20012002
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
|X|[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001March 31, 2002.
OR
|_|[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________
Commission File No. 000-24657
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
Texas 75-2508900
(State or other Jurisdiction 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|X No |_|___.
---
As of November 1, 2001,May 14, 2002, the number of shares outstanding of the registrant's
sole class of common stock, par value $0.0001 per share was 25,051,301.25,134,840.
TABLE OF CONTENTS
Page
----
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.......................................................................Statements.......................................................................... 1
Consolidated Balance Sheets...................................................................Sheets........................................................................ 1
Consolidated Statements of Operations.........................................................Operations.............................................................. 2
Consolidated Statements of Cash Flows.........................................................Flows.............................................................. 3
Notes to Consolidated Financial Statements....................................................Statements......................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 8
Overview...................................................................................... 8Operations......... 7
Overview........................................................................................... 7
Results of Operations......................................................................... 11
Three-monthsOperations.............................................................................. 10
Three months ended September 30, 2001March 31, 2002 compared with the three-monthsthree months ended
September 30, 2000....................................................................... 11
Nine-months ended September 30, 2001 compared with the nine-months ended
September 30, 2000....................................................................... 13March 31, 2001................................................................................. 10
Liquidity and Capital Resources............................................................... 15Resources.................................................................... 12
Recent Financial Accounting Standards Board Statements........................................ 16
Outlook....................................................................................... 17Statements............................................. 14
Outlook............................................................................................ 15
Forward-looking Statements.................................................................... 17Statements......................................................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 19Risk................................... 16
Part II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 19Proceedings............................................................................ 17
Item 2. Changes in Securities and Use of Proceeds ................................................ 19................................................... 17
Item 3. Defaults Upon Senior Securities........................................................... 20Securities.............................................................. 17
Item 4. Submission of Matters to a Vote of Security Holders....................................... 20Holders.......................................... 17
Item 5. Other Information......................................................................... 20Information............................................................................ 17
Item 6. Exhibits and Reports on Form 8-K.......................................................... 20
Signatures......................................................................................... 228-K............................................................. 17
Signatures............................................................................................ 18
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MANNATECH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December September
31, 30,
2000March 31,
2001 -------- --------2002
---- ----
(Unaudited)
ASSETS
Cash and cash equivalents .................................................................................................................................... $ 5,7369,926 $ 5,79712,734
Accounts receivable less allowance for doubtful accounts of $58 in 2000 and 2001 .......... 692 948
Income tax receivable ....................................................................... 2,300 1,718613 1,546
Current portion of notes receivable-shareholders ............................................ 187.......................................... 119 174
Inventories ................................................................................. 13,326 10,302............................................................................... 8,386 5,937
Prepaid expenses and other current assets ................................................... 745 1,448................................................. 1,064 1,180
Deferred tax assets ......................................................................... 1,201 1,199....................................................................... 1,535 1,536
-------- --------
Total current assets .................................................................. 24,187 21,531.............................................................. 21,643 23,107
Property and equipment, net ................................................................. 13,324 11,294............................................................... 10,448 9,745
Notes receivable-shareholders, excluding current portion .................................... 390 327.................................. 334 229
Restricted cash ........................................................................... -- 300
Other assets ................................................................................ 1,000 859
Long-term investments ....................................................................... 1 --.............................................................................. 718 671
-------- --------
Total assets ................................................................................................................................................ $ 38,90233,143 $ 34,01134,052
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of capital leases and notes payable ................................................................................ $ 315 $ 301
$ 526
Accounts payable ............................................................................ 4,309 453.......................................................................... 509 425
Accrued expenses ............................................................................ 11,768 13,164
Accrued compensation to related parties (Note 4) ............................................ 520 1,582.......................................................................... 13,165 14,065
Current portion of accrued severance ...................................................... 1,732 1,621
-------- --------
Total current liabilities ............................................................. 16,898 15,725......................................................... 15,721 16,412
Capital leases and notes payable, excluding current portion ................................. 27............................... -- 15
Accrued compensation to related parties (Note 4) ............................................ 500 1,100severance, excluding current portion .............................................. 950 625
Deferred tax liabilities .................................................................... 1,752 917.................................................................. 380 382
-------- --------
Total liabilities ..................................................................... 19,177 17,742................................................................. 17,051 17,434
-------- --------
Commitments and contingencies (Notes 4 and 5) ...............................................(Note 4) .................................................... -- --
Commitment to repurchase common stock (Note 5) .............................................. 1,000 --
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and
outstanding ........................................................................... -- --
outstanding ..............................................................................
Common stock, $0.0001 par value, 99,000,000 shares authorized, 25,051,30125,162,541 shares issued
and 24,929,173 outstanding in 2000, 25,051,301 issued and25,134,840 outstanding in 2001 ............and 2002 ........................................... 3 3
Additional paid-in capital .................................................................. 17,949 17,949
Note receivable due from shareholders (Note 5) .............................................. (167) (815)
Retained earnings (deficit) ................................................................. 2,798 (436)................................................................ 18,204 18,191
Accumulated deficit ....................................................................... (1,407) (811)
Accumulated other comprehensive loss--foreign currency translation adjustment ............... (321) (432)............. (608) (665)
-------- --------
20,262 16,26916,192 16,718
Less treasury stock, at cost, 122,128 shares in 2000 and 027,701 shares in 2001 and a commitment
to repurchase common stock of $1,000 in 2000 (Note 5) .................................... (1,537) --2002 .............................. (100) (100)
-------- --------
Total shareholders' equity ............................................................ 18,725 16,269........................................................ 16,092 16,618
-------- --------
Total liabilities commitment to repurchase common stock and shareholders' equity ............................................. $ 38,90233,143 $ 34,01134,052
======== ========
See accompanying notes to consolidated financial statements.
1
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE-MONTHSTHREE MONTHS ENDED SEPTEMBER 30, 2000 ANDMARCH 31, 2001 AND THE NINE-MONTHS ENDED SEPTEMBER 30, 2000 AND 20012002
(in thousands, except per share information)
Three-months ended Nine-months ended
September 30 September 30
---------------------- -----------------------
2000 2001 2000 2001
---- ---- ---- ----
Net Sales ............................................... $ 37,364 $ 30,307 $ 116,096 $ 97,017
-------- -------- --------- --------
Cost of Sales ........................................... 6,776 5,590 20,469 17,130
Commissions ............................................. 15,294 12,171 47,346 38,465
-------- -------- --------- --------
22,070 17,761 67,815 55,595
-------- -------- --------- --------
Gross profit ........................................ 15,294 2,546 48,281 41,422
-------- -------- --------- --------
Operating Expenses:
Selling and administrative expenses ................. 8,054 7,180 26,988 23,784
Other operating costs ............................... 8,549 5,503 23,922 17,153
Severance expenses related to former executives ..... 125 -- 125 3,420
Write-off of fixed asset ............................ -- -- 870 --
-------- -------- --------- --------
Total operating expenses .......................... 16,728 12,683 51,905 44,357
-------- -------- --------- --------
Loss from operations .................................... (1,434) (137) (3,624) (2,935)
Interest income ......................................... 139 53 561 208
Interest expense ........................................ (15) (9) (58) (24)
Other expense, net ...................................... (250) (30) (383) (132)
-------- -------- --------- --------
Loss before income taxes and cumulative effect of
accounting change ..................................... (1,560) (123) (3,504) (2,883)
Income tax (expense) benefit ............................ 357 (182) 984 194
-------- -------- --------- --------
Loss before cumulative effect of accounting change ...... (1,203) (305) (2,520) (2,689)
Cumulative effect of accounting change, net of tax of
$126 .................................................. -- -- (210) --
-------- -------- --------- --------
Net loss ................................................ $ (1,203) $ (305) $ (2,730) $ (2,689)Three months ended
March 31,
----------------------
2001 2002
-------- --------
Net Sales .......................................... $ 34,195 $ 32,926
-------- --------
Cost of Sales ...................................... 5,726 5,903
Commissions ........................................ 13,805 13,821
-------- --------
19,531 19,724
-------- --------
Gross profit .................................. 14,664 13,202
-------- --------
Operating Expenses:
Selling and administrative expenses ........... 9,034 7,502
Other operating costs ......................... 6,124 4,536
-------- --------
Total operating expenses .................. 15,158 12,038
-------- --------
Income (loss) from operations ...................... (494) 1,164
Interest income .................................... 97 74
Interest expense ................................... (9) (6)
Other expense, net ................................. (115) (17)
-------- --------
Income (loss) before income taxes .................. (521) 1,215
Income tax (expense) benefit ....................... 212 (619)
-------- --------
Net income (loss) .................................. $ (309) $ 596
======== ========
Earnings (loss) per common share:
Basic ......................................... $ (0.01) $ 0.02
======== ========
Diluted ....................................... $ (0.01) $ 0.02
======== ========
Weighted-average common shares outstanding:
Basic ......................................... 24,799 25,135
======== ========
Diluted ....................................... 24,799 25,269
======== ======== ========= ========
Earnings (loss) per common share - Basic:
Before cumulative effect of accounting change ....... $ (0.05) $ (0.01) $ (0.10) $ (0.11)
Cumulative effect of accounting change .............. -- -- (0.01) --
-------- -------- --------- --------
Net ................................................. $ (0.05) $ (0.01) $ (0.11) $ (0.11)
======== ======== ========= ========
Earnings (loss) per common share - Diluted:
Before cumulative effect of accounting change ....... $ (0.05) $ (0.01) $ (0.10) $ (0.11)
Cumulative effect of accounting change .............. -- -- (0.01) --
-------- -------- --------- --------
Net ................................................. $ (0.05) $ (0.01) $ (0.11) $ (0.11)
======== ======== ========= ========
Weighted-average common shares outstanding
Basic ............................................... 24,984 24,367 24,945 24,614
======== ======== ========= ========
Diluted ............................................. 24,984 24,367 24,945 24,614
======== ======== ========= ========
See accompanying notes to consolidated financial statements.
2
MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE-MONTHSTHREE MONTHS ENDED SEPTEMBER 30, 2000MARCH 31, 2001 AND 20012002
(in thousands)
2000 2001 ---- ----2002
-------- --------
Cash flows from operating activities:
Net loss .......................................................................................income (loss) ....................................................................... $ (2,730) $(2,689)(309) $ 596
Adjustments to reconcile the net lossincome (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................................ 2,662 2,911
Write-off of a fixed asset ................................................................... 870 --
Loss......................................................... 991 994
(Gain) loss on disposal of assets ................................................................... 423 126
Tax benefit from exercise of..................................................... (12) 21
Accounting charge related to stock options ................................................... 239granted .................................... -- Cumulative effect of accounting change, net of tax ........................................... 210 --(13)
Deferred income tax expense (benefit) ........................................................ 29 (833)taxes ................................................................. -- 1
Changes in operating assets and liabilities:
Accounts receivable ........................................................................ 27 (274)
Income tax receivable ...................................................................... (1,393) 582................................................................. 72 (935)
Inventories ................................................................................ (866) 2,968......................................................................... (118) 2,445
Prepaid expenses and other current assets .................................................. (390) 61........................................... 21 (117)
Other assets ............................................................................... 151 142........................................................................ 69 44
Accounts payable ........................................................................... (971) (2,386).................................................................... (1,169) (82)
Accrued expenses and accrued compensation to related parties ............................... 879 3,067.................................................................... 55 903
Accrued severance ................................................................... -- (436)
-------- ---------------
Net cash provided by (used in) operating activities ...................................... (860) 3,675............................. (400) 3,421
-------- ---------------
Cash flows from investing activities:
Acquisition of property and equipment ........................................................ (4,420) (1,057)................................................. (73) (288)
Cash proceeds from sale of property and equipment ................................................................................. 2 -- 2
Repayments by shareholders/related parties ................................................... 132 130............................................ 143 50
Increase in restricted cash ........................................................... -- (300)
Maturities of investments .................................................................... 1,752............................................................. 1 --
-------- ---------------
Net cash used inprovided by (used in) investing activities .................................................... (2,536) (924)............................. 73 (538)
-------- ---------------
Cash flows from financing activities:
Payment of cashBook overdrafts .......................................................................................................................................... (1,352) --
(1,450)
Proceeds from stock options exercised ........................................................ 328 --
PaymentRepayment of capital lease obligations ......................................................... (403) (293)................................................ (146) (14)
Purchase of common stock from shareholder ................................................................................................. (83) --
(656)
Advance to shareholder ....................................................................... (500) --
PaymentRepayment of notes payable ..................................................................... (140) (280)............................................................ (16) (18)
-------- ---------------
Net cash used in financing activities .................................................... (715) (2,679)........................................... (1,597) (32)
-------- ---------------
Effect of exchange rate changes on cash and cash equivalents ................................... 5 (11)............................ (6) (43)
-------- ---------------
Net increase (decrease) in cash and cash equivalents ........................................... (4,106) 61.................................... (1,930) 2,808
Cash and cash equivalents:
Beginning of the period ...................................................................... 11,576............................................................... 5,736 9,926
-------- ---------------
End of the period ................................................................................................................................................. $ 7,4703,806 $ 5,79712,734
======== ===============
Supplemental disclosure of cash flow information:
Interest paid ......................................................................................................................................................... $ 599 $ 246
======== ===============
Taxes paid ............................................................................ $ -- $ 1,200
======== ========
Summary of non-cash investing and financing activities follows:
Assets acquired through notes payable ........................................................and a capital lease ............................ $ --187 $ 77133
======== ===============
Treasury shares received for the payment of a note receivable due from a shareholder ......... $ 83shareholder... $ 167 ======== =======
Treasury shares acquired by issuance of note receivable due from a shareholder ............... $ --
$ 815
======== =======
Commitment to repurchase common stock from a shareholder ..................................... $ 1,000 $ (417)
======== =======
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 high-quality, proprietary
nutritional supplements, topical products and weight-management products
primarily through a network marketing system operating in the United States,
Canada, Australia, the United Kingdom and Japan. Independent associates
("Associates"associates") purchase the Company's products at wholesale prices for the
primary purpose of selling to retail consumers or for personal consumption. Activeconsumption,
while independent members ("members") purchase products at a discount from
retail prices. Associates are eligible to earn commissions on their downline
growth and sales volume. In June 2001,The Company has nine wholly-owned subsidiaries located
throughout the Company
introduced its member program specifically designed for consumers ("Members") to
purchase products for personal consumption at a discount but not to participate
in the various incentive programs.world. The Company's nine wholly-owned subsidiaries are as follows:
Wholly-owned subsidiary name Date incorporated Location of subsidiary Date operations began
---------------------------- ----------------- ---------------------- ---------------------
Mannatech Australia Pty Limited April 22, 1998 St. Leonards, Australia October 1, 1998
Mannatech Limited December 1, 1998 Republic of Ireland No operations
Mannatech Ltd. November 18, 1998 Aldermaston, Berkshire November 15, 1999
U.K.
Mannatech Payment Services Incorporated April 11, 2000 Coppell, Texas June 26, 2000
Mannatech Foreign Sales CorporationCorporation* May 1, 1999 Barbados May 1, 1999
Internet Health Group, Inc. (ceased* May 7, 1999 Coppell, Texas December 20, 1999
operations as of December 29, 2000)
Mannatech Japan, Inc. January 21, 2000 Tokyo, Japan June 26, 2000
Mannatech Limited February 14, 2000 New Zealand No operations
Mannatech Products Company, Inc. April 17, 2001 Coppell, Texas No operations
-------------------------------------------
*Subsidiaries ceased operations on December 29, 2000.
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 Company's 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 as of, and 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 Company's consolidated
financial statements and accompanying footnotes included in theirthe Company's annual
report on Form 10-K for the year ended December 31, 2000.2001.
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.
Revenue Recognition
The Company's revenues primarily consist of sales from products sold, starter and
renewal packs sold and shipping fees.fees charged. Substantially all product sales
are sold to Associatesassociates at published wholesale prices and are sold to Membersmembers at
published discounteda discount from retail prices. Net sales includeThe Company also records a product return reserve
for estimatedrelated to refunds in net sales. The Company records the product returns and any
related refunds, which arereturn reserve
based on its historical experience. The Company
adopted Staff Accounting Bulletin No. 101 "Revenue Recognitionexperience in Financial
Statements" ("SAB 101") in the fourth quarter of 2000. As a result of adopting
SAB 101, the Company has restated its 2000 quarterly financial information and
recorded a one-time charge of $210,000, net of tax of $126,000 forsales.
4
the cumulative effect of this accounting change at January 1, 2000. Beginning in
2000, theThe Company defers all of its revenues until the consumerassociate or member
receives the products shipped.shipment. The Company also defers a portion of itsthe revenue received
from salesthe sale of the starter and renewal packs which are inwhen the revenue exceeds the
excess of the total average cumulative wholesale value of all of the individual items
included in such packs and amortizes such deferrals over a twelve-month period.
Some of the higher dollar packs also contain an event admission pass, which
allows an associate free admission to a corporate sponsored event. Revenues from
these packs are allocated between products and event admission based on the
proportionate average fair value of products and the allocated event admission.
The allocated event admission revenue contained in these pack sales are also
amortized over a twelve month period. Total deferred revenue was $691,000$433,000 and
$704,000 at December 31, 20002001 and $736,000 at September 30, 2001.March 31, 2002, respectively.
Shipping and Handling Costs
In accordance with the Emerging Issue Task Force No. 00-10 "Accounting for
Shipping and Handling Fees and Costs," theThe Company records freight and shipping revenues collected from
its Associatesassociates and Members,members as revenue. The Company records the in-bound freight and
shipping costs as a part of cost of sales and records the shipping and handling
costs associated with shipping its products to all of its consumersassociates and members as selling
and administrative expenses.expenses in the accompanying consolidated financial
statements. Total shipping and handling costs included in selling and
administrative expenses wasexpense were approximately $1.2$1.6 million and $1.3$1.4 million for the
three-monthsthree months ended September 30,March 31, 2001 and 2000, respectively and $4.3 million and $5.8 million for the nine-months ended
September 30, 2001 and 2000,2002, respectively.
Earnings 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 the
period. At September 30, 2000,March 31, 2001, all of the 3,863,9523,228,685 common stock options and 213,333
warrants were excluded from the diluted EPS calculation and at September 30, 2001, allMarch 31, 2002,
2,898,833 of the
3,764,307 common stock options and 213,333100,000 warrants were excluded from
the diluted EPS calculation, as their effect was antidilutive.
The following data shows the amounts used in computing earnings (loss)
per share and their effect on the weighted-average number of common shares of
dilutive common share equivalents for the three-monthsthree months ended September 30, 2000March 31, 2001 and
2001.2002. The amounts are rounded to the nearest thousand except for per share
amounts.
2000 2001 ----------------------------------------- ----------------------------------------
Net loss2002
-------------------------------------- -------------------------------------
Loss Shares Per share Net lossShare Income Shares Per shareShare
(Numerator) (Denominator) amountAmount (Numerator) (Denominator) amountAmount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS:
Net lossincome (loss) available to to
common shareholders $(1,203) 24,984 $(0.05) $(305) 24,367 $(0.01)($309) 24,799 ($0.01) $596 25,135 $0.02
Effect of dilutive securities:
Stock options/warrants -- -- -- --
-------options - - - - 121 -
Warrants - - - - 13 -
----- ------ ------ ---- ------ ----- ------
Diluted EPS:
Net lossincome (loss) available to
common shareholders plus
assumed conversions $(1,203) 24,984 $(0.05) $(305) 24,367 $(0.01)
=======($309) 24,799 ($0.01) $596 25,269 $0.02
===== ====== ====== ========= ====== ===========
5
The following data shows the amounts used in computing earnings
(loss) per share and their effect on the weighted-average number of common
shares of dilutive common share equivalents for the nine-months ended September
30, 2000 and 2001. The amounts are rounded to the nearest thousand except for
per share amounts.
2000 2001
-------------------------------------------- --------------------------------------------
Net loss Shares Per share Net loss Shares Per share
(Numerator) (Denominator) amount (Numerator) (Denominator) amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS:
Net loss available to
to common shareholders $(2,730) 24,945 $(0.11) $(2,689) 24,614 $(0.11)
Effect of dilutive securities:
Stock options/warrants -- -- -- --
------- ------ ------- ------
Diluted EPS:
Net loss available to
common shareholders plus
assumed conversions $(2,730) 24,945 $(0.11) $(2,689) 24,614 $(0.11)
======= ====== ====== ======= ====== ======
NOTE 2 INVENTORIES
At December 31, 20002001 and September 30, 2001March 31, 2002 inventory, rounded to the
nearest thousands, consisted of the following:
2000 2001 2002
---- ----
Raw materials ................................materials............................ $ 6,5874,311 $ 5,1052,380
Finished goods ............................... 6,739 5,197goods........................... 4,075 3,557
------- -------
$13,326 $10,302$ 8,386 $ 5,937
======= =======
NOTE 3 COMPREHENSIVE LOSSINCOME (LOSS)
Comprehensive lossincome (loss) for the three-monthsthree months ended March 31, 2001
and the nine-months ended
September 30, 2000 and 20012002 is as follows (in thousands):
Three-monthsThree months ended Nine-months ended
------------------ -----------------
September 30 September 30
------------ ------------
2000March 31,
----------------------------
2001 2000 2001
---- ----2002
---- ----
Net loss .................................. $(1,203) $(305) $(2,730) $(2,689)income (loss).............................. ($309) $596
Foreign currency translation adjustment ... 5 118 5 (112)
-------adjustment........ (234) (57)
----- ------- -----------
Comprehensive loss ........................ $(1,198) $(187) $(2,725) $(2,801)
=======income (loss).................... ($543) $539
===== ======= ===========
NOTE 4 COMMITMENTS AND CONTINGENCIES
In the fourth quarter of 2000, Mr. Anthony Canale resigned and in the
second quarter of 2001, Ms. Deanne Varner, Mr. Charles Fioretti and Mr. Patrick
Cobb resigned as executive officers of the Company. As a result, the Company
entered into Separation Agreements with each of them. Under the terms of their
agreements, the executives are bound by certain non-compete and confidentiality
clauses and the Company agreed to pay them an aggregate amount of $1.9 million
in 2001, $1.6 million in 2002, $850,000 in 2003 and $150,000 in 2004. The
payments consist of compensation related to the cancellation of their employment
agreements, accrued vacation, health insurance and automobile expenses. The
Company also agreed to grant Mr. Canale 213,333 warrants, Ms. Varner a total of
163,333 stock options and Mr. Cobb a total of 60,000 stock options, all at
exercise prices ranging from $1.75 to $4.00. As of September 30, 2001, none of
these options or warrants had been exercised. The warrants and stock options
vest on the date they were granted and are exercisable for ten years. In the
second quarter of 2001, the Company recorded a one-time charge for all of these
separation agreements of which $2.7 million remained unpaid as of September 30,
2001.
6
In September 2001, the Company amended its agreement with a high-level
Associate,associate and shareholder and advisory board member to promote the Company and develop downline growth in
Japan. The amendment further clarified that the Company would pay this Associateassociate
a royalty of $5.00 perfor each specific promotional materialsitem sold by the Company, up to
a maximum of $1.6 million. The Company does not expect to incur any royalty expensebegan paying royalties associated with
this agreement until the first quarter ofin May 2002.
NOTE 5 TRANSACTIONS WITH RELATED PARTIES
On September 24, 2001,In January 2002, the Company amended their agreement with Mr.
Charles Fiorettibegan leasing approximately $250,000 of
computer hardware under a noncancelable master lease. The master lease contains
four separate three-year operating leases that expire at various times through
May 2005. In April 2002, the master lease was increased to contingently release Mr. Fioretti from his Lockup and
Repurchase Agreement in which$300,000. The master
lease requires the Company originally agreed to buy, on a monthly
basis, uprestrict cash equal to $1.0 million worth of his stock valued at 90%125% of the fair market
value so that Mr. Fioretti could sell 3,500,000 of his common shares to Mr. J.
Stanley Fredrick. Under the terms of their agreement, Mr. Fredrick agreed to
purchase 3,500,000 shares of Mr. Fioretti's stock, and Mr. Fioretti agreed to
transfer all of the voting rights associated with his remaining shares to Mr.
Fredrick. In addition, Mr. Fredrick has the right of first refusal to acquire
the remaining 690,848 shares from Mr. Fioretti. On September 28, 2001, the
Company's Board of Directors appointed Mr. Fredrick to the Board of Directors to
fill the vacancy created when Mr. Fioretti resigned in August 2001.
On September 28, 2001,borrowed line
as collateral. At March 31, 2002, the Company entered into an agreement with Mr. Ray
Robbins, a high-level Associate, shareholder and board member,restricted $300,000 of its cash
for use as collateral related to sell him all
of the Company's 815,009 shares of treasury stock at $1.00 per share. The
Company recorded the sale and a receivable due from a shareholder on September
30, 2001. The receivable was non-interest bearing and paid in full in October
2001.
On October 1, 2001, the Company entered into a two-year Consulting and
Lockup Agreement with Mr. Fredrick. This agreement automatically renews annually
unless thirty-day written notice is given to all parties. Under the terms of
this agreement, Mr. Fredrick will provide advice and perform various functions
for the Board of Directors for which the Company will pay Mr. Fredrick a total
of $185,000 per year. In addition, under this agreement, Mr. Fredrick is
prohibited from selling his shares, unless approved by the Company's Board of
Directors.master lease.
NOTE 65 RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations"
and No. 142 ("SFAS 142") "Goodwill and Other Intangibles Assets."
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 "Business
Combinations." The most significant changes made by SFAS 141 are that it
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
recognition of certain intangiblesintangible assets separately from goodwill and requires
the immediate write-off of unallocated negative goodwill.
SFAS 142 supercedes Accounting Principles Board Opinion No. 17
"Intangible Assets." SFAS 142 is effective for fiscal years beginning after
December 15, 2001. SFAS 142 prohibits goodwill and indefinite lived intangible
assets from being amortized and requires them to be annually tested for
impairment at each reporting unit level. In addition, SFAS 142 removes the
limitation of forty years for the useful lives of finite intangible assets.
In JuneAugust 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 143 ("SFAS 143") "Accounting
for Asset Retirement Obligations" and in October 2001, issued No. 144 ("SFAS
144") "Accounting for the Impairment or Disposal of Long-Lived Assets."
6
SFAS 143 amends SFAS 19, "Financial Accounting and Reporting by Oil and
Gas Producing Companies" and is effective for fiscal years beginning after June
15, 2002. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be determined. In addition, SFAS 143
requires the associated asset retirement costs to be capitalized as part of the
carrying amount of the long-lived asset.
SFAS 144 supercedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Accounting
Principles Board Opinion No. 30 "Reporting Results of Operations-
7
ReportingOperations-Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 is effective for
fiscal years beginning after December 15, 2001. SFAS 144 requires that impaired
long-lived assets be measured at the lower of carrying amount or fair value less
costs to sell, regardless if they are reported in continuing operations or in
discontinued operations. In addition, discontinued operations should no longer
be measured at net realizable value or include amounts for operating losses that
have not yet occurred. Finally, SFAS 144 broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction.
In September 2001, the Emerging Issues Task Force ("EITF") issued EITF
01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller
of the Vendor's Products," which addresses the statement of operations
characterization of stock option awards, royalties, and other cash consideration
the Company pays to its associates. The Company believesprovisions of EITF 01-09 is effective
for fiscal years beginning after December 15, 2001.
The adoption of the above pronouncements will haveas of January 1, 2002, had no
significant effect on its consolidated financial positions, results of
operations or cash flows.
NOTE 7 SUBSEQUENT EVENTS
On October 1, 2001, the Company entered into an employment agreement with
Ms. Bettina S. Simon to serve as the new Senior Vice President and General
Counsel. Under the terms of the employment agreement, Ms. Simon will be paid an
annual base salary of $200,000 and was granted 50,000 stock options, which vest
over three-years and are exercisable over ten years at a stock price of $1.07
per share. The employment agreement has no fixed term; however, if cancelled
without cause, Ms. Simon will be entitled to receive between three to six months
of her annual base salary.
On November 1, 2001, the Company granted 625,000 stock options to various
executive officers. The options vest over three years, expire in ten years and
are exercisable at $2.69 per share.
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 its results of operations for the three
and
nine-monthsmonths ended September 30, 2001March 31, 2002 compared to the same periodsperiod in 2000.2001. The
Consolidated Financial Statements and related Notes should be referred to in
conjunction with this discussion. Unless stated otherwise, all financial
information presented below, throughout this report and in the Consolidated
Financial Statements and related Notes includes Mannatech and all of its
subsidiaries on a consolidated basis.
Overview
Mannatech develops and sells itsinnovative, high-quality, proprietary nutritional
supplements, topical products and weight-management products primarilythat are sold
through a worldwide network marketingglobal network-marketing system operating inthroughout the United States, Canada,
Australia, the United Kingdom and Japan. Mannatech plans to begin distribution
of its products, for personal consumption, into New Zealand in the summer of
2002. The distribution of products into New Zealand will be serviced through
Mannatech's Australian subsidiary. Currently, Mannatech hasoperates as a single
segment and primarily sells its products through a network of approximately
202,000187,000 active associates and members and associates as of September 30, 2001 compared to approximately 274,000237,000 active associates as of September 30, 2000.a
year ago. Mannatech defines an active"active associate" as an associate or member as one havingwho
has purchased Mannatech products within the last twelve months.
Members may purchase Mannatech's high-quality
proprietarynet sales consist of sales from products for personal consumptionsold, starter and
renewal packs sold and shipping fees. Substantially all product sales are made
to associates at published wholesale prices and are sold to members at a
discount but not participate
in the various incentive programs.
Mannatech's earnings (loss) per share remained at ($0.11) for each of the
nine-months ended September 30, 2001 and for the comparable period in 2000,
respectively in spite of recording a one-time charge of $3.4 million, in the
second quarter of 2001, which related to the resignations of various former
executives with employment agreements. In addition, Mannatech reported a
decrease in net sales, which was directly attributed to a 26% decrease in
Mannatech's active associate and member base. For the nine-months ended
September 30, 2001, Mannatech would have reported net income of $731,000,
exclusive of the $3.4 million one-time severance charge and continues to report
income from operations for its North American operations. The net loss for 2000
totaling ($2.7 million) primarily related to a decrease in net sales, incurring
approximately $4.4 million related to international expansion into the United
Kingdom and Japan, and continuing to fund operations for its Internet
subsidiary, Internet Health Group, Inc, which ceased operations on December 29,
2000.
8
Beginning in February 2001, Mannatech increased the shipping fees it
charges to consumers and in March 2001, Mannatech increased the sale prices of
some of its finished goods. The price increase on certain finished goods
was Mannatech's first price increase since its inception in 1993.
In June 2001, Mannatech introduced its member program and announced the
hiring of new general managers for both its Australia and Japan operations,
which it believes will help in strengthening its international operations. In
addition, in the second quarter of 2001, Mannatech implemented some new
incentive programs specifically designed to reward its entry-level associates
faster, increase its active associate base and boost net sales. In October 2001,
Mannatech unveiled its strategy for its new global compensation plan that will
help to refocus its associates to primarily concentrate on Mannatech's
performance and leadership incentive programs. Overall, Mannatech believes the
changes to its compensation plan will better reward its associates and continue
to pay approximately 42% of commissionable sales as compensation expense to its
active associates.
Net sales by country, as a percentage of consolidated net sales, including
the Japan operations, which began operations on June 26, 2000, are as follows:
Nine-months ended September 30 U.S. Canada Australia U.K. Japan Total
- ------------------------------ ----- ------ --------- ---- ----- ------
2001............. 77.0% 14.7% 3.4% 0.9% 4.0% 100.0%
2000............. 77.1% 13.4% 6.3% 1.2% 2.0% 100.0%
Mannatech believes that it continues to provide the highest-quality of
products to its consumers, which helps the consumer achieve optimal health and
wellness. Mannatech also believes it only introduces products that help meet a
current demand in the wellness industry at the highest quality available.
Recently Mannatech introduced four new products including:
o ImmunoStart(TM), which was introduced in October 2000, as a chewable
tablet that aids in energy levels and helps the immune system.
o Glyco-Bears(R), which was introduced in March 2001 as a new chewable
multivitamin for children. Mannatech believes the chewable vitamin
will help supplement children's diets and aid in their overall
health and wellness.
o Glycentials(TM), which was introduced in August 2001 as an
antioxidant-rich multivitamin/mineral formula that helps to provide
vitamin and mineral support. Mannatech believes this multivitamin
will aid in ones overall health and wellness.
o CardioBALANCE (TM), which was introduced in October 2001 to provide
a wide range of certain nutritional benefits specifically designed
to aid in the cardio-vascular system.
Mannatech primarily derives its revenues from sales of its products and
starter and renewal packs.suggested retail pricing. Starter and renewal packs include some combinationconsist of
Mannatech's proprietaryvarious combinations of products and promotional materials. An activeMannatech tries to
offer a comparable associate who purchases a starter or renewal pack is entitled to purchase Mannatech's
high-quality proprietary products at wholesale prices and earn various
incentives and bonuses. In June 2001, Mannatech introduced its member program,
which allows a member to purchase its high-quality proprietary products at 95%
of the suggested retail price or 86% of the suggested retail price for an
automatic monthly order. Mannatech offers comparable starter and renewal packs in each country in which it does
business; however, due tobecause each country has different regulatory guidelines in each country,that
must be followed, not all of Mannatech's packs are offered in all countries.
Mannatech adopted Staff Accounting Bulletin No. 101 "Revenue Recognition
in Financial Statements" ("SAB 101") in the fourth quarter of 2000. Under SAB
101, Mannatech is required to deferdefers the recognition of revenuesrevenue for product sales until 9
its
associates or members receive the consumer receives the products shipped. The adoption of SAB 101 resulted in
a one-time cumulative effect of accounting change of approximately $210,000, net
of tax of $126,000.
On average, the wholesale value of the nutritional and topical products
contained in each of Mannatech's starter and renewal packs are between 60% and
100% of the total wholesale value of the packs. The remainder of the total
wholesale value, if any, consists of various promotional materials. Mannatech
defers revenue over a twelve-month period for revenue received from the sale of
its associate packs to the extent that the sales price exceeds the sum of the
total average wholesale value of all of the individual items included in such
packs. Total deferred revenue was approximately $691,000 at December 31, 2000
and $736,000 at September 30, 2001.
Mannatech compensates its active associates by paying them commissions and
incentives, which is its most significant expense. The commission structure is
designed to not materially exceed 42% of commissionable net sales. Inproducts. During March 2001, Mannatech
announcedincreased the following two incentive bonus programs forsale prices of certain of its active associates:
o The Power Plan incentive bonus, which pays active associates for
enrolling six All-Star associates;products and o The Team incentive bonus, which pays active associates for meeting
and maintaining certain purchasing levels in their organizations.shipping fees. In the
future, Mannatech believes these incentive programs will ultimately pay more
commissions to the entry-level associate faster. In October 2001, Mannatech
announced that its strategyinternational operations may account for its new compensation plan would help to refocus
its associates to concenrate on its leadership and performance incentive
programs; however, nonean
increasing percentage of these changes to its compensation plan are expected
to significantly change the total commissions paidconsolidated net sales. The net sales by country as a
percentage of commissionableconsolidated net sales are as follows:
7
United United
Three months ended March 31, States Canada Australia Kingdom Japan Total
--------------------------- ------ ------ --------- ------- ----- -----
2002....................... 77.5% 12.8% 3.6% 0.9% 5.2% 100.0%
2001....................... 78.4% 13.7% 3.3% 0.9% 3.7% 100.0%
For the three months ended March 31, 2002, net product and pack sales
increased in Australia and Japan. Mannatech believes this increase is in
response to leadership changes in its Australia and Japan operations and hiring
a new President of International Operations in December 2001. For its domestic
operations, net product sales decreased, but pack sales increased. Mannatech
believes its pack sales help indicate future product sales. CommissionsMannatech believes
the current decrease in net product sales of its domestic operation is due to
the following:
. a decrease in active associates;
. uncertain general economic conditions; and
. the change in the timing of its international annual
corporate-sponsored sales event, called Mannafest, which is used as
a recruiting tool by many of its associates. This event was held in
March 2001 and shifted to April 2002.
In June 2002, Mannatech plans to discontinue its MVP(TM) product, which
contains ephedrine. Net sales for MVP(TM) for the three months ended March 31,
2002 and 2001 were $269,000 and $377,000, respectively. In 2002, to help
stimulate net sales, Mannatech also plans to improve several of its core
products. Since March 2001, Mannatech introduced two new products and
reformulated some of its weight-management products. The new products include
the following:
. Glycentials(TM) Vitamin, Ambroglycin(TM) Mineral and Antioxidant
Formula, introduced in August 2001, a dietary supplement that helps
provide a balanced food matrix of vitamins, chelated minerals, trace
minerals, antioxidant co-factors and Ambrotose(R) complex;
. CardioBALANCE(TM) Heart Care Formula, introduced in October 2001, a
dietary supplement that helps provide a wide range of specific
nutritional benefits designed to aid in keeping an already healthy
cardiovascular system strong and well; and
. GlycoLEAN(R) Body System, reformulated and introduced in January
2002 that includes a full spectrum of various weight management
products, new and updated comprehensive information, charts, better
tasting meal replacement drinks and a reformulated GlycoLEAN(R)
Accelerator2(TM), which includes a new ephedrine-free ingredient.
Costs of sales primarily consist of cost of products purchased from
third-party manufacturers, costs of promotional materials sold to Mannatech's
associates and write-downs of inventory. As the mix of products, packs and
promotional material shifts, costs of sales and gross profit may fluctuate due
to the different margins on each product sold.
Mannatech's most significant expense is commissions. When Mannatech
expanded internationally, it integrated the majority of its associate's global
incentive plan across all markets in which its products were sold, thereby
allowing all of its existing associates to receive commissions for direct and
indirect global product sales. This global structure allows associates to build
their global networks by expanding their existing downlines into newly-formed
international markets rather than having to establish new downlines to requalify
for higher levels of commissions within each new country. Mannatech pays its
associates various commissions and incentives based upon the associates' direct
and indirect product sales and expansion of their downlines.
8
In late 2001, Mannatech outlined its overall plans to change its global
associate incentive plan to eliminate a commission that is paid only in the
United States and Canada that rewards associates for building their network and
increases the payouts of all other existing commissions paid in order to
concentrate commission payments on product sales and network development.
Generally, commissions and incentives are paid to active associates
are based on the
following criteria:
o associatesfollowing:
. associates' placement and position within the compensationincentive plan;
o. volume of their direct and indirect commissionable net sales;
o. number of new enrollednewly-enrolled associates; and
o. achievement of certain levels to qualify for the various incentive
programs.
Operating expenses consist primarily of selling and administrative
expenses and other operating costs. Selling and administrative expenses are a
combination of both fixed and variable expenses and include compensation,
shipping and freight and marketing-related expenses such as hosting Mannatech's
national corporate-sponsored events. Other operating costs include utilities,
depreciation, travel, consulting fees, professional fees, office expenses,
printing expenses and miscellaneous operating expenses.
Income taxes include both domestic and foreign taxes. In 2001 Mannatech believes itsand 2002,
Mannatech's United States federal statutory tax rate will remainwas 34%. Mannatech pays
taxes in Australia at 34%a statutory tax rate of approximately 36% and in the
United Kingdom at a statutory tax rate of approximately 30%. Mannatech expects
to pay taxes in Japan at a statutory tax rate ranging between 42% and 48%;
however, since its inception, Mannatech has only reported net operating losses
in Japan. Mannatech also pays taxes in various state jurisdictions at an
approximate average effective tax rate of 3%. Mannatech expectsDue to pay taxesits international
operations, a portion of Mannatech's income is subject to taxation in Australia, the
United Kingdom and Japan at statutory tax rates ranging from
31% to 42%. The payment of such foreign taxes could resultcountries in which it operates; however, it may receive foreign tax credits that
would reduce the amount of United States taxes owed; however,owed. Mannatech may not be able
to fully-utilizeuse all of such foreign tax credits in the United States. Mannatech hasmay also
incurredincur net operating losses from its
Japan subsidiary that may not be fully realizablerealizable. Mannatech records a
valuation allowance for any expected net operating losses, which it may not be
able to realize in the future.
109
Results of Operations
The following table summarizes Mannatech's operating results as a
percentage of net sales for each of the periods indicated.
Three-monthsThree months ended
Nine-months ended
September 30 September 30March 31,
------------------
-----------------
2000 2001 2000 2001
---- ----2002
---- ----
Net sales ........................................... 100.0% 100.0%........................................ 100.0% 100.0%
Cost of sales ..................................... 18.1 18.4 17.6 17.7.................................... 16.8 17.9
Commissions ....................................... 40.9 40.2 40.8 39.6...................................... 40.4 42.0
------ ------ ------- ------
Gross profit ........................................ 41.0 41.4 41.6 42.7.............................. 42.8 40.1
Operating expenses:
Selling and administrative expenses ............... 21.6 23.7 23.2 24.5......... 26.4 22.8
Other operating costs ............................. 22.9 18.2 20.6 17.7
Severance expenses related to former executives ... 0.3 0.0 0.8 3.5
Write-off of a fixed asset ........................ 0.0 0.0 0.1 0.0....................... 17.9 13.7
------ ------
------- ------
LossIncome (loss) from operations ................................ (3.8) (0.5) (3.1) (3.0)............. (1.5) 3.6
Interest income ................................... 0.4 0.2 0.5.................................. 0.3 0.2
Interest expense .................................. (0.1) 0.0 (0.1)................................. (0.0) 0.0
Other expense, net ................................ (0.7)............................... (0.3) (0.1) (0.3) (0.2)
------ ------
------- ------
LossIncome (loss) before income taxes and cumulative effect of
accounting change .................................. (4.2) (0.4) (3.0) (3.0)......... (1.5) 3.7
Income tax (expense) benefit ........................ 1.0 (0.6) 0.8 0.2..................... 0.6 (1.9)
------ ------
------- ------
Loss before cumulative effect of accounting change .. (3.2) (1.0) (2.2) (2.8)
Cumulative effect of accounting change, net of tax .. 0.0 0.0 (0.2) 0.0
------ ------ ------- ------
Net loss ............................................ (3.2)income (loss) ......................... (0.9)% (1.0)% (2.4)% (2.8)%1.8%
====== ====== ======= ======
Number of starter packs sold ........................ 24,493 16,095 88,066 49,274..................... 16,582 18,653
Number of renewal packs sold ........................ 16,215 10,816 48,779 34,128..................... 13,986 11,971
------ ------ ------- ------
Total number of packs sold .......................... 40,708 26,911 136,845 83,402....................... 30,568 30,624
====== ====== ======= ======
Total associates canceling associate status ......... 1,182 1,174 4,903 3,540...... 1,217 1,158
====== ====== ======= ======
Three-monthsThree months ended September 30, 2001March 31, 2002 compared with the three-monthsthree months ended September 30, 2000March 31,
2001
Net sales. Net sales decreased (19.0%(3.8%) to $30.3$32.9 million for the three-monthsthree
months ended September 30, 2001March 31, 2002 from $37.4$34.2 million for the comparable period in
2000.2001. Net sales consist of both product sales and pack sales. The decrease in
net sales consisted of the following:
. the change in timing of Mannafest from March 2001 to April 2002;
. a ($2.3) million decrease in product sales, which primarily related
to an overall decrease of active associates by (21.1%) as compared
to the comparable period in 2001. This decrease was primarily composed of a decrease of 26% in its
active associate base, which was partially offset
by a 7% increase in the sales
prices of some of its finished goods implemented in March 2001and the introduction of severalMannatech's new products including ImmunoStart(TM), Optimal Health
Pack (TM), GlycoBears(R)products: Glycentials(TM)
Vitamin, Ambroglycin(TM) Mineral and Glycentials(TM)Antioxidant Formula and
CardioBALANCE(TM); and
. a $1.0 million increase in pack sales, which primarily related to
the completion of a successful travel incentive for its associates
to win a cruise. Mannatech will continue to offer periodic travel
incentives in the future. Mannatech believes that its pack sales
help predict the expected change in active associates and are a
leading indicator of future product sales.
Cost of sales. Cost of sales decreased (17.6%)increased 3.5% to $5.6$5.9 million for the
three-monthsthree months ended September 30, 2001March 31, 2002 from $6.8$5.7 million for the comparable period in
2000.2001. As a percentage of net sales, cost of sales increased to 18.4%17.9% for the
three-monthsthree months ended September 30, 2001March 31, 2002 from 18.1%16.8% for the comparable period in 2000.2001.
The increase in cost of sales as a percentage of net sales was
primarily due to a write-off of some expected spoilage and obsolescence of
products totaling $525,000 and a change in the product mix of finished goods
sold. The dollar decrease was primarily due to a decrease in the volume of
finished goods sold, which was partially offset by the write-off of certain
products.
Commissions. Commissions consist of payments to active associates for
their sales activity and downline growth. Commissions decreased (20.3%) to $12.2
million for the three-months ended September 30, 2001 from $15.3 million for the
comparable period in 2000. As a percentage of net sales, commissions slightly
decreased to 40.2% for
11
the three-months ended September 30, 2001 from 40.9% for the comparable period
in 2000. The decrease was the direct result of a decrease in commissionable net
sales and a 7% increase in the sales prices of some of its finished goods.
Gross profit. Gross profit decreased (18.3%) to $12.5 million for the
three-months ended September 30, 2001 from $15.3 million for the comparable
period in 2000. As a percentage of net sales, gross profit slightly increased to
41.4% for the three-months ended September 30, 2001 from 41.0% for the
comparable period in 2000. These changes were primarily attributable to the
factors described above.
Selling and administrative expenses. Selling and administrative expenses
are a mixture of both fixed and variable expenses and include compensation,
shipping and freight and marketing expenses. Selling and administrative expenses
decreased (11.1%) to $7.2 million for the three-months ended September 30, 2001
from $8.1 million for the comparable period in 2000. As a percentage of net
sales, selling and administrative expenses increased to 23.7% for the
three-months ended September 30, 2001 from 21.6% for the comparable period in
2000, which was the result of Mannatech's inability to reduce some fixed and
semi-variable expenses associated with the decrease in net sales. The dollar
decrease was primarily due to the following:
o a decrease of ($700,000) in compensation and related employee
benefits due to the reduction of employees, including the
resignation of various executives;
o a decrease of ($404,000) in marketing related expenses, which
was the result of recording a car incentive bonus and
elimination of various events for its Japan operations;
o the above were partially offset by an increase of $226,000 in
freight cost as a result of opening its Japan operations.
Other operating costs. Other operating costs include utilities,
depreciation, travel, office expenses and printing expenses. Other operating
costs decreased (35.3%) to $5.5 million for the three-months ended September 30,
2001 from $8.5 million for the comparable period in 2000. As a percentage of net
sales, other operating costs decreased to 18.2% for the three-months ended
September 30, 2001 from 22.9% for the comparable period in 2000. The decrease
was primarily due to the following:
o a decrease of ($870,000) related to variable expenses
associated with a decrease in net sales and the curtailment of
certain operating expenses;
o a decrease of ($1.3 million) relating to the reduction in
long-distance telephone expenses, postage and international
travel related to the international expansion that was
substantially completed by the end of 2000; and
o a decrease of ($835,000) related to the completion of several
projects by outside consultants.
Interest income. Interest income decreased (61.9%) to $53,000 for the
three-months ended September 30, 2001 from $139,000 for the comparable period in
2000. As a percentage of net sales, interest income decreased to 0.2% for the
three-months ended September 30, 2001 from 0.4% for the comparable period in
2000. The decrease was due to using investments to fund current year operations.
Interest expense. Interest expense decreased (40.0%) to $9,000 for the
three-months ended September 30, 2001 from $15,000 for the comparable period in
2000. As a percentage of net sales, interest expense decreased to 0.0% for the
three-months ended September 30, 2001 from (0.1%) for the comparable period in
2000. The decrease was primarily due to Mannatech paying off an existing note
and two capital leases.
Other expense, net. Other expense, net consists of foreign currency
translation adjustments relating to the United Kingdom and Australia operations
and miscellaneous non-operating items. Other expense, net decreased to ($30,000)
for the three-months ended September 30, 2001 from ($250,000) for the comparable
period in 2000. As a percentage of net sales, other expense, net decreased to
(0.1%) for the three-months ended September 30, 2001 from
12
(0.7%) for the comparable period in 2000. For the three-months ended September
30, 2001, other expense, net consisted primarily of currency translation
adjustments. For the three-months ended September 30, 2000, other expense, net
consisted of currency translation adjustments and a loss from the abandonment of
certain fixed assets.
Income tax (expense) benefit. Income tax (expense) benefit was ($182,000)
for the three-months ended September 30, 2001 and $357,000 for the comparable
period in 2000. Mannatech's effective tax rate increased to (148.0%) for the
three-months ended September 30, 2001 from 22.9% for the comparable period in
2000. Mannatech's effective tax rate increased primarily as a result of
Mannatech's inability to recognize foreign income tax benefits relative to its
Japan operations.
Cumulative effect of accounting change, net of tax. In the fourth quarter
of 2000, Mannatech adopted SAB 101, which resulted in a one-time charge of
$210,000, net of tax of $126,000 for the cumulative effect of the accounting
change. SAB 101 required Mannatech to defer the recognition of revenues until
the consumers receive their products shipped.
Net loss. Net loss decreased (74.6%) to ($305,000) for the three-months
ended September 30, 2001 from ($1.2 million) for the comparable period in 2000.
As a percentage of net sales, the net loss decreased to (1.0%) for the
three-months ended September 30, 2001 from (3.2%) for the comparable period in
2000. The decrease was due to the following:
o curtailment of various operating expenses;
o no longer incurring expenses related to its Internet subsidiary;
o a 19% decrease in net sales; and
o substantial completion of its planned international expansion into
three foreign countries.
Nine-months ended September 30, 2001 compared with the nine-months ended
September 30, 2000
Net sales. Net sales decreased (16.5%) to $97.0 million for the
nine-months ended September 30, 2001 from $116.1 million for the comparable
period in 2000. This decrease was primarily composed of a decrease of 26% in is
active associate base, which was partially offset by a 7% sales price increase
in some of its finished goods implemented in March 2001, a $3.7 million increase
from opening Japan on June 26, 2000 and the introduction of several new products
including ImmunoStart(TM), Optimal Health Pack(TM), GlycoBears(R) and
Glycentials(TM).
Cost of sales. Cost of sales decreased (16.6%) to $17.1 million for the
nine-months ended September 30, 2001 from $20.5 million for the comparable
period in 2000. As a percentage of net sales, cost of sales slightly increased
to 17.7% for the nine-months ended September 30, 2001 from 17.6% for the
comparable period in 2000. The slight increase in cost of sales as a percentage of net sales was
primarily due to the write-offfollowing:
. a higher raw material ingredient costs;
. the introduction of products for spoilagethe free product with the enrollment of an
automatic order; and
obsolescence, a10
. the change in the product mix of finished goods sold, partially
offset by a 7% price increase for some of its finished goods that was
implemented in March 2001. The dollar decrease was due to a decrease in the
volume of finished goods sold.
Commissions. Commissions consist of payments to active associates for
sales activity and downline growth. Commissions decreased (18.6%) to $38.5remained at $13.8 million for the nine-monthsthree months
ended September 30, 2001 from $47.3 millionMarch 31, 2002 and for the comparable period in 2000.2001. As a percentage of
net sales, commissions slightly
decreasedincreased to 39.6%42.0% for the nine-monthsthree months ended September 30, 2001March 31,
2002 from 40.8%40.4% for the comparable period in 2000 due to a 7%2001. The increase in the sale prices of some of
its finished goods. The dollar decrease was the direct result
of a decrease in
commissionable net sales.introducing new incentive programs for its associates.
Gross profit. Gross profit decreased (14.3%(10.2%) to $41.4$13.2 million for the
nine-monthsthree months ended September 30, 2001March 31, 2002 from $48.3$14.7 million for the comparable period
in 2000.2001. As a percentage of net sales, gross profit increaseddecreased to 42.7%40.1% for the
nine-monthsthree months ended September 30, 2001March 31, 2002 from 41.6%42.8% for the comparable period in 2000.2001.
These changes were primarily attributable to the factors
described above.
13
change in mix of sales and the
increase in commissions as a result of introducing additional incentive programs
for its associates.
Selling and administrative expenses. Selling and administrative expenses
are a mixture of both fixed and variable expenses and include compensation,
shipping and freight and marketing expenses. Selling and administrative expenses
decreased (11.9%(16.7%) to $23.8$7.5 million for the nine-monthsthree months ended September 30, 2001March 31, 2002 from
$27.0$9.0 million for the comparable period in 2000.2001. As a percentage of net sales,
selling and administrative expenses increaseddecreased to 24.5%22.8% for the nine-monthsthree months
ended September 30, 2001March 31, 2002 from 23.2%26.4% for the comparable period in 2000, which was the result of the inability to reduce some fixed and
semi-variable expenses associated with the decrease in net sales.2001. The dollar decrease
was primarily due to the following:
o. a ($250,000) decrease of ($1.3 million) in compensation, including wages and related
employeepayroll
benefits related to a reduction in employees
including the resignationtermination of various executives;
ohighly-paid
executives during 2001, partially offset by the increase in
compensation related to the replacement of some of these executives
and establishing in-house order processing and customer service
centers in each of its foreign operations, except for Canada;
. a decrease$119,000 increase in contract labor related to the increase in the
number of programmers needed for the expected on-going maintenance
to the global incentive plan;
. a ($600,000)224,000) decrease in freight cost resulting fromcosts related to the decrease in
net sales;
. a ($1.1) million decrease in expenses related to the timing of
Mannafest; and
. the remaining decrease related to a decrease in net sales, which was partially offset by opening
its Japan operations;
o a decrease of ($1.1 million) invarious marketing
related expenses,
which was the result of not hosting various events for its
Japan and United Kingdom operations; and
o a decrease of ($200,000) in advertising expenses as a result
of discontinuing operations of its Internet subsidiary.expenses.
Other operating costs. Other operating costs include utilities,
depreciation, travel, office expenses and printing expenses. Other operating
costs decreased (28.0%(26.2%) to $17.2$4.5
million for the nine-monthsthree months ended September 30,
2001March 31, 2002 from $23.9$6.1 million for the
comparable period in 2000.2001. As a percentage of net sales, other operating costs
decreased to 17.7%13.7% for the nine-monthsthree months ended September 30, 2001March 31, 2002 from 20.6%17.9% for the
comparable period in 2000. The percentage
decrease was the result of management making a concerted effort to curtail
expenses.2001. The dollar decrease was primarily due to the
following:
o. a ($799,000) decrease of ($2.0 million) related to variable expenses
associatedcanceling various contracts with
third-party contractors to provide its international operations with
order processing and customer service;
. a ($318,000) decrease in net salestravel expenses primarily related to
minimizing travel to its international operations;
. a ($396,000) decrease in accounting, legal and consulting services,
which are no longer needed for international operations and the
curtailmentcancellation of certain operating expenses;
o a decrease of ($4.3 million) in expensesvarious consulting contracts related to travel,
consulting, postageits
international operations; and
telephone expenses incurred in. the prior yearremaining decrease related to the expansion into the United Kingdom
and Japan;
o a decrease of ($200,000) from the prior year related to the
buyout of Ray Robbins last remaining incentive agreement in 2000, which was initially canceled in July 1999;
o a decrease of ($400,000) related to license fees paid to a
third party for the Internet subsidiary, which discontinued
operations on December 29, 2000, which was;
o partially offset by an increase of $200,000 in depreciation
expense related to the recent expansion into Japan.
Severance expenses related to former executives. In the second quarter of
2001, management entered into Separation Agreements with various former
executives and recorded a one-time charge of $3.4 million. The $3.4 million
consisted of compensation related to the cancellation of their employment
agreements, accrued vacation, health insurance and automobile expenses that will
be paid to the former employees at various times through 2004.
Write-off of a fixed asset. In the second quarter of 2000, Mannatech
determined its Internet subsidiary, Internet Health Group, Inc.'s, fixed asset
with a book value of $870,000 was impaired and should be written off. The write-
off was a result of the continuation of the poor performance of the subsidiary,
which discontinued operations as of December 29, 2000.operating
expenses.
Interest income. Interest income decreased (62.9%(23.7%) to $208,000$74,000 for the
nine-monthsthree months ended September 30, 2001March 31, 2002 from $561,000$97,000 for the comparable period in
2000.2001. As a percentage of net sales, interest income decreased to 0.2% 14
for the
nine-monthsthree months ended September 30, 2001March 31, 2002 from 0.5%0.3% for the comparable period in 2000.2001.
The decrease was primarily due to using investments to fund current year
operations.the decrease in interest rates.
Interest expense. Interest expense decreased (59.3%(33.3%) to $24,000$6,000 for the
nine-monthsthree months ended September 30, 2001March 31, 2002 from $58,000$9,000 for the comparable period in 2000.2001.
As a percentage of net sales, interest expense decreased toremained at 0.0% for the nine-monthsthree
months ended September 30, 2001 from (0.1%)March 31, 2002 and for the comparable period in 2000.2001. The dollar
decrease was primarily due
11
to paying off anthe repayment of existing notecapital leases and two
capital leases.notes payable, partially offset
by refinancing the renewal of its annual insurance premiums for 2002.
Other expense,income (expense), net. Other expense,income (expense), net consists
primarily of foreign currency translation adjustments related to the United Kingdom and Australia operations
and miscellaneous non-operating items.Mannatech's
foreign operations. Other expense,income (expense), net decreased (65.5%(85.2%) to ($132,000)$17,000 for
the nine-monthsthree months ended September 30, 2001March 31, 2002 from ($383,000)$115,000 for the comparable period in
2000.2001. As a percentage of net sales, other expense,income (expense), net decreased to
(0.2%)0.1% for the nine-monthsthree months ended September 30, 2001March 31, 2002 from (0.3%0.3% for the comparable
period in 2001. The decrease was the result of fluctuations in the currency
exchange rates.
Income tax (expense) benefit. Income tax (expense) benefit increased to
$619,000 for the three months ended March 31, 2002 from ($212,000) for the
comparable period in 2001. Mannatech's effective tax rate increased to 50.9% for
the three months ended March 31, 2002 from 40.6% for the comparable period in
2001. Mannatech's effective tax rate increased primarily as a result of
increasing the valuation allowance for the net operating losses from its Japan
subsidiary.
Net income (loss). Net income (loss) increased to $596,000 for the three
months ended March 31, 2002 from ($309,000) for the comparable period in 2001.
As a percentage of net sales, net income (loss) increased to 1.8% for the three
months ended March 31, 2002 from (0.9%) for the comparable period in 2000. For the nine-months ended September 30, 2001,
other expense, net consisted primarily2001.
Mannatech reported diluted earnings per share of currency exchange losses due to
currency translation fluctuations. For the nine-months ended September 30, 2000,
other expense, net primarily consisted of approximately $36,000 in certain tax
penalties and currency exchange losses due to currency translation fluctuations.
Income tax (expense) benefit. Income tax benefit was $194,000$0.02 for the nine-monthsthree-months
ended September 30, 2001 and $984,000March 31, 2002 as compared to a loss per share of ($0.01) for the
comparable period in 2000. Mannatech's effective tax rate decreased to 6.7% for2001. The dollar increase was primarily the nine-months ended
September 30, 2001 from 28.1% for the comparable period in 2000. Mannatech's
effective tax rate decreased primarily as a result of
Mannatech's inability to
recognize foreign income tax benefits relative to its Japan operations.
Cumulative effect of accounting change, net of tax. In the fourth quarter
of 2000, Mannatech adopted SAB 101, which resulted in a one-time charge of
$210,000, net of tax of $126,000 for the cumulative effect of the accounting
change. SAB 101 required Mannatech to defer the recognition of revenues until
the consumers receive their products shipped.
Net loss. Net loss remained at ($2.7 million) for both the nine-months
ended September 30, 2001 and the comparable period in 2000. As a percentage of
net sales, the net loss slightly increased to (2.8%) for the nine-months ended
September 30, 2001 from (2.4%) for the comparable period in 2000. In 2001, the
net loss was primarily due to recording a one-time charge of $3.4 million
related to the resignation of various executives who held employment agreements
and a decrease in net sales of (16.5%), which was a direct result of a 26%
decrease in active associates. This wasreducing certain fixed operating expenses, partially offset by the curtailment of
various operating expenses, no longer incurring expensesdecrease in
gross profit related to its Internet
subsidiary and substantial completion of its planned international expansion
into three foreign countries. For the nine-months ended September 30, 2001,
Mannatech would have reported net income of $731,000, exclusive of the one-time
severance charge for four former executives totaling $3.4 million. The net loss
for 2000 primarily related to a decrease in netproduct sales and incurring
approximately $4.4 million in expenses related to its international expansion.the introduction of
additional incentives for Mannatech's associates.
Liquidity and Capital Resources
Historically, Mannatech has funded its business objectives, working
capital and operations primarily through its cash flows from operations.
Working capital. Mannatech's working capital decreased to $5.8 million as of September 30, 2001increased from $7.3$5.9 million
at December 31, 2000. In 2000, Mannatech funded approximately $4.42001 to $6.7 million for expansion into Japan and $4.1 million for operations for its
Internet subsidiary, Internet Health Group, Inc.as of March 31, 2002. In 2001, Mannatech
funded $2.1$1.8 million in severance payments to various former executives holding employment agreements,and
concentrated on reducing its inventories. In 2002, Mannatech increased cash on
hand by curtailing certain operating expenses, which totaled $3.4 million, and reported a decreasewas partially offset by
funding the various severance payments to its former executives as set forth in
net sales of 16.5%.their separation agreements. Mannatech plans tobelieves it can continue to fund its
business objectives, working capital and operations primarily through its current cash
flows from operations.
Provided by (used in) September 30, 2001 September 30, 2000
- --------------------- ------------------ ------------------
Operating activities $3.7 million ($860,000)
Investing activities ($924,000) ($2.5Mannatech's cash flow are as follows:
For the three months ended March 31,
------------------------------------
Provided by (used in): 2002 2001
----------------------- ---- ----
Operating activities................... $3.4 million ($400,000)
Investing activities................... ($538,000) $ 73,000
Financing activities................... ($ 32,000) ($1.6 million)
Financing activities ($2.7 million) ($715,000)
Operating activities. For the nine-monthsthree months ended September 30, 2000,March 31, 2001,
operating activities consisted of a decrease in cash, primarily relateddue to its international expansion intoa $1.1
million decrease in accounts payable and accrued expenses offset by $700,000
from earnings before depreciation and amortization. For the United Kingdom and Japan, which resulted in a net lossthree months ended
March 31, 2002, operating activities consisted of ($2.7 million)
combined
15
with an increase in inventory of ($866,000),cash, primarily
due to $1.6 million from earnings before depreciation and amortization and an
increase of $1.8 million from the net change in prepaids of
($390,000) and increaseworking capital. The net change
in receivables of ($1.4 million) forworking capital was primarily the expected income
tax refund. These decreases were partially offset by $2.7 million in
deprecation, the write-off of certain abandoned fixed assets of $423,000, and
the impairmentresult of a fixed asset from its Internet subsidiary totaling $870,000.
For the nine-months ended September 30, 2001, operating activities primarily
related to a one-time charge of $3.4$2.4 million related to the resignation of
various executives, which resulted in a net loss of ($2.7 million), which was
offset by recording $2.9 million in depreciation, a decrease in
inventory of
$3.0 million due to the closing of the Internet subsidiary, completion of its
planned international expansion in 2000 and depleting its current on-hand
inventory levels.inventory.
12
Investing activities. For the nine-monthsthree months ended September 30, 2000,March 31, 2001,
investing activities consisted of the $143,000 repayment of notes receivable due
from certain shareholders/affiliates, partially offset by capital asset
purchases of ($73,000) related to computer hardware and software. For the three
months ended March 31, 2002, investing activities consisted of ($288,000) in
capital asset additions related to computer hardware and software and
restricting ($300,000) in cash as collateral related to the build out of the Japan facility totaling ($4.4 million), which was
partially offset by the maturing of investments of $1.8 million.master operating
lease. The investments
were primarily used to fund current operations and opening its Japan subsidiary.
For the nine-months ended September 30, 2001, investing activities consisted of
purchases of property and equipment and software development costs totaling
($1.1 million) which were assets purchased for the new database primarily for
its associates called Success Tracker, which was partially offset bydecrease in the repayment of notes receivable due from a shareholdershareholders
was the result of $130,000.Mr. Gary Watson and Mr. William C. Fioretti, former officers
and shareholders not paying their payments related to their notes receivable,
including interest, of approximately $67,000. As of May 8, 2002, the remaining
balance owed to Mannatech by these two shareholders was $164,680.
Financing activities. For the nine-monthsthree months ended September 30, 2000,March 31, 2001,
financing activities consisted of the repayment of variousbook overdrafts of ($1.4)
million, repayment of capital leases and notes payable totalingof ($543,000), partially offset by162,000) and the
receiptrepayment of $328,000a note receivable related to Mr. Charles E. Fioretti of ($83,333)
as set forth in the exercise of 235,700 stock options at prices per share ranging
from $1.35 to $2.00.repurchase agreement with Mr. Fioretti, which was terminated
in September 2001. For the nine-monthsthree months ended September 30, 2001,March 31, 2002, financing
activities consisted of the paymentrepayment of cash overdrafts of ($1.5 million), paying
off two capital leases and a note payable of ($573,000) and the repurchase of
655,833 shares of common stock from Mr. Charles Fioretti totaling ($656,000)
pursuant to his Lock-up and Repurchase Agreement, which was terminated on
September 24, 2001.notes payable.
Mannatech believes that its existing liquidity and cash flows from
operations, including current cash on hand of $12.7 million, capital resources
and bankfinance company's borrowings, coupledincluding an operating lease line-of-credit
totaling $300,000, together with the continuation of thecontinued suspension of dividend payments
to shareholders, should be adequate to fund its business operations and
commitments for at least the next twelve months including the following:
o In August 2001, Mannatech committed to fund up to $1 million
to expand its core software database application onto a more
easily maintainable architecture, which should provide
additional reporting capabilities and scheduled to be
substantially complete within the next twelve-months.
o Funding payments totaling $2.7 million related to the recent
resignations of Mr. Anthony Canale, Ms. Deanne Varner, Mr.
Charles Fioretti and Mr. Patrick Cobb. Under the terms of the
various separation agreements, Mannatech is required to pay an
aggregate amount of $2.7 million, of which $1.6 million will
be paid over the next twelve-months.
o Funding payments of its annual insurance premiums, totaling
approximately $1 million, which Mannatech has historically
funded over ten monthly installments to various finance
companies.
Mannatech has no present commitments or agreements with respect to any
acquisitions or purchases of any manufacturing facilities. Mannatech believes
any future changes in its operations may consume available capital resources
faster than anticipated. Mannatech believes its existing capital requirements
depend on its retention and expansion of its current associate and member base
and continuing to refine and introduce high-quality products.
Ifmonths. However, if existing capital resources
or cash flows become insufficient to meet Mannatech's business plans and
existing capital requirements, Mannatech would be required to raise additional
funds, which it cannot assure will be available on favorable terms, if at all.
Mannatech's existing commitments and obligations include the following:
. funding payments totaling $2.2 million related to the resignations
of former executives in 2001. Under the terms of the various
separation agreements, Mannatech is required to pay the remaining
aggregate amount of $2.2 million, of which $1.6 million will be paid
over the next twelve months.
. funding the remaining payments of its annual insurance premiums,
totaling approximately $300,000, which were financed with a finance
company and are due in monthly installments through July 2002.
. funding various marketing promotional incentives estimated at $2.7
million.
. a purchase commitment with its supplier of Manapol(R), one of the
key ingredients used in Mannatech's proprietary
compound--Ambrotose(R) complex. The purchase commitment requires
Mannatech to purchase $3.7 million in 2002 and $2.5 million in 2003
of Manapol(R).
The approximate future maturities of notes payable, capital leases,
severance payments to executives, purchase commitment and minimum rental
commitments related to various non-cancelable operating leases are as follows
(in thousands):
For the nine months
ended December 31, For the year ended December 31,
------------------ ----------------------------------------------
2002 2003 2004 2005 2006 Thereafter
---- ---- ---- ---- ---- ----------
Notes payable and financing ................................... $ 272 $ -- $ -- $ -- $ -- $ --
Capital leases ................................................ 29 8 7 -- -- --
Severance payments to former executives ....................... 1,621 475 150 -- -- --
Purchase commitment ........................................... 2,755 2,450 -- -- -- --
Minimum rental commitment related to noncancellable
operating leases ............................................ 1,362 1,021 808 745 738 303
------ ------ ------ ------ ----- -----
$6,039 $3,954 $ 965 $ 745 $ 738 $ 303
====== ====== ====== ====== ===== =====
13
Mannatech has no present commitments or agreements with respect to any
acquisitions or purchases of any manufacturing facilities. Mannatech believes
any unanticipated future changes in its operations could consume available
capital resources faster than anticipated. Mannatech also believes that its
existing capital requirements depend on its ability to refine and introduce
high-quality products, to attract new associates and to retain and expand its
current associates and members.
During 2001, Mannatech entered into various financing agreements to
finance insurance premiums totaling $0.8 million. The notes required a 25% down
payment, accrue interest at 9.15% and are due in eight monthly payments through
July 2002. In January 2002, Mannatech entered into a three-year capital lease to
lease warehouse equipment of $32,500.
Recent Financial Accounting Standards Board Statements
In July 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations"
and No. 142 ("SFAS 142") "Goodwill and Other Intangibles Assets."
16
SFAS 141 supercedes Accounting Principles Board Opinion No. 16 "Business
Combinations." The most significant changes made by SFAS 141 are that it
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, establishes specific criteria for
recognition of certain intangiblesintangible assets separately from goodwill and requires
the immediate write-off of unallocated negative goodwill.
SFAS 142 supercedes Accounting Principles Board Opinion No. 17
"Intangible Assets." SFAS 142 is effective for fiscal years beginning after
December 15, 2001. SFAS 142 prohibits goodwill and indefinite lived intangible
assets from being amortized and requires them to be annually tested for
impairment at each reporting unit level. In addition, SFAS 142 removes the
limitation of forty years for the useful lives of finite intangible assets.
In JuneAugust 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 143 ("SFAS 143") "Accounting
for Asset Retirement Obligations" and in October 2001, issued No. 144 ("SFAS
144") "Accounting for the Impairment or Disposal of Long-Lived Assets."
SFAS 143 amends SFAS 19, "Financial Accounting and Reporting by Oil and
Gas Producing Companies" and is effective for fiscal years beginning after June
15, 2002. This statement requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be determined. In addition, SFAS 143
requires the associated asset retirement costs to be capitalized as part of the
carrying amount of the long-lived asset.
SFAS 144 supercedes SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and Accounting
Principles Board Opinion No. 30 "Reporting Results of Operations-Reporting the
Effects of Disposal of a Segment of a Business." SFAS 144 is effective for
fiscal years beginning after December 15, 2001. SFAS 144 requires that impaired
long-lived assets be measured at the lower of carrying amount or fair value less
costs to sell, regardless if they are reported in continuing operations or in
discontinued operations. In addition, discontinued operations should no longer
be measured at net realizable value or include amounts for operating losses that
have not yet occurred. Finally, SFAS 144 broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction.
In September 2001, the Emerging Issues Task Force ("EITF") issued EITF
01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller
of the Vendor's Products," which addresses the statement of operations
characterization of stock option awards, royalties, and other cash consideration
Mannatech believespays its associates. The provisions of EITF 01-09 is effective for
fiscal years beginning after December 15, 2001.
The adoption of the above pronouncements will haveas of January 1, 2002, had no
significant effect on its consolidated financial positions, results of
operations or cash flows.
14
Outlook
Mannatech believes its outlook for the remainder of 2001 and looking
forward into 2002 will be
contingent upon the success of retaining and expanding its active associateassociates and
member base,members, its ability to refine and introduce new high-quality products whichthat will
expandincrease sales to support its global operations and effectively communicate itscommunicating the changes to its compensation
plan. Mannatech believes its increase of $1.0 million in net pack sales for the
three months ended March 31, 2002 as compared to the comparable period in 2001,
is an indication of future product sales.
Forward-Looking Statements
Some of our statementsCertain disclosure and analysis included under "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Quantitative
and Qualitative Disclosures about Market Risk"Risk," "Other Information" and Notes to
Consolidated Financial Statements and elsewhere in this report may constitute "forward-looking statements"includes
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, Section 21E of the Securities Exchange Act of 1934 and
the Private Securities Litigation Reform Act of 1995.1995 and are subject to various
risks and uncertainties. Opinions, forecasts, projections, guidance or other
statements other than statements of historical fact are considered
forward-looking statements and reflect Mannatech'sreflects the current viewsview of Mannatech about
future events and financial performance. These forward-looking statements are
subject to certain events, risks and uncertainties that may be outside
Mannatech's control. Some of these forward-looking statements include statements
regarding:
17
o. existing cash flows being adequate to fund future cash needs;
. management's plans, objectives for its future operations and
economic performance;
. the realization of deferred tax assets;
. the ability to maintain current business
operations;
o beliefs that somelevels of its incentive plans will pay entry-level
associates faster;
o commissions not exceeding 42% of commissionable net sales;
ooperating expenditures;
. the value of the United States dollar not materially effecting its
overall financial results;
o establishment of certain policy, procedures and internal processes
to combat any exposure to market risk;
o any actual impact of future market changes due to futureits exposure to foreign
currency rate fluctuations;
o management's plans, objectives and budgets for its future operations
and future economic performance;
o capital budget and future capital requirements relating to capital
projects and severance payments to executives;
o maintaining current levels of future expenditures;
otranslations;
. any significant impact on its financial positions, results of
operations or cash flows by recent accounting pronouncements;
o. the outcome of any regulatory and litigation matters;
o. the global statutory tax rates remaining unchanged;
o. the recent increase in its priceestablishment of its stock;
o Mannatech's products aiding in the overall healthcertain policies, procedures and wellness;internal
processes to combat exposure to market risk; and
o. the assumptions described in this report underlying such
forward-looking statements.
Actual results and developments may materially differ from those
expressed in or implied by such statements due to a number of factors,
including, without
limitation:
oincluding:
. those described in the context of such forward-looking statements;
o. future product development and manufacturing costs;
o recent and future. the impact of any changes into Mannatech's global compensation and
incentive plans;
o. the retention and expansion of itsMannatech's associate and member
base;
o. its pack sales being a leading indicator of product sales for the
next twelve months;
15
. timely development and acceptance of new products or refinements of
existing products;
o. the markets for Mannatech's domestic and international operations;
o. the impact of new competition and competitive products and pricing;
o. the political, social and economic climate in which Mannatech
conducts its operations; and
o. the risk factors described in other documents and reports filed with
the Securities and Exchange Commission.
18
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,"
"projects." "in the future" or "continue" or the negative of such terms and
other comparable terminology. Readers are cautioned when considering these
forward-looking statements to keep in mind these risks and uncertainties and any
other cautionary statements in this report as all of the forward-looking
statements contained herein speak only as of the date of this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Mannatech does not engage in trading market risk sensitive instruments
and does not purchase as investments, andas hedges or for purposes "other than
trading," instruments that are likely to expose it to certain types of market
risk, including interest rate, commodity price or equity price risk. Although
Mannatech has investments, but there has not been noany material change in its
exposure to interest rate risk. Mannatech has not issued any debt instruments,
entered into any forward or futures contracts, purchased any options or entered
into any swaps.
Mannatech is exposed to certain other market risks, including changes in
currency exchange rates as measured against the United States dollar. The value
of the United States dollar may affect Mannatech's financial results. Changes in
exchange rates may positively or negatively affect its financial results, as
expressed in United States dollars. When the United States dollar increases
against currencies in which products are sold or when thethere is a weakening exchange
rate weakens against currencies in which Mannatech incurs costs, net sales or costs may
be adversely affected.
Mannatech has established certain policies, procedures and internal processes,
which it believes will help monitor any significant market risks. Currently,
Mannatech does not use any financial instruments to manage its exposure to such
risks. The sensitivity of earnings and cash flows to variability in currency
exchange rates is assessed by applying an appropriate range of potential rate
fluctuations to Mannatech's assets, obligations and projected transactions
denominated in foreign currency. Based upon its overall
currency rate exposure at September 30, 2001, Mannatech believes the actual
impact of future market changes could differ materially due to, among other
things, factors discussed in this report. Mannatech cannot predict with any certainty its
future exposure to such currency exchange rate fluctuations or the impact, if
any, itsuch fluctuations may have on its future business, product pricing,
consolidated financial position, results of operations or cash flows; however,flows. However,
Mannatech believes it closely monitors current fluctuations for exposure to such
market risk. Currently, the foreign currencies in which Mannatech has exposure
to foreign currency exchange rate risk include Canada, Australia, the United
Kingdom and Japan. The high and low currency exchange rates to the United States
dollar, for each of these countries, for the nine-monthsthree-months ended September 30, 2001March 31, 2002
are as follows:
Country/Currency High Low
- ---------------- -------- --------
Canadian/Dollar.................... $0.63550 $0.61750
Australia/Dollar ................ $0.57220 $0.47730Dollar................... $0.53550 $0.50490
United Kingdom/British Pound .... $1.51030 $1.36770Pound....... $1.45690 $1.40380
Japan/Yen ....................... $0.00880 $0.00788Yen.......................... $0.00791 $0.00739
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes in, or additions to, the legal
proceedings previously reported in Mannatech's Annual Report on Form 10-K as
amended (File No. 000-24657) for 20002001 as filed with the Securities and Exchange
Commission on April 2, 2001.1, 2002.
Item 2. Changes in Securities and Use of Proceeds
On September 28, 2001, Mannatech entered into an agreement with Mr. Ray
Robbins, a high-level associate, shareholder and board member, to sell to him
all of Mannatech's 815,009 shares of treasury stock at $1.00 per share.
19
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On October 1, 2001,March 5, 2002, the Board of Directors appointednominated Mr. J. Stanley
FredrickSamuel L. Caster
as Chairman of the Board and Mr. Jules Zimmerman as Vice-Chairman of the Board.
Mr. James M. Doyle Jr. and Dr. Steven A. Barker Ph.D., whose terms as directors
expire on June 4, 2002, announced that they do not intend to stand for
re-election to the Board, of Directors to replace Mr. Charles Fioretti, who resigned
from the Board of Directors in August 2001. Mr. Fredrick has considerable
industry experience with various companies engaged in direct selling activities.
Mr. Fredrick has served as the President and CEO of SMC Industries, which
included Saladmaster Corporation among its holdings, and was co-founder,
Chairman and CEO of Cameo Couture, which sold products through home parties. Mr.
Fredrick has also served as a member of the Board of Texas Central Bank, was a
co-founder of Irving National Bank Shares, a commercial bank holding company and
currently is the owner of Fredrick Consulting Services. Mr. Fredrick has many
professional affiliations including Founding Board Membership of the National
Aloe Science Council; the Personal Selling Institute of Baylor University;
served as past Chairman and Board member of the Direct Selling Association
("DSA") and Direct Selling Education Foundation. Mr. Fredrick was awarded the
DSA Hall of Fame award, is a member of the Circle of Honor from the Direct
Selling Education Foundation. As a result of his vast experience in the direct
selling industry, Mannatech entered into a two-year Consulting and Lockup
Agreement with Mr. Fredrick to perform various consulting and other services for
the Board. Under the terms of the agreement, Mannatech will pay Mr. Fredrick
$185,000 annually. The Consulting and Lockup Agreement automatically renews
annually unless terminated by either party. In addition, under the terms of this
agreement, Mr. Fredrick is prohibited from selling his shares unless approved by
the Company's Board of Directors.
Effective October 1, 2001, Mannatech hired Ms. Bettina S. Simon to serve
as the new Senior Vice President and General Counsel. Ms. Simon holds both a BFA
and Juris Doctorate from Southern Methodist University and is a member of the
State Bar of Texas. Ms. Simon has served as the Associate General Counsel for
Zale Corporation where she was responsible for a majority of the general legal
matters for approximately 15,000 employees in 1,200 retail locations. Ms. Simon
has also served as the General Counsel, Vice President and Corporate Secretary
for Home Interiors and Gifts, Inc. where she was responsible for all general
legal maters as well as regulatory and compliance matters. On November 1, 2001,
Ms. Simon was appointed as Mannatech's Corporate Secretary.effective June 4, 2002.
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 May
19, 1998, incorporated herein by reference to Exhibit 3.1 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
October 28, 1998.
3.2 Fourth Amended and Restated Bylaws of Mannatech dated April 27, 2001,
incorporated herein by reference to Exhibit 99.1 to Mannatech's Form
8-K (File No. 000-24657) filed with the Commission on August 22, 2001.
4.1 Specimen Certificate representing Mannatech's common stock, par value
$0.0001 per share, incorporated herein by reference to Exhibit 4.1 to
Mannatech's Amendment No. 1 to Form S-1 (File No. 333-63133) filed with
the Commission on October 28, 1998.
10.1 Consulting Agreement dated October 1, 2001 between Mannatech and Mr. J.
Stanley Fredrick.*
10.2 Release Agreement dated September 24, 2001 between Mannatech and Mr.
Charles E. Fioretti.*
20
10.3 Employment Agreement dated October 1, 2001 between Mannatech and Ms.
Bettina S. Simon.*
10.4 Royalty Agreement dated September 10, 2001 between Mannatech and Jett.*
10.5 Agreement dated September 28, 2001 between Mannatech and Mr. Marlin Ray
Robbins.*
- ----------
* Filed herewith.
(b) Reports on Form 8-K.
On August 22, 2001, Mannatech filed a Form 8-K (File No.
000-24657) with the United States Securities and Exchange Commission
in connection with the adoption of the Fourth Amendment to the
By-laws. Mannatech believes the amendment helps to further clarify
certain procedures relating to shareholder voting and shareholders'
meetings. The changes includes, but are not limited to the
following:
o the validity of any proxy shall be determined according
to the criteria established by the Board or its
designee;
o the directors shall be elected if the director receives
the vote of the holders of a plurality of the shares
entitled to vote in the election of directors that are
represented in person or by proxy at a shareholders'
meeting;
o Mannatech will be required to publish in advance of any
shareholders' meeting the rules and procedures that will
govern the conduct of such meeting;
o the Board is required to maintain at least the minimum
number of independent directors required by the rules of
the United States Securities and Exchange Commission and
any applicable securities exchanges on which the stock
of Mannatech maybe listed; and
o clarifies the procedures by which shareholders may
nominate candidates for membership to the Board of
Directors stating that any shareholder may deliver to
Mannatech written notice of a proposed director
candidate no later than December 31st of the prior year.
The nominating committee or the Board shall establish
criteria for consideration of any such nominees to the
Board and if such nominees will be disclosed in
Mannatech's proxy statement and/or listed on the ballot
for election of directors distributed at a shareholders
meeting.
21None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MANNATECH, INCORPORATED
November 14, 2001May 15, 2002 /S/ ROBERT M. HENRY
---------------------------------------------------------------------------------
Robert M. Henry
Chief Executive Officer and Director
(principal executive officer)
November 14, 2001May 15, 2002 /S/ STEPHEN D. FENSTERMACHER
---------------------------------------------------------------------------------
Stephen D. Fenstermacher
Senior Vice President and
Chief Financial Officer
(principal financial officer)
2218
INDEX TO EXHIBITS
3.1 Amended and Restated Articles of Incorporation of Mannatech dated May
19, 1998, incorporated herein by reference to Exhibit 3.1 to
Mannatech's Form S-1 (File No. 333-63133) filed with the Commission on
October 28, 1998.
3.2 Fourth Amended and Restated Bylaws of Mannatech dated April 27, 2001,
incorporated herein by reference to Exhibit 99.1 to Mannatech's Form
8-K (File No. 000-24657) filed with the Commission on August 22, 2001.
4.1 Specimen Certificate representing Mannatech's common stock, par value
$0.0001 per share, incorporated herein by reference to Exhibit 4.1 to
Mannatech's Amendment No. 1 to Form S-1 (File No. 333-63133) filed
with the Commission on October 28, 1998.
10.1 Consulting Agreement dated October 1, 2001 between Mannatech and Mr. J.
Stanley Fredrick.*
10.2 Release Agreement dated September 24, 2001 between Mannatech and Mr.
Charles E. Fioretti.*
10.3 Employment Agreement dated October 1, 2001 between Mannatech and Ms.
Bettina S. Simon.*
10.4 Royalty Agreement dated September 10, 2001 between Mannatech and Jett.*
10.5 Agreement dated September 28, 2001 between Mannatech and Mr. Marlin Ray
Robbins.*
- ----------
* Filed herewith.
2319