642,000 shares of our common stock issuable upon the
exercise of options issued under the 1997 Stock Option Plan. These 642,000
shares will be eligible for sale on the open market on May 13, 1999. We intend
to register, on Form S-8 under the Securities Act of 1933, the offering and
sale of the remaining shares of our common stock issuable under our stock
option plans as soon as practicable.
Canadian Offering
Assuming we receive the necessary approvals from all Canadian jurisdictions,
several of our major shareholders are planning to sell up to 900,000 shares of
our common stock to our Canadian associates at a price of $8.00 per share. We
currently anticipate that any shares sold to Canadian associates will not be
transferable for 180 days after they are purchased. However, at the end of this
180-day period, we plan to register these shares for sale under the United
States' securities laws. All of such shares will then be freely tradeable in
the public market. We will pay for the costs of the sale of the shares to
Canadian associates and the subsequent registration of the shares.
77
Shares Eligible for Future Sale
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders have entered into agreements with us which prohibit
them from selling any of the shares of common stock offered under this
prospectus until August 11, 1999. We may waive the provisions of these
agreements to the degree necessary to allow the sale of the shares offered by
this prospectus.
Shares offered under this prospectus may be offered and sold, from time to
time and at any time, either inside or outside of the United States:
. directly to purchasers or a single purchaser;
. to brokers or dealers as principal or as agent;
. to investors and/or dealers through a specific bidding or auction
process or otherwise;
. through underwriters or dealers;
. through agents; or
. through a combination of any such methods of sale.
Such sales may be made on any stock exchange on which the common stock may be
listed at the time of sale, in the over-the-counter market, in privately
negotiated transactions, or otherwise at prices prevailing in such exchange or
market or at prices related to the then-current market price or as may be
negotiated at the time of sale. The shares offered by this prospectus will be
listed on the Nasdaq National Market System.
Offers to purchase shares of common stock may be solicited directly by the
selling shareholders or by agents designated by the selling shareholders from
time to time. Any such agent which may be deemed to be an underwriter, as that
term is defined in the Securities Act of 1933, involved in the offer or sale of
the shares of common stock in respect of which this prospectus is delivered
will be named, and any commissions payable to such agent will be set forth, in
a prospectus supplement. Unless otherwise indicated in such prospectus
supplement, any such agent will be acting on a best efforts basis. In effecting
sales, underwriters, brokers or dealers may arrange for other underwriters,
brokers or dealers to participate. Brokers or dealers will receive commissions,
concessions or discounts in amounts to be negotiated immediately prior to the
sale.
If a dealer is utilized in the sale of the shares of common stock in respect
of which this prospectus is delivered, such shares of common stock will be sold
to such dealer as principal. The dealer may then resell such shares of common
stock to the public at varying prices to be determined by such dealer at the
time of resale. In the case of a sale to a dealer, the prospectus supplement
will state the name of such dealer, the number of shares purchased and the
price paid.
78
Plan of Distribution
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of our common stock offered hereby
will be passed upon for Mannatech by Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
Dallas, Texas.
EXPERTS
The consolidated financial statements of Mannatech as of December 31, 1997
and 1998, and for each of the years ended December 31, 1997 and 1998, included
in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Mannatech as of December 31, 1996,
and for the year ended December 31, 1996, included in this prospectus have been
so included in reliance on the report of Belew Averitt LLP, independent
accountants, given on the authority of said firm as experts in accounting and
auditing.
In November 1997, we advised Belew Averitt LLP that we would no longer retain
the firm as independent accountants. The reports of Belew Averitt LLP on
Mannatech did not contain an adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles. The decision to change accountants was precipitated by our plan to
complete an initial public offering in 1998 and was approved by our board of
directors in November 1997. During the periods audited by Belew Averitt LLP and
through November 1997 there were no disagreements with Belew Averitt LLP on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which, if not resolved to the satisfaction of
Belew Averitt LLP, would have caused it to make reference to the matter in
their reports. We engaged PricewaterhouseCoopers LLP as our independent
accountants in November 1997.
ADDITIONAL INFORMATION
Mannatech has filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act of 1933 with
respect to the 1,519,542 shares of common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement, portions of which have been omitted as permitted by the
rules and regulations of the Securities and Exchange Commission. Statements
contained in this prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
registration statement, each statement being qualified in all respects by such
reference. For further information with respect to Mannatech and our common
stock, we refer you to the registration statement. Copies of such materials may
be examined without charge at or obtained upon payment of prescribed fees from
the Public Reference Room of the Securities and Exchange Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and its regional offices located at
7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison
79
Additional Information
<PAGE>
Street, 14th Floor, Chicago, Illinois 60661-2511. The public may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains an internet website that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the website is http://www.sec.gov.
We are subject to the periodic reporting and other informational requirements
of the Securities Exchange Act of 1934. As long as we are subject to such
periodic reporting and information requirements, we will file with the
Securities and Exchange Commission all the required reports, proxy statements
and information. We intend to furnish our shareholders with annual reports
containing financial statements audited by an independent certified public
accounting firm and may furnish to shareholders quarterly reports containing
unaudited financial information for the first three quarters of each fiscal
year.
80
Additional Information
<PAGE>
MANNATECH, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Accountants........................................ F-2
Independent Auditor's Report............................................. F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March
31, 1999 (unaudited).................................................... F-4
Consolidated Statements of Income for the years ended December 31, 1996,
1997 and 1998 and the three months ended March 31, 1998 and 1999
(unaudited)............................................................. F-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for
the years ended December 31, 1996, 1997 and 1998 and the three months
ended March 31, 1999 (unaudited)........................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999
(unaudited)............................................................. F-7
Notes to Consolidated Financial Statements............................... F-8
</TABLE>
F-1
Financial Statements
<PAGE>
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
Financial Statements
<PAGE>
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
Financial Statements
<PAGE>
MANNATECH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998 AND MARCH 31, 1999
<TABLE>
<CAPTION>
December 31, March 31,
------------------------ -----------
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 61,148 $ 763,375 $ 8,380,344
Restricted cash......................... 199,619 -- --
Short-term investments.................. -- -- 100,571
Accounts receivable, less allowance for
doubtful accounts of $194,000 in 1997
and $58,000 for 1998 and 1999,
respectively........................... 549,904 62,834 41,383
Receivable from related parties......... 148,888 125,000 125,000
Current portion of notes receivable-
shareholders........................... 934,929 307,487 158,359
Inventories............................. 5,323,056 6,875,044 8,000,466
Prepaid expenses and other current
assets................................. 542,978 446,564 638,024
Deferred tax assets..................... 399,368 398,000 398,000
----------- ----------- -----------
Total current assets................ 8,159,890 8,978,304 17,842,147
Property and equipment, net............. 10,583,910 14,103,372 13,781,853
Notes receivable-shareholders, excluding
current portion........................ -- 701,042 512,562
Other assets............................ 470,952 947,489 911,384
Deferred offering costs................. 343,672 2,143,743 --
----------- ----------- -----------
Total assets........................ $19,558,424 $26,873,950 $33,047,946
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of capital leases and
notes payable.......................... $ 249,655 $ 854,423 $ 798,993
Accounts payable........................ 4,287,159 5,480,033 1,695,768
Accrued expenses........................ 11,540,577 15,063,237 11,154,396
Dividends payable....................... 1,321,654 -- --
----------- ----------- -----------
Total current liabilities........... 17,399,045 21,397,693 13,649,157
Capital leases and notes payable,
excluding current portion.............. 110,482 1,055,609 879,133
Deferred tax liabilities................ 505,000 1,438,000 1,438,000
----------- ----------- -----------
Total liabilities................... 18,014,527 23,891,302 15,966,290
----------- ----------- -----------
Commitments and contingencies (note
11)....................................
Redeemable warrants..................... 300,000 300,000 --
----------- ----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized, no
shares issued and outstanding........ -- -- --
Common stock, $0.0001 par value,
99,000,000 shares authorized,
22,101,738 shares issued and
outstanding in 1997 and 1998 and
24,076,753 in 1999, respectively..... 2,210 2,210 2,408
Additional paid-in capital.............. 2,632,238 2,632,238 14,818,898
Notes receivable from shareholders...... (636,418) (636,418) --
Retained earnings (deficit)............. (754,133) 684,618 2,260,350
----------- ----------- -----------
Total shareholders' equity.......... 1,243,897 2,682,648 17,081,656
----------- ----------- -----------
Total liabilities, redeemable
warrants and shareholders'
equity........................... $19,558,424 $26,873,950 $33,047,946
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
Financial Statements
<PAGE>
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
December 31, March 31,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $86,311,972 $150,569,843 $164,933,261 $41,087,754 $42,616,269
----------- ------------ ------------ ----------- -----------
Cost of sales........... 13,406,303 24,735,616 27,139,647 6,060,118 6,893,132
Commissions............. 35,155,231 61,677,103 66,650,001 16,883,420 17,316,177
----------- ------------ ------------ ----------- -----------
48,561,534 86,412,719 93,789,648 22,943,538 24,209,309
----------- ------------ ------------ ----------- -----------
Gross profit........ 37,750,438 64,157,124 71,143,613 18,144,216 18,406,960
----------- ------------ ------------ ----------- -----------
Operating expenses:
Selling and
administrative
expenses............. 17,764,415 27,845,502 31,880,442 7,683,934 8,471,792
Other operating
costs................ 11,746,003 19,402,317 22,359,134 4,695,819 5,353,889
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 12,379,753 13,825,681
----------- ------------ ------------ ----------- -----------
Income from operations.. 8,240,020 14,717,695 16,057,255 5,764,463 4,581,279
Other (income) expense,
net.................... (116,009) (43,170) 259,912 (61,963) (21,549)
----------- ------------ ------------ ----------- -----------
Income before income
taxes.................. 8,356,029 14,760,865 15,797,343 5,826,426 4,602,828
Income tax expense...... 1,193,640 4,138,822 5,743,364 2,208,961 1,700,992
----------- ------------ ------------ ----------- -----------
Net income.............. $ 7,162,389 $ 10,622,043 $ 10,053,979 $ 3,617,465 $ 2,901,836
=========== ============ ============ =========== ===========
Earnings per common
share:
Basic................. $ 0.35 $ 0.50 $ 0.45 $ 0.16 $ 0.13
=========== ============ ============ =========== ===========
Diluted............... $ 0.35 $ 0.47 $ 0.42 $ 0.15 $ 0.12
=========== ============ ============ =========== ===========
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................. $ 0.25 $ 0.42
=========== ============
Diluted............... $ 0.25 $ 0.41
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
Financial Statements
<PAGE>
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Common Stock Notes Total
----------------- Additional receivable Retained shareholders'
Par Paid-in from earnings equity
Shares Value capital shareholders (deficit) (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
($0.37 per share)..... -- -- -- -- (8,150,201) (8,150,201)
Net income............. -- -- -- -- 10,622,043 10,622,043
Distributions to
partners.............. -- -- -- -- (4,054,739) (4,054,739)
---------- ------ ----------- --------- ----------- -----------
Balance at December 31,
1997................... 22,101,738 2,210 2,632,238 (636,418) (754,133) 1,243,897
Dividends declared
($0.39 per share)..... -- -- -- -- (8,615,228) (8,615,228)
Net income............. -- -- -- -- 10,053,979 10,053,979
---------- ------ ----------- --------- ----------- -----------
Balance at December 31,
1998................... 22,101,738 2,210 2,632,238 (636,418) 684,618 2,682,648
Dividends declared
($0.06 per share)
(unaudited)........... -- -- -- -- (1,326,104) (1,326,104)
Repayment of notes
receivable--
shareholders
(unaudited)........... -- -- -- 636,418 -- 636,418
Net proceeds from
offering (unaudited).. 1,500,000 150 9,240,809 -- -- 9,240,959
Exercise of warrants
(unaudited)........... 475,015 48 941,223 -- -- 941,271
Tax benefit from
exercise of warrants
(unaudited)........... -- -- 2,004,628 -- -- 2,004,628
Net income
(unaudited)........... -- -- -- -- 2,901,836 2,901,836
---------- ------ ----------- --------- ----------- -----------
Balance at March 31,
1999 (unaudited)....... 24,076,753 $2,408 $14,818,898 $ -- $ 2,260,350 $17,081,656
========== ====== =========== ========= =========== ===========
</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
Financial Statements
<PAGE>
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
<TABLE>
<CAPTION>
December 31, March 31,
--------------------------------------- ------------------------
1996 1997 1998 1998 1999
----------- ------------ ------------ ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 7,162,389 $ 10,622,043 $ 10,053,979 $ 3,617,465 $ 2,901,836
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 414,299 1,189,494 2,226,931 398,838 732,501
Loss on disposal of
assets............... 3,876 411,202 351,642 (60,687) --
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) 350,283 934,368 213,961 --
Changes in operating
assets and
liabilities:
Accounts and notes
receivable.......... (449,899) (1,740,731) 437,358 468,245 21,451
Refundable income
taxes............... (455,089) 741,000 -- -- --
Inventories.......... (1,801,879) (375,719) (1,551,988) (1,071,015) (1,125,422)
Prepaid expenses and
other current
assets.............. (50,330) (376,507) 96,414 (413,638) (191,460)
Other assets......... 70,798 (4,749) 47,798 44,599 36,105
Accounts payable..... 191,504 1,747,043 1,192,874 (836,726) (3,784,265)
Accrued expenses..... 4,531,725 4,555,685 3,522,660 1,979,339 (3,908,841)
----------- ------------ ------------ ----------- -----------
Net cash provided by
(used in) operating
activities......... 9,595,565 19,766,157 18,158,818 4,340,381 (5,318,095)
----------- ------------ ------------ ----------- -----------
Cash flows from
investing activities:
Acquisition of
property and
equipment and
construction in
progress............. (2,660,108) (8,737,232) (4,625,849) (903,291) (410,982)
Proceeds from sale of
equipment............ -- -- -- 36,472 --
Security deposits..... (460,350) -- (88,865) -- --
Deposits of restricted
cash................. -- (199,619) 199,619 199,619 --
Short-term
investments.......... -- -- -- -- (100,571)
(Advance) Repayment of
shareholders/related
party receivables.... -- -- -- (15,030) 974,026
Other assets.......... (40,000) -- -- -- --
----------- ------------ ------------ ----------- -----------
Net cash provided by
(used in) investing
activities......... (3,160,458) (8,936,851) (4,515,095) (682,230) 462,473
----------- ------------ ------------ ----------- -----------
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) (2,643,309) (1,326,104)
Repayment of capital
lease obligations.... -- (37,265) (301,031) (5,073) (175,150)
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) -- -- -- --
Proceeds from the
initial public
offering............. -- -- -- -- 12,000,000
Proceeds from warrant
exercise............. -- -- -- -- 641,271
Payment of notes
payable.............. (71,200) (26,400) (56,730) -- (56,756)
Deferred offering
costs................ -- (343,672) (2,646,853) (118,721) (615,298)
Tax benefit of
warrants exercised... -- -- -- -- 2,004,628
----------- ------------ ------------ ----------- -----------
Net cash used in
financing
activities......... (6,227,751) (11,928,095) (12,941,496) (2,767,103) 12,472,591
----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 207,356 (1,098,789) 702,227 891,048 7,616,969
Cash and cash
equivalents:
Beginning of year..... 952,581 1,159,937 61,148 61,148 763,375
----------- ------------ ------------ ----------- -----------
End of year........... $ 1,159,937 $ 61,148 $ 763,375 $ 952,196 $ 8,380,344
=========== ============ ============ =========== ===========
Supplemental disclosure
of cash flow
information:
Income taxes paid..... $ 1,716,100 $ 68,800 $ 3,642,000 $ 2,280,000 $ 3,464,000
=========== ============ ============ =========== ===========
Interest paid......... $ -- $ 10,885 $ 109,000 $ 12,630 $ 53,000
=========== ============ ============ =========== ===========
A summary of non-cash
investing and
financing activities
follows:
Accrued dividends and
distributions........ $ 672,091 $ 1,321,654 $ -- $ 1,326,104 $ --
=========== ============ ============ =========== ===========
Assets acquired
through capital lease
obligations.......... $ -- $ 397,402 $ 1,471,986 $ 910,041 $ --
=========== ============ ============ =========== ===========
Asset acquired through
note payable......... $ -- $ -- $ 435,670 $ -- $ --
=========== ============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
Financial Statements
<PAGE>
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.
F-8
Financial Statements
<PAGE>
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.
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
F-9
Financial Statements
<PAGE>
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
F-10
Financial Statements
<PAGE>
net deferred tax assets, the Company evaluates the probability of realizing the
future benefits indicated by such assets. A valuation allowance is provided for
a portion or all of the net deferred tax assets when it is more likely than not
that such portion, or all of such deferred tax assets, will not be realized.
Prior to the merger of the Partnerships, the Company and the Partnerships
filed separate tax returns. Prior to June 1, 1997, no provision for income
taxes was necessary in the consolidated financial statements for the income
attributable to the Partnerships because, as partnerships, they were not
subject to federal income tax because the tax effect of their activities flowed
through directly to the individual partners. Beginning June 1, 1997, all income
earned by the Company became subject to income tax.
Pro Forma Information (Unaudited)
Pro forma income tax information has been provided, using the statutory tax
rate of the Company, as if all of the Company's and the Partnerships' income
had been subject to income taxes.
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.
F-11
Financial Statements
<PAGE>
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, Food and
Drug Administration 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.
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.
F-12
Financial Statements
<PAGE>
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 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 $500,000 at
December 31, 1998.
Reclassification
Certain prior years' balances have been reclassified to conform to the 1998
consolidated financial statement presentation.
Unaudited Interim Financial Information
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments that are necessary for fair presentation, have been
included in the unaudited financial information for the interim periods ended
March 31, 1998 and 1999.
F-13
Financial Statements
<PAGE>
NOTE 2 INVENTORIES
Inventories at December 31, 1997, 1998 and March 31, 1999 consist of the
following:
<TABLE>
<CAPTION>
unaudited
----------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Raw materials.................................. $1,827,823 $3,054,317 $4,412,167
Work-in-progress............................... -- -- --
Finished goods................................. 3,495,233 3,820,727 3,588,299
---------- ---------- ----------
$5,323,056 $6,875,044 $8,000,466
========== ========== ==========
</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 $ 4,776,409
Computer equipment.................. 3 to 5 years 2,724,579 6,833,690
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>
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>
F-14
Financial Statements
<PAGE>
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-15
Financial Statements
<PAGE>
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
---------- ---------- ----------
<S> <C> <C> <C>
Current provision:
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>
F-16
Financial Statements
<PAGE>
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 cancelled, (Note 9). 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>
F-17
Financial Statements
<PAGE>
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.
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
F-18
Financial Statements
<PAGE>
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 Incentive 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................................... -- -- -- --
Cancelled................................... -- -- -- --
----- -----
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
Options Outstanding Exercisable
---------------------------------- ------------------
Weighted
Weighted Average Weighted
Number Average Remaining Average
of 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
F-19
Financial Statements
<PAGE>
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>
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
F-20
Financial Statements
<PAGE>
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 five of its executives. The employment agreements are for five
years with a specified minimum salary and are extended automatically each year
for one additional year unless both parties agree to termination prior to the
end of any term. The agreements can be cancelled by either party; however if
cancelled, 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 cancellable employment agreements with some of its key
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.
F-21
Financial Statements
<PAGE>
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 $0.01 per share to $0.0001 per share, and increased
the number of authorized shares to 100,000,000. All share and per share data
have been retroactively adjusted for this split.
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.
F-22
Financial Statements
<PAGE>
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 May 14, 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>
<TABLE>
<CAPTION>
Unaudited March 31, 1998 Unaudited March 31, 1999
-------------------------------- --------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
common shareholders.... $3,617,465 22,101,738 $0.16 $2,901,836 23,113,960 $0.13
Effect of dilutive
securities:
Stock options........... -- 1,332,737 -- 1,219,941
Stock warrants.......... -- 270,867 -- 146,381
---------- ---------- ---------- ----------
Diluted EPS:
Net income available to
common shareholders
plus assumed
conversions............ $3,617,465 23,705,342 $0.15 $2,901,836 24,480,282 $0.12
========== ========== ===== ========== ========== =====
</TABLE>
NOTE 15 SUBSEQUENT EVENTS
On February 12, 1999, the Company issued 1,500,000 shares of common stock to
investors at $8.00 per share, resulting in net cash proceeds to the Company of
approximately $9.2 million. In addition, in February 1999, the Company received
$187,083 in proceeds from the exercise of 138,580 outstanding warrants at $1.35
per share. On February 22, 1999, the Company filed a Registration Statement on
Form S-8, registering 336,435 shares of the Common Stock issuable upon exercise
of the remaining 336,435 outstanding warrants. In late February 1999, the
Company received $454,188 in proceeds from the exercise of the remaining
336,435 outstanding warrants at $1.35 per share. The shares of Common Stock
issued upon exercise of these warrants were then sold in the public markets.
F-23
Financial Statements
<PAGE>
[LOGO OF MANNATECH INCORPORATED APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The estimated expenses in connection with the issuance and distribution of
the securities being registered are set forth in the following table. Each
amount, except for the Securities and Exchange Commission fee, is estimated. We
intend to pay all expenses of registration, issuance and distribution with
respect to the shares being sold by the selling shareholders.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 7,710
Transfer agent's and registrar's fees and expenses............... 2,000
Printing and engraving expenses.................................. 135,000
Legal fees and expenses.......................................... 150,000
Accounting fees and expenses..................................... $ 25,000
Miscellaneous.................................................... 5,000
--------
Total........................................................ $324,710
========
</TABLE>
Item 14. Indemnification of Directors and Officers
Mannatech is empowered by Article 2.02-1 of the Texas Business Corporation
Act to indemnify its directors and officers with respect to certain liabilities
arising out of their capacity or status as directors and officers. Further, we
are required to indemnify and pay reasonable expenses incurred or paid by any
of its directors or officers in the successful defense of any action, suit or
proceeding arising out of their capacity as a director or officer. Article
2.02-1 also provides that such indemnification is not exclusive of other rights
to which the person may be entitled under a corporation's articles of
incorporation, bylaws, agreement, vote of shareholders or disinterested
directors, or otherwise. Our bylaws provide for the indemnification of our
directors and officers to the fullest extent permitted by the Texas Business
Corporation Act. In addition, pursuant to Article 1302-7.06 of the Texas
Miscellaneous Corporation Laws Act, we provided in our articles of
incorporation that a director shall not be liable to us or our shareholders for
monetary damages for an act or omission in a director's capacity as director.
Furthermore, we have entered into individual indemnification agreements with
each of our directors that contractually obligate us to indemnify the directors
for liabilities they may incur in the performance of their duties and provide
insurance or self-insurance in lieu of. The form of such indemnification
agreements with a schedule of director signatories is incorporated by reference
as Exhibit 10.7.
Item 15. Recent Sales of Unregistered Securities
The following sets forth information regarding all sales of unregistered
securities of Mannatech during the past three years. All such shares were
issued in reliance upon an exemption from registration under the Securities Act
of 1933 by reason of Section 4(2) or
II-1
<PAGE>
3(b) of the Securities Act of 1933 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. Such persons were provided access either
through employment or other relationships to all relevant information regarding
Mannatech and/or represented to Mannatech 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 us 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 of 1933.
1. Issuance of an aggregate of 10,000,000 shares of our common stock on
June 1, 1997 in exchange for (1) 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 (2) 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>
2. Issuance of an aggregate of 2,027,571 shares of our 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 our common stock on March 3, 1998 to
Richard Howard in exchange for the cancellation of his incentive
compensation agreement.
4. On May 1, 1997, we granted a warrant to purchase 475,015 shares of
our common stock at a price of $1.35 per share, which were exercised in
February 1999. The warrant has been exercised in full and the shares of
our common stock received upon exercise have been sold pursuant to a
Registration Statement on Form S-8.
5. We have granted options to purchase an aggregate of 2,518,000 shares
of our common stock at a weighted average exercise price of $3.60 per
share. Options granted to one individual to purchase 50,000 shares of our
common stock have been cancelled, leaving 2,468,000 outstanding.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of Mannatech,
incorporated herein by reference to Exhibit 3.1 to Mannatech's Form S-
1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
3.2 Second Amended and Restated Bylaws of Mannatech, incorporated herein
by reference to Exhibit 4.3 to Mannatech's Form S-8 (File No. 333-
77227) filed with the Securities and Exchange Commission on April 28,
1999.
4 Specimen Certificate representing our common stock, par value $0.0001
per share, incorporated herein by reference to Exhibit 4.1 to
Mannatech's Amendment No. 1 to Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on October 28, 1998.
5** Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 1997 Stock Option Plan dated May 20, 1997, incorporated herein by
reference to Exhibit 10.1 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Securities and Exchange Commission on September 10,
1998.
10.2 1998 Incentive Stock Option Plan dated April 8, 1998, incorporated
herein by reference to Exhibit 10.2 to Mannatech's Form S-1 (File No.
333-63133) filed with the Securities and Exchange Commission on
September 10, 1998.
10.3 Agreement and Plan of Merger dated as of June 1, 1997 among Mannatech
and Eight Point Services, Inc., Triple Gold Business, Inc., Five Small
Fry, Inc., and Beta Nutrient Technology, Inc., incorporated herein by
reference to Exhibit 10.3 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Securities and Exchange Commission on September 10,
1998.
10.4 Exchange Agreement dated June 1, 1997 among Mannatech and the limited
partners of Power Three Partners, Ltd., Eleven Point Partners, Ltd.
and Beta M. Partners, Ltd., incorporated herein by reference to
Exhibit 10.4 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.5 Plan and Agreement of Reorganization dated June 1, 1997 by and among
Mannatech, Dynamic Eight Partners, Ltd., Power Three Partners, Ltd.,
Eleven Point Partners, Ltd. and Beta M. Partners, Ltd. and the general
and limited partners of the partnerships, incorporated herein by
reference to Exhibit 10.5 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Securities and Exchange Commission on September 10,
1998.
10.6 Exchange Agreement by and among Gary Watson, Patrick Cobb, Samuel
Caster, Charles Fioretti and William Fioretti and Mannatech dated
August 31, 1997, incorporated herein by reference to Exhibit 10.6 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Securities
and Exchange Commission on September 10, 1998.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
10.7 Form of Indemnification Agreement with a schedule of director
signatures, incorporated herein by reference to Exhibit 10.8 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Securities
and Exchange Commission on September 10, 1998.
10.8 Letter of Understanding Regarding Development of Proprietary
Information for Mannatech effective as of August 1, 1997, as amended,
by and between Bill H. McAnalley, Ph.D. and Mannatech, incorporated
herein by reference to Exhibit 10.12 to Mannatech's Form S-1 (File No.
333-63133) filed with the Securities and Exchange Commission on
September 10, 1998.
10.9 Commercial Lease Agreement dated November 7, 1996 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First Amendment
dated May 29, 1997 and the Second Amendment dated November 13, 1997,
incorporated herein by reference to Exhibit 10.13 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
10.10 Commercial Lease Agreement dated May 29, 1997 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First Amendment
dated November 6, 1997, incorporated herein by reference to Exhibit
10.14 to Mannatech's Form S-1 (File No. 333-63133) filed with the
Securities and Exchange Commission on September 10, 1998.
10.11 Assignment of Patent Rights dated October 30, 1997 by and among Bill
H. McAnalley, Ph.D., H. Reginald McDaniel, D. Eric Moore, Eileen P.
Vennum and William C. Fioretti and Mannatech, incorporated herein by
reference to Exhibit 10.15 to Mannatech's Form S-1 (File No. 333-
63133) filed with the Securities and Exchange Commission on September
10, 1998.
10.12 Supply Agreement effective as of March 31, 1995 by and between
Mannatech and Caraloe, Inc., incorporated herein by reference to
Exhibit 10.16 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.13 Supply Agreement effective as of August 14, 1997 by and between
Mannatech and Caraloe, Inc., incorporated herein by reference to
Exhibit 10.17 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.14 Trademark License Agreement effective as of March 31, 1995 by and
between Mannatech and Caraloe, Inc., incorporated herein by reference
to Exhibit 10.18 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on September 10, 1998.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
10.15 Trademark License Agreement effective as of August 14, 1997 by and
between Mannatech and Caraloe, Inc., incorporated herein by reference
to Exhibit 10.19 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on September 10, 1998.
10.16 Letter Agreement from Mannatech to Michael L. Finney of Larex,
Incorporated dated December 23, 1997, incorporated herein by reference
to Exhibit 10.20 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on September 10, 1998.
10.17 Product Development and Distribution Agreement effective as of
September 15, 1997 between New Era Nutrition Inc. and Mannatech,
incorporated herein by reference to Exhibit 10.21 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
10.18 Summary of Management Bonus Plan, incorporated herein by reference to
Exhibit 10.23 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.19 Individual Guaranty of Samuel L. Caster dated January 5, 1998,
incorporated herein by reference to Exhibit 10.27 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
10.20 Individual Guaranty of Charles E. Fioretti dated January 5, 1998,
incorporated herein by reference to Exhibit 10.28 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
10.21 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 Mannatech's Form S-1 (File No. 333-
63133) filed with the Securities and Exchange Commission on September
10, 1998.
10.22 Form of Employment Agreement entered into between Mannatech and each
of Charles E. Fioretti, Patrick D. Cobb, Anthony E. Canale, Bill H.
McAnalley and Deanne Varner, incorporated herein by reference to
Exhibit 10.30 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.23 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $33,316.02 made by Patrick D. Cobb, incorporated herein by
reference to Exhibit 10.25 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Securities and Exchange Commission on March 31,
1999.
10.24 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.10 made by Samuel L. Caster, incorporated herein by
reference to Exhibit 10.26 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Securities and Exchange Commission on March 31,
1999.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
10.25 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.09 made by Charles E. Fioretti, incorporated herein
by reference to Exhibit 10.27 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Securities and Exchange Commission on March 31,
1999.
16 Letter of Belew Averitt LLP, former accountants to Mannatech,
incorporated herein by reference to Exhibit 16 to Mannatech's Form S-1
(File No.333-63133) filed with the Securities and Exchange Commission
on September 10, 1998.
21* List of Subsidiaries.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Belew Averitt LLP.
23.3** Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its
opinion filed as Exhibit 5 to this registration statement).
24* Power of Attorney (included on signature page of this registration
statement).
27* Financial Data Schedule.
</TABLE>
- --------
*Filed herewith
**To be filed by amendment
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because they are not required,
are not applicable, or the information is included in the consolidated
financial statements or related notes.
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to Item 14 herein, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities, other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding, is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this
II-6
<PAGE>
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement, or the most recent
post-effective amendment thereof, which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the information statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered, if the total
dollar value of securities offered would not exceed that which was
registered and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus
filed with the Securities and Exchange Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent
no more than 20 percent change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(4) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(5) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas on May 13, 1999.
MANNATECH, INCORPORATED
/s/ Charles E. Fioretti
By: _________________________________
Charles E. Fioretti
Chairman of the Board and Chief
Executive Officer
Each person whose signature appears below hereby appoints and constitutes
Charles E. Fioretti and Samuel L. Caster and each of them, as his true and
lawful attorney-in-fact and agent, with full power of substitution, to execute
on his or her behalf individually and in the capacity stated below and to
perform any acts necessary to be done in order to file all amendments and
post-effective amendments to this registration statement and any registration
statement for the same offering that is to be effective upon filing pursuant
to Rule 462(d) under the Securities Act of 1933, and any and all instruments
or documents filed as a part thereof or in connection therewith, making such
changes thereto as the person so acting deems appropriate, hereby ratifying
and confirming all that said attorney-in-fact, or his substitute may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles E. Fioretti Chairman of the Board and May 13, 1999
______________________________________ Chief Executive Officer
Charles E. Fioretti (principal executive
officer)
/s/ Samuel L. Caster President and Director May 13, 1999
______________________________________
Samuel L. Caster
/s/ Patrick D. Cobb Vice President, Chief May 13, 1999
______________________________________ Financial Officer and
Patrick D. Cobb Director (principal
financial officer)
/s/ Stephen D. Fenstermacher Vice President of Accounting May 13, 1999
______________________________________ and Controller (principal
Stephen D. Fenstermacher accounting officer)
/s/ Chris T. Sullivan Director May 13, 1999
______________________________________
Chris T. Sullivan
/s/ Steven A. Barker Director May 13, 1999
______________________________________
Steven A. Barker
</TABLE>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of Mannatech,
incorporated herein by reference to Exhibit 3.1 to Mannatech's Form S-
1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
3.2 Second Amended and Restated Bylaws of Mannatech, incorporated herein
by reference to Exhibit 4.3 to Mannatech's Form S-8 (File No. 333-
77227) filed with the Securities and Exchange Commission on April 28,
1999.
4 Specimen Certificate representing the our common stock, par value
$0.0001 per share, incorporated herein by reference to Exhibit 4.1 to
Mannatech's Amendment No. 1 to Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on October 28, 1998.
5** Opinion and Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
10.1 1997 Stock Option Plan dated May 20, 1997, incorporated herein by
reference to Exhibit 10.1 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Securities and Exchange Commission on September 10,
1998.
10.2 1998 Incentive Stock Option Plan dated April 8, 1998, incorporated
herein by reference to Exhibit 10.2 to Mannatech's Form S-1 (File No.
333-63133) filed with the Securities and Exchange Commission on
September 10, 1998.
10.3 Agreement and Plan of Merger dated as of June 1, 1997 among Mannatech
and Eight Point Services, Inc., Triple Gold Business, Inc., Five Small
Fry, Inc., and Beta Nutrient Technology, Inc., incorporated herein by
reference to Exhibit 10.3 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Securities and Exchange Commission on September 10,
1998.
10.4 Exchange Agreement dated June 1, 1997 among Mannatech and the limited
partners of Power Three Partners, Ltd., Eleven Point Partners, Ltd.
and Beta M. Partners, Ltd., incorporated herein by reference to
Exhibit 10.4 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.5 Plan and Agreement of Reorganization dated June 1, 1997 by and among
Mannatech, Dynamic Eight Partners, Ltd., Power Three Partners, Ltd.,
Eleven Point Partners, Ltd. and Beta M. Partners, Ltd. and the general
and limited partners of the partnerships, incorporated herein by
reference to Exhibit 10.5 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Securities and Exchange Commission on September 10,
1998.
10.6 Exchange Agreement by and among Gary Watson, Patrick Cobb, Samuel
Caster, Charles Fioretti and William Fioretti and Mannatech dated
August 31, 1997, incorporated herein by reference to Exhibit 10.6 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Securities
and Exchange Commission on September 10, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
10.7 Form of Indemnification Agreement with a schedule of director
signatures, incorporated herein by reference to Exhibit 10.8 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Securities
and Exchange Commission on September 10, 1998.
10.8 Letter of Understanding Regarding Development of Proprietary
Information for Mannatech effective as of August 1, 1997, as amended,
by and between Bill H. McAnalley, Ph.D. and Mannatech, incorporated
herein by reference to Exhibit 10.12 to Mannatech's Form S-1 (File No.
333-63133) filed with the Securities and Exchange Commission on
September 10, 1998.
10.9 Commercial Lease Agreement dated November 7, 1996 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First Amendment
thereto dated May 29, 1997 and the Second Amendment thereto dated
November 13, 1997, incorporated herein by reference to Exhibit 10.13
to Mannatech's Form S-1 (File No. 333-63133) filed with the Securities
and Exchange Commission on September 10, 1998.
10.10 Commercial Lease Agreement dated May 29, 1997 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First Amendment
thereto dated November 6, 1997, incorporated herein by reference to
Exhibit 10.14 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.11 Assignment of Patent Rights dated October 30, 1997 by and among Bill
H. McAnalley, Ph.D., H. Reginald McDaniel, D. Eric Moore, Eileen P.
Vennum and William C. Fioretti and Mannatech, incorporated herein by
reference to Exhibit 10.15 to Mannatech's Form S-1 (File No. 333-
63133) filed with the Securities and Exchange Commission on September
10, 1998.
10.12 Supply Agreement effective as of March 31, 1995 by and between
Mannatech and Caraloe, Inc., incorporated herein by reference to
Exhibit 10.16 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.13 Supply Agreement effective as of August 14, 1997 by and between
Mannatech and Caraloe, Inc., incorporated herein by reference to
Exhibit 10.17 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.14 Trademark License Agreement effective as of March 31, 1995 by and
between Mannatech and Caraloe, Inc., incorporated herein by reference
to Exhibit 10.18 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on September 10, 1998.
10.15 Trademark License Agreement effective as of August 14, 1997 by and
between Mannatech and Caraloe, Inc., incorporated herein by reference
to Exhibit 10.19 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on September 10, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
10.16 Letter Agreement from Mannatech to Michael L. Finney of Larex,
Incorporated dated December 23, 1997, incorporated herein by reference
to Exhibit 10.20 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on September 10, 1998.
10.17 Product Development and Distribution Agreement effective as of
September 15, 1997 between New Era Nutrition Inc. and Mannatech,
incorporated herein by reference to Exhibit 10.21 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
10.18 Summary of Management Bonus Plan, incorporated herein by reference to
Exhibit 10.23 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Securities and Exchange Commission on September 10, 1998.
10.19 Individual Guaranty of Samuel L. Caster dated January 5, 1998,
incorporated herein by reference to Exhibit 10.27 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
10.20 Individual Guaranty of Charles E. Fioretti dated January 5, 1998,
incorporated herein by reference to Exhibit 10.28 to Mannatech's Form
S-1 (File No. 333-63133) filed with the Securities and Exchange
Commission on September 10, 1998.
10.21 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 Mannatech's Form S-1 (File No. 333-
63133) filed with the Securities and Exchange Commission on September
10, 1998.
10.22 Form of Employment Agreement entered into between Mannatech and each
of Charles E. Fioretti, Patrick D. Cobb, Anthony E. Canale, Bill H.
McAnalley, Ph.D. and Deanne Varner, incorporated herein by reference
to Exhibit 10.30 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Securities and Exchange Commission on September 10, 1998.
10.23 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $33,316.02 made by Patrick D. Cobb, incorporated herein by
reference to Exhibit 10.25 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Securities and Exchange Commission on March 31,
1999.
10.24 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.10 made by Samuel L. Caster, incorporated herein by
reference to Exhibit 10.26 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Securities and Exchange Commission on March 31,
1999.
10.25 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.09 made by Charles E. Fioretti, incorporated herein
by reference to Exhibit 10.27 to Mannatech's Form 10-K (File No. 000-
24657) filed with the Securities and Exchange Commission on March 31,
1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibits
------- --------
<C> <S>
16 Letter of Belew Averitt LLP, former accountants to Mannatech,
incorporated herein by reference to Exhibit 16 to Mannatech's Form S-1
(File No. 333-63133) filed with the Securities and Exchange Commission
on September 10, 1998.
21* List of Subsidiaries.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Belew Averitt LLP.
23.3** Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (included in its
opinion filed as Exhibit 5 to this registration statement).
24* Power of Attorney (included on signature page of this registration
statement).
27* Financial Data Schedule.
</TABLE>
- --------
* Filed herewith
** To be filed by amendment
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
Mannatech Australia Pty Limited--incorporated in April 1998 in Australia and
currently operating in St. Leonards, Australia.
Mannatech Ltd.--incorporated in April 1999 under the laws of the United
Kingdom. This entity is currently dormant, pending the start up of operations
in the United Kingdom.
Internet Health Group, Inc.--incorporated on May 7, 1999 as a Texas
corporation and currently operating in Dallas, Texas.
Mannatech Foreign Sales Corporation--incorporated on May 1, 1999 under the
laws of Barbados.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 19, 1999,
except as to Note 6 which is as of March 16, 1999, relating to the financial
statements of Mannatech, Incorporated, which appears in such prospectus. We
also consent to the references to us under the headings "Selected Financial
Data" and "Experts" in such prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data."
/s/ PricewaterhouseCoopers LLP
_____________________________________
PricewaterhouseCoopers LLP
Dallas, Texas
May 13, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 21, 1997 relating
to the financial statements of Mannatech, Incorporated, which appears in such
prospectus. We also consent to the references to us under the headings
"Selected Financial Data" and "Experts" in such prospectus. However, it should
be noted that Belew Averitt LLP has not prepared or certified such "Selected
Financial Data."
/s/ Belew Averitt LLP
_____________________________________
Belew Averitt LLP
Dallas, Texas
May 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND MARCH 31, 1999 (UNAUDITED)
AND THE CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 763 8,380
<SECURITIES> 0 101
<RECEIVABLES> 1,254 895
<ALLOWANCES> 58 58
<INVENTORY> 6,875 8,000
<CURRENT-ASSETS> 8,978 17,842
<PP&E> 17,483 17,879
<DEPRECIATION> 3,379 4,097
<TOTAL-ASSETS> 26,874 33,048
<CURRENT-LIABILITIES> 21,398 13,649
<BONDS> 0 0
0 0
0 0
<COMMON> 2 2
<OTHER-SE> 2,681 14,819
<TOTAL-LIABILITY-AND-EQUITY> 26,874 33,048
<SALES> 164,933 42,616
<TOTAL-REVENUES> 164,933 42,616
<CGS> 27,140 6,893
<TOTAL-COSTS> 27,140 24,209
<OTHER-EXPENSES> 121,736 13,826
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 53 49
<INCOME-PRETAX> 15,797 4,603
<INCOME-TAX> 5,743 1,701
<INCOME-CONTINUING> 10,054 2,902
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,054 2,902
<EPS-PRIMARY> .45 .13
<EPS-DILUTED> .42 .12
</TABLE>
