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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 000-24657
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2508900
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
600 S. Royal Lane, Suite 200
Coppell, Texas
75019
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, including Area Code: (972) 471-7400
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
----- -----
As of July 31, 2000, the number of shares outstanding of the registrant's
sole class of common stock, par value $0.0001 per share was 24,994,993.
TABLE OF CONTENTS
Page
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................................... 1
Consolidated Balance Sheets.................................................................. 1
Consolidated Statements of Operations........................................................ 2
Consolidated Statements of Cash Flows........................................................ 3
Notes to Consolidated Financial Statements................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 6
Overview..................................................................................... 6
Results of Operations........................................................................ 8
Three months ended June 30, 2000 compared with the three months ended June 30, 1999.......... 8
Six months ended June 30, 2000 compared with the six months ended June 30, 1999.............. 10
Liquidity and Capital Resources.............................................................. 13
Year 2000.................................................................................... 14
Recent Financial Accounting Standards Board Statements....................................... 14
Forward-Looking Statements................................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 16
Part II - OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 16
Item 2. Changes in Securities and Use of Proceeds................................................ 16
Item 3. Defaults Upon Senior Securities.......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders...................................... 17
Item 5. Other Information........................................................................ 18
Item 6. Exhibits and Reports on Form 8-K......................................................... 19
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MANNATECH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
December 31, June 30, 2000
1999 (Unaudited)
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ASSETS
Cash and cash equivalents...................................... $11,576 $10,358
Short-term investments......................................... 1,388 229
Accounts receivable, less allowance for doubtful
accounts of $58.............................................. 275 224
Current portion of notes receivable-shareholders............... 158 176
Inventories.................................................... 13,318 14,687
Prepaid expenses and other current assets...................... 728 1,100
Deferred tax assets............................................ 564 542
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Total current assets......................................... 28,007 27,316
Property and equipment, net.................................... 14,093 14,827
Notes receivable-shareholders, excluding current portion....... 543 384
Other assets................................................... 1,231 1,122
Long-term investments.......................................... 905 672
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Total assets................................................. $44,779 $44,321
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of capital leases and note payable............ $ 732 $ 603
Accounts payable............................................... 1,890 3,378
Accrued expenses............................................... 13,722 12,704
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Total current liabilities.................................... 16,344 16,685
Capital leases and note payable, excluding current portion.... 326 96
Deferred tax liabilities....................................... 817 821
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Total liabilities............................................ 17,487 17,602
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Commitments and contingencies..................................
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding................. -- --
Common stock, $0.0001 par value, 99,000,000 shares authorized
24,790,601 and 24,774,293 shares issued and outstanding
in 1999 and 25,011,301 and 24,994,993 in 2000................ 2 2
Additional paid-in capital..................................... 17,348 17,868
Retained earnings.............................................. 10,146 9,053
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27,496 26,923
Less treasury stock, at cost, 16,308 shares.................... (204) (204)
------- -------
Total shareholders' equity................................... 27,292 26,719
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Total liabilities and shareholders' equity................... $44,779 $44,321
======= =======
See accompanying notes to consolidated financial statements.
1
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 2000
AND THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(in thousands, except per share information)
Three months ended Six months ended
June 30 June 30
--------------------- ---------------------
1999 2000 1999 2000
------- ------- ------- -------
Net Sales.............................................. $45,035 $39,308 $87,651 $79,582
------- ------- ------- -------
Cost of Sales.......................................... 7,167 6,818 14,060 13,848
Commissions............................................ 18,665 15,637 35,981 32,382
------- ------- ------- -------
25,832 22,455 50,041 46,230
------- ------- ------- -------
Gross profit......................................... 19,203 16,853 37,610 33,352
------- ------- ------- -------
Operating Expenses:
Selling and administrative expenses.................. 8,888 8,987 17,360 18,934
Other operating costs................................ 6,754 7,939 12,108 15,373
Write-off of fixed asset............................. - 870 - 870
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Total operating expenses.......................... 15,642 17,796 29,468 35,177
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Income (loss) from operations.......................... 3,561 (943) 8,142 (1,825)
Interest income........................................ 84 179 173 422
Interest expense....................................... (42) (20) (92) (43)
Other expense, net..................................... (200) (22) (218) (134)
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Income (loss) before income taxes...................... 3,403 (806) 8,005 (1,580)
Income tax (expense) benefit........................... (1,221) 216 (2,922) 487
------- ------- ------- -------
Net income (loss)...................................... $ 2,182 $ (590) $ 5,083 $(1,093)
======= ======= ======= =======
Earnings (loss) per common share:
Basic................................................ $0.09 $ (0.02) $0.22 $(0.04)
======= ======= ======= =======
Diluted.............................................. $0.08 $ (0.02) $0.20 $( 0.04)
======= ======= ======= =======
Weighted-average common shares outstanding
Basic................................................ 24,160 24,989 23,640 24,931
======= ======= ======= =======
Diluted.............................................. 25,569 24,989 25,142 24,931
======= ======= ======= =======
Dividends declared per common share.................... $ 0.00 $ 0.00 $ 0.06 $ 0.00
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
2
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(in thousands)
1999 2000
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Cash flows from operating activities:
Net income (loss)............................................... $ 5,083 $ (1,093)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization............................... 1,449 1,754
Write-off of fixed asset software........................... -- 870
Tax benefit of warrants and options exercised............... 3,270 226
Deferred income tax expense................................. -- 26
Changes in operating assets and liabilities:
Accounts receivable....................................... (10) 51
Inventories............................................... (1,057) (1,369)
Prepaid expenses and other current assets................. (463) (372)
Other assets.............................................. 95 109
Accounts payable.......................................... (4,539) 1,488
Accrued expenses.......................................... (301) (1,018)
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Net cash provided by operating activities............... 3,527 672
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment and construction
in progress................................................... (592) (3,358)
Purchases of investments........................................ (1,337) --
Maturities of investments....................................... -- 1,392
Repayment of shareholders/related party receivables............. 974 141
-------- --------
Net cash used in investing activities........................... (955) (1,825)
-------- --------
Cash flows from financing activities:
Payment of dividends............................................ (1,327) --
Repayment of capital lease obligations.......................... (311) (266)
Proceeds from the initial public offering....................... 12,000 --
Proceeds from warrants.......................................... 641 --
Proceeds from stock option exercises............................ 378 294
Payment of note payable......................................... (100) (93)
Deferred offering costs......................................... (615) --
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Net cash provided by (used in) financing activities..... 10,666 (65)
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Net increase (decrease) in cash and cash equivalents.............. 13,238 (1,218)
Cash and cash equivalents:
Beginning of period............................................. 763 11,576
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End of period................................................... $14,001 $10,358
======= =======
Supplemental disclosure of cash flow information:
Income taxes paid............................................... $ 3,464 $ 50
======= =======
Interest paid................................................... $ 78 $ 47
======= =======
See accompanying notes to consolidated financial statements.
3
MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Mannatech, Incorporated (the "Company") was incorporated in the State of
Texas on November 4, 1993, as Emprise International, Inc. Effective October 25,
1995, the Company changed its name to Mannatech, Incorporated. The Company,
located in Coppell, Texas, develops and sells proprietary nutritional
supplements and topical products through a network marketing system. The Company
currently sells its products in the United States, Canada, Australia, the United
Kingdom and Japan. Independent associates ("Associates") purchase products at
wholesale for the primary purpose of selling to retail consumers or for personal
consumption. In addition, Associates earn commissions on their downline growth
and sales volume. The Company has eight wholly-owned subsidiaries located
throughout the world for the purpose of conducting business in the related
country. The wholly-owned subsidiaries are as follows:
Wholly-owned Subsidiary Dated Began
Name Date Incorporated Location of Subsidiary Operations
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Mannatech Australia Pty Limited April 22, 1998 St. Leonards, Australia October 1, 1998
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Mannatech Limited December 1, 1998 Republic of Ireland Dormant pending start
up operations
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Mannatech Ltd. November 18, 1998 Basingstoke, Hampshire U.K. November 15, 1999
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Mannatech Payment Services April 11, 2000 Coppell, Texas June 26, 2000
Incorporated facilitating payments
services for Mannatech
Japan, Inc.
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Mannatech Foreign Sales May 1, 1999 Barbados May 1, 1999 acting as
Corporation a foreign sales
Corporation
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Internet Health Group, Inc. May 7, 1999 Coppell, Texas December 20, 1999
operating through its
website "clickwell.com"
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Mannatech Japan, Inc. January 21, 2000 Tokyo, Japan June 26, 2000
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Mannatech Limited February 14, 2000 New Zealand Dormant pending start up
operations
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The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair statement of the
Company's financial information for the periods presented. The consolidated
results of operations of any interim period are not necessarily indicative of
the consolidated results of operations to be expected for the fiscal year. For
further information, refer to the consolidated financial statements and
accompanying footnotes included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
4
Earnings (loss) per Share
The Company calculates earnings (loss) per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 requires dual presentation of basic and diluted earnings (loss) per share
("EPS") on the face of the consolidated statement of operations for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. Basic EPS calculations are based on the weighted-
average number of common shares outstanding during the period, while diluted EPS
calculations are calculated using the weighted-average number of common shares
and dilutive common share equivalents outstanding during each period. At June
30, 2000, all of the 2,028,300 common stock options were excluded from the
dilutive EPS calculation as their effect was antidilutive.
The following data show the amounts used in computing earnings (loss) per
share and the effect on the weighted-average number of shares of dilutive common
stock for the three months ended June 30, 1999 and 2000. The amounts are rounded
to the nearest thousands except for per share amounts.
1999 2000
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Income Shares Per Share Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ------------ ------------- ---------
Basic EPS:
Net income (loss) available to
to common shareholders $ 2,182 24,160 $ 0.09 $ (590) 24,989 ($0.02)
Effect of dilutive securities:
Stock options -- 1,409 -- --
----------- ------------- ------------ -------------
Diluted EPS:
Net income (loss) available to
common shareholders plus
assumed conversions $ 2,182 25,569 $ 0.08 $ (590) 24,989 ($0.02)
============ ============= ========= ============ ============= =========
The following data show the amounts used in computing earnings (loss) per
share and the effect on the weighted-average number of shares of dilutive common
stock for the six months ended June 30, 1999 and 2000. The amounts are rounded
to the nearest thousands except for per share amounts.
1999 2000
------------------------------------- --------------------------------------
Income Shares Per Share Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ------------- ------------- ---------
Basic EPS:
Net income (loss) available to
to common shareholders $ 5,083 23,640 $ 0.22 $ (1,093) 24,931 ($0.04)
Effect of dilutive securities:
Stock options -- 1,502 -- --
----------- ------------- ------------ -------------
Diluted EPS:
Net income (loss) available to
common shareholders plus
assumed conversions $ 5,083 25,142 $ 0.20 $ (1,093) 24,931 ($0.04)
=========== ============= ========= ============ ============= =========
5
NOTE 2 INVENTORIES
Inventories consist of raw materials and finished goods and are stated at
the lower of cost (using the first-in, first-out method) or market. At December
31, 1999 and June 30, 2000 inventories, rounded to the nearest thousands,
consist of the following:
1999 2000
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Raw materials.................................... $ 5,788 $ 5,799
Finished goods................................... 7,530 8,888
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$ 13,318 $ 14,687
======== ========
NOTE 3 ASSET IMPAIRMENT LOSS
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company recorded an impairment loss on the long-lived asset
of its subsidiary Internet Health Group, Inc. as the trend in sales for the
subsidiary indicated that the undiscounted future cash flows from its operation
would be less than the carrying value of the long-lived asset related to their
operation. Accordingly, in the quarter ended June 30, 2000, the Company
recognized an asset impairment loss of $870,000. The impairment loss was
measured as the difference between the carrying value of the asset and the fair
value of the asset based on discounted estimated future cash flows.
NOTE 4 RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission
("Commission") issued Staff Accounting Bulletin No. 101, " Revenue Recognition
in Financial Statements" ("SAB 101") which provides guidance on revenue
recognition issues. In June 2000, the Commission issued Staff Accounting
Bulletin No. 101B, "Second Amendment: Revenue Recognition in Financial
Statements" which delayed the implementation of SAB 101 until the fourth fiscal
quarter of fiscal years beginning after December 15, 1999. Management does not
believe the implementation of SAB 101 will have a material effect on our
financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion is intended to assist in the understanding of
Mannatech's financial position and results of operations for the six months
ended June 30, 2000 compared to the same period in 1999. The Consolidated
Financial Statements and related Notes should be referred to in conjunction with
this discussion. Unless we state otherwise, all financial information presented
below, throughout this report and in the Consolidated Financial Statements and
related Notes includes Mannatech and all of its subsidiaries on a consolidated
basis.
Overview
We develop and sell proprietary nutritional supplements and topical
products through a network marketing system. We currently sell our products in
the United States, Canada, Australia, the United Kingdom and beginning on June
26, 2000 in Japan, through a worldwide network of approximately 267,000 active
associates as of June 30, 2000, compared to approximately 246,000 active
associates as of June 30, 1999. We are also exploring the most efficient way to
enter the New Zealand market either later this year or early next year.
Our basic earnings (loss) per share was ($0.04) for the six-months ended
June 30, 2000 compared to $0.22 per share for the six-months ended June 30,
1999. This was primarily due to a decrease in sales of $8.1 million, $2.0
million of expenses for our subsidiary, Internet Health Group, Inc., including a
one time write-off of the fixed asset software, totaling $870,000, $3.0 million
of start up expenses relating to our international expansion into Japan and some
additional expenses incurred with the opening of the United Kingdom operations
in November 1999. We expect a decrease in start up expenses and operating
expenses for our subsidiaries in the third quarter of 2000.
6
Internet Health Group, Inc., our subsidiary, which sells various
nonproprietary vitamins and nutritional supplements through its website -
clickwell.com, has continued to report disappointing results since its inception
- --------------
in December 1999. For the six months ended June 30, 2000, the subsidiary had a
loss before income taxes of approximately $2.0 million, which included the write
off of their fixed asset software totaling $870,000. Our management is currently
researching possible alternatives concerning this subsidiary. Management has
significantly reduced the subsidiary's future operating expenses; however, the
subsidiary has two lease agreements and one agreement relating to its website
that are noncancelable and remain in effect through December 2002. The
remaining payments, reduced by the subleases relating to these three
noncancelable agreements through December 2002 are approximately $419,000.
During the six months ended June 30, 2000, the percentages of consolidated
net sales for the United States, Canada, Australia, the United Kingdom and Japan
were 78.3%, 13.2%, 6.5%, 1.4%, and 0.6%, respectively. In the future we expect
our international operations to account for an increasing percentage of our
consolidated net sales, especially with the opening of our Japan operations on
June 26, 2000. October 1998 marked the beginning of our international expansion
and it also marked the beginning of the shrinking of our growth rate in net
sales generated in the United States and Canada. In addition, in the second
quarter of 2000, United States, Canadian and Australia net sales continued to
decrease as compared to the same period in 1999. We believe these decreases are
due to our associates in the United States, Canada and Australia concentrating
their efforts on the development of their presence in the United Kingdom and
Japan and competitive Internet networking companies distracting many of our
active associates. In addition, associates may have been concerned about recent
management changes that occurred in the second quarter of 2000 and the decline
of our stock price by heavy trading during the second quarter. To counter this
decline we intend to refocus everyone's efforts on our future growth by
increasing the number of active associates, introducing new products and
revamping our training and marketing materials.
Our revenues are primarily derived from sales of our products and our
associate starter and renewal packs, which include some combination of our
products and promotional materials. The purchase of a starter or renewal pack
allows the associate to purchase products at wholesale prices. If the associate
purchases a pack with a wholesale price of $300 or higher, the associate also
receives a $50 credit toward admission to one of our corporate events. We offer
a comparable associate starter pack in each country in which we do business;
however, each country has different regulatory guidelines that must be followed
and therefore not all types of packs are offered in all countries.
We generally recognize revenues when products or promotional materials are
shipped. Our revenues are based primarily on the wholesale prices of the
products sold. On average, the wholesale value of the nutritional and topical
products contained in each of our packs is between 60% and 70% of the total
wholesale value of the packs. On average, the promotional materials value
contained in each of the packs are between 30% and 40% of the total wholesale
value of the packs. Revenues from promotional packs are allocated between
products and events admission based on the proportionate fair value of these
items. We defer revenue received from the sale of our promotional packs to the
extent that it is greater than the wholesale value of the individual items
included in such packs. Allocated event revenues are also deferred. All deferred
revenue is amortized over a 12-month period. Total deferred revenue was
approximately $845,000 and $847,000 at December 31, 1999 and June 30, 2000,
respectively.
Associates are compensated by commissions, which are our most significant
expense; however, we do not intend for commissions to materially exceed 42% of
commissionable net sales. Commissions are paid to associates based on the
following:
. their placement and position within our compensation plan;
. volume of direct commissionable sales; and
. number of new enrolled associates.
7
Our United States federal statutory tax rate is 35%. We pay taxes in
Australia at a statutory tax rate of 36% and in the United Kingdom at 31%. We
expect to pay taxes in Japan at a statutory tax rate of up to 54%. We also pay
taxes in various state jurisdictions at an approximate average statutory tax
rate of 3%. As our international expansion continues, a portion of our income
will be subject to taxation in the countries in which we operate. We may receive
foreign tax credits that would reduce the amount of United States taxes we owe,
based upon the amount of foreign taxes paid. We may not be able to use all of
such foreign tax credits in the United States. The use of the foreign tax
credits is based upon the proportionate amount of net sales in each country.
Because some of the countries that we have expanded to or plan to during 2000
and beyond may have maximum statutory tax rates higher than the United States
tax rate, we may pay a higher overall effective tax rate on our consolidated
operations.
Results of Operations
The following table summarizes Mannatech's operating results as a
percentage of net sales for each of the periods indicated.
Three months ended Six months ended
June 30 June 30
---------------------------------- ----------------------------------
1999 2000 1999 2000
------ ------ ------ ------
Net sales....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 15.9 17.3 16.0 17.4
Commissions..................................... 41.5 39.8 41.1 40.7
------ ------ ------ ------
Gross profit.................................. 42.6 42.9 42.9 41.9
Operating expenses:
Selling and administrative expenses........... 19.7 22.9 19.8 23.8
Other operating costs......................... 14.9 20.2 13.8 19.3
Write off of fixed asset...................... 0.0 2.2 0.0 1.1
------ ------ ------ ------
Income (loss) from operations................... 8.0 (2.4) 9.3 (2.3)
Interest income 0.2 0.5 0.2 0.5
Interest expense (0.1) (0.1) (0.1) (0.0)
Other expense, net.............................. (0.5) (0.1) (0.3) (0.2)
------ ------ ------ ------
Income (loss) before income taxes............... 7.6 (2.1) 9.1 (2.0)
------ ------ ------ ------
Income tax (expense) benefit.................... (2.7) 0.6 (3.3) 0.6
------ ------ ------ ------
Net income (loss)............................... 4.9% (1.5)% 5.8% (1.4)%
====== ====== ====== ======
Number of starter packs sold.................... 33,279 31,136 65,809 63,574
Number of renewal packs sold.................... 13,189 14,227 27,793 32,564
------ ------ ------ ------
Total number of packs sold...................... 46,468 45,363 93,602 96,138
====== ====== ====== ======
Total associates canceling associate status..... 1,336 1,225 2,784 3,721
====== ====== ====== ======
Three months ended June 30, 2000 compared with the three months ended June 30,
1999
Net Sales. Net sales decreased (12.7%) to $39.3 million for the three
months ended June 30, 2000 from $45.0 million for the comparable period in 1999.
The net sales for United States, Canada and Australia decreased as compared to
the same period in 1999. We believe this decrease was the result of many of our
associates concentrating their efforts on developing a presence in Japan and
concerns about recent management changes. The overall decrease was primarily
composed of the following:
. A $4.7 million increase from the sale of several new products introduced
during the first six months of 2000 and the last six months of 1999.
8
. A ($9.9) million decrease in existing product sales resulting from a
decrease in the volume of products sold, which was partially offset by
the opening of the United Kingdom operations in November 1999.
. A decrease of ($501,000) in associate pack sales resulting from a
decrease in the number and a change in the mix of associate packs sold
to new associates, which was partially offset by the slight increase
in the number and mix of associate renewal packs sold. We are
currently exploring ways to change our packs to increase the number of
associate packs and renewal packs sold.
Cost of Sales. Cost of sales decreased (5.6%) to $6.8 million for the three
months ended June 30, 2000 from $7.2 million for the comparable period in 1999.
As a percentage of net sales, cost of sales increased to 17.3% for the three
months ended June 30, 2000 from 15.9% for the comparable period in 1999. The
increase in cost of sales as a percentage of net sales was primarily due to a
change in the product mix sold. The dollar amount decrease was due to the
decrease in the volume of finished goods sold and the recording of an increase
of $153,000 for write-offs of discontinued promotional materials, normal
inventory shrinkage and inventory given away as samples and charitable
contributions.
Commissions. Commissions consist of payments to associates for sales
activity and down line growth. Commissions decreased (16.6%) to $15.6 million
for the three months ended June 30, 2000 from $18.7 million for the comparable
period in 1999. As a percentage of net sales, commissions decreased to 39.8% for
the three months ended June 30, 2000 from 41.5% for the comparable period in
1999. The decrease was the direct result of decreased commissionable sales
partially offset by the start up of operations in the United Kingdom in November
1999 and Japan in June 2000.
Gross Profit. Gross profit decreased (12.0%) to $16.9 million for the three
months ended June 30, 2000 from $19.2 million for the comparable period in 1999.
As a percentage of net sales, gross profit increased to 42.9% for the three
months ended June 30, 2000 from 42.6% for the comparable period in 1999. These
changes were primarily attributable to the factors described above.
Selling and Administrative Expenses. Selling and administrative expenses
consist of human resource expenses, including wages, bonuses, printing,
marketing expenses and associate events and are a mixture of both fixed and
variable expenses. Selling and administrative expenses increased 1.1% to $9.0
million for the three months ended June 30, 2000 from $8.9 million for the
comparable period in 1999. As a percentage of net sales, selling and
administrative expenses increased to 22.9% for the three months ended June 30,
2000 from 19.7% for the comparable period in 1999. The increase was due
primarily to the following:
. an increase of $270,000 related to printing costs associated with the
expansion into new countries, the printing of various reports for
public filings and hosting our annual shareholders meeting;
. an increase of $113,000 related to freight costs associated with the
expansion into new international markets partially offset by the
decrease in freight due to decreased sales;
. a decrease of ($115,000) in wages and benefits primarily due to the
reduction in bonuses and contract labor, which was partially offset by
increase due to international expansion; and
. a decrease of ($225,000) for our national events and associate
events.
Other Operating Costs. Other operating costs include utilities,
depreciation, office supplies and travel expenses. Other operating costs
increased 16.2% to $7.9 million for the three months ended June 30, 2000 from
$6.8 million for the comparable period in 1999. As a percentage of net sales,
other operating costs increased to 20.2% for the three months ended June 30,
2000 from 14.9% for the comparable period in 1999. The dollar amount increase
was primarily due to the following:
. an increase of approximately $857,000 related to consulting services
including accounting, legal and traveling for the start up of our
international expansion into United Kingdom and Japan;
9
. an increase of approximately $370,000 related to various general and
administrative expenses such as building rent for our overseas
offices, insurance, depreciation, postage and telephone related to
international expansion into United Kingdom and Japan;
. approximately $450,000 increase in fees charged by third party
processors for our international sales and distribution facilities;
and
. a net decrease of ($575,000) for the reduction of royalties due to the
buyout of the royalty agreement with Ray Robbins in 1999.
Write off of fixed asset. In the second quarter of 2000, management
determined our subsidiary Internet Health Group, Inc.'s fixed asset with a book
value of $870,000, was impaired and should be written off. The write off was a
result of the poor performance of our subsidiary. Management has also reduced
their future operating costs and is researching possible alternatives concerning
this subsidiary.
Interest Income. Interest income increased 113.1% to $179,000 for the three
months ended June 30, 2000 from $84,000 for the comparable period in 1999. As a
percentage of net sales, interest income increased to 0.5% for the three months
ended June 30, 2000 from 0.2% for the comparable period in 1999. The dollar
increase was due to certain investments.
Interest Expense. Interest expense decreased (52.4%) to $20,000 for the
three months ended June 30, 2000 from $42,000 for the comparable period in 1999.
As a percentage of net sales, interest expense remained the same at 0.1% for the
three months ended June 30, 2000 and for the comparable period in 1999. The
decrease was due primarily to the reduction of the two lease agreements with a
bank, to purchase various equipment for our warehouse and laboratory facility.
Other Expense, Net. Other expense consists of tax penalties, miscellaneous
income and nonoperating items. Other expense decreased 89.0% to $22,000 for the
three months ended June 30, 2000 from $200,000 for the comparable period in
1999. As a percentage of net sales, other expense decreased to 0.1% for the
three months ended June 30, 2000 from 0.5% for the comparable period in 1999.
For the three months ended June 30, 2000, other expense consisted of $10,000 in
sales tax payments and $20,000 in currency exchange losses due to translation
fluctuations. For the three months ended June 30, 1999, other expense consisted
of tax penalties of $91,000, sales tax payments of $44,000, loss on abandonment
of computer hardware of $42,000, settlement of a lawsuit of $75,000 and
($38,000) of currency exchange gains due to translation fluctuations.
Income Tax (Expense) Benefit. Income tax (expense) benefit was $216,000 for
the three months ended June 30, 2000 and ($1.2) million for the comparable
period in 1999. The effective tax rate decreased to 26.8% for the three months
ended June 30, 2000 from 35.9% for the comparable period in 1999. Our effective
tax rate decreased primarily as a result of recording certain nondeductible
expenses and income related to foreign operations.
Net Income (Loss). For the three months ended June 30, 2000 we had a net
loss of ($590,000) compared to net income of $2.2 million for the comparable
period in 1999. As a percentage of net sales, (1.5%) for the three months ended
June 30, 2000 compared to 4.9% in 1999. The dollar amount of the decrease was
due primarily to net sales decreasing by (12.7%), expenses incurred related to
our international expansion totaling $3.0 million and $2.0 million including the
$870,000 write off of the fixed asset, for our Internet Health Group, Inc.
subsidiary.
Six months ended June 30, 2000 compared with the six months ended June 30, 1999
Net Sales. Net sales decreased (9.2%) to $79.6 million for the six months
ended June 30, 2000 from $87.7 million for the comparable period in 1999. The
net sales for United States, Canada and Australia decreased as compared to the
same period in 1999. We believe this decrease was the result of many of our
associates concentrating their efforts on developing a presence in the United
Kingdom and Japan as well as concerns over recent management changes. The
overall decrease in net sales was primarily composed of the following:
10
. An $8.8 million increase from the sale of several new products
introduced during the first six months of 2000 and the last six months
of 1999.
. A ($16.3) million decrease in existing product sales resulting from a
decrease in the volume of products sold, which was partially offset by
the opening of the United Kingdom operations in November 1999.
. A decrease of ($543,000) in associate pack sales resulting from a
decrease in the number and change in the mix of associate packs sold
to new associates which was partially offset by an increase in the
number and mix of associate renewal packs sold. The overall increase
in the number of packs sold but a decrease in dollars of packs sold is
a result of our international expansion and our concentrated efforts
on our associate renewal program. We will continue to explore new
strategies to further the increase in associate pack sales and renewal
pack sales and expect the international expansion to increase
associate pack sales.
Cost of Sales. Cost of sales decreased (2.1%) to $13.8 million for the six
months ended June 30, 2000 from $14.1 million for the comparable period in 1999.
As a percentage of net sales, cost of sales increased to 17.4% for the six
months ended June 30, 2000 from 16.0% for the comparable period in 1999. The
increase in cost of sales as a percentage of net sales was primarily due to a
change in product mix sold. The decrease in the dollar amount was primarily due
to the decrease in volume of finished goods sold and the recording of an
increase of $375,000 for write-offs of discontinued promotional materials,
normal inventory shrinkage and inventory given away as samples and charitable
contributions.
Commissions. Commissions consist of payments to associates for sales
activity and downline growth. Commissions decreased (10.0%) to $32.4 million for
the six months ended June 30, 2000 from $36.0 million for the comparable period
in 1999. As a percentage of net sales, commissions decreased to 40.7% for the
six months ended June 30, 2000 from 41.1% for the comparable period in 1999. The
decrease was the direct result of decrease in commissionable sales which was
partially offset by the following:
. an increase in the number of associate packs sold;
. the introduction of new incentive programs for associates, including
the fast start bonus program in the fourth quarter of 1999; and
. the start up of operations in the United Kingdom in November 1999 and
Japan in June 2000.
Gross Profit. Gross profit decreased (11.2%) to $33.4 million for the six
months ended June 30, 2000 from $37.6 million for the comparable period in 1999.
As a percentage of net sales, gross profit decreased to 41.9% for the six months
ended June 30, 2000 from 42.9% for the comparable period in 1999. These changes
were primarily attributable to the factors described above.
Selling and Administrative Expenses. Selling and administrative expenses
consist of human resource expenses, including wages, bonuses, printing,
marketing expenses and associate events and are a mixture of both fixed and
variable expenses. Selling and administrative expenses increased 8.6% to $18.9
million for the six months ended June 30, 2000 from $17.4 million for the
comparable period in 1999. As a percentage of net sales, selling and
administrative expenses increased to 23.8% for the six months ended June 30,
2000 from 19.8% for the comparable period in 1999. The dollar amount of the
increase was due primarily to the following:
. $558,000 increase related to our annual national events, which
includes hosting events in Australia, United Kingdom and Japan and an
increase in the attendance of our annual national event held in March
2000;
. $300,000 increase related to mailing and printing costs associated
with international expansion, reports for public filings and hosting
our first annual shareholders meeting;
. $327,000 increase related to advertising for our Internet Health
Group, Inc. subsidiary and for our international operations;
. $220,000 increase in wages and benefits primarily due to international
expansion; and
11
. $129,000 increase related to freight costs associated with our
personal consumption plan introduced in Japan.
Other Operating Costs. Other operating costs include utilities,
depreciation, office supplies and travel expenses. Other operating costs
increased 27.3% to $15.4 million for the six months ended June 30, 2000 from
$12.1 million for the comparable period in 1999. As a percentage of net sales,
other operating costs increased to 19.3% for the six months ended June 30, 2000
from 13.8% for the comparable period in 1999. The increase in the dollar amount
was primarily due to the following:
. an increase of approximately $1.5 million related to consulting
services including accounting, legal and traveling for the start up
of our international expansion into the United Kingdom and Japan;
. an increase of approximately $1.5 million related to various general
and administrative expenses such as building rent for our overseas
offices, insurance, depreciation, postage and telephone related to our
international expansion into the United Kingdom and Japan;
. approximately $755,000 increase in fees charged by third party
processors for our international sales and distribution facilities;
and
. a decrease of ($575,000) related to the buyout of the Ray Robbins
royalty agreement in 1999.
Write off of fixed asset. In the second quarter of 2000, management
determined our Internet Health Group, Inc. Subsidiary's fixed asset with a book
value of $870,000, was impaired and should be written off. The write off was a
result of the continuation of the poor performance of our subsidiary. Management
has also reduced their future operating costs and is researching possible
alternatives concerning this subsidiary.
Interest Income. Interest income increased 143.9% to $422,000 for the six
months ended June 30, 2000 from $173,000 for the comparable period in 1999. As a
percentage of net sales, interest income increased to 0.5% for the six months
ended June 30, 2000 from 0.2% for the comparable period in 1999. The dollar
increase was primarily due to investing in certain investments.
Interest Expense. Interest expense decreased (53.3%) to $43,000 for the six
months ended June 30, 2000 from $92,000 for the comparable period in 1999. As a
percentage of net sales, interest expense decreased to 0.0% for the six months
ended June 30, 2000 from 0.1% for the comparable period in 1999. The decrease
was due primarily to the reduction of the two lease agreements with a bank, to
purchase various equipment for our warehouse and laboratory facility.
Other Expense, Net. Other expense consists of tax penalties, miscellaneous
income and nonoperating items. Other expense decreased (38.5%) to $134,000 for
the six months ended June 30, 2000 from $218,000 for the comparable period in
1999. As a percentage of net sales, other expense decreased to 0.2% for the six
months ended June 30, 2000 from 0.3% for the comparable period in 1999. For the
six months ended June 30, 2000, other expense consisted of approximately $36,000
in sales tax payments and tax penalties and approximately $75,000 in currency
exchange losses due to translation fluctuations. For the six months ended June
30, 1999, other expense consisted primarily of tax penalties of $91,000, $36,000
currency exchange gains due to translation fluctuations, $42,000 loss from the
abandonment of computer hardware and miscellaneous expenses.
Income Tax (Expense) Benefit. Income tax (expense) benefit was $487,000 for
the six months ended June 30, 2000 and ($2.9) million for the comparable period
in 1999. The effective tax rate decreased to 30.6% for the six months ended
June 30, 2000 from 36.5% for the comparable period in 1999. Our effective tax
rate decreased primarily as a result of recording certain nondeductible expenses
and income related to foreign operations.
Net Income (Loss). For the six months ended June 30, 2000 we had a net loss
of ($1.1) million compared to net income of $5.1 million for the comparable
period in 1999. As a percentage of net sales the net income (loss) was (1.4%)
for the six months ended June 30, 2000 compared to 5.8% in 1999. The dollar
amount of the decrease was due to net sales decreasing by
12
(9.2%), the $870,000 write off of fixed asset and $3.0 million in expenses
incurred related to our international expansion and associate events hosted by
Mannatech.
Liquidity and Capital Resources
In February 1999, we received approximately $9.2 million in net proceeds
from the sale of our common stock in our initial public offering. In the initial
public offering, we sold 1,500,000 shares of our common stock, at $8.00 per
share and have used all of the proceeds. We used approximately $6.3 million of
our proceeds from the initial public offering for international expansion,
primarily for product registration, initial inventory requirements and similar
items and have used the remaining $2.9 million to fund working capital and for
general corporate purposes. In February 1999, we also received $641,271 from the
exercise of 475,015 outstanding warrants at $1.35 per share.
Our primary capital requirement is to fund working capital to support our
international growth. We financed our operations primarily through cash flows
from operating activities and proceeds from our initial public offering. As a
result of our expenditures on the facilities, equipment and personnel necessary
to support our international expansion, we had working capital of $11.7 million
as of December 31, 1999 compared to working capital of $10.6 million at June 30,
2000. For the first six months of 1999, we invested approximately $592,000
relating to property and equipment including the expansion into Australia.
During the first six months of 2000 we invested approximately $3.4 million in
property and equipment including expansion into the United Kingdom and Japan.
These projects were financed through operating cash flow in 1999 and 2000.
We paid approximately $1.3 million in dividends to our shareholders in
January and February of 1999. For the six months ended June 30, 2000, current
liabilities increased due to an increase in payables and inventory purchases
relating to our expansion into the United Kingdom and Japan. We believe our
existing facilities are sufficient to support 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 operating activities was $3.5 million for the six
months ended June 30, 1999 compared to $672,000 for the six months ended June
30, 2000. During 1999, an increase in net sales was partially offset by
increases in inventories and other expenses related to our international
expansion and a decrease in income tax payable of approximately $3.0 million
from the tax benefit related to the exercise of warrants and options. During the
six months ended June 30, 2000, we had a net loss and an increase in inventories
and payables related to our continued international expansion. For the six
months of 2000, we have spent approximately $3.0 million and expect to spend up
to an additional $500,000 for the start up operations in Japan and the United
Kingdom.
Net cash used in investing activities was $955,000 for the six months ended
June 30, 1999 compared to $1.8 million for the six months ended June 30, 2000.
In 1999, these activities consisted primarily of purchases of computer hardware,
internal development of computer software and investing the net proceeds from
the initial public offering into investments offset by the repayment of the
notes receivable due from certain shareholders to us of approximately $974,000.
We believe the new facilities and software program should be sufficient for our
immediate needs. In the first six months of 2000, these activities consisted of
purchases of computer hardware and software, build out of our Japan facility and
investments earning interest. During the remainder of 2000, we intend to spend
up to an additional $300,000 for translation of our software into other
languages and additional purchases of equipment for our international expansion
into Japan and New Zealand.
Net cash provided by (used in) financing activities totaled $10.7 million
and ($65,000) for the six months ended June 30, 1999 and 2000, respectively. 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
13
offering proceeds of approximately $12.0 million were received. In the first six
months of 2000, we received approximately $289,000 related to the exercise of
206,200 stock options at a price per share ranging from $1.35 to $2.00.
Our existing capital resources, including cash provided by operating
activities, bank borrowings 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; however, we have
committed to loaning Mr. Fioretti $500,000 and purchasing up to $1.5 million of
stock from Mr. Charles E. Fioretti. See Item 5 on page 18 for a summary of
terms. Mannatech also has agreed to reserve up to $2.0 million to buy back our
stock, on the open market, under certain price conditions. Changes could also
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 are insufficient to meet our capital
requirements, we will be required to raise additional funds. We cannot be sure
that additional funding, if necessary, will be available on favorable terms, if
at all.
Year 2000
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many computer systems and
software programs. This inability to distinguish whether "00" means 1900 or 2000
may have resulted in failures or the creation of erroneous results. Most reports
to date, however, are that computer systems are functioning normally and the
compliance and remediation work accomplished leading up to 2000 was effective
and prevented such problems.
We believe that our current versions of software products licensed from
third parties are Year 2000 compliant; however, some of our suppliers may be
running earlier versions of software products that may not be Year 2000
compliant. We have evaluated the Year 2000 readiness of our vendors and third
parties and found no system failures. Furthermore, we currently are unaware of
any material operational issues or costs associated with preparing and
maintaining our computer and technology systems for the Year 2000; however, we
may still experience material unanticipated problems and costs caused by
undetected errors or defects, which could seriously harm our business.
Our total cost associated with Year 2000 identification, remediation and
testing was approximately $100,000 and was funded through our operating cash
flows. None of our applications failed to perform on January 1, 2000; however,
computer experts have warned that there may still be residual consequences of
the change in centuries. If we experience any application failures in 2000, it
could result in a decrease in sales of our products or an increase in the
allocation of resources to address the problem with the Year 2000. If this
should occur, we would have to resort to temporary manual processing, which is
not expected to have a material adverse impact on our short-term operations.
Recent Financial Accounting Standards Board Statements
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 133, "Accounting for Derivative, Instruments and Hedging
Activities." This statement establishes accounting and reporting standards for
derivative financial instruments, including certain derivative financial
instruments imbedded in other contracts and for hedging activities. In June
1999, the Financial Accounting Standards Board issued Financial Accounting
Standard No. 137, which defers the effective date of Financial Accounting
Standard No. 133 to fiscal years beginning after June 15, 2000. As we do not
have any derivative financial instruments, this pronouncement is not expected to
impact us.
14
In December 1999, the Securities and Exchange Commission ("Commission")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") which provides guidance on revenue recognition issues.
In June 2000, the Commission issued Staff Accounting Bulletin No. 101B, "Second
Amendment: Revenue Recognition in Financial Statements" which delayed the
implementation of SAB 101 until the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. We do not believe the implementation of SAB
101 will have a material effect on our financial position or results of
operations.
Forward-Looking Statements
Some of our statements under "Legal Proceedings," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Quantitative
and Qualitative Disclosures about Market Risk", the Notes to Consolidated
Financial Statements, "Other Information" and elsewhere in this report may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
that are subject to certain events, risks and uncertainties that maybe outside
of 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 existing and future operating needs;
. the level of future expenditures; including plans for any of our
subsidiaries;
. planned international expansion; and
. the outcome of regulatory and litigation matters, and the assumptions
described in this report underlying such forward-looking statements.
Actual results and developments may differ materially from those expressed
in or implied by such statements due to a number of factors, including, without
limitation:
. those described in the context of such forward-looking statements;
. future product development and manufacturing costs;
. timely development and acceptance of new products;
. the entrance into new countries and markets;
. the impact of competitive products and pricing;
. the political and economic climate in which we conduct operations; and
. the risk factors described from time to time in other documents and reports
filed with the Securities and Exchange Commission.
In some cases, forward-looking statements are identified by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "approximates," "predicts," "potential"
or "continue" or the negative of such terms and other comparable terminology.
15
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 and
we are under no duty to update any of the forward-looking statements after the
date of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do not engage in trading market risk sensitive instruments and do not
purchase as investments, hedges that are likely to expose us to certain types of
market risk including interest rate, commodity price or equity price risk. We
have purchased investments but there has been no material change in our exposure
to interest rate risk from our investments. We have not issued any debt
instruments, entered into any forward or futures contracts, purchased any
options or entered into any swaps.
We also are exposed to certain other market risks, including changes in
currency exchange rates as measured against the United States dollar. The value
of the United States dollar affects our financial results. Changes in exchange
rates may positively or negatively affect our sales (as expressed in United
States dollars), gross margins, operating expenses and retained earnings. When
the United States dollar increases against currencies in which we sell products
or a weakening exchange rate against currencies in which we incur costs, our net
sales or costs may be adversely affected. We have established policies,
procedures, and internal processes governing the management of market risk and
the use of any financial instruments to manage our exposure to such risks. The
sensitivity of earnings and cash flows to variability in currency exchange rate
is assessed by applying an appropriate range of potential rate fluctuations to
our assets, obligations and projected transactions denominated in foreign
currency. Based upon our overall currency rate exposure at June 30, 2000, we do
not believe that our exposure to exchange rate fluctuations will have a material
impact on our consolidated financial position or consolidated results of
operations. However, as we have expanded into Japan the Japanese Yen will become
our primary currency for which we will have exposure to foreign currency
exchange rate risk. The Japan Yen fluctuated during the first six months of
2000 from 101.3 to 111.7 Japanese Yen to the United States dollar. Given the
uncertainty of the exchange rate fluctuation against the United States dollar,
we cannot determine the dollar effect, if any, of the fluctuation on our future
business, product pricing, results of operations or financial condition. All
statements other than historical information incorporated in this Item 3 are
forward-looking statements. The actual impact of future market changes could
differ materially due to, among other things, factors discussed in this report.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material changes in, or additions to, the legal proceedings previously
reported in Mannatech's Annual Report on Form 10-K for 1999 as filed with the
Commission on March 30, 2000 or in our Quarterly Report on Form 10-Q for our
first quarter of 2000 as filed with the Commission on May 15, 2000.
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) None.
(d) Use of Proceeds from Registered Securities. On February 12, 1999,
we completed our initial public offering. In the initial public offering, we and
certain shareholders sold an aggregate of 3,056,016 shares of our common stock,
par value $0.0001 per share, at a price of $8.00 per share. None of such
payments were direct or indirect payments to directors, officers, affiliates or
10% beneficial owners of Mannatech. No underwriter was involved in the initial
public offering.
16
Of the total number of shares sold in the initial public offering,
1,556,016 shares of common stock were sold by certain shareholders of Mannatech
at a price of $8.00 per share, yielding gross proceeds to them, of $12,448,128.
The net proceeds paid to the selling shareholders were $11,950,203, after
deducting the placement agent's fee of approximately $497,925.
The remaining 1,500,000 shares sold in the initial public offering were
sold by Mannatech at a price of $8.00 per share, yielding gross proceeds to
Mannatech of $12 million. The net proceeds were $9,240,958, after deducting:
. deferred offering costs of approximately $1,963,431;
. legal, accounting, printing and other costs of approximately $406,385;
and
. the placement agent's fee of $389,226, net of reimbursement of $90,774
in expenses by the placement agent.
We have used all of our $9.2 million net proceeds, as planned, as follows:
. $6,265,858 of the net proceeds was used to pay for our expansion into
Australia, the United Kingdom and Japan; and
. $2,975,100 of the net proceeds was used to fund our current working
capital needs.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
a) The 2000 Annual Shareholders Meeting of Mannatech was held on
June 19, 2000 and each of the proposals were described in detail
in our Definitive Proxy Statement filed with the Securities and
Exchange Commission on May 10, 2000 which is attached, herein as
Exhibit 22.
b) Anthony Canale and Robert Henry were elected to continue to serve
as Class I directors until the 2003 Annual Shareholders Meeting.
Mr. Jules Zimmerman was elected as a Class II independent
director and will serve until the 2001 Annual Shareholders
Meeting.
c) The voting for the three proposals were as follows:
Each of the three directors were approved according to the
following votes:
Director For Against or withheld Broker non-votes
------------------------------------------------------------------------------------------------------------
Anthony Canale 21,797,275 167,567 244,967
------------------------------------------------------------------------------------------------------------
Robert Henry 21,872,504 92,338 169,738
------------------------------------------------------------------------------------------------------------
Jules Zimmerman 21,879,061 85,781 163,181
------------------------------------------------------------------------------------------------------------
The appointment of PricewaterhouseCoopers LLP as independent
auditors for the fiscal year ending December 31, 2000 was
ratified according to the following votes:
For Against or withheld Abstentions Broker non-votes
------------------------------------------------------------------------------------------------------------
22,003,129 20,676 18,437 0
------------------------------------------------------------------------------------------------------------
17
The Mannatech's 2000 Stock Option Plan was ratified according to
the following votes:
For Against or withheld Abstentions Broker non-votes
---------------------------------------------------------------------------------------
7,795,927 1,301,981 5,764,071 7,180,263
---------------------------------------------------------------------------------------
d) None.
Item 5. Other Information
On May 5, 2000, the written resignation of Mr. Samuel L. Caster was
accepted by our Board of Directors. Mr. Caster resigned due to the decision to
remove him as President, replace him with Terry L. Persinger and the refusal
to accept his demand to be named as the sole Chairman of the Board. Mr. Robert
M. Henry was appointed to replace Mr. Samuel L. Caster as a Class I director.
On June 1, 2000, a consultancy agreement between Mannatech and Mr. Samuel
L. Caster was entered into in which Mr. Caster is retained as a Global Vision
Architect Consultant for an annual fee of $600,000 plus all expenses, a leased
automobile and insurance. The agreement is for two years with annual renewal
options.
On June 26, 2000, Mr. Chris T. Sullivan who was a Class II, independent
director, resigned from our Board of Directors to pursue various personal
ventures. On August 2, 2000, the Board of Directors unanimously voted Mr. Samuel
L. Caster as a Class II director to replace Mr. Chris T. Sullivan; however, Mr.
Caster is prohibited from becoming an independent director due to history with
Mannatech. In the future, the Board of Directors plans to add three more
independent directors as they believe this would strengthen our board. The Board
is currently interested in candidates who have multi-level marketing experience.
On August 8, 2000, an agreement between Mannatech and Mr. Charles E.
Fioretti was entered into to purchase some of his stock and enter into an
eighteen month lock up agreement. The terms of the agreement is as follows:
For Charles E. Fioretti:
. On August 8, 2000, Mannatech will loan Mr. Charles Fioretti
$500,000 at an interest rate of 6.9% that will be imputed but not
charged. The outstanding balance of the note will be repaid in
six successive with monthly installments of 26,455 shares of
common stock ($83,333.33 divided by the closing price on August
8, 2000 at $3.50 times 0.90) beginning on September 3, 2000 and
continuing through February 3, 2001, at which time any remaining
balance will be due. The note is collateralized by 174,570 shares
of Mr. Fiorettis' stock.
18
. From March 3, 2001 through March 3, 2002, Mannatech will purchase
$83,333.33 of his stock, on a monthly basis, valued at 90% of
the fair market value price on the close of that business day.
. Mr. Fioretti will be prohibited from selling any shares he owns
directly or indirectly for eighteen months beginning on August
8, 2000.
. Commencing on March 3, 2002 and on the third business day
thereafter, Mannatech will have the right but not the obligation
to purchase at least $100,000 worth of his stock, valued at the
greater of 90% of the fair market value, or $2.00 per share.
On August 9, 2000 the Board approved up to $2.0 million to be used to buy
back our stock, on the open market, under certain price conditions. The Board
also agreed to end the unsuccessful negotiations with Mr. William C. Fioretti to
obtain a lock up agreement as his terms were considered unreasonable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
3.1 Amended and Restated Articles of Incorporation of Mannatech,
dated October 25, 1995, incorporated herein by reference to
Exhibit 3.1 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
3.2 Second Amended and Restated Bylaws of Mannatech, dated August 26,
1997, incorporated herein by reference to Exhibit 3.2 to
Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
3.3 Amendment to the Bylaws of Mannatech dated May 19, 1998,
incorporated herein by reference to Exhibit 3.3 to Mannatech's
Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
3.4 Amendment to the Bylaws of Mannatech dated October 20, 1999,
incorporated herein by reference to Exhibit 99 to Mannatech's
Form 8-K (File No. 000-24657) filed with the Commission on
November 3, 1999.
4 Specimen Certificate representing the common stock, par value
$0.0001 per share, of Mannatech, incorporated herein by reference
to Exhibit 4.1 to Mannatech's Amendment No. 1 to Form S-1 (File
No. 333-63133) filed with the Commission on October 28, 1998.
10.1 1997 Stock Option Plan dated May 20, 1997, incorporated herein
by reference to Exhibit 10.1 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
10.2 1998 Incentive Stock Option Plan dated April 8, 1998,
incorporated herein by reference to Exhibit 10.2 to Mannatech's
Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.3 Option Agreement dated July 1, 1997 with Multi-Venture Partners,
Ltd., incorporated herein by reference to Exhibit 10.7 to
Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.4 Option Agreement dated October 19, 1999 with Steven A. Barker
Ph.D., incorporated by reference to Exhibit 10.8 to Mannatech's
1999 Form 10-K (File No. 000-24657) filed with the Commission on
March 30, 2000.
19
10.5 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
Commission on September 10, 1998.
10.6 Schedule of additional directors signatories relating to the Form
of Indemnification Agreements in Exhibit 10.5 above, incorporated
by reference to Exhibit 10.10 to Mannatech's 1999 Form 10-K (File
No. 000-24657) filed with the Commission on March 30, 2000.
10.7 Letter of Understanding Regarding Development of Proprietary
Information for Mannatech effective as of August 1, 1997, as
amended, by and between Bill H. McAnalley, Ph.D. and Mannatech,
incorporated herein by reference to Exhibit 10.12 to Mannatech's
Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.8 Commercial Lease Agreement dated November 7, 1996 between MEPC
Quorum Properties II Inc. and Mannatech, as amended by the First
Amendment thereto dated May 29, 1997 and the Second Amendment
thereto dated November 13, 1997, incorporated herein by reference
to Exhibit 10.13 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
10.9 Commercial Lease Agreement dated May 29, 1997 between MEPC Quorum
Properties II Inc. and Mannatech, as amended by the First
Amendment thereto dated November 6, 1997, incorporated herein by
reference to Exhibit 10.14 to Mannatech's Form S-1 (File No. 333-
63133) filed with the Commission on September 10, 1998.
10.10 Assignment of Patent Rights dated October 30, 1997 by and among
Bill H. McAnalley, Ph.D., H. Reginald McDaniel, D. Eric Moore,
Eileen P. Vennum and William C. Fioretti and Mannatech,
incorporated herein by reference to Exhibit 10.15 to Mannatech's
Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.11 Supply Agreement effective as of August 14, 1997 by and between
Mannatech and Caraloe, Inc., incorporated herein by reference to
Exhibit 10.17 to Mannatech's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.
10.12 Trademark License Agreement effective as of August 14, 1997 by
and between Mannatech and Caraloe, Inc., incorporated herein by
reference to Exhibit 10.19 to Mannatech's Form S-1 (File No. 333-
63133) filed with the Commission on September 10, 1998.
10.13 Supply Agreement effective January 12, 2000 by and between
Mannatech and Caraloe, Inc, incorporated herein by reference to
Exhibit 10.17 to Mannatech's 1999 Form 10-K (File No. 000-24657)
filed with the Commission on March 30, 2000.
10.14 Letter of Agreement from Mannatech to Michael L. Finney of
LAREX, Incorporated dated December 23, 1997, incorporated herein
by reference to Exhibit 10.20 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
10.15 Product Development and Distribution Agreement effective as of
September 15, 1997 between New Era Nutrition Inc. and Mannatech,
incorporated herein by reference to Exhibit 10.21 to Mannatech's
Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.16 Summary of Management Bonus Plan, incorporated herein by
reference to Exhibit 10.23 to Mannatech's Form S-1 (File No. 333-
63133) filed with the Commission on September 10, 1998.
20
10.17 Individual Guaranty of Samuel L. Caster dated January 5, 1998,
incorporated herein by reference to Exhibit 10.27 to Mannatech's
Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.
10.18 Individual Guaranty of Charles E. Fioretti dated January 5,
1998, incorporated herein by reference to Exhibit 10.28 to
Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.19 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 Amendment No. 1 to Form
S-1 (File No. 333-63133) filed with the Commission on October 28,
1998.
10.20 Employment Agreement dated November 1, 1999, entered into
between Mannatech and Terry L. Persinger, incorporated herein by
reference to Exhibit 10.25 to Mannatech's 1999 Form 10-K (File
No. 000-24657) filed with the Commission on March 30, 2000.
10.21 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 1998 Form 10-
K (File No. 000-24657) filed with the Commission on March 31,
1999.
10.22 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 1998 Form 10-
K (File No. 000-24657) filed with the Commission on March 31,
1999.
10.23 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
1998 Form 10-K (File No. 000-24657) filed with the Commission on
March 31, 1999.
10.24 Form of Employment Agreement entered into between Mannatech and
Robert M. Henry, incorporated herein by reference to Exhibit
10.24 to Mannatech's 2000 Form 10-Q (File No. 000-24657) filed
with the Commission on March 30, 2000, incorporated herein by
reference to Exhibit 10-24 to Mannatech's March 31, 2000 Form 10-
Q (File No. 000-24657) filed with the Commission on May 15, 2000.
10.25* Consultancy Agreement dated June 1, 2000 by and between
Mannatech, Incorporated and Samuel L. Caster.
10.26* 2000 Stock Option Plan, dated June 19, 2000.
10.27* Lock-up agreement between Mannatech and Charles E. Fioretti,
dated August 8, 2000.
22 Definitive Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (File No. 000-24657) filed with
the Commission on May 10, 2000.
27* Financial Data Schedule.
_____________
* Filed herewith.
21
(b) Reports on Form 8-K.
On May 12, 2000, Mannatech filed a Form 8-K (File No. 000-24657) with
the Securities and Exchange Commission in connection with the written
resignation of Mr. Samuel L. Caster that was accepted by our Board of
Directors on May 5, 2000. Mr. Caster outlined his resignation and
disagreements in a letter dated May 3, 2000.
Mannatech believes Mr. Caster's reasons for resigning were ultimately
personal and strongly disagreed with Mr. Caster's allegations. In
addition, Mannatech also rejected his demand letter, dated May 3,
2000.
22
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MANNATECH, INCORPORATED
August 14, 2000 /S/ ROBERT M. HENRY
----------------------------------------------
Robert M. Henry
Chief Executive Officer
August 14, 2000 /S/ STEPHEN D. FENSTERMACHER
----------------------------------------------
Stephen D.Fenstermacher
Senior Vice President and Chief Financial
Officer and principal financial officer
23
INDEX TO EXHIBITS
3.1 Amended and Restated Articles of Incorporation of Mannatech,
dated October 25, 1995, incorporated herein by reference to
Exhibit 3.1 to Mannatech's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.
3.2 Second Amended and Restated Bylaws of Mannatech, dated August
26, 1997, incorporated herein by reference to Exhibit 3.2 to
Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
3.3 Amendment to the Bylaws of Mannatech dated May 19, 1998,
incorporated herein by reference to Exhibit 3.3 to
Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
3.4 Amendment to the Bylaws of Mannatech dated October 20, 1999,
incorporated herein by reference to Exhibit 99 to Mannatech's
Form 8-K 9File No. 000-24657) filed with the Commission on
November 3, 1999.
4 Specimen Certificate representing the common stock, par value
$0.0001 per share, of Mannatech, incorporated herein by
reference to Exhibit 4.1 to Mannatech's Amendment No. 1 to
Form S-1 (File No. 333-63133) filed with the Commission on
October 28, 1998.
10.1 1997 Stock Option Plan dated May 20, 1997, incorporated
herein by reference to Exhibit 10.1 to Mannatech's Form S-1
(File No. 333-63133) filed with the Commission on September
10, 1998.
10.2 1998 Incentive Stock Option Plan dated April 8, 1998,
incorporated herein by reference to Exhibit 10.2 to
Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.3 Option Agreement dated July 1, 1997 with Multi-Venture
Partners, Ltd., incorporated herein by reference to Exhibit
10.7 to Mannatech's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.
10.4 Option Agreement dated October 19, 1999 with Steven A. Barker
Ph.D., incorporated by reference to Exhibit 10.8 to
Mannatech's 1999 Form 10-K (File No. 000-24657) filed with
the Commission on March 30, 2000.
10.5 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
Commission on September 10, 1998.
10.6 Schedule of additional directors signatories relating to the
Form of Indemnification Agreements in Exhibit 10.5 above,
incorporated by reference to Exhibit 10.10 to Mannatech's
1999 Form 10-K (File No. 000-24657) filed with the Commission
on March 30, 2000.
10.7 Letter of Understanding Regarding Development of Proprietary
Information for Mannatech effective as of August 1, 1997, as
amended, by and between Bill H. McAnalley, Ph.D. and
Mannatech, incorporated herein by reference to Exhibit 10.12
to Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.8 Commercial Lease Agreement dated November 7, 1996 between
MEPC Quorum Properties II Inc. and Mannatech, as amended by
the First Amendment thereto dated May 29, 1997 and the Second
Amendment thereto dated November 13, 1997, incorporated
herein by reference to Exhibit 10.13 to Mannatech's Form S-1
(File No. 333-63133) filed with the Commission on September
10, 1998.
10.9 Commercial Lease Agreement dated May 29, 1997 between MEPC
Quorum Properties II Inc. and Mannatech, as amended by the
First Amendment thereto dated November 6, 1997, incorporated
herein by reference to Exhibit 10.14 to Mannatech's Form S-1
(File No. 333-63133) filed with the Commission on September
10, 1998.
10.10 Assignment of Patent Rights dated October 30, 1997 by and
among Bill H. McAnalley, Ph.D., H. Reginald McDaniel, D. Eric
Moore, Eileen P. Vennum and William C. Fioretti and
Mannatech, incorporated herein by reference to Exhibit 10.15
to Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.11 Supply Agreement effective as of August 14, 1997 by and
between Mannatech and Caraloe, Inc., incorporated herein by
reference to Exhibit 10.17 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
10.12 Trademark License Agreement effective as of August 14, 1997
by and between Mannatech and Caraloe, Inc., incorporated
herein by reference to Exhibit 10.19 to Mannatech's Form S-1
(File No. 333-63133) filed with the Commission on September
10, 1998.
10.13 Supply Agreement effective January 12, 2000 by and between
Mannatech and Caraloe, Inc, incorporated herein by reference
to Exhibit 10.17 to Mannatech's 1999 Form 10-K (File No. 000-
24657) filed with the Commission on March 30, 2000.
10.14 Letter of Agreement from Mannatech to Michael L. Finney of
LAREX, Incorporated dated December 23, 1997, incorporated
herein by reference to Exhibit 10.20 to Mannatech's Form S-1
(File No. 333-63133) filed with the Commission on September
10, 1998.
10.15 Product Development and Distribution Agreement effective as
of September 15, 1997 between New Era Nutrition Inc. and
Mannatech, incorporated herein by reference to Exhibit 10.21
to Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.16 Summary of Management Bonus Plan, incorporated herein by
reference to Exhibit 10.23 to Mannatech's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.
10.17 Individual Guaranty of Samuel L. Caster dated January 5,
1998, incorporated herein by reference to Exhibit 10.27 to
Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.18 Individual Guaranty of Charles E. Fioretti dated January 5,
1998, incorporated herein by reference to Exhibit 10.28 to
Mannatech's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
10.19 Form of Employment Agreement entered into between Mannatech
and each of Charles E. Fioretti, Patrick D. Cobb, Anthony E.
Canale, Bill H. McAnalley and Deanne Varner, incorporated
herein by reference to Exhibit 10.30 to Mannatech's Amendment
No. 1 to Form S-1 (File No. 333-63133) filed with the
Commission on October 28, 1998.
10.20 Employment Agreement dated November 1, 1999, entered into
between Mannatech and Terry L. Persinger, incorporated herein
by reference to Exhibit 10.25 to Mannatech's 1999 Form 10-K
(File No. 000-24657) filed with the Commission on March 30,
2000.
10.21 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 1998 Form 10-K (File No. 000-24657) filed with
the Commission on March 31, 1999.
10.22 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 1998 Form 10-K (File No. 000-24657) filed with
the Commission on March 31, 1999.
10.23 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 1998 Form 10-K (File No. 000-24657) filed with
the Commission on March 31, 1999.
10.24 Form of Employment Agreement entered into between Mannatech
and Robert M. Henry, incorporated herein by reference to
Exhibit 10.24 to Mannatech's 2000 Form 10-Q (File No. 000-
24657) filed with the Commission on March 30, 2000,
incorporated herein by reference to Exhibit 10-24 to
Mannatech's March 31, 2000 Form 10-Q (File No. 000-24657)
filed with the Commission on May 15, 2000.
10.25* Consultancy Agreement dated June 1, 2000 by and between
Mannatech, Incorporated and Samuel L. Caster.
10.26* 2000 Stock Option Plan, dated June 19, 2000.
10.27* Lock-up agreement between Mannatech and Charles E. Fioretti,
dated August 8, 2000.
22 Definitive Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (File No. 000-24657) filed
with the Commission on May 10, 2000.
27* Financial Data Schedule.
_____________
* Filed herewith.