| •
| | • | The MTech AO Blend™Blend®, our proprietary, patent-pending antioxidant used in the Ambrotose AO®; complex; and |
| • | A compound used in our reformulated Advanced Ambrotose® complex that allows for a more potent concentration of the full range of mannose-containing polysaccharides occurring naturally in aloe. |
A compound used in our reformulated Advanced Ambrotose™ that allows for a more potent concentration of the full range of mannose-containing polysaccharides occurring naturally in aloe.
We have filed patent applications for Ambrotose®, Phytomatrix®, and Ambrotose® complex in the United States and certain other countries, and as of December 31, 2007,2008, we have obtainedhad received over 43 patents43patents for Ambrotose® complex, five of which were issued in the United States and the remainder in 29 foreign jurisdictions. In addition, we have entered into confidentiality agreements with our independent associates, suppliers, manufacturers, directors, officers, and consultants to help protect our proprietary rights. Nevertheless, we continue to face the risk that our patent protection for Ambrotose® complexeach of these products will be denied or that the patent protection we are granted is more limited than originally requested. As a precaution, we consult with outside legal counsel and consultants to help ensure that we diligently protect our proprietary rights to minimize this risk. However, our business, profitability, and growth prospects could be adversely affected if we fail to receive adequate protection of our proprietary rights. 6. | Adverse or negative publicity, including the publicity related to the lawsuit filed against us by the Texas Attorney General, could cause our business to suffer. |
6. Adverse or negative publicity, including the publicity related to the lawsuit filed against us by the Texas Attorney General, could cause our business to suffer. Our business depends, in part, on the public’s perception of our integrity and the safety and quality of our products. Any adverse publicity could negatively affect the public’s perception about our industry, our products, or our reputation and could result in a significant decline in our operations and/or the number of our independent associates. Specifically, we are susceptible to adverse or negative publicity regarding: the nutritional supplements industry; the safety and quality of our products and/or our ingredients; regulatory investigations of our products or our competitors’ products; the actions of our independent associates; and the direct selling/network-marketing industry.industry; and scandals within the industries in which we operate. On July 5, 2007, the Texas Attorney General filed suit against us, MannaRelief Ministries, Samuel L. Caster,L.Caster, the Fisher Institute, and H. Reginald McDaniel alleging violations of the Texas Deceptive Trade Practices Act and the Texas Food, Drug, and Cosmetic Act. The lawsuit created a substantial amount of adverse publicity. The effects of that adverse publicity cannot be fully determined at this time, but the publicity may have had and may continue to have a negative impact on our business. On February 26, 2009, we reached an agreement with the Texas Attorney General’s office settling the enforcement action. Without admitting any wrongdoing, we have agreed to return up to $4 million to members only and have agreed to pay $2 million to cover fees and expenses of Texas regulators. The settlement does not include any fine or penalty against Mannatech. We have also taken a number of actions to address concerns raised by the Texas Attorney General’s action and will continue to fully cooperate with the Texas Attorney General’s office to resolve this matter. We cannot predict at this time, however, what the possible outcome would be of any resolution or court proceeding.action. 7. | The ultimate outcome of pending securities litigation and shareholder derivative lawsuits is uncertain. |
We and some of our officers were named in three similar purported securities class action lawsuits. The complaints in these actions, which have been consolidated into one action, allege violations of Sections 10(b), Rule 10b-5 and Section 20(a) of the Exchange Act through alleged artificial inflation of the value of our stock by knowingly allowing independent contractors to recklessly misrepresent the efficacy of our products during the purported class period and seek an unspecified award of damages. We have filed a motion to dismiss which is currently pending.
We have also been sued in five shareholder derivative lawsuits. Three of these actions where filed shortly after the commencement of the class action litigation and make allegations similar to those in the class action litigation described above. The Special Litigation Committee appointed by our independent directors has determined that it is in our best interest to dismiss these three lawsuits, and we have filed a motion to dismiss the two active cases. The third case has been administratively closed by the Court. The other two actions make allegations with regard to our funding of various research projects. The Special Litigation Committee has determined that it is not in our best interest to allow the continuation of these two actions. The plaintiffs in the shareholder derivative lawsuits seek an unspecified amount of damages.
The parties to the three purported class action lawsuits and to the five shareholder derivative lawsuits attended mediation on November 20, 2007. Settlement negotiations between the parties are ongoing. While we do not believe that any of these litigation matters alone or in the aggregate will have a material effect on our consolidated financial position, an adverse outcome in one or more of these matters could be material to our consolidated results of operations and cash flows for any one period. Further, no assurance can be given that any adverse outcome would not be material to our consolidated financial position. See Note 13 to our Consolidated Financial Statements for a detailed summary of these lawsuits.22
8. | If we are exposed to product liability claims, we may be liable for damages and expenses, which could affect our overall financial condition. |
7. If we are exposed to product liability claims, we may be liable for damages and expenses, which could affect our overall financial condition. We could face financial liability due to certain product liability claims if the use of our products results in significant loss or injury. We make no assurances that we will not be exposed to any substantial future product liability claims. Such claims may include claims that our products contain contaminants, that we provide our independent associates and consumers with inadequate instructions regarding product use, or that we provide inadequate warnings concerning side effects or interactions of our products with other substances. We believe that our suppliers and manufacturers maintain adequate product liability insurance coverage. However, a substantial future product liability claim could exceed the amount of insurance coverage or could be excluded under the terms of an existing insurance policy, which could adversely affect our overall future financial condition. In recent years a discovery of Bovine Spongiform Encephalopathy, (“BSE”),or BSE, which is commonly referred to as “Mad Cow Disease”, has caused concern among the general public. As a result, some countries have banned the importation or sale of products that contain bovine materials sourced from locations where BSE has been identified. We have certain products that use a beef-based gelatin capsule. All of our gelatin capsules are currently produced in the United States or in Australia, which are considered BSE-free countries, although a few cases of BSE have been identified in the United States. Nonetheless, in 2006, we voluntarily began to switch most of our production to utilize non-bovine gelatin capsules that are vegetable-based rather than beef-based. However, future government action could require companies to use vegetable-based capsules or other capsules, and if required, the costs of vegetable-based or other capsules could increase our costs as compared to the costs of bovine-based capsules. The higher costs could affect our financial condition, results of operations, and our cash flows. 8. If our outside suppliers and manufacturers fail to supply products in sufficient quantities and in a 9. | If our outside suppliers and manufacturers fail to supply products in sufficient quantities and in a timely fashion, our business could suffer.
|
Outside manufacturers make all of our products. For both 2007 and 2006, we purchased 100% of a supplier’s Australia Plum Powder, which is used in our Ambrotose AO® product. During 2007 and 2006, we purchased approximately 31% and 29%, respectively, of one of our manufacturer’s production. Our profit margins and timely product delivery are dependent upon the ability of our outside suppliers and manufacturers to supply us with products in a timely and cost-efficient manner. Our ability to enter new markets and sustain satisfactory levels of sales in each market depends on the ability of our outside suppliers and manufacturers to produce the ingredients and products and to comply with all applicable regulations. As a precaution, we have approved alternate suppliers and manufacturers for our products. However, the failure of our primary suppliers or manufacturers to supply ingredients or produce our products could adversely affect our business operations. We believe we have dependable suppliers for all of our ingredients and that we have identified alternative sources for all of our ingredients except Arabinogalactan, which is an important component used in the formulation of our Ambrotose® complex. Although we maintain good relationships with our suppliers and could produce or replace certain of our ingredients if our suppliers are unable to perform, any delay in replacing or substituting such ingredients could affect our business. 10. | Inability of new products to gain associate, member, and market acceptance could harm our business. |
The supplier of one of our major product components announced in February 2009 that the processing facility was closed and manufacturing of the component would cease. Mannatech owns extensive inventory of this component and believes that its needs for the next twelve months or more will be covered by this inventory. Alternate sources of supply for this component are currently being explored, but failure to secure another source of supply could adversely affect our business operations. 9. Our inability to develop and introduce new products that gain associate, member, and market acceptance could harm our business. A critical component of our business is our ability to develop new products that create enthusiasm among our independent associates and members. If we are unable to introduce new products planned for introduction, our associate productivity could be harmed. In addition, if any new products fail to gain market acceptance, are restricted by regulatory requirements or have quality problems, this would harm our results of operations. Factors that could affect our ability to continue to introduce new products include, among others, government regulations, the inability to attract and retain qualified research and development staff, the termination of third-party research and collaborative arrangements,
proprietary protections of competitors that may limit our ability to offer comparable products, and the difficulties in anticipating changes in consumer tastes and buying preferences. 11. | Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancements could significantly harm our independent associate and member relationships and product sales and harm our financial condition and operating results. |
10. Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancements could significantly harm our relationship with independent associates and members, product sales, as well as our financial condition and operating results. Our business is subject to changing consumer trends and preferences. Therefore, our continued success depends in part on our ability to anticipate and respond to these changes, and we may not respond in a timely or commercially appropriate manner to such changes. The nutritional supplement industry is characterized bypreferences, including rapid and frequent changes in demand for products, and new product introductions, and enhancements. Our failure to accurately predict these trends could negatively impact consumer opinion of our products, which in turn could harm our independent associate and member relationships and cause the loss of sales. The success of our new product offerings and enhancements depends upon a number of factors, including our ability to: accurately anticipate consumer needs; innovate and develop new products or product enhancements that meet these needs; successfully commercialize new products or product enhancements in a timely manner; price our products competitively; manufacture and deliver our products in sufficient volumes and in a timely manner; and differentiate our product offerings from those of our competitors. If we do not introduce new products or make enhancements to meet the changing needs of our members in a timely manner, some of our products could be rendered obsolete, which could negatively impact our revenues, financial condition, and operating results. 12. | The global nutrition industry is intensely competitive and the strengthening of any of our competitors could harm our business. |
11. The global nutrition industry is intensely competitive and the strengthening of any of our competitors could harm our business. The global nutrition industry is intensely fragmented and competitive. We compete for independent associates with other network-marketing companies outside the global nutrition industry. Many competitors have greater name recognition and financial resources, which may give them a competitive advantage. Our competitors may also be able to devote greater resources to marketing, promotional, and pricing campaigns that may influence our continuing and potential independent associates and members to buy products from competitors rather than from us. Such competition could adversely affect our business and current market share. 13. | A downturn in the economy may affect consumer purchases of discretionary items such as the health and wellness products that we offer, which could have a material adverse effect on our business, financial condition, profitability and cash flows. |
12. A downturn in the economy may affect consumer purchases of discretionary items such as the health and wellness products that we offer, which could have a material adverse effect on our business, financial condition, profitability and cash flows. We appeal to a wide demographic consumer profile and offer a broad selection of health and wellness products. A downturn in the economy could adversely impact consumer purchases of discretionary items such as health and wellness products. Factors that could affect consumers’ willingness to make such discretionary purchases include general business conditions, levels of employment, interest rates and tax rates, the availability of consumer credit and consumer confidencedisposable income. During calendar year 2008, the U.S. and global economies slowed dramatically as a result of a variety of serious problems, including turmoil in futurethe credit and financial markets, concerns regarding the stability and viability of major financial institutions, the state of the housing markets and volatility in worldwide stock markets. Given the significance and widespread nature of these nearly unprecedented circumstances, the U.S. and global economies could remain significantly challenged in a recessionary state for an indeterminate period of time. These economic conditions. Inconditions, which are beyond our control, could cause many of our existing and potential associates to delay or reduce purchases of our products for some time, which in turn would harm our business by adversely affecting our revenues, results of operations, cash flows and financial condition. We cannot predict the eventduration of anthese economic downturn, consumer spending habits could be adversely affected and we could experience lower than expected net sales, which couldconditions or the impact they will have a material adverse effect on our business, financial condition, profitabilityconsumers or business. For additional information regarding current economic conditions and cash flows.their impact on our results of operations, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. 14. | If our network-marketing activities do not comply with government regulations, our business could suffer. |
13. If our network-marketing activities do not comply with government regulations, our business could suffer. Many governmental agencies regulate our network-marketing activities. A government agency’s determination that our business or our independent associates have significantly violated a law or regulation could adversely affect our business. The laws and regulations regulating network-marketing generally intend to prevent fraudulent or deceptive schemes. Our business faces constant regulatory scrutiny due to the interpretive and enforcement discretion given to regulators, periodic misconduct by our independent associates, adoption of new laws or regulations, and changes in the interpretation of new or existing laws or regulations. Most recently,In July 2007, the Texas Attorney General filed suit against us, MannaRelief Ministries, Samuel L. Caster,L.Caster, the Fisher Institute, and H. Reginald McDaniel alleging violations of the Texas Deceptive Trade Practices Act and the Texas Food, Drug, and Cosmetic Act. We are working with our litigation counsel to vigorously defend this lawsuit, but it is not possible at this time to predict whetherOn February 26, 2009, we will incur any liability in connectionreached an agreement with the lawsuit. Texas Attorney General’s office settling the enforcement action. Without admitting any wrongdoing, we have agreed to return up to $4 million to members only, and to pay $2 million to cover fees and expenses of Texas regulators. The settlement does not include any fine or penalty against Mannatech. We have also made and agreed to make certain corporate governance changes required by the Texas Attorney General’s office and agreed not to violate certain provisions of the Texas Deceptive Trade Practices Act and Texas Food, Drug, and Cosmetic Act. If we are unable to comply fully with the provisions of the settlement, Texas regulators could pursue further remedies that may impact our business. In addition, in the past and as a result of the industry in which we operate, we have experienced inquiries regarding specific independent associates. We have complied and fully cooperated with all regulatory agencies in connection with such inquiries and are also required by regulatory authorities to disclose any on-going significant regulatory actions. 15. | If government regulations regarding network-marketing change or are interpreted or enforced in a manner adverse to our business, we may be subject to new enforcement actions and material limitations regarding our overall business model. | 14. If government regulations regarding network-marketing change or are interpreted or enforced in a manner adverse to our business, we may be subject to new enforcement actions and material limitations regarding our overall business model.Network-marketing is always subject to extensive governmental regulations, including foreign, federal, and state regulations. Any detrimental change in legislation and regulations could affect our business. Furthermore, significant penalties could be imposed on us for failure to comply with various statutes or regulations. Violations may result from: misconduct by us or our independent associates; regulations and related court decisions; the discretion afforded to regulatory authorities and courts interpreting and enforcing laws; and new regulations or interpretations of regulations affecting our business. 16. | If we violate governmental regulations or fail to obtain necessary regulatory approvals, our operations could be adversely affected. |
15. If we violate governmental regulations or fail to obtain necessary regulatory approvals, our operations could be adversely affected. Our operation is subject to extensive laws, governmental regulations, administrative determinations, court decisions, and similar constraints at the federal, state, and local levels in our domestic and foreign markets. These regulations primarily involve the following: the formulation, manufacturing, packaging, labeling, distribution, importation, sale, and storage of our products; the health and safety of fooddietary supplements, cosmetics and dietary supplements;foods; trade practice laws and network-marketing laws; our product claims and advertising by our independent associates; our network-marketing system; pricing restrictions regarding transactions with our foreign subsidiaries or other related parties and similar regulations that affect our level of foreign taxable income;
the assessment of customs duties; further taxation of our independent associates, which may obligate us to collect additional taxes and maintain additional records; and export and import restrictions. Any unexpected new regulations or changes in existing regulations could significantly restrict our ability to continue operations, which could adversely affect our business. For example, changes regarding health and safety, and food and drug regulations for our nutritional products could require us to reformulate our products to comply with such regulations. In some foreign countries, nutritional products are considered foods, while other countries consider them drugs. Future health and safety, or food and drug, regulations could delay or prevent our introduction of new products or suspend or prohibit the sale of existing products in a given country or marketplace. In addition, if we expand into other foreign markets, our operations or products could also be affected by the general stability of foreign governments and the regulatory environment relating to network-marketing and our products. If our products are subject to high customs duties, our sales and competitive position could suffer as compared to locally produced goods. Furthermore, import restrictions in certain countries and jurisdictions could limit our ability to import products from the United States. 17. | Increased regulatory scrutiny of nutritional supplements as well as new regulations that are being adopted in some of our markets with respect to nutritional supplements could result in more restrictive and burdensome regulations and harm our results if our supplements or advertising activities are found to violate existing or new regulations or if we are not able to effect necessary changes to our products in a timely and efficient manner to respond to new regulations. | 16. Increased regulatory scrutiny of nutritional supplements as well as new regulations that are being adopted in some of our markets with respect to nutritional supplements could result in more restrictive regulations and harm our results if our supplements or advertising activities are found to violate existing or new regulations or if we are not able to effect necessary changes to our products in a timely and efficient manner to respond to new regulations.There has been an increasing movement in the United States and other markets to increase the regulation of dietary supplements, which couldwill impose additional restrictions or requirements in the future.requirements. In several of our markets, new regulations have been adopted or are likely to be adopted in the near-term that couldwill impose new requirements, make changes in some classifications of supplements under the regulations, or limit the claims we can make. In addition, there has been increased regulatory scrutiny of nutritional supplements and marketing claims under existing and new regulations. In Europe for example, we are unable to market supplements that contain ingredients that have not been previously marketed in Europe (“novel foods”) without going through an extensive registration and approval process. Europe is also expected to adopt additional regulations this fall setting new limits on acceptable levels of nutrients. In addition, theThe FDA recently finalized newhas implemented GMPs for the US nutritional supplement industry. Our operations could be harmed if new regulations require us to reformulate products or effect new registrations, if regulatory authorities make determinations that any of our products do not comply with applicable regulatory requirements, or if we are not able to effect necessary changes to our products in a timely and efficient manner to respond to new regulations. In addition, our operations could be harmed if governmental laws or regulations are enacted that restrict the ability of companies to market or distribute nutritional supplements or impose additional burdens or requirements on nutritional supplement companies. 18. | If our international markets are not successful, our business could suffer. |
17. If our international markets are not successful, our business could suffer. We currently sell our products in the international markets of Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, and Germany.Singapore. Nonetheless, our international operations could experience changes in legal and regulatory requirements, as well as difficulties in adapting to new foreign cultures and business customs. If we do not adequately address such issues, our international markets may not meet growth expectations. Our international operations and future expansion plans are subject to political, economic, and social uncertainties, including: the renegotiation or modification of various agreements; increases in custom duties and tariffs; changes and limits in export controls; government regulations and laws; trademark availability and registration issues;
changes in exchange rates; wars and other hostilities; and changes in the perception of network-marketing. Any negative changes related to these factors could adversely affect our business, profitability, and growth prospects. Furthermore, any negative changes in our distribution channels may force us to invest significant time and money related to our distribution and sales to maintain our position in certain international markets. 19. | If our information technology system fails, our operations could suffer. | 18. If our information technology system fails, our operations could suffer.Like many companies, our business is heavily dependent upon our information technology infrastructure to effectively manage and operate many of our key business functions, including: cash receipts and payments; and These systems and operations are vulnerable to damage or interruption from fires, earthquakes, telecommunications failures and other events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Although we maintain an extensive security system and disaster recovery program that was developed under the guidelines published by the National Institute of Standards of Technology, a long-term failure or impairment of any of our information technology systems could adversely affect our ability to conduct day-to-day business. 20. | Currency exchange rate fluctuations could reduce our overall profits. |
19. Currency exchange rate fluctuations could reduce our overall profits. In 20072008 and 2006,2007, we recognized 40.8%46.9% and 33.8%40.8%, respectively, of our net sales in markets outside of the United States. In preparing our consolidated financial statements, certain financial information is required to be translated from foreign currencies to the United States dollar using either the spot rate or the weighted-average exchange rate. If the United States dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. However, to help mitigate this risk, our management monitors applicable exchange rates. To date we have not entered into any hedging contracts or participated in any hedging or derivative activities. 21. | We may be held responsible for certain taxes or assessments relating to the activities of our independent associates, which could harm our financial condition and operating results. |
20. We may be held responsible for certain taxes or assessments relating to the activities of our independent associates, which could harm our financial condition and operating results. Our independent associates are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes, and to maintain appropriate records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our distributors. In the event that local laws and regulations or the interpretation of local laws and regulations change to require us to treat our independent distributors as employees, or that our distributors are deemed by local regulatory authorities in one or more of the jurisdictions in which we operate to be our employees rather than independent contractors under existing laws and interpretations, we may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results. 22. | Our stock price is volatile and may fluctuate significantly. |
21. Our stock price is volatile and may fluctuate significantly. The price of our common stock is subject to sudden and material increases and decreases. Decreases could adversely affect investments in our common stock. The price of our common stock and the price at which we could sell securities in the future could significantly fluctuate in response to: broad market fluctuations and general economic conditions; fluctuations in our financial results; future securities offerings; changes in the market’s perception of our products or our business, including false or negative publicity; governmental regulatory actions; the outcome of any lawsuits; financial and business announcements made by us or our competitors; and the general condition of the industry.industry; and the sale of large amounts of stock by insiders. In addition, the stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies. The changes often appear to occur without regard to specific operating performance. The price of our common stock in the open market could fluctuate based on factors that have little or nothing to do with us or that are outside of our control. 23. | Certain shareholders, directors, and officers own a significant amount of our stock, which could allow them to influence corporate transactions and other matters. |
22. Certain shareholders, directors, and officers own a significant amount of our stock, which could allow them to influence corporate transactions and other matters. As of December 31, 2007,2008, our directors and executive officers, collectively with their families and affiliates, beneficially owned approximately 40.8%40.5% of our total outstanding common stock. As a result, if any of these shareholders choose to act together based on their current share ownership, they may be able to control a significant percentage of the total outstanding shares of our common stock, which could affect the outcome of a shareholder vote on the election of directors, the adoption of stock option plans, the adoption or amendment of provisions in our articles of incorporation and bylaws, or the approval of mergers and other significant corporate transactions. 24. | We have implemented anti-takeover provisions that may help discourage a change of control. |
23. We have implemented anti-takeover provisions that may help discourage a change of control. Certain provisions in our articles of incorporation, bylaws, and the Texas Business Corporation Act help discourage unsolicited proposals to acquire our company, even if the proposal may benefit our shareholders. Our articles of incorporation authorize the issuance of preferred stock without shareholder approval. Our Board of Directors has the power to determine the price and terms of any preferred stock. The ability of our Board of Directors to issue one or more series of preferred stock without shareholders’ approval could deter or delay unsolicited changes of control by discouraging open market purchases of our common stock or a non-negotiated tender or exchange offer for our common stock. Discouraging open market purchases may be disadvantageous to our shareholders who may otherwise desire to participate in a transaction in which they would receive a premium for their shares. In addition, other provisions may also discourage a change of control by means of a tender offer, open market purchase, proxy contest or otherwise. Our charter documents provide for three classes of directors on our Board of Directors with members of each class serving staggered three year terms. Also, the Texas Business Corporation Act restricts, subject to exceptions, business combinations with any “affiliated shareholder.” Any or all of these provisions could delay, deter or help prevent a takeover of our Company and could limit the price investors are willing to pay for our common stock. 25. | We are not required to pay dividends, and our board of directors could decide not to declare a dividend or could reduce the amount of the dividend at any time. |
24. We are not required to pay dividends, and our Board of Directors could decide not to declare a dividend or could reduce the amount of the dividend at any time. While we have historically paid dividends since 2004, the declaration of dividends on our common stock is solely within the discretion of our boardBoard of directors,Directors, subject to limitations under Texas law stipulating that dividends may not be paid if payment therefore would cause the corporation to be insolvent or if the amount of the dividend would exceed the surplus of the corporation. Our boardBoard of directorsDirectors could at any time decide not to declare a dividend, or could reduce the level of our dividend payments, or we could be prevented from declaring a dividend because of legal or contractual restrictions. The failure to pay a dividend could reduce our stock price. 25. Concentration Risk A significant portion of our revenue is derived from our core Ambrotose® complex products which include the Ambrotose® products and Advanced Ambrotose® products. A decline in sales value of such legacy products could have a material adverse effect on our earnings, cash flows, and financial position. Revenue from the core Ambrotose® products were as follows for the years ended December 31, 2008 and 2007 (in thousands, except percentages): | 2008 | | 2007 | | Sales by product | | % of total net sales | | | Sales by product | | % of total net sales | | Advanced Ambrotose® | $ | 85,980 | | 25.8 | % | | $ | 117,471 | | 28.5 | % | Ambrotose® | | 33,748 | | 10.1 | % | | | 39,440 | | 9.6 | % | Total | $ | 119,728 | | 35.9 | % | | $ | 156,911 | | 38.1 | % |
We are not exposed to customer concentration risk as no single independent associate has ever accounted for more than 10% of our consolidated net sales. Circumstances and conditions may change. Accordingly, additional risks and uncertainties not currently known, or that we currently deem not material, may also adversely affect our business operations.
Item 1B. | Unresolved Staff Comments |
Item 1B. Unresolved Staff Comments None. We lease property at several locations for our headquarters and distribution facilities, including: Location | Size | | Original term | | Expiration date | Coppell, Texas (corporate headquarters) | 110,000 | sq. feet | | 10 | years | | March 2017 | Coppell, Texas (distribution center) | 75,000 | sq. feet | | 10 | years | | March 2017 | St. Leonards, Australia (Australian headquarters) | 850 | sq. meters | | 5 | years | | August 2013 | Didcot, Oxfordshire (combined U.K. headquarters and distribution center) | 16,631 | sq. feet | | 5 | years | | November 2009 | Minato-ku, Tokyo, Japan (Japanese headquarters) | 296 | Tsubos(1) | | 2 | years | | November 2010 | Kangnam-gu, Seoul, Korea (Republic of Korea headquarters) | 625 | Pyung (2) | | 2 | years | | June 2009 | Taipei, Taiwan (Taiwan headquarters) | 254 | pings (3) | | 3 | years | | November 2010 | Zug, Switzerland (Switzerland headquarters) | 680 | sq. meters | | 5 | years | | October 2013 | | | | | | | | | | |
______________________ | | | | | | | Location
| | Size | | Original
term | | Expiration
date | Coppell, Texas (corporate headquarters)
| | 110,000 sq. feet | | 10 years | | March 2017 | Coppell, Texas (distribution center)(1)
| | 75,000 sq. feet | | 10 years | | March 2017Approximately 10,538 square feet. |
St. Leonards, Australia (Australian headquarters)
| | 850 sq. meters | | 5 years | | August 2008 | Didcot, Oxfordshire (combined U.K. headquarters and distribution center)(2)
| | 16,631 sq. feet | | 5 years | | November 2009 | Minato-ku, Tokyo, Japan (Japanese headquarters)
| | 296 Tsubos(3) | | 2 years | | November 2008 | Kangnam-gu, Seoul, Korea (Republic of Korea headquarters)
| | 625 Pyung(4) | | 2 years | | June 2009 | Taipei, Taiwan (Taiwan headquarters)
| | 254 pings(5) | | 3 years | | November 2010 | Zug, Switzerland (Switzerland headquarters)
| | 35 sq. meters | | monthly | | — |
(1) | Our United States distribution facility is capable of filling 18,000 orders per day and is currently operating at 38% of full capacity. |
(2) | Our United Kingdom distribution facility is capable of filling 650 orders per day and is currently operating at 54% of full capacity. |
(3) | Approximately 10,538 square feet. |
(4) | Approximately 22,190 square feet. |
(5)(3) | Approximately 9,021 square feet. |
Our main distribution facility is located in Coppell, Texas and consists of 75,000 square feet of leased space that houses an automated distribution system capable of processing up to 18,000 orders per day. Currently our distribution facility in the United States operates at 38% of capacity and is capable of supporting our planned sales volume growth into the foreseeable future. In 2005, we opened a distribution facility in the United Kingdom, which is located in Didcot, Oxfordshire and is capable of processing up to 650 orders per dayday. Both distribution centers currently operate well below full capacity and currently operates at 54%are capable of capacity.supporting our planned sales volume growth in the foreseeable future. To maximize our operating strategy and minimize costs, we continue to contract with third-party distribution and fulfillment facilities in Canada, Australia, Japan, the Republic of Korea, Taiwan, and Taiwan.South Africa. By entering into these third-party distribution facility agreements, our smaller offices maintain flexible operating capacity, minimize shipping costs, and are able to process an order within 24-hours after order placement and payment. Our third-party contract distribution operations and their respective current operating capacities asreceipt of December 31, 2007, include the following:payment. | | | | | | | | Location | | Square feet | | Orders per day capacity | | Current operating capacity | | Calgary, Alberta | | 2,775 | | 2,000 | | 30 | % | Wetherill Park, NSW, Australia | | 9,000 | | 4,000 | | 29 | % | Ohta-Ku, Tokyo, Japan | | 4,085 | | 2,500 | | 40 | % | Ganseo-ku, Seoul, Republic of Korea | | 5,338 | | 2,000 | | 40 | % | Taoyuan City, Taiwan | | 1,225 | | 300 | | 30 | % |
Securities Class Action Lawsuits
We have been suedSee “Litigation” in Note 14 of the following three securities class action lawsuits, each ofNotes to our Consolidated Financial Statement, which remained pending at December 31, 2007:is incorporated herein by reference.
First, on August 1, 2005, Mr. Jonathan Crowell filed a putative class action lawsuit against us and Mr. Samuel L. Caster, our Chief Executive Officer, on behalf of himself and all others who purchased or otherwise acquired our common stock between August 10, 2004 and May 9, 2005, inclusive, and who were damaged thereby.
Second, on August 30, 2005, Mr. Richard McMurry filed a class action lawsuit against us, Mr. Caster, Mr. Terry L. Persinger, the Company’s President and Chief Operating Officer, and Mr. Stephen D. Fenstermacher, our Chief Financial Officer.
Third, on September 5, 2005, Mr. Michael Bruce Zeller filed a class action lawsuit against us, Mr. Caster, Mr. Persinger, and Mr. Fenstermacher.
These three lawsuits were initially filed and consolidated in the United States District of New Mexico. On January 29, 2007, the consolidated action was transferred to the United States District Court for the Northern District of Texas, Dallas Division, and on March 29, 2007, upon joint motion of the parties, was transferred to the docket of United States District Judge Ed Kinkeade. The Mannatech Group, consisting of Mr. Austin Chang, Ms. Naomi S. Miller, Mr. John Ogden, and the Plumbers and Pipefitters Local 51 Pension Fund, has been appointed as lead plaintiffs, Coughlin Stoia Geller Rudman & Robbins LLP has been appointed as lead counsel, and Provost Umphrey LLP has been appointed local counsel for the putative class.
On July 12, 2007, Lead Plaintiff for the putative class filed a Second Amended Consolidated Class Action Complaint, which is substantively similar to the Amended Consolidated Class Action Complaint filed on March 22, 2007, and reported in our previous filings, but expands the class period to July 5, 2007, and adds references to an enforcement lawsuit discussed below, which was filed by the Texas Attorney General against us on July 5, 2007, and the subsequent drop in our stock price.
We filed a motion to dismiss the Second Amended Consolidated Class Action Complaint on August 27, 2007, arguing that the complaint did not meet the heightened pleading standards of the Private Securities Litigation Reform Act. Lead Plaintiffs filed their Opposition Brief on December 20, 2007, and we filed our Reply Brief in Support of the Motion on January 22, 2008.
Formal Mediation was conducted before Judge Daniel Weinstein in California on November 20, 2007, involving us, the individual Defendants in all pending securities and derivative lawsuits, and counsel for plaintiffs in both the securities class action and the various derivative actions. Informal discussions between the parties and Judge Weinstein continued thereafter. The parties continue to discuss the potential for settlement.
Shareholder Derivative Lawsuits
We have also been sued in the following five purported derivative actions, which remained pending at December 31, 2007:
First, on October 18, 2005, a shareholder derivative lawsuit was filed by Norma Middleton, Derivatively and on Behalf of Nominal Defendant, Mannatech, Incorporated, against Samuel L. Caster, Terry L. Persinger, Donald A. Buchholz, J. Stanley Fredrick, Gerald E. Gilbert, Alan D. Kennedy, Marlin Ray Robbins, and Patricia A. Wier, in the United States District Court for the Northern District of Texas, Dallas Division.
Second, on January 11, 2006, a shareholder derivative action was filed by Kelly Schrimpf, Derivatively and on Behalf of Nominal Defendant, Mannatech, Incorporated, against Samuel L. Caster, Terry L.
| Persinger, Steven W. Lemme, and Stephen D. Fenstermacher in the 162nd District Court of Dallas County, Texas.
|
Third, on January 13, 2006, a shareholder derivative action was filed by Frances Nystrom, Derivatively and on Behalf of Nominal Defendant, Mannatech, Incorporated, against Samuel L. Caster, Terry L. Persinger, Stephen D. Fenstermacher, John Stuart Axford, J. Stanley Fredrick, Gerald E. Gilbert, Alan D. Kennedy, Marlin Ray Robbins, Patricia A. Wier, and Donald A. Buchholz in the United States District Court for the Northern District of Texas.
Fourth, on April 25, 2007, a shareholder derivative action was filed by Duncan Gardner, Derivatively and on Behalf of Nominal Defendant, Mannatech, Incorporated, against Samuel L. Caster, Terry L. Persinger, Stephen D. Fenstermacher, J. Stanley Fredrick, Patricia A. Wier, Alan D. Kennedy, Gerald E. Gilbert, John Stuart Axford, Marlin Ray Robbins, and Larry A. Jobe in the 162nd District Court of Dallas County, Texas.
Fifth, on July 23, 2007, a shareholder derivative action was filed by Frances Nystrom, Derivatively and On Behalf of Mannatech, Incorporated against Samuel L. Caster, Terry L. Persinger, Stephen D. Fenstermacher, Stephen Boyd, John Stuart Axford, J. Stanley Fredrick, Gerald E. Gilbert, Alan D. Kennedy, Marlin Ray Robbins, Patricia A. Wier, Larry A. Jobe, Bill H. McAnalley and Donald A. Buchholz in the 44th District Court of Dallas County, Texas.
Shortly after the commencement of the class action litigation, the first three of these actions were filed. These three lawsuits make allegations similar to the allegations of the shareholder class action litigation described above. The Schrimpf state court lawsuit remains stayed, and administratively closed subject to being reopened, pending the outcome of the Middleton federal lawsuit, the first-filed derivative action.
The Special Litigation Committee appointed by our Independent Directors to review the allegations made by Middleton, Schrimpf, and Nystrom determined that it is in our best interests to dismiss those derivative lawsuits. We filed motions to dismiss the Middleton and Nystrom complaints on March 12, 2007, seeking dismissal under Federal Rule 12(b)(6) and Texas Business Corporation Act article 5.14. The plaintiffs were required to file their responses by July 31, 2007, but the parties agreed to extend the response date until 60 days after the Court rules on the plaintiffs’ pending motions to compel, and motions to that effect were filed on July 31, 2007 by each plaintiff. The motions to set a revised briefing schedule, and the motions to compel, remain pending before the Court. The Court administratively closed the Middleton and Nystrom cases on April 18, 2007.
The Gardner action, which was filed on April 25, 2007, and the second Nystrom action, which was filed July 23, 2007, make allegations with regard to the funding of various research projects by us. Both lawsuits are consistent with demand letters sent on behalf of both shareholders, and noted in our previous filings. The Special Litigation Committee appointed to review these allegations made by Gardner and Nystrom has determined that continuation of the Gardner and Nystrom lawsuits is not in our best interests. While the Gardner and Nystron state court lawsuits have been stayed pending the review by the Special Litigation Committee pursuant to Texas Business Corporation Act article 5.14, the determination of the Committee has been communicated to the courts and we anticipate the stays will be lifted.
On January 9, 2008, counsel for Norma Middleton filed a Notice of Settlement with the Court stating that the parties had reached a settlement. This notice was corrected by a joint filing on January 10, 2008, stating that settlement communications between all derivative plaintiffs and defendants were ongoing, but no final settlement agreement had been reached with any party. At this time, those negotiations are still ongoing.
Plaintiffs in the consolidated putative class actions and in the shareholder derivative actions seek an unspecified amount of compensatory damages, interest, and costs, including legal and expert fees.
In response to these actions, we continue to work with our experienced securities litigation counsel to vigorously defend ourself and our officers and directors. We also believe this type of litigation is inherently
unpredictable. It should be noted that a court must certify a class before a case can proceed as a class action lawsuit and that the determination has not been made in the consolidated securities cases. We believe these types of repetitive lawsuits (seeking class action status) are common in today’s litigious society and many reputable companies have successfully defended themselves against such litigation.
Texas Attorney General’s Lawsuit
We have also been sued in an enforcement action (referenced above) that was filed by the Texas Attorney General’s Office on July 5, 2007. In that lawsuit, the State of Texas sued Mannatech, Incorporated, MannaRelief Ministries, Samuel L. Caster, the Fisher Institute, and Reginald McDaniel for alleged violations of the Texas Food, Drug, and Cosmetics Act and the Texas Deceptive Trade Practices Act. The allegations, consistent with the allegations made by the securities class action and derivative plaintiffs, primarily concern the marketing of our products by independent associates. The action seeks temporary and permanent injunctive relief, statutorily-prescribed civil monetary penalties, and the restoration of money or other property allegedly taken from persons by means of unlawful acts or practices, or alternatively, damages to compensate for such losses. We have continued discussions with representatives of the Attorney General’s Office to attempt to resolve the concerns raised in the petition.
Patent Infringement Litigation
We currently have the following two patent infringement suits on file:
Mannatech, Incorporated v. Glycobiotics International, Inc.
On March 16, 2006, we first filed a patent infringement lawsuit against Glycobiotics International, Inc. for alleged infringement of its utility United States Patent No. 6,929,807 (“Compositions of Plant Carbohydrates as Dietary Supplements”) in the United States District Court of the Northern District of Texas, Dallas Division. On February 9, 2007, we filed an Amended Complaint, which adds patent infringement claims relating to its utility United States Patent No. 7,157,431 (also entitled “Compositions of Plant Carbohydrates as Dietary Supplements”).
In the Amended Complaint, we seek to stop Glycobiotics from manufacturing, offering, and selling its infringing glyconutritional product marketed under the brand name “Glycomannan.” The Amended Complaint also alleges claims for unfair competition and business disparagement because of false and misleading statements made by Glycobiotics in connection with its marketing and sale of Glycomannan.
Glycobiotics answered our Amended Complaint on February 20, 2007, asserting various affirmative defenses and three counterclaims alleging anticompetitive conduct under the Sherman Act in connection with the market for arabinogalactan. Following extensive discovery by us, and the disclosure of an expert refuting the allegations contained in the counterclaims, on August 6, 2007, Glycobiotics filed a stipulated motion to dismiss all of its counterclaims.
The Court conducted a hearing on June 22, 2007 on Glycobiotics’ Motion for Markman Claim Construction on the patents-at-issue. The Court issued an Order on June 26, 2007 construing the terms of the patents-at-issue in our favor. On July 12, 2007, Glycobiotics filed a Motion for Reconsideration of the Court’s Markman Order. We opposed the Motion for Reconsideration and the Court denied the motion on July 16, 2007.
In December 2007, the Court denied the parties’ cross-motions for partial summary judgment and set the case for trial on May 5, 2008. We continue to vigorously prosecute the case and believe the likelihood of an unfavorable outcome is remote.
Mannatech, Incorporated v. K.Y.C. Inc. d/b/a Techmedica Health Inc.
On May 5, 2006, we also filed a patent infringement lawsuit against Techmedica Health™ Inc., or Techmedica, for alleged infringement of our utility United States Patent No. 6,929,807 (“Compositions of Plant
Carbohydrates as Dietary Supplements”) in the United States District Court of the Northern District of Texas, Dallas Division. The Original Complaint sought to stop Techmedica from manufacturing, offering, and selling its infringing glyconutritional product marketed under the brand name “Nutratose.” The Original Complaint also alleged claims for unfair competition and business disparagement because of false and misleading statements made by Techmedica in connection with its marketing and sale of Nutratose.
In response to our discovery requests, Techmedica Health claimed that Triton Nutra, Inc. manufactures the glyconutritional product that it markets and sells under the brand name Nutratose. Shortly thereafter, the United States Patent and Trademark Office issued United States Patent No. 7,157,431 (also entitled “Compositions of Plant Carbohydrates as Dietary Supplements”). Accordingly, on February 6, 2007, we filed our Amended Complaint, which named Triton Nutra as an additional defendant to the original claims and added infringement claims relating to the new patent against both Techmedica Health and Triton Nutra. Pending Triton Nutra’s appearance in the case, we and Techmedica Health filed a Joint Motion to Lift the Scheduling Order on February 15, 2007 to allow all parties to coordinate on a new scheduling order. The Court granted the Joint Motion on February 16, 2007.
After Triton Nutra failed to answer the Amended Complaint, we requested, and the Clerk of Court entered, default against Triton Nutra on May 3, 2007. We also sought to continue our case against Techmedica Health, seeking discovery on the patent infringement and business disparagement claims. In response, Techmedica Health filed a Motion to Stay Proceedings and for a Protective Order from Deposition Notice on May 2, 2007, which sought to stay the case until after a judgment is issued in the Glycobiotics case. The Court granted the motion on August 10, 2007. Once judgment has issued in the Glycobiotics case, we intend to prosecute this case to judgment and believe the likelihood of an unfavorable outcome is remote. With no pending counterclaims, our potential loss is limited to an award of the defendants’ court costs.
DPT Litigation
On November 8, 2007, DPT Laboratories, Ltd. (“DPT”) filed a lawsuit against us in the 224th Judicial District Court of Bexar County, Texas alleging suit on a sworn account, breach of contract, promissory estoppel, quantum meruit, and unjust enrichment. This lawsuit arose from an agreement between DPT and us that addressed the manner in which DPT would reformulate and manufacture our North American skin care line. DPT claimed we breached the agreement by canceling open purchase orders and sought $1.6 million in damages.
We answered DPT’s petition on January 18, 2008, asserting various affirmative defenses and three counterclaims alleging breach of contract, promissory estoppel, and negligent misrepresentation. We claimed that DPT failed to perform services under the agreement by manufacturing a defective product that we had to recall and failing to manufacture the skin care line by the requested deadline. We sought $4.8 million in lost profits from the anticipated sales of the skin care line and $0.6 million in costs related to the recall of the defective product.
On February 27, 2008, the parties entered into a settlement agreement, and on March 5, 2008, an Agreed Order of Dismissal with Prejudice was entered with the Court. Terms of the settlement are confidential pursuant to the settlement agreement.
Litigation in General
We also have several other pending claims incurred in the normal course of business. In our opinion, such claims can be resolved without any material adverse effect on its consolidated financial position, results of operations, or cash flows.
We maintain certain liability insurance; however, certain costs of defending lawsuits, such as those below the insurance deductible amount, are not covered by or only partially covered by our insurance policies, or our
insurance carriers could refuse to cover certain of these claims in whole or in part. We accrue costs to defend ourself from litigation as it is incurred or as it becomes determinable.
The outcome of litigation may not be assured, and despite management’s views of the merits of any litigation, or the reasonableness of our estimates and reserves, our financial statements could nonetheless be materially affected by an adverse judgment. We believe we have adequately reserved for the contingencies arising from the above legal matters where an outcome was deemed to be probable and the loss amount could be reasonably estimated. While it is not possible to predict with certainty what liability or damages we might incur in connection with any of the above-described lawsuits, based on the advice of counsel and a management review of the existing facts and circumstances related to these lawsuits, we have accrued $5.3 million as of December 31, 2007 for these matters, which is included in accrued expenses on our Consolidated Balance Sheet.
Item 4. | Submission of Matters to a Vote of Security Holders |
None.
PART II Item 5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
Market for Our Common Stock.On February 12, 1999, we completed our initial public offering and on February 16, 1999, our common stock began trading on the NASDAQ Global Market (formerly the NASDAQ National Market) under the symbol “MTEX.” On July 1, 2006, the NASDAQ National Market was renamed the NASDAQ Global Market. In conjunction with this,its renaming, NASDAQ Global Market created the new NASDAQ Global Select Market, a segment of the NASDAQ Global Market with the highest initial listing standards of any exchange in the world. Beginning July 3, 2006, NASDAQ moved our common stock to the NASDAQ Global Select Market. As of March 7, 2008,6, 2009, the total number of outstanding shares of our common stock was 26,460,788 and the closing price on such date was $7.26.$2.82. Below are the high and low closing prices of Mannatech’s common stock as reported on the NASDAQ for each quarter of the fiscal years ended December 31, 20072008 and 2006:2007: | | | Low | | High | | 2008: | | 2008: | Low | | High | First Quarter | | | $ | 5.09 | | $ | 8.49 | | Second Quarter | | | $ | 5.44 | | $ | 7.39 | | Third Quarter | | | $ | 3.48 | | $ | 6.96 | | Fourth Quarter | | | $ | 1.88 | | $ | 4.41 | | 2007: | | | | | | | | | | | | First Quarter | | $ | 13.81 | | $ | 16.34 | | $ | 13.81 | | $ | 16.34 | | Second Quarter | | $ | 13.97 | | $ | 15.93 | | $ | 13.97 | | $ | 15.93 | | Third Quarter | | $ | 6.25 | | $ | 16.06 | | $ | 6.25 | | $ | 16.06 | | Fourth Quarter | | $ | 5.89 | | $ | 9.36 | | $ | 5.89 | | $ | 9.36 | | 2006: | | | | | | First Quarter | | $ | 11.45 | | $ | 17.38 | | Second Quarter | | $ | 11.05 | | $ | 20.06 | | Third Quarter | | $ | 11.76 | | $ | 18.04 | | Fourth Quarter | | $ | 13.46 | | $ | 19.26 | |
Holders.As of March 7, 2008,6, 2009, there were approximately 3,6003,400 shareholders of record who held approximately 27% of our common stock directly and approximately 180150 security brokers and dealers who held approximately 73% of our common stock on behalf of approximately 15,00013,000 shareholders. Dividends.We began paying dividends in 2004. During 20072008 and 2006,2007, we declared and paid the following dividends on our common stock: | | | | | | | | | Declared date
| | Date of record
| | Date paid
| | Total Amount of
Declared date | | Date of record | | Date paid | | Total Amount of Dividends | | Dollar amount paid per common share | November 19, 2008 | | December 11, 2008 | | December 29, 2008 | | $ | 0.5 | million | | $ | 0.02 | August 26, 2008 | | September 10, 2008 | | September 29, 2008 | | $ | 0.5 | million | | $ | 0.02 | April 30,2008 | | June 5, 2008 | | June 26, 2008 | | $ | 2.4 | million | | $ | 0.09 | February 22, 2008 | | March 7, 2008 | | March 28, 2008 | | $ | 2.4 | million | | $ | 0.09 | November 6, 2007 | | November 30, 2007 | | December 21, 2007 | | $ | 2.4 | million | | $ | 0.09 | September 27, 2007 | | October 11, 2007 | | October 25, 2007 | | $ | 2.4 | million | | $ | 0.09 | June 14, 2007 | | June 29, 2007 | | July 20, 2007 | | $ | 2.4 | million | | $ | 0.09 | March 13, 2007 | | March 28, 2007 | | April 13, 2007 | | $ | 2.4 | million | | $ | 0.09 | | | | | | | | | | | | | |
Dividends
| | Dollar amount paid
per common share
| March 13, 2007 | | March 28, 2007 | | April 13, 2007 | | $2.4 million | | $0.09 | June 14, 2007 | | June 29, 2007 | | July 20, 2007 | | $2.4 million | | $0.09 | September 27, 2007 | | October 11, 2007 | | October 25, 2007 | | $2.4 million | | $0.09 | November 6, 2007 | | November 30, 2007 | | December 21, 2007 | | $2.4 million | | $0.09 | March 13, 2006 | | March 31, 2006 | | April 17, 2006 | | $2.1 million | | $0.08 | June 13, 2006 | | June 26, 2006 | | July 17, 2006 | | $2.1 million | | $0.08 | October 2, 2006 | | October 13, 2006 | | October 27, 2006 | | $2.1 million | | $0.08 | November 20, 2006 | | December 8, 2006 | | January 5, 2007 | | $2.1 million | | $0.08 |
In 2007,August 2008, our boardBoard of directors increased ourDirectors decreased the quarterly cash dividend to $0.09$0.02 per common share. The decrease was a result of lower sales and associate recruiting in the second half of 2008. Our boardBoard of directorsDirectors expects to continue to pay a dividend and to reevaluate our dividend policy based on our ongoing consolidated results of operations, financial condition, cash requirements, and other relevant factors.global economic conditions. Any payment of dividends is also subject to limitations under the Texas Business Corporation Act. See “Risk Factors—Factors—We are not required to pay dividends, and our boardBoard of directorsDirectors could decide not to declare a dividend or could reduce the amount of the dividend at any time” in Itemitem 1A of this Form 10-K for further discussion related to future payment of dividends.
Stock OptionsOptions. The following table provides information as of March 7, 20086, 2009 about our common stock that may be issued upon the exercise of stock options under all of our existing stock option plans.plan. | Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) | | Weighted-average exercise price of outstanding options, warrants, and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) | | Weighted-average exercise price of outstanding options, warrants, and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | Equity compensation plans approved by shareholders | | 1,346,350 | | $ | 7.35 | | 53,561 | | | Equity compensation plans not approved by shareholders | | — | | | — | | 1,000,000 | | | | | | | | | | Equity compensation plan | | | 1,578,920 | | $ | 5.82 | | 587,157 | Equity compensation plans not approved by Shareholders | | | — | | | — | | — | Total | | 1,346,350 | | | | 1,053,561 | | 1,578,920 | | | | | 587,157 | | | | | | | | |
In February 2007, our Board of Directors approved the 2007 Stock Incentive Plan (“the 2007 Plan”), and in June 2007, our shareholders ratified the 2007 Plan. However, in July 2007, we determined that the number of shares reported as reserved for issuance under existing stock plans and the number of shares reserved for issuance under outstanding but unexercised awards was incorrectly stated in the 2007 Plan and our Proxy Statement as 1,234,985 and 235,808, respectively, but should have been reported as 224,687 and 1,227,485, respectively. It is not clear that inclusion of the mistaken share numbers had any material impact on the shareholders’ vote to ratify the 2007 Plan; however, we decided not to implement the 2007 Plan, as a result of this discrepancy, and to instead adopt a new plan, the 2008 Stock Incentive Plan.
In February 2008, our Board of Directors approved our 2008 Stock Incentive Plan (the “2008 Plan”), which reserves, for issuance of stock options and restricted stock to our employees, board members, and consultants, up to 1,000,000 shares of our common stock plus any shares of common shock that were reserved under our existingthen-existing, unexpired stock plans for which options had not been issued, and any shares underlying outstanding options under the existingthen-existing stock option plans that terminate without having been exercised in full. The 2008 Stock Incentive Plan will be submitted for approval towas approved by our shareholders of record at our 2008 Annual Shareholders’ meeting to beMeeting held on June 18, 2008. Currently, the 2008 Plan is our only active stock incentive plan. Sales of Unregistered Securities. None. Uses of Proceeds from Registered Securities. None. Issuer Purchases of Equity SecuritiesSecurities. None.
Performance GraphGraph. Our common stock began trading on the NASDAQ Global Market (formerly the NASDAQ National Market) on February 16, 1999. Set forth below is information comparing the cumulative total shareholder return and share price appreciation plus dividends on our common stock with the cumulative total return of the S&P 500Midcap Index and a market weighted index of publicly traded peers for the period from December 31, 20022003 through December 31, 2007.2008. The comparison assumes that $100 is invested in shares of our common stock, the S&P 500Midcap Index and an index of publicly traded peers on December 31, 2002,2003, and that all dividends were reinvested. The publicly-traded companies in our peer group are Schiff Nutrition International, Inc.(NYSE Symbol WNI), Herbalife Ltd. (NYSE(NYSE Symbol HLF) Nature’s Sunshine Products, Inc.(NYSE Symbol NATR.PK), USANA Health Sciences Inc.(NADSAQ Symbol USNA), and Nu Skin Enterprises Inc.(NYSE Symbol NUS). COMPARISON OF THE CUMULATIVE TOTAL RETURN OF MANNATECH, INCORPORATED, THE S&P MIDCAP INDEX AND MANNATECH’S PEER GROUP INDEX (Assumes $100 investment on December 31, 2002)2003)
| | | | | | | Measurement Period | | Mannatech | | S&P Midcap Index | | Peer Group Index | December 31, 2002 | | $ 100.00 | | $100.00 | | $100.00 | December 31, 2003 | | $ 672.22 | | $135.62 | | $175.99 | December 31, 2004 | | $1,198.67 | | $157.97 | | $252.53 | December 30, 2005 | | $ 891.48 | | $177.81 | | $284.65 | December 31, 2006 | | $ 971.44 | | $196.15 | | $330.10 | December 31, 2007 | | $ 431.79 | | $211.80 | | $311.48 |
Measurement Period | | Mannatech | | S&P Midcap Index | | Peer Group Index | December 31, 2003 | | $ | 100.00 | | $ | 100.00 | | $ | 100.00 | December 31, 2004 | | $ | 178.31 | | $ | 116.48 | | $ | 141.78 | December 31, 2005 | | $ | 132.62 | | $ | 131.11 | | $ | 164.78 | December 30, 2006 | | $ | 144.51 | | $ | 144.64 | | $ | 192.63 | December 31, 2007 | | $ | 64.23 | | $ | 156.18 | | $ | 181.37 | December 31, 2008 | | $ | 25.92 | | $ | 99.59 | | $ | 120.04 |
Item 6. | Selected Financial Data |
Item 6. Selected Financial Data The Selected Financial Data set forth below for each of the five years ended December 31, have been derived from and should be read in conjunction with (A) Our Consolidated Financial Statements and related notes set forth in Item 15 of this report, beginning on page F-1, and (B) Our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Item 7 of this report. | | | 2007(5) | | 2006(4) | | 2005(3) | | 2004(2) | | 2003(1) | | | | (in thousands, except per share amounts) | | 2008(4) | | 2007(3) | | 2006(2) | | 2005 | | 2004(1) | | Consolidated Statements of Operations Data: | | | | | | | | | | | | (in thousands, except per share amounts) | | Net sales | | $ | 412,678 | | $ | 410,069 | | $ | 389,383 | | $ | 294,508 | | $ | 191,019 | | $ | 332,703 | | $ | 412,678 | | $ | 410,069 | | $ | 389,383 | | $ | 294,508 | | Gross profit | | $ | 163,846 | | $ | 169,393 | | $ | 159,204 | | $ | 117,430 | | $ | 80,558 | | $ | 134,544 | | $ | 163,846 | | $ | 169,393 | | $ | 159,204 | | $ | 117,430 | | Income from operations | | $ | 7,609 | | $ | 44,074 | | $ | 45,610 | | $ | 26,537 | | $ | 11,592 | | | | | | | | | | | | | | Net income | | $ | 6,594 | | $ | 32,390 | | $ | 28,647 | | $ | 19,552 | | $ | 8,790 | | | | | | | | | | | | | | Earnings Per Common Share: | | | | | | | | | | | | Income (loss) from operations | | | $ | (14,499 | ) | $ | 7,609 | | $ | 44,074 | | $ | 45,610 | | $ | 26,537 | | Net income (loss) | | | $ | (12,628 | ) | $ | 6,594 | | $ | 32,390 | | $ | 28,647 | | $ | 19,552 | | Earnings (loss) Per Common Share: | | | | | | | | | | | | | | | | | | Basic | | $ | 0.25 | | $ | 1.22 | | $ | 1.06 | | $ | 0.74 | | $ | 0.34 | | $ | (0.48 | ) | $ | 0.25 | | $ | 1.22 | | $ | 1.06 | | $ | 0.74 | | | | | | | | | | | | | | Diluted | | $ | 0.25 | | $ | 1.19 | | $ | 1.03 | | $ | 0.71 | | $ | 0.34 | | $ | (0.48 | ) | $ | 0.25 | | $ | 1.19 | | $ | 1.03 | | $ | 0.71 | | | | | | | | | | | | | | Weighted-Average Common Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 26,443 | | | 26,598 | | | 26,990 | | | 26,436 | | | 25,494 | | | 26,461 | | | 26,443 | | | 26,598 | | | 26,990 | | | 26,436 | | | | | | | | | | | | | | Diluted | | | 26,893 | | | 27,219 | | | 27,771 | | | 27,491 | | | 26,175 | | | 26,461 | | | 26,893 | | | 27,219 | | | 27,771 | | | 27,491 | | | | | | | | | | | | | | Other Financial Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital expenditures(6) | | $ | 13,446 | | $ | 27,216 | | $ | 13,114 | | $ | 7,241 | | $ | 932 | | | | | | | | | | | | | | Capital expenditures | | | $ | 5,633 | | $ | 13,446 | | $ | 27,216 | | $ | 13,114 | | $ | 7,241 | | Dividends declared per common share | | $ | 0.36 | | $ | 0.32 | | $ | 0.29 | | $ | 0.27 | | $ | — | | $ | 0.22 | | $ | 0.36 | | $ | 0.32 | | $ | 0.29 | | $ | 0.27 | | | | | | | | | | | | | | Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 152,454 | | $ | 152,235 | | $ | 122,795 | | $ | 98,346 | | $ | 60,023 | | $ | 124,058 | | $ | 152,454 | | $ | 152,235 | | $ | 122,795 | | $ | 98,346 | | | | | | | | | | | | | | Long-term obligations, excluding current portion | | $ | 9,431 | | $ | 11,402 | | $ | 4,964 | | $ | 2,218 | | $ | 497 | | $ | 9,813 | | $ | 9,431 | | $ | 11,402 | | $ | 4,964 | | $ | 2,218 | | | | | | | | | | | | | |
(1) | We recorded severance charges of $2.0 million related to the resignation of Mr. Henry, our former Chief Executive Officer, and Mr. Wayment, our former Senior Vice President of Marketing, as well as other employees. In addition, we recorded non-cash accounting charges of $1.5 million related to modifying the terms of these former employees’ stock options. |
(2) | We recorded a non-cash charge of $3.0 million related to the indirect benefit of the sale of 180,000 shares of our common stock by Mr. Caster, our Chairman and former Chief Executive Officer, to a former employee, Dr. Reg McDaniel, in a private sale for a price below the fair market value. Additionally, we recognized a tax benefit of $2.3 million associated with the release of our valuation allowance related to our deferred tax assets for our Japan operations. |
(3)(2) | We capitalized $12.1 million of costs related to our internally-developed software projects, which were completed in April 2007. |
(4) | We adopted FAS 123(R) and recorded a non-cash charge of $0.7 million related to unvested stock options and additional stock option grants. Additionally, we capitalized $18.4 million of costs related to our internally-developed software projects, which were completed in April 2007. In addition, we recognized an income tax benefit of $3.3 million associated with income tax credits for our research and experimentation activities. |
(5)(3) | We recorded $5.3 million of legal costs related to ongoing litigation matters. |
(4) | We recorded $5.7 million of legal costs related to ongoing litigation matters. |
(6) | Capital expenditures include assets acquired through capital lease obligations of approximately $37,000 in 2007, $496,000 in 2006, and $40,000 in 2003. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsItem 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each of the three years ended December 31, 2008, 2007, 2006, and 2005.2006. This discussion should be read in conjunction with “Item 15. – Consolidated Financial Statements and related Notes,” beginning on page F-1 of this report and with other financial information included elsewhere in this report. 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 our subsidiaries on a consolidated basis. Company Overview Since November 1993, we have developedcontinued to develop innovative, high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products that are sold through a global network-marketing system operating in the United States, Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, and Germany.Singapore. The United States location processes orders for the United States, Canada, and South Africa. The Australian location process orders for Australia, New Zealand, is serviced by our Australian subsidiary and Denmark and Germany are serviced by ourSingapore. The United Kingdom subsidiary. Our Australian and United Kingdom subsidiaries each operate as limited-risk service providerslocation processes orders for Mannatech Swiss Holdings GMBH (“Swiss”), the parent company of our international subsidiaries. The Swiss parent owns all of the sales and inventories and accrues all commissions and cost of sales in New Zealand, Australia, the United Kingdom, Denmark, and Germany. The Swiss parent pays the limited-risk service providers a management fee for processingSwitzerland office was created to manage certain day-to-day business needs of non-North American markets and shipping orders in Australia, New Zealand, the United Kingdom, Denmark, and Germany.coordinates our continued global expansion. We operate as a single business segment and primarily sell our products through a network of approximately 575,000531,000 independent associates and members who have purchased our products and/or packs within the last 12 months, which we refer to ascurrent independent associates and members. We operate as a seller of nutritional supplements through our network-marketing distribution channels operating in tentwelve different countries. We review and analyze our net sales by geographical location and further analyze our net sales by packs and by products. Each of our subsidiaries sells the same types of products and possesses similar economic characteristics, such as selling prices and gross margins. Because we sell our products through network-marketing distribution channels, the opportunities and challenges that affect us most are: recruitment and retention of independent associates and members, entry into new markets and growth of existing markets, niche market development, new product introduction, and investment in our infrastructure. Current Economic Conditions and Recent Developments. During calendar year 2008, the year ended December 31,U.S. and global economies slowed dramatically as a result of a variety of serious problems, including turmoil in the credit and financial markets, concerns regarding the stability and viability of major financial institutions, the state of the housing markets, high unemployment rates, and volatility in worldwide stock markets. Harsh economic conditions significantly reduced consumers’ disposable income and impacted our customers’ spending practices, causing a decline in our revenues in the second half of 2008. In addition, during 2007 and 2008, we were subjected to certain negative publicity resulting from heightened litigation and regulatory activities. See Note 1314 (“Litigation”) to the consolidated financial statements for a detailed discussion of such legal proceedings. The global financial crisis, combined with the steep decline in customer demand and uncertainties associated with the potential outcome of outstanding litigation, have intensified our need to accelerate cost-cutting measures and has forced us to reevaluate certain business priorities. During 2008 and early 2009, we implemented various initiatives to reduce expenses while staying committed to our strategic plan of developing new, innovative science-based products, strengthening financial results, reduction in expenses, and adding value to our shareholders and independent associates. In August 2008, our Board of Directors reduced the amount of our quarterly cash dividend to $0.02 per common share in response to lower sales and instability in the capital markets. The decrease represents a reduction of $0.07 per share from the dividend paid in the first and second quarters of 2008. With 26,460,788 shares outstanding as of December 31, 2008, this reduction allowed us to save approximately $3.7 million in dividend distributions. Strong liquidity is an important factor in our on-going efforts to weather the current economic downturn and we believe this initiative has made an important contribution. See “Risk Factors—We are not required to pay dividends, and our Board of Directors could decide not to declare a dividend or could reduce the amount of the dividend at any time” in item 1A of this Form 10-K for further discussion related to future payment of dividends.
The uncertainty associated with the current macro-economic conditions led us to take steps to improve our operating cost structure. In July 2008, we eliminated approximately 60 employees, or 15% of our U.S. workforce in an effort to reduce expenses and improve profitability. In addition, atin January 2009, we eliminated over 25 permanent and contract positions. We anticipate roughly $4.5 million in annual future savings associated with these reductions. Depending on the severity and length of the financial crisis and its impact on our business, it may be prudent to take similar actions in the future. We also continue to eliminate non-essential costs and have postponed certain projects and international expansion plans in the near term. We continue to focus on new product development. In 2008, we introduced two new products in selected markets. In March 2008, we launched the Bounce-Back™ capsules, an all natural product that supports recovery after physical activity or over-exertion. In September 2008, we launched our OsoLean™ powder, a new fat-loss product. The OsoLean™ whey protein supplement is an all-natural powder product that mixes with a variety of food and beverages allowing consumers to easily add it to any weight management and fitness program. In order to reward our independent associates for their business building successes, we modified our global associate career and compensation plan by increasing opportunities for certain qualified independent associates to earn additional bonuses, including matching bonuses for enrollers. These changes became effective for all countries by the end of the second quarter of 2008. In addition, in March 2007,2008, we hadlaunched a new global sales platform in the United States designed to delay processing ordersassist our independent associates in their business-building efforts. We remain committed to adding value to our independent associates. In January 2009, we announced a new, simplified offering, which features a $499 Premium/All-Star Pack. This $499 Premium/All-Star Pack provides income opportunities for approximately one week as we began implementing Phase IIbusiness builders seeking a second income stream along with our leading wellness products. Developed in response to the current economic crisis, this more affordable pack includes more than $600 of products including our new fat loss product OsoLean™ powder. The enhanced compensation plan allows independent sales associates to start their business building opportunity in the wellness industry at a lower cost while providing faster access to leadership qualification. During 2008, several of our enterprise resource planning (“ERP”) system, which includedcore products were certified by NSF International, an independent, accredited testing laboratory. To date, we have received certifications from NSF for PhytoMatrix® caplets, PLUS™ caplets, Ambrotose AO® capsules, Advanced Ambrotose®, Ambrotose® complex, and Optimal Support Packets. The products were certified according to the launchingNSF/ANSI 173 Dietary Supplement Standard, the only U.S. national standard for dietary supplements. We strive to ensure all of our new corporate website. After implementation, we experiencedproducts meet the strictest guidelines for purity, and these additional processingcertifications from NSF exemplify our commitment to offering our customers the highest quality. We intend to carry the NSF certification mark on the supplements’ labels and customer service delays as our employees and customers transitionedpromotional materials to our new ERP system. The delays were largely caused by the need for additional training and an increase in customer service call volume related to implementing our new ERP system. Although we believe our new ERP system has been largely stabilized, we are currently adding additional functionality and re-working our corporate website order placement.demonstrate compliance. We will continue to refineseek NSF certification on our ERP systementire product line to demonstrate the ultimate value and quality when purchasing and consuming Mannatech products. We continue to focus our efforts on increasing operational efficiency. We have made certain changes to our management structure in 2008 to provide stronger foundation for growth and better align our organization with our long-term goals. We believe that efficiencies gained from the organization realignment will help us to improve cost controls and distinguish us in the marketplace by adding emphasis to brand management, associate recruitment, supply chain excellence, new product development, and international expansion. We expect a turbulent economy for the foreseeable future and we have undertaken several actions to address this environment. We believe our aggressive cost reduction actions and financial discipline will enable us to effectively manage through the costs associated with adding new functionalitychallenging economy. We believe recent changes to our ERP systembusiness model will be capitalized.position us to support future long-term profitable growth. To address
Results of Operations Year Ended December 31, 2008 compared to Year Ended December 31, 2007 The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2008 and 2007. | 2008 | | 2007 | | Change | | Total Dollars | | % of net sales | | Total dollars | | % of net sales | | Dollar | | Percentage | | (in thousands, except percentages) | Net sales | $ | 332,703 | | 100 | % | | $ | 412,678 | | 100 | % | $ | (79,975 | ) | (19.4 | )% | Cost of sales | | 48,564 | | 14.6 | % | | | 59,765 | | 14.5 | % | | (11,201 | ) | (18.7 | )% | Commissions and incentives | | 149,595 | | 45.0 | % | | | 189,067 | | 45.8 | % | | (39,472 | ) | (20.9 | )% | | | 198,159 | | 59.6 | % | | | 248,832 | | 60.3 | % | | (50,673 | ) | (20.4 | )% | Gross profit | | 134,544 | | 40.4 | % | | | 163,846 | | 39.7 | % | | (29,302 | ) | (17.9 | )% | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | Selling and administrative expenses | | 81,077 | | 24.4 | % | | | 84,298 | | 20.4 | % | | (3,221 | ) | (3.8 | )% | Depreciation and amortization | | 12,310 | | 3.7 | % | | | 10,236 | | 2.5 | % | | 2,074 | | 20.3 | % | Other operating costs | | 55,656 | | 16.7 | % | | | 61,703 | | 15.0 | % | | (6,047 | ) | (9.8 | )% | Total operating expenses | | 149,043 | | 44.8 | % | | | 156,237 | | 37.9 | % | | (7,194 | ) | (4.6 | )% | Income (loss) from operations | | (14,499 | ) | (4.4 | )% | | | 7,609 | | 1.8 | % | | (22,108 | ) | (290.6 | )% | Interest income | | 1,604 | | 0.5 | % | | | 2,700 | | 0.7 | % | | (1,096 | ) | (40.6 | )% | Other income (expense), net | | (5,303 | ) | (1.6 | )% | | | 180 | | 0.0 | % | | (5,483 | ) | (3046.1 | )% | Income (loss) before income taxes | | (18,198 | ) | (5.5 | )% | | | 10,489 | | 2.5 | % | | (28,687 | ) | (273.5 | )% | (Provision) benefit for income taxes | | 5,570 | | 1.7 | % | | | (3,895 | ) | (0.9 | )% | | 9,465 | | 243.0 | % | Net income (loss) | $ | (12,628 | ) | (3.8 | )% | | $ | 6,594 | | 1.6 | % | $ | (19,222 | ) | (291.5 | )% | | | | | | | | | | | | | | | | | | | | |
For geographical purposes, consolidated net sales primarily shipped to customers by location for the years ended December 31, 2008 and 2007 were as follows: Net Sales in Dollars and as a Percentage of Consolidated Net Sales | | 2008 | | 2007 | | | (in millions, except percentages) | United States | | $ | 176.9 | | 53.1 | % | | $ | 244.5 | | 59.2 | % | Japan | | | 44.8 | | 13.5 | % | | | 42.3 | | 10.3 | % | Republic of Korea | | | 35.7 | | 10.7 | % | | | 44.0 | | 10.7 | % | Australia | | | 26.1 | | 7.8 | % | | | 29.4 | | 7.1 | % | Canada | | | 23.6 | | 7.1 | % | | | 27.4 | | 6.6 | % | South Africa | | | 5.5 | | 1.7 | % | | | — | | — | | New Zealand | | | 5.2 | | 1.6 | % | | | 6.9 | | 1.7 | % | Taiwan | | | 5.2 | | 1.6 | % | | | 5.4 | | 1.3 | % | United Kingdom | | | 4.7 | | 1.4 | % | | | 6.7 | | 1.6 | % | Germany | | | 3.8 | | 1.1 | % | | | 4.6 | | 1.1 | % | Denmark | | | 1.2 | | 0.4 | % | | | 1.5 | | 0.4 | % | Totals | | $ | 332.7 | | 100 | % | | $ | 412.7 | | 100 | % | | | | | | | | | | | | | |
Net Sales For the year ended December 31, 2008, our operations outside of the United States accounted for approximately 46.9% of our consolidated net sales, whereas in the same period in 2007, our operations outside of the United States accounted for approximately 40.8% of our consolidated net sales. Consolidated net sales for the year ended December 31, 2008 decreased by $80 million, or 19.4%, to $332.7 million as compared to $412.7 million for the same period in 2007. Expanding our business to South Africa in the second quarter of 2008 accounted for net sales of $5.5 million. Operations in Japan continue to grow as seen by a $2.5 million increase in net sales for 2008 as compared to 2007. These increases were offset by a decrease in North America and international net sales of $71.4 million and $16.6 million, respectively, as compared to 2007. This decrease in net sales is a result of independent associate and member concerns about certain negative publicity as well as a weakened economy. Overall, the appreciation/depreciation of foreign currencies during 2008 had approximately a $0.1 million favorable impact on net sales in 2008, with a favorable first half impact essentially offset by unfavorable second half results. Our total sales and sales mix can be influenced by any of the following: changes in our sales prices; changes in consumer demand; changes in competitors’ products; changes in economic conditions; announcements of new scientific studies and breakthroughs; introduction of new products; discontinuation of existing products; changes in our commissions and incentives programs. Our sales mix for the years ended December 31, was as follows: | | Change | | | 2008 | | 2007 | | Dollar | | Percentage | | | (in millions, except percentages) | | Product sales | | $ | 260.5 | | $ | 316.9 | | $ | (56.4 | ) | (17.8 | )% | Pack sales | | | 57.7 | | | 79.0 | | $ | (21.3 | ) | (27.0 | )% | Other, including freight* | | | 14.5 | | | 16.8 | | $ | (2.3 | ) | (13.7 | )% | Total net sales | | $ | 332.7 | | $ | 412.7 | | $ | (80.0 | ) | (19.4 | )% |
____________________________ * In April 2007, we began operating our new ERP System, which allowed us to separately quantify deferred revenue associated with sales of packs and products that were shipped but not yet received by customers. As a result, in April 2007, we began recording deferred revenue related to packs with pack sales and deferred revenue associated with products with product sales. For the three months ended March 31, 2007, other sales included $1.9 million related to the change in deferred revenue for packs and products shipped but not yet received by customers, rather than in the applicable pack or product sales category. The decrease in our consolidated net sales consisted of a decrease in the volume of products and packs sold and a change in the mix of packs and products sold. Pack sales generally correlate to the number of new independent associates and members who purchase starter packs as well as the number of continuing independent associates who purchase upgrade or renewal packs. However, there is not a direct correlation between the number of new and continuing independent associates and members purchasing packs and the amount of product sales because independent associates and members may consume different products at different consumption levels. Product Sales For the year ended December 31, 2008, product sales decreased $56.4 million, or 17.8%, to $260.5 million, as compared to $316.9 million for the same period in 2007. The $56.4 million decrease in product sales was comprised of a decrease in existing product sales of $54.1 million and a decrease attributable to the $2.3 million cost of introducing the
new products set forth below. We believe the decrease in product sales was primarily related to the economic downturn and independent associate and member concerns over certain negative publicity and litigation. The following new products were introduced during 2008: Mannatech Optimal Skin Care System products in certain international markets; A new sales kit in the United States; | • | PhytoMatrix® caplets in Japan, Taiwan, United Kingdom, Denmark, Germany, and South Korea; |
| • | Bounce Back™ capsules in North America, Australia, and New Zealand; |
| • | OsoLean™ powder in North America, Australia, New Zealand, Japan, and Korea; |
| • | HeartSmart™ tablets in Taiwan; |
Various Optimal Health products in Singapore; and Various Optimal Health and Optimal Weight and Fitness products in South Africa. Pack Sales We sell packs to our independent associates, which entitles them to purchase our products at wholesale prices. Members can also purchase packs, which enables them to purchase our products at a discount from published retail prices. Depending on the type of pack purchased, a pack may include certain products, promotional and educational information, and policies and procedures. Independent associates can also purchase upgrade packs, entitling the independent associate to additional promotional materials and additional commissions and incentives. Our business-building associates purchase annual renewal packs. The number of new and continuing independent associates and members, who purchased our packs during the years ended December 31, were as follows: | | 2008 | | 2007 | New | | 133,000 | | 25 | % | | 191,000 | | 33.2 | % | Continuing | | 398,000 | | 75 | % | | 384,000 | | 66.8 | % | Total | | 531,000 | | 100 | % | | 575,000 | | 100 | % |
For the year ended December 31, 2008, the overall number of independent associates and members decreased by 44,000 or 7.7%, to 531,000 as compared to 575,000 for 2007. We experienced a decrease in the number of upgrade and renewal packs purchased by our continuing independent associates and a decrease in the number of new independent associates and members purchasing starter packs as compared to the same period in 2007. We believe the decrease in upgrade and renewal packs and starter packs purchased was related to the current economic conditions and independent associate and member concerns over certain negative publicity resulting from ongoing litigation. In 2008, we took the following actions to help increase the number of independent associates and members: registered our most popular products with the appropriate regulatory agencies in all countries of operations; focused on new product development; launched a new, aggressive marketing and educational campaign; explored and entered new international markets; strengthened compliance initiatives; initiated additional incentives; explored new advertising and educational tools to broaden name recognition; implemented changes to our global associate career and compensation plan; introduced new products; and introduced a $499 Premium/Allstar Pack in the U.S., Canada and South Africa in January 2009.
Pack sales associated with the number of independent associates and members can be further analyzed as follows, for the years ended December 31: | | 2008 | | 2007 | | | | | Number of independent associates and members | | Pack sales | | Number of independent associates and members | | Pack sales | | Percentage and dollar change of pack sales | | | (in millions except percentages and independent associate information) | New | | 133,000 | | $ | 28.0 | | 191,000 | | $ | 39.6 | | $ | (11.6 | ) | (29.3 | )% | Continuing | | 398,000 | | | 29.7 | | 384,000 | | | 39.4 | | | (9.7 | ) | (24.6 | )% | Total | | 531,000 | | $ | 57.7 | | 575,000 | | $ | 79.0 | | $ | (21.3 | ) | (27.0 | )% |
For the year ended December 31, 2008, our total pack sales decreased by $21.3 million, or 27.0%, to $57.7 million as compared to $79.0 million for the same period in 2007. The decrease in total pack sales was composed of an $11.6 million decrease due to a decline in the number of new independent associates and members purchasing starter packs and a decrease of $9.7 million due to a decline in the number of business-building independent associates purchasing renewal and upgrade packs. Other Sales Other sales consisted of the following: | § | freight revenue charged to our independent associates and members; |
| § | sales of promotional materials; |
| § | training and event registration fees; |
| § | monthly fees collected for Success Tracker™, a customized electronic business-building and educational materials database for our independent associates that helps stimulate product sales and provide business management; |
| § | a reserve for estimated sales refunds and returns; and |
| § | through March 31, 2007, deferred revenue that pertains to the timing of recognition of revenue for pack and product shipments. |
For the year ended December 31, 2008, other sales decreased by $2.3 million, or 13.7%, to $14.5 million as compared to $16.8 million for the same period in 2007. The decrease was primarily due to the decrease in product and pack shipments, which more than offset the increase in freight charged per shipment. The decrease in other sales is also related to the classification of deferred revenue of $1.9 million for pack and product sales, which was partially offset by an increase in income related to a transactional tax holiday for certain sales occurring in 2008. Gross Profit For the year ended December 31, 2008, gross profit decreased by $29.3 million, or 17.9%, to $134.5 million as compared to $163.8 million for the same period in 2007. The decrease was primarily due to a 19.4% decrease in net sales, which correlates to the 18.7% decrease in cost of sales, 19.6% decrease in commissions, and 39.5% decrease in incentives as compared to the same period in 2007. For the year ended December 31, 2008, gross profit as a percentage of net sales increased to 40.4% as compared to 39.7% for the same period in 2007. Cost of sales decreased during the year ended December 31, 2008 by 18.7%, or $11.2 million to $48.6 million as compared to $59.8 million for the same period in 2007. The decrease in cost of sales was primarily due to a decline in product cost of $9.8 million. The inventory write-offs and adjustments decreased by $0.9 million primarily due to the complimentary products shipped in 2007 as a result of the recall of the North American Optimal Restoring Serum. A decrease in freight cost was slightly offset by an increase in shipping supplies, which generated a net decrease of $0.5 million as compared to the same period in 2007. Cost of sales as a percentage of net sales increased slightly to 14.6% as compared to 14.5% for the same period in 2007.
Commission costs decreased for the year ended December 31, 2008, by 19.6%, or $34.6 million, to $142.1 million as compared to $176.7 million for the same period in 2007. The decrease in commissions was primarily related to the decrease in commissionable net sales. For the year ended December 31, 2008, commissions as a percentage of net sales remained relatively flat at 42.7% as compared to 42.8% for the same period of 2007. Incentive costs decreased for the year ended December 31, 2008, by 39.5%, or $4.9 million, to $7.5 million as compared to $12.4 million for the same period in 2007. The costs of incentives, as a percentage of net sales, decreased to 2.3% for the year ended December 31, 2008, as compared to 3.0% for the same period in 2007. The decrease in incentive costs was also the result of a decrease in the number of independent associates who qualified for annual travel incentives, which fell in 2008 by 33.0% to 889 as compared to 1,326 in 2007. Selling and Administrative Expenses Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor, outbound shipping and freight, and marketing-related expenses, such as monthly magazine development costs and costs related to hosting our corporate-sponsored events. For the year ended December 31, 2008, overall selling and administrative expenses decreased $3.2 million, or 3.8%, to $81.1 million as compared to $84.3 million for the same period in 2007. Selling and administrative expenses, as a percentage of net sales for the year ended December 31, 2008, increased to 24.4%, as compared to 20.4% for the same period in 2007. Compensation and compensation-related costs increased by of $3.4 million, due to an increase in payroll and payroll-related costs of approximately $5.6 million. These compensation related costs were offset by a decrease in temporary and contract labor of approximately $1.8 million, as well as a decrease in stock option expense of $0.4 million, all of which were due to the conversion of a number of temporary and contract labor positions to permanent employees, normal merit increases, decreased capitalization of salaries for the development of our new Enterprise Resource Planning system, and costs related to staff reduction. This net increase was offset by a decrease in freight costs of $3.7 million due to a decrease in product and pack shipments, and a decrease in marketing costs of $2.9 million, which related to a change in distribution of an internal publication to associates, a reduction in cost related to corporate-sponsored events, and a reduction in the cost associated with advertising materials and printing. Other Operating Costs Other operating costs generally include travel, accounting/legal/consulting fees, royalties, credit card processing fees, banking fees, off-site storage fees, utilities, and other miscellaneous operating expenses. Generally, changes in other operating costs are associated with the changes in our net sales. For the year ended December 31, 2008, other operating costs decreased by $6.0 million, or 9.8%, to $55.7 million as compared to $61.7 million for the same period in 2007. For the year ended December 31, 2008, other operating costs as a percentage of net sales increased to 16.7% compared to 15.0 % for the same period in 2007. The decrease in other operating costs was primarily due to a $3.2 million decrease in general office expenses. There was also a $1.8 million decrease in travel cost, a $1.5 million decrease in credit card fees and royalties, and a $0.6 decrease in R&D costs. These reductions in other operating costs were partially offset by a $0.5 million increase in legal fees related to ongoing lawsuits, a $0.4 increase in accounting and consulting fees related to global expansion activities and the write-off of capitalized consulting fees associated with a sales software project, and a $0.2 million increase in repairs and maintenance costs. Included in legal costs in the fourth quarter of 2008 is a $5.5 million reversal of the estimated legal costs accrual related to the preliminary settlement of the Texas Attorney General complaint. Depreciation and Amortization Expense For the year ended December 31, 2008, depreciation and amortization expense increased by 20.3%, or $2.1 million, to $12.3 million as compared to $10.2 million for the same period in 2007. As a percentage of net sales, depreciation and amortization expense increased to 3.7% from 2.5% for the same period in 2007. The increase in depreciation and amortization expense primarily related to placing into service our ERP system, implementation issues,which cost approximately $34.0 million and is being amortized over 5 years.
Provision for Income Taxes Provision for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates by jurisdiction are as follows, for the years ended December 31: Country | 2008 | | 2007 | Australia | 30.0 | % | | 30.0 | % | Canada | 33.0 | % | | 30.0 | % | Japan | 42.0 | % | | 42.0 | % | Republic of Korea | 27.5 | % | | 27.5 | % | South Africa | 28.0 | % | | N/A | | Switzerland | 16.2 | % | | N/A | | Taiwan | 25.0 | % | | 25.0 | % | United Kingdom | 28.0 | % | | 30.0 | % | United States | 37.5 | % | | 37.5 | % |
Income from our international operations is subject to taxation in the countries in which we extendedoperate. Although we may receive foreign income tax credits that would reduce the qualification periodtotal amount of income taxes owed in the United States, we may not be able to fully utilize our 2007 annual global travel incentive from late-Aprilforeign income tax credits in the United States. We use the recognition and measurement provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, (“FAS 109”), to mid-June. In addition,account for income taxes. The provisions of FAS 109 require a company to record a valuation allowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance in Augusteach tax jurisdiction. As of December 31, 2008 and 2007, we changedmaintained our customer testimonial policy,valuation allowance for deferred tax assets in Taiwan totaling $0.9 million and changed$0.7 million, respectively, as we believe the “more likely than not” criterion for recognition and realization purposes, as defined in FAS 109, cannot be met. The dollar amount of the provisions for income taxes is directly related to our sales return policyprofitability and changes in taxable income among countries. For the year ended December 31, 2008, our effective income tax rate decreased to 30.6% from 90% to a 100% satisfaction guarantee policy37.1% for the first 180 days following a product’s purchase. Furthermore, we are strengthening our multi-faceted educational, compliance, and marketing programs. same period in 2007. For 2008, the Company’s effective income tax rate was lower than what would be expected if the federal statutory income tax rate were applied to income before taxes primarily because of favorable differences from foreign operations. For 2007, the Company’s effective income tax rate was higher than what would be expected if the federal statutory income tax rate were applied to income before taxes primarily because of unfavorable permanent items from foreign operations.
Year Ended December 31, 2007 compared to Year Ended December 31, 2006 The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2007 and 2006. | | | 2007 | | 2006 | | Change | | | 2007 | | 2006 | | Change | | | | Total Dollars | | % of net sales | | Total dollars | | % of net sales | | Dollar | | Percentage | | | Total Dollars | | % of net sales | | Total dollars | | % of net sales | | Dollar | | Percentage | | | (in thousands, except percentages) | | | (in thousands, except percentages) | | Net sales | | $ | 412,678 | | | 100 | % | | $ | 410,069 | | | 100 | % | | $ | 2,609 | | | 0.6 | % | | $ | 412,678 | | 100 | % | $ | 410,069 | | 100 | % | $ | 2,609 | | 0.6 | % | Cost of sales | | | 59,765 | | | 14.5 | % | | | 58,461 | | | 14.3 | % | | | 1,304 | | | 2.2 | % | | | 59,765 | | 14.5 | % | | 58,461 | | 14.3 | % | | 1,304 | | 2.2 | % | Commissions and incentives | | | 189,067 | | | 45.8 | % | | | 182,215 | | | 44.4 | % | | | 6,852 | | | 3.8 | % | | | 189,067 | | 45.8 | % | | 182,215 | | 44.4 | % | | 6,852 | | 3.8 | % | | | | | | | | | | | | | | | | | | | | | 248,832 | | 60.3 | % | | 240,676 | | 58.7 | % | | 8,156 | | 3.4 | % | | | | 248,832 | | | 60.3 | % | | | 240,676 | | | 58.7 | % | | | 8,156 | | | 3.4 | % | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 163,846 | | | 39.7 | % | | | 169,393 | | | 41.3 | % | | | (5,547 | ) | | (3.3 | %) | | | 163,846 | | 39.7 | % | | 169,393 | | 41.3 | % | | (5,547 | ) | (3.3 | )% | | | | | | | | | | | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling and administrative expenses | | | 84,298 | | | 20.4 | % | | | 71,892 | | | 17.6 | % | | | 12,406 | | | 17.3 | % | | | 84,298 | | 20.4 | % | | 71,892 | | 17.6 | % | | 12,406 | | 17.3 | % | Depreciation and amortization | | | 10,236 | | | 2.5 | % | | | 4,960 | | | 1.2 | % | | | 5,276 | | | 106.4 | % | | | 10,236 | | 2.5 | % | | 4,960 | | 1.2 | % | | 5,276 | | 106.4 | % | Other operating costs | | | 61,703 | | | 15.0 | % | | | 48,467 | | | 11.8 | % | | | 13,236 | | | 27.3 | % | | | 61,703 | | 15.0 | % | | 48,467 | | 11.8 | % | | 13,236 | | 27.3 | % | | | | | | | | | | | | | | | | | | | | Total operating expenses | | | 156,237 | | | 37.9 | % | | | 125,319 | | | 30.6 | % | | | 30,918 | | | 24.7 | % | | | 156,237 | | 37.9 | % | | 125,319 | | 30.6 | % | | 30,918 | | 24.7 | % | | | | | | | | | | | | | | | | | | | | Income from operations | | | 7,609 | | | 1.8 | % | | | 44,074 | | | 10.7 | % | | | (36,465 | ) | | (82.7 | %) | | | 7,609 | | 1.8 | % | | 44,074 | | 10.7 | % | | (36,465 | ) | (82.7 | )% | Interest income | | | 2,700 | | | 0.7 | % | | | 2,513 | | | 0.6 | % | | | 187 | | | 7.4 | % | | | 2,700 | | 0.7 | % | | 2,513 | | 0.6 | % | | 187 | | 7.4 | % | Other income (expense), net | | | 180 | | | 0.0 | % | | | 1,101 | | | 0.3 | % | | | (921 | ) | | (83.7 | %) | | | 180 | | 0.0 | % | | 1,101 | | 0.3 | % | | (921 | ) | (83.7 | )% | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 10,489 | | | 2.5 | % | | | 47,688 | | | 11.6 | % | | | (37,199 | ) | | (78.0 | %) | | | 10,489 | | 2.5 | % | | 47,688 | | 11.6 | % | | (37,199 | ) | (78.0 | )% | Provision for income taxes | | | (3,895 | ) | | (0.9 | %) | | | (15,298 | ) | | (3.7 | %) | | | 11,403 | | | 74.5 | % | | | (3,895 | ) | (0.9 | )% | | (15,298 | ) | (3.7 | )% | | 11,403 | | 74.5 | % | | | | | | | | | | | | | | | | | | | | Net income | | $ | 6,594 | | | 1.6 | % | | $ | 32,390 | | | 7.9 | % | | ($ | 25,796 | ) | | (79.6 | %) | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | | $ | 6,594 | | 1.6 | % | $ | 32,390 | | 7.9 | % | $ | (25,796 | ) | (79.6 | )% |
For geographical purposes, consolidated net sales primarily shipped to customers by location for the years ended December 31, 2007 and 2006 were as follows: Net Sales in Dollars and as a Percentage of Consolidated Net Sales | | | 2007 | | 2006 | | | 2007 | | 2006 | | | (in millions, except percentages) | | | (in millions, except percentages) | United States | | $ | 244.5 | | 59.2 | % | | $ | 271.4 | | 66.2 | % | | $ | 244.5 | | 59.2 | % | | $ | 271.4 | | 66.2 | % | Republic of Korea | | | | 44.0 | | 10.7 | % | | | 12.4 | | 3.0 | % | Japan | | | | 42.3 | | 10.3 | % | | | 41.4 | | 10.1 | % | Australia | | | | 29.4 | | 7.1 | % | | | 30.5 | | 7.4 | % | Canada | | | 27.4 | | 6.6 | % | | | 28.6 | | 7.0 | % | | | 27.4 | | 6.6 | % | | | 28.6 | | 7.0 | % | Australia | | | 29.4 | | 7.1 | % | | | 30.5 | | 7.4 | % | | New Zealand | | | | 6.9 | | 1.7 | % | | | 8.9 | | 2.2 | % | United Kingdom | | | 6.7 | | 1.6 | % | | | 7.5 | | 1.8 | % | | | 6.7 | | 1.6 | % | | | 7.5 | | 1.8 | % | Japan | | | 42.3 | | 10.3 | % | | | 41.4 | | 10.1 | % | | New Zealand | | | 6.9 | | 1.7 | % | | | 8.9 | | 2.2 | % | | Republic of Korea | | | 44.0 | | 10.7 | % | | | 12.4 | | 3.0 | % | | Taiwan | | | 5.4 | | 1.3 | % | | | 3.7 | | 0.9 | % | | | 5.4 | | 1.3 | % | | | 3.7 | | 0.9 | % | Germany | | | | 4.6 | | 1.1 | % | | | 2.3 | | 0.6 | % | Denmark | | | 1.5 | | 0.4 | % | | | 3.4 | | 0.8 | % | | | 1.5 | | 0.4 | % | | | 3.4 | | 0.8 | % | Germany | | | 4.6 | | 1.1 | % | | | 2.3 | | 0.6 | % | | | | | | | | | | | | | | Totals | | $ | 412.7 | | 100 | % | | $ | 410.1 | | 100 | % | | $ | 412.7 | | 100 | % | | $ | 410.1 | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | |
Net Sales For the year ended December 31, 2007, our operations outside of the United States accounted for approximately 40.8% of our consolidated net sales, whereas in the same period in 2006, our operations outside of the United States accounted for approximately 33.8% of our consolidated net sales. Consolidated net sales for the year ended December 31, 2007, increased by $2.6 million or 0.6% as compared to the same period in 2006. International sales have experienced growth, which generated $29.5 million in incremental net sales for the year ended December 31, 2007 as compared to the same period in 2006. The international sales growth in 2007 was largely associated with greater sales volume in Korea, Taiwan, Japan, and Germany driven by the continued growth of our PhytoMatrix™PhytoMatrix ® caplets and Mannatech Optimal Skin Care System sales, introduced in Japan and other Asian countries in 2006, as well as the introduction of Advanced Ambrotose™Ambrotose ® products in Japan in 2007. However, net sales for the year ended December 31, 2007, for Canada, Australia, New Zealand, Denmark, and the United Kingdom decreased slightly compared to the same period in 2006. The overall increase in international net sales was offset by a decrease in domestic sales, which we believe was affected by independent associate and member concerns related to certain negative publicity from litigation and regulatory activities, and delays in processing orders caused by implementation issues in our ERP system. The decline in domestic sales was partially offset by the introduction of our Mannatech Optimal Skin Care System products and Optimal Support Packets into North America in late March 2007. Overall, the appreciation of foreign currencies had approximately a $5.1 million favorable impact on net sales in 2007. Our total sales and sales mix can be influenced by any of the following: changes in our sales prices; changes in consumer demand; changes in competitors’ products; changes in economic conditions; announcements of new scientific studies and breakthroughs; introduction of new products; discontinuation of existing products; changes in our commissions and incentives programs. Our sales mix for the years ended December 31, was as follows: | | | | | Change | | | | | Change | | | 2007* | | 2006 | | Dollar | | Percentage | | | 2007 | | 2006 | | Dollar | | Percentage | | | (in millions, except percentages) | | | (in millions, except percentages) | | Product sales | | $ | 316.9 | | $ | 309.1 | | $ | 7.8 | | | 2.5 | % | | $ | 316.9 | | $ | 309.1 | | $ | 7.8 | | 2.5 | % | Pack sales | | | 79.0 | | | 80.7 | | ($ | 1.7 | ) | | (2.1 | %) | | | 79.0 | | | 80.7 | | $ | (1.7 | ) | | (2.1 | )% | Other, including freight | | | 16.8 | | | 20.3 | | ($ | 3.5 | ) | | (17.2 | %) | | | | | | | | | | | | | Other, including freight* | | | | 16.8 | | | 20.3 | | | ($3.5 | ) | | (17.2 | )% | Total net sales | | $ | 412.7 | | $ | 410.1 | | $ | 2.6 | | | 0.6 | % | | $ | 412.7 | | $ | 410.1 | | $ | 2.6 | | 0.6 | % | | | | �� | | | | | | | |
* | In April 2007, we began operating our new ERP system, which allowed us to separately quantify deferred revenue associated with sales of packs and products that were shipped but not yet received by customers. As a result, in April 2007, we began recording deferred revenue related to packs with pack sales and deferred revenue associated with products with product sales. For the year ended December 31, 2007, we recorded deferred revenue of ($3.9 million) for product sales and $0 for pack sales. For the year ended December 31, 2006, we recorded deferred revenue of $1.0 million related to packs and products shipped but not yet received by customers in other sales rather than in the applicable pack or product sales category because our previous computer system could not separately differentiate deferred revenue associated with packs and products. |
* In April 2007, we began operating our new ERP system, which allowed us to separately quantify deferred revenue associated with sales of packs and products that were shipped but not yet received by customers. As a result, in April 2007, we began recording deferred revenue related to packs with pack sales and deferred revenue associated with products with product sales. For the three months ended March 31, 2007 and for the year ended December 31, 2006, we recorded deferred revenue of $1.9 million and $1.0 million, respectively, related to packs and products shipped but not yet received by customers in other sales rather than in the applicable pack or product sales category because our previous computer system could not separately differentiate deferred revenue associated with packs and products. The increase in our consolidated net sales consisted of a change in the mix of packs and products sold. Pack sales generally correlate to the number of new independent associates and members who purchase a starter pack and with the number of continuing independent associates who purchase upgrade or renewal packs. However, there is not a direct correlation between the number of new and continuing independent associates and members purchasing packs and the amount of product sales because independent associates and members may consume different products at different consumption levels.
Product Sales For the year ended December 31, 2007, product sales grew $7.8 million, or 2.5%, as compared to the same period in 2006. Of the $7.8 million increase in product sales, $19.8 million of the increase was attributable to the introduction of new products. The increase was offset by a decrease in existing product sales of $8.1 million and deferred revenue of $3.9 million, which was previously recorded in other sales. We believe existing product sales decreased primarily due to independent associate and member concerns over certain negative publicity and litigation and regulatory activities and the delays in order processing due to the implementation of our ERP system. The following new products were introduced during 2007: Mannatech Optimal Skin Care System Products in North America and Australia; Optimal Support Packets in North America; Advanced Ambrotose™ capsules in international markets; and
| • | Advanced Ambrotose® capsules in international markets; and |
| • | PhytoMatrix ® capsules in Australia and New Zealand. |
PhytoMatrix™ in Australia and New Zealand.
Pack Sales We sell packs to our independent associates, which entitles them to purchase our products at wholesale prices. Members can also purchase a pack, which entitles them to purchase our products at a discount from published retail prices. Depending on the type of pack purchased, a pack may include certain products, promotional and educational information, and policies and procedures. Independent associates can also purchase upgrade packs, entitling the independent associate to additional promotional materials and additional commissions and incentives. Our business-building associates purchase annual renewal packs. The number of new and continuing independent associates and members, who purchased our packs during the years ended December 31, were as follows: | 2007 | | 2006 | New | 191,000 | | 33.2 | % | | 203,000 | | 37.4 | % | Continuing | 384,000 | | 66.8 | % | | 341,000 | | 62.6 | % | Total | 575,000 | | 100 | % | | 544,000 | | 100 | % | | | | | | | | | | | | |
For the year ended December 31, 2007, the overall number of independent associates and members increased by 31,000 or 5.7%, as compared to 2006. Beginning in the second quarter of 2007, we recorded pack sale-related deferred revenue with pack sales, instead of with other sales, which decreased the pack sales presented for 2007. We have continued to experience an increase in the number of continuing independent associates who purchase our upgrade and renewal packs. However, we experienced a decrease in the number of new independent associates and members purchasing starter packs as compared to the same period in 2006. We believe the decrease in new independent associates and members purchasing starter packs may relate to certain negative publicity, customer difficulty adapting to our new ERP system, changes to our corporate website and independent associate and member concerns resulting from ongoing litigation and regulatory activities. Additional actions we took in 2007 to help increase the number of independent associates and members are as follows:were: registered our most popular products in all countries of operations; focused on new product development; explored new international markets; launched an aggressive marketing and educational campaign; expanded our 2007 annual travel incentive for one additional business period; instituted a 100% satisfaction guarantee program; strengthened compliance initiatives; concentrated on publishing results of research studies and clinical trials related to our products; initiated additional incentives; and explored new advertising and educational tools to broaden name recognition.
Pack sales associated with the number of independent associates and members can be further analyzed as follows, for the years ended December 31: | | | 2007 | | 2006 | | | | | 2007 | | 2006 | | | | | Number of independent associates and members | | Pack sales | | Number of independent associates and members | | Pack sales | | Percentage and dollar change of pack sales | | | Number of independent associates and members | | Pack sales | | Number of independent associates and members | | Pack sales | | Percentage and dollar change of pack sales | | | (in millions except percentages and independent associate information) | | | (in millions except percentages and independent associate information) | | New | | 191,000 | | $ | 39.6 | | 203,000 | | $ | 51.5 | | ($ | 11.9 | ) | | (23.1 | %) | | 191,000 | | $ | 39.6 | | 203,000 | | $ | 51.5 | | ($11.9 | ) | (23.1 | )% | Continuing | | 384,000 | | | 39.4 | | 341,000 | | | 29.2 | | | 10.2 | | | 34.9 | % | | 384,000 | | | 39.4 | | 341,000 | | | 29.2 | | 10.2 | | 34.9 | % | | | | | | | | | | | | | | | | Total | | 575,000 | | $ | 79.0 | | 544,000 | | $ | 80.7 | | ($ | 1.7 | ) | | (2.1 | %) | | 575,000 | | $ | 79.0 | | 544,000 | | $ | 80.7 | | ($1.7 | ) | (2.1 | )% | | | | | | | | | | | | | | | |
For the year ended December 31, 2007, our total pack sales decreased by $1.7 million, or 2.1%, to $79.0 million as compared to $80.7 million for the same period in 2006. The decrease in total pack sales was composed of an $11.9 million decrease related to a decrease in the number of new independent associates and members purchasing starter packs. This decrease was partially offset by an increase of $10.2 million related to an increase in the number of business-building independent associates purchasing renewal and upgrade packs. Other Sales Other sales consisted of the following: freight revenue charged to our independent associates and members; sales of promotional materials; training and event registration fees; monthly fees collected for Success Tracker™, a customized electronic business-building and educational materials database for our independent associates that helps stimulate product sales and provide business management;
| • | monthly fees collected for Success Tracker™, a customized electronic business-building and educational materials database for our independent associates that helps stimulate product sales and provide business management; |
a reserve for estimated sales refunds and returns; and through March 31, 2007, deferred revenue that pertains to the timing of recognition of revenue for pack and product shipments. For the year ended December 31, 2007, other sales decreased by $3.5 million to $16.8 million from $20.3 million for the same period in 2006, primarily due to a decrease in freight revenue of $1.8 million and an increase in costs related to sales refunds of $1.7 million. Freight revenue decreased due to the change in the sales mix between countries in which freight is charged to customers and those in which it is not. The increase in costs related to sales refunds was due to a product recall in 2007, issues with shipments during the implementation of our ERPEnterprise Resource Planning system, and a change in our sales return policy. Gross Profit For the year ended December 31, 2007, gross profit decreased by $5.5 million, or 3.3%, to $163.8 million as compared to $169.4 million for the same period in 2006. For the year ended December 31, 2007, gross profit as a percentage of net sales decreased to 39.7% as compared to 41.3% for the same period in 2006. The decrease in gross profit was primarily due to a 2.2% increase in costs of sales and a 3.8% increase in commissions and incentives, which was partially offset by a 0.6% increase in net sales. Cost of sales increased during the year ended December 31, 2007, by 2.2%, or $1.3 million, to $59.8 million as compared to $58.5 million for the same period in 2006. The increase in cost of sales was primarily due to an increase in inventory write-offs and adjustments of $1.5 million, an increase in freight and other costs of $0.6 million, offset by a decrease in the costs of finished goods of $0.8 million. The inventory write-offs and adjustments were for skin care, shrinkage in certain raw materials, and an increase in complimentary products shipped in connection with the recall of the North American Optimal Restoring Serum, and issues with shipments during the implementation of our ERP system. The increase in freight and other costs was due to increases in shipping rates and an increase in shipments to foreign countries, due to the change in sales among countries. The decrease in the costs of finished goods was due to changes in the sales
mix between packs and products. Cost of sales as a percentage of net sales increased to 14.5%from 14.3%, which primarily related to the change in the mix of packs and products sold, increased freight costs, and an increase in inventory write-offs. Commission costs increased for the year ended December 31, 2007, by 0.9%, or $1.6 million, to $176.7 million as compared to $175.1 million for the same period in 2006. The increase in commissions primarily related to the increase in commissionable net sales. For the year ended December 31, 2007, commissions as a percentage of net sales remained relatively flat at 42.8% as compared to 42.7% for the same period of 2006. Incentive costs increased for the year ended December 31, 2007, by 74.6%, or $5.3 million, to $12.4 million as compared to $7.1 million for the same period in 2006. The costs of incentives, as a percentage of net sales, increased to 3.0% for the year ended December 31, 2007, as compared to 1.7% for the same period in 2006. The increase was the result of an increase in the number of independent associates who qualified for annual travel incentives, which increased in 2007 by 10.3% to 1,326 as compared to 1,202 in 2006. The increase is also related to the increase in the number of independent associates in international countries who qualified for an annual travel incentive, as the international travel incentives are more expensive per person than domestic travel incentives. Additionally, new international incentives and contests were added during the year ended December 31, 2007, resulting in an increase in incentive costs. Selling and Administrative Expenses Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor, outbound shipping and freight, and marketing-related expenses, such as monthly magazine development costs and costs related to hosting our corporate-sponsored events. For the year ended December 31, 2007, selling and administrative expenses increased $12.4 million, or 17.3%, to $84.3 million as compared to $71.9 million for the same period in 2006. Selling and administrative expenses, as a percentage of net sales for the year ended December 31, 2007, increased to 20.4%, as compared to 17.6% for the same period in 2006. The increase in selling and administrative expenses consists primarily of the following: a net increase of $11.0 million in compensation and compensation-related costs, which included an increase in payroll and payroll-related costs of approximately $6.9 million, an increase in temporary and contract labor of approximately $3.7 million, and an increase in stock option expense of $0.4 million, all of which were due to an increase in staffing levels, normal merit increases, and decreased capitalization of salaries for the ERP system; and an increase of approximately $1.2 million in marketing and marketing-related expenses due to marketing costs associated with new product introductions, an increase in magazine costs, and costs associated with increased attendance at our corporate-sponsored events. Other Operating Costs Other operating costs generally include travel, accounting/legal/consulting fees, royalties, credit card processing fees, banking fees, off-site storage fees, utilities, and other miscellaneous operating expenses. Generally, changes in other operating costs are associated with the changes in our net sales. For the year ended December 31, 2007, other operating costs increased by $13.2 million, or 27.3%, to $61.7 million as compared to $48.5 million for the same period in 2006. For the year ended December 31, 2007, other operating costs as a percentage of net sales increased to 15.0% compared to 11.8% for the same period in 2006. The increase in other operating costs was primarily due to a $10.2 million increase in accounting, legal, and consulting fees, a $0.7 million increase in various repairs and maintenance costs including purchases of noncapitalizable equipment, a $1.1 million increase in credit card fees, and a $1.2 million increase in bad debt expenses. Accounting, legal, and consulting fees increased by $10.2 million as compared to the same period in 2006, primarily due to legal fees and litigation costs associated with ongoing lawsuits and regulatory matters of approximately $6.4 million and accounting fees associated with tax related services of $2.6 million.$2.6million. The remaining increase of $1.2 million is the additional consulting fees associated with our new ERP system, global associate training, and global expansion activities.
Credit card processing fees increased by $1.1 million as compared to the same period in 2006 due to an increase in international net sales, especially in South Korea. Depreciation and Amortization Expense For the year ended December 31, 2007, depreciation and amortization expense increased by 106.4%, or $5.3 million, to $10.2 million as compared to $5.0 million for the same period in 2006. As a percentage of net sales, depreciation and amortization expense increased to 2.5% from 1.2% for the same period in 2006. The increase in depreciation and amortization expense primarily related to placing into service our ERP system, which cost approximately $34.0 million and is being amortized over 5 years. Provision for Income Taxes Provision for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates by jurisdiction are as follows, for the years ended December 31: Country | 2007 | | 2006 | United States | 37.5 | % | | 37.5 | % | Australia | 30 | % | | 30 | % | United Kingdom | 30 | % | | 30 | % | Japan | 42 | % | | 42 | % | Republic of Korea | 27.5 | % | | 27.5 | % | Taiwan | 25 | % | | 25 | % |
Income from our international operations is subject to taxation in the countries in which we operate. Although we may receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not be able to fully utilize our foreign income tax credits in the United States. We use the recognition and measurement provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, (“FAS 109”), to account for income taxes. The provisions of FAS 109 require a company to record a valuation allowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance in each tax jurisdiction. As of December 31, 2007 and 2006, we maintained our valuation allowance for deferred tax assets in Taiwan totaling $0.7 million and $0.5 million, respectively, as we believe the “more likely than not” criterion for recognition and realization purposes, as defined in FAS 109, cannot be met. The Republic of Korea deferred tax assets carrying a valuation allowance of $0.6 million at December 31, 2006, were fully utilized in 2007. The dollar amount of the provisions for income taxes is directly impacted by our profitability and changes in taxable income among countries. For the year ended December 31, 2007, our effective income tax rate increased to 37.1% from 32.1% for the same period in 2006. For 2007, the Company’s effective income tax rate was higher than what would be expected if the federal statutory income tax rate were applied to income before income taxes primarily because of unfavorable permanent items from foreign operations. The tax rate difference for 2006 was primarily due to filing for research and experimentation income tax credits totaling $1.6 million for 2002 through 2005 activities. Year Ended December 31, 2006 compared to Year Ended December 31, 2005
The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2006 and 2005.Seasonality
| | | | | | | | | | | | | | | | | | | | | | | | 2006 | | | 2005 | | | Change | | | | Total dollars | | | % of net sales | | | Total dollars | | | % of net sales | | | Dollar | | | Percentage | | | | (in thousands, except percentages) | | Net sales | | $ | 410,069 | | | 100 | % | | $ | 389,383 | | | 100 | % | | $ | 20,686 | | | 5.3 | % | Cost of sales | | | 58,461 | | | 14.3 | % | | | 58,028 | | | 14.9 | % | | | 433 | | | 0.7 | % | Commissions and incentives | | | 182,215 | | | 44.4 | % | | | 172,151 | | | 44.2 | % | | | 10,064 | | | 5.8 | % | | | | | | | | | | | | | | | | | | | | | | | | | | 240,676 | | | 58.7 | % | | | 230,179 | | | 59.1 | % | | | 10,497 | | | 4.6 | % | | | | | | | | | | | | | | | | | | | | | | | Gross profit | | | 169,393 | | | 41.3 | % | | | 159,204 | | | 40.9 | % | | | 10,189 | | | 6.4 | % | | | | | | | | Operating expenses: | | | | | | | | | | | | | | | | | | | | | | Selling and administrative expenses | | | 71,892 | | | 17.6 | % | | | 65,923 | | | 16.9 | % | | | 5,969 | | | 9.1 | % | Depreciation and amortization | | | 4,960 | | | 1.2 | % | | | 3,905 | | | 1.0 | % | | | 1,055 | | | 26.9 | % | Other operating costs | | | 48,467 | | | 11.8 | % | | | 43,766 | | | 11.2 | % | | | 4,701 | | | 10.7 | % | | | | | | | | | | | | | | | | | | | | | | | Total operating expenses | | | 125,319 | | | 30.6 | % | | | 113,594 | | | 29.1 | % | | | 11,725 | | | 10.3 | % | | | | | | | | | | | | | | | | | | | | | | | Income from operations | | | 44,074 | | | 10.7 | % | | | 45,610 | | | 11.8 | % | | | (1,536 | ) | | (3.4 | %) | Interest income | | | 2,513 | | | 0.6 | % | | | 1,778 | | | 0.5 | % | | | 735 | | | 41.3 | % | Other income (expense), net | | | 1,101 | | | 0.3 | % | | | (1,940 | ) | | (0.6 | )% | | | 3,041 | | | (156.8 | %) | | | | | | | | | | | | | | | | | | | | | | | Income before income taxes | | | 47,688 | | | 11.6 | % | | | 45,448 | | | 11.7 | % | | | 2,240 | | | 4.9 | % | Provision for income taxes | | | (15,298 | ) | | (3.7 | %) | | | (16,801 | ) | | (4.3 | %) | | | 1,503 | | | (8.9 | %) | | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 32,390 | | | 7.9 | % | | $ | 28,647 | | | 7.4 | % | | $ | 3,743 | | | 13.1 | % | | | | | | | | | | | | | | | | | | | | | | |
For geographical purposes, consolidated net sales primarily shipped to customers by location for the years ended December 31, 2006 and 2005 were as follows:
Net Sales in Dollars and as a Percentage of Consolidated Net Sales
| | | | | | | | | | | | | | | 2006 | | | 2005 | | | | (in millions, except percentages) | | United States | | $ | 271.4 | | 66.2 | % | | $ | 259.4 | | 66.6 | % | Canada | | | 28.6 | | 7.0 | % | | | 28.0 | | 7.2 | % | Australia | | | 30.5 | | 7.4 | % | | | 35.7 | | 9.2 | % | United Kingdom | | | 7.5 | | 1.8 | % | | | 8.9 | | 2.3 | % | Japan | | | 41.4 | | 10.1 | % | | | 35.4 | | 9.1 | % | New Zealand | | | 8.9 | | 2.2 | % | | | 14.6 | | 3.7 | % | Republic of Korea | | | 12.4 | | 3.0 | % | | | 4.6 | | 1.2 | % | Taiwan* | | | 3.7 | | 0.9 | % | | | 2.3 | | 0.6 | % | Denmark** | | | 3.4 | | 0.8 | % | | | 0.5 | | 0.1 | % | Germany*** | | | 2.3 | | 0.6 | % | | | — | | — | % | | | | | | | | | | | | | | Totals | | $ | 410.1 | | 100 | % | | $ | 389.4 | | 100 | % | | | | | | | | | | | | | |
* | Taiwan began operations in June 2005. |
** | United Kingdom began shipping products to Denmark in August 2005. |
*** | United Kingdom began shipping products to Germany in March 2006. |
Net Sales
For the year ended December 31, 2006, our operations outside of the United States accounted for approximately 33.8% of our consolidated net sales, whereas in the same period in 2005, our operations outside of the United States accounted for approximately 33.4% of our consolidated net sales.
Overall, our consolidated net sales for the year ended December 31, 2006 increased by $20.7 million, or 5.3%, compared to the same period in 2005. However, net sales for Australia, New Zealand, and the United Kingdom decreased. The decrease in the United Kingdom was the result of heightened activities in the new markets of Denmark and Germany. The decrease in net sales for Australia and New Zealand was the result of continued consumer questions concerning the reformulation of Advanced Ambrotose™. The original formulation of Advanced Ambrotose™ was introduced in the United States in March 2005 and then in other countries in the second half of 2005. Because the initial reaction by some consumers to the original formula of Advanced Ambrotose™ was unfavorable, we introduced a reformulated Advanced Ambrotose™ in mid 2006. The reformulated Advanced Ambrotose™ contains a compound, created using the latest technology, which allows a more potent concentration of the full range of mannose-containing polysaccharides occurring naturally in aloe to be produced in a stable powdered form. This technology allows the compound to possess the most potent immunostimulatory properties because it does not strip the compound of its natural mineral counterparts by organic solvent precipitation, and most importantly, allows the compound to retain a high proportion of molecular weight polysaccharides that are believed to be responsible for the effective immune stimulating properties of aloe. This enhanced immune stimulating capability has been demonstrated by independent biological assays conducted by Hyperion Biotechnology.
To help offset the decrease in net sales associated with the questions surrounding our reformulated Advanced Ambrotose™that we experienced in the third quarter of 2006, we launched multi-faceted educational and marketing programs to explain the science behind the superior-quality and potency of our reformulated Advanced Ambrotose™. Additionally, with the cooperation of our independent associates, we developed a multi-tiered marketing program, which includes a number of published articles, tours, other publications, marketing materials and web casts, and conference calls in an effort to further emphasize the advantages of our reformulated Advanced Ambrotose™.
Our total sales and sales mix can be influenced by any of the following:
changes in our sales prices;
changes in consumer demand;
changes in competitors’ products;
changes in economic conditions;
announcements of new scientific studies and breakthroughs;
introduction of new products;
discontinuation of existing products;
changes in our commissions and incentives programs.
Our sales mix for the year ended December 31, was as follows:
| | | | | | | | | | | | | | | | | | | Change | | | 2006 | | 2005 | | Dollar | | | Percentage | | | (in millions, except percentages) | Product sales | | $ | 309.1 | | $ | 284.8 | | $ | 24.3 | | | 8.5% | Pack sales | | | 80.7 | | | 87.8 | | | (7.1 | ) | | (8.1%) | Other, including freight | | | 20.3 | | | 16.8 | | | 3.5 | | | 20.8% | | | | | | | | | | | | | | Total net sales | | $ | 410.1 | | $ | 389.4 | | $ | 20.7 | | | 5.3% | | | | | | | | | | | | | |
Overall, the dollar increase in our consolidated net sales consisted of a change in mix of net sales and an increase in volume of products sold. Pack sales relate to the number of new and continuing independent associates and members who purchase our products. However, there is not a direct correlation between the increase in the number of new and continuing independent associates and members purchasing packs and the amount of the increase in product sales because independent associates and members may consume different products at different consumption levels.
Product Sales
For the year ended December 31, 2006, product sales grew $24.3 million, or 8.5%, as compared to the same period in 2005. Of the $24.3 million increase in product sales, $5.4 million of the increase was attributable to the introduction of new products, and the remaining $18.9 million increase in product sales was the result of an increase in the number of independent associates and members purchasing our products. The introduction of new products consisted of the following:
Optimal Skin Care in Japan in May 2006;
Undaria in Australia and New Zealand in July 2006; and
PhytoMatrix™ in the United States and Canada in November 2006.
Pack Sales
We sell packs to our independent associates, which entitles them to purchase our products at wholesale prices. Members can also purchase a pack, which entitles them to purchase our products at a discount from published retail prices. Depending on the type of pack purchased, a pack may include certain products,
promotional and educational information, policies and procedures. Independent associates can also purchase upgrade packs, entitling the independent associate to additional promotional materials and additional commissions and incentives. Our business-building associates purchase annual renewal packs.
The number of new and continuing independent associates and members who purchased our packs during the years ended December 31, were as follows:
| | | | | | | | | | | | | 2006 | | | 2005 | | New | | 203,000 | | 37.4 | % | | 230,000 | | 47.0 | % | Continuing | | 341,000 | | 62.6 | % | | 260,000 | | 53.0 | % | | | | | | | | | | | | Total | | 544,000 | | 100 | % | | 490,000 | | 100 | % | | | | | | | | | | | |
For the year ended December 31, 2006, the overall number of independent associates and members increased by 54,000, or 11.0%, as compared to 2005. We did experience a decrease in the number of new independent associates and members purchasing starter packs, which we believe primarily related to concerns resulting from ongoing litigation and from the reformulation of Advanced Ambrotose™. Additional actions we took in the second half of 2006 to help increase the number of independent associates and members are as follows:
| •
| | the introduction in November 2006 of PhytoMatrix™, which contains a unique blend of plant-based minerals, natural vitamin complexes, and standardized phytochemicals that we believe is the first such product in our industry;
|
the registration of our new paraben-free skin care products into all other markets in which we operate;
the initiation of additional incentives;
the investment in additional research and development activities related to our products and proprietary ingredients; and
the exploration of new advertising tools to broaden our name recognition.
Pack sales associated with the number of independent associates and members can be further analyzed as follows:
| | | | | | | | | | | | | | | | | | | | For the years ended December 31, | | | | 2006 | | 2005 | | 2006 to 2005 | | | | Number of independent associates and members | | Pack sales | | Number of independent associates and members | | Pack sales | | Percentage and dollar change of pack sales | | | | (in millions except percentages and independent associate information) | | New | | 203,000 | | $ | 51.5 | | 230,000 | | $ | 61.3 | | ($ | 9.8 | ) | | (16.0 | %) | Continuing | | 341,000 | | | 29.2 | | 260,000 | | | 26.5 | | | 2.7 | | | 10.2 | % | | | | | | | | | | | | | | | | | | | Total | | 544,000 | | $ | 80.7 | | 490,000 | | $ | 87.8 | | ($ | 7.1 | ) | | (8.1 | %) | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2006, our total pack sales decreased by $7.1 million, or 8.1%, to $80.7 million as compared to $87.8 million for the same period in 2005. The decrease in total pack sales was composed of a $9.8 million decrease from the number of new independent associates and members purchasing starter packs. This decrease was partially offset by an increase of $2.7 million related to an increase in the number of business-building independent associates purchasing renewal and upgrade packs.
Other Sales
Other sales consisted of the following:
freight revenue charged to our independent associates and members;
sales of promotional materials;
training and event registration fees;
monthly fees collected for Success Tracker™, a customized electronic business-building and educational materials database for our independent associates that helps stimulate product sales and provide business management;
a reserve for estimated sales refunds and returns; and
a change in deferred revenue that pertains to the timing of recognition of revenue for pack and product shipments.
For the year ended December 31, 2006, other sales increased by $3.5 million to $20.3 million from $16.8 million for the same period in 2005. The increase in other sales was composed of an increase of $2.4 million for deferred revenue associated with the timing of revenue recognition and an increase of $1.4 million in freight fees collected from customers. These increases were partially offset by an increase of $0.2 million in sales of promotional materials and an increase of $0.1 million in sales refund reserves.
Cost of Sales
Cost of sales consisted of products purchased from third-party manufacturers, costs of promotional materials sold to our independent associates, in-bound freight, provisions for slow-moving or obsolete inventories, and costs associated with complementary shipped products. Our cost of sales as a percentage of net sales is affected by unit costs for purchased products and the mix of products and packs sold due to the fact that product sales have higher gross margins than pack sales.
At December 31, 2006, inventories increased by $4.1 million, or 20.7%, to $23.9 million as compared to $19.8 million at December 31, 2005. The increase in inventories consisted of an increase in finished goods and promotional materials related to new products such as PhytoMatrix™ and skin-care and timing of ordering inventory. In addition, inventory increased by $2.6 million in work in process related to inventory being reworked, partially offset by a decrease of $0.6 million associated with the timing of purchases of raw materials. Our inventories turned at an annual rate of 2.7 times during 2006 as compared to 3.5 times during 2005. The decrease in inventory turnover is attributable to the increase in work in process and finished goods, which related to the timing of ordering inventory.
For the year ended December 31, 2006, cost of sales increased by $0.4 million, or 0.7%, to $58.4 million from $58.0 million for the same period in 2005. The dollar increase was composed of a change in sales mix and an increase in net sales, an increase in costs associated with product testing, and an increase in freight-in costs related to higher fuel costs. Cost of sales as a percentage of net sales decreased to 14.3% for the year ended December 31, 2006 as compared to 14.9% for the same period in 2005. The percentage decrease related to a change in sales mix sold and efficiencies in the supply chain process achieved through the use of more economical product components related to new technology in production of certain product components, partially offset by an increase in additional costs associated with product testing.
We recorded a provision for obsolete and slow-moving inventories of $0.4 million for each of the years ended December 31, 2006 and 2005. The provision primarily relates to discontinued promotional materials, write-off of the original formula of Advanced Ambrotose™, and normal obsolete or damaged products.
Commissions and Incentives
Commissions and incentives are heavily dependent on the sales mix and types of incentives offered and generally run between 41% and 46% as a percentage of net sales. Commissions are earned by independent associates in accordance with our global associate career and compensation plan. Incentives consist of contests and travel incentives offered to our independent associates. Commissions and incentives are calculated using
commissionable net sales, which consist of finished product and pack sales and are based on the following criteria:
the independent associate’s earned placement and position within our overall global career and compensation plan;
specific timing and sales volume of an independent associate’s direct and indirect commissionable sales; and
the achievement of certain sales levels.
Our unique global associate career and compensation plan allows new and existing independent associates to build their individual global networks by expanding their existing downlines into international markets rather than requiring them to establish new downlines to qualify for commissions and incentives within each country of operation.
Commissions
For the year ended December 31, 2006, commissions increased by $8.7 million, or 5.2%, to $175.1 million as compared to $166.4 million for the same period in 2005. As a percentage of net sales, commissions for the year ended December 31, 2006 remained at 42.7% as compared to the same period in 2005. The dollar increase related to the increase in the volume of sales.
Incentives
Each year, we offer new travel incentives and contests that are designed to stimulate both pack and product sales. We accrue costs associated with the travel incentives during the months when independent associates qualify to win the trips. In 2006, we offered travel incentives in each country in the first half of the year and also offered an additional incentive in the second half of the year in our international markets.
For the year ended December 31, 2006, the cost of incentives increased by $1.3 million, or 22.4%, to $7.1 million as compared to $5.8 million for the same period in 2005. As a percentage of net sales, for the year ended December 31, 2006, incentives increased to 1.7% as compared to 1.5% for the same period in 2005. The dollar increase for the year ended December 31, 2006 related to initiating each country’s travel incentive and contests, which attracted participation by additional independent associates. For the year ended December 31, 2006, total incentive costs consisted of costs of $4.2 million associated with our 2006 annual travel incentive contest held in early 2006 and costs of $2.9 million associated with other contests and incentives held throughout the year. For the year ended December 31, 2005, total incentive costs consisted of costs of $4.0 million associated with our 2005 travel incentive contest held in the summer and costs of $1.8 million associated with other contests and incentives.
Gross Profit
For the year ended December 31, 2006, gross profit increased by $10.2 million, or 6.4%, to $169.4 million as compared to $159.2 million for the same period in 2005. For the year ended December 31, 2006, gross profit as a percentage of net sales increased to 41.3% as compared to 40.9% for the same period in 2005. The increase in gross profit related to a decrease in cost of sales associated with efficiencies in the supply chain process achieved through the use of more economical product components related to new technology in production of certain product components and the shift in sales mix.
Selling and Administrative Expenses
Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor, outbound shipping
and freight, and marketing-related expenses, such as monthly magazine development costs and costs related to hosting our corporate-sponsored events.
For the year ended December 31, 2006, selling and administrative expenses increased $6.0 million, or 9.1%, to $71.9 million as compared to $65.9 million for the same period in 2005. Selling and administrative expenses, as a percentage of net sales for the year ended December 31, 2006, increased to 17.6% as compared to 16.9% for the same period in 2005. The increase in selling and administrative expenses consists of the following:
a net increase of $3.2 million in compensation and compensation-related costs, which included an increase in payroll and payroll-related costs of $5.7 million that was partially offset by a decrease in temporary and contract labor of $0.3 million and the capitalization of $2.2 million in compensation costs associated with our internally-developed software projects;
an increase of $1.7 million in marketing and marketing-related expenses due to marketing costs associated with new product introductions and an increase in magazine costs, increase in attendance at our corporate-sponsored events, and costs associated with an increase in the number of active independent associates;
recording $0.7 million related to the adoption of FAS 123(R), which requires a company to record compensation expense for unvested stock options granted prior to December 31, 2005 and granting stock options after December 31, 2005; and
an increase of $0.4 million in freight-out and third-party warehouse costs associated with an increase in net sales.
Depreciation and Amortization
For the year ended December 31, 2006, depreciation and amortization expense increased by $1.1 million, or 26.9%, to $5.0 million from $3.9 million for the same period in 2005. The increase in depreciation expense related to the purchase of additional leasehold improvements and the capitalization of costs incurred related to Phase I of our internally-developed software project that was put into service in 2005.
Other Operating Costs
Other operating costs generally include travel, accounting/legal/consulting fees, royalties, credit card processing fees, banking fees, off-site storage fees, utilities, and other miscellaneous operating expenses. Generally, changes in other operating costs are associated with the changes in our net sales.
For the year ended December 31, 2006, other operating costs increased by $4.7 million, or 10.7%, to $48.5 million as compared to $43.8 million for the same period in 2005. For the year ended December 31, 2006, other operating costs as a percentage of net sales increased to 11.8% compared to 11.2% for the same period in 2005.
Travel
For the year ended December 31, 2006, travel expenses increased by $1.4 million, or 26.4%, to $6.7 million from $5.3 million for the same period in 2005. The increase in travel expenses are due to additional trips by our management to attend corporate-sponsored events, additional support and training provided to our international offices, costs associated with our internally-developed software project, and planned international growth.
Accounting, legal, and consulting fees
For the year ended December 31, 2006, accounting, legal, and consulting fees decreased by $0.3 million, or 2.7%, to $10.8 million as compared to $11.1 million for the same period in 2005. Accounting and legal fees
decreased by $1.1 million, which related to a decrease in legal fees in connection with the defense of certain lawsuits and registration costs in foreign countries and accounting costs associated with the timing of legal activity and timing of testing of our internal controls related to the Sarbanes-Oxley Act of 2002. These decreases were partially offset by an increase in consulting fees of $0.8 million related to consultants for international expansion, new product development, and an increase in payments to our board of directors.
Royalties
For the year ended December 31, 2006, royalties decreased by $2.2 million, or 73.3%, to $0.8 million as compared to $3.0 million for the same period in 2005. The decrease in royalties related to fully accruing future royalties associated with the long-term post-retirement royalty agreement with Dr. Bill McAnalley in the third quarter of 2005.
Credit card processing fees
For the year ended December 31, 2006, credit card processing fees increased by $0.9 million, or 11.3%, to $8.9 million from $8.0 million for the same period in 2005. The increase is the result of the credit card company increasing the processing fee rate and an increase in net sales.
Research and development costs
For the year ended December 31, 2006, research and development costs increased by $1.4 million, or 350.0%, to $1.8 million from $0.4 million for the same period in 2005. The increase in research and development costs related to the timing of research activities for clinical studies and development of our skin-care formulation, as well as other research and development activities.
Other miscellaneous operating expenses
The remaining miscellaneous operating expenses are primarily variable in nature and relate directly to the change in net sales. Variable costs included in other miscellaneous operating expenses consist of bank charges, utilities, repair and maintenance, telephone, insurance, postage, and offsite storage fees. For the year ended December 31, 2006, other miscellaneous operating expenses increased by $3.5 million, or 21.7%, to $19.5 million as compared to $16.0 million for the same period in 2005.
Interest Income
We maintain interest-bearing accounts for certain of our cash equivalents and investments. For the year ended December 31, 2006, interest income increased by $0.7 million to $2.5 million as compared to $1.8 million for the same period in 2005. The increase in interest income related to an increase in the average balance and an improvement of our average yield on investments by shifting some of our investments to tax-exempt investments.
Other Income (Expense), Net
Other income (expense), net consists of foreign currency transaction gains and losses related to translating our foreign subsidiaries’ assets, liabilities, revenues, and expenses to the United States dollar and translating the United States parent’s monetary accounts held in foreign locations using current and weighted-average currency exchange rates. Net foreign currency transaction gains and losses are the result of the United States dollar fluctuating in value against foreign currencies.
For the year ended December 31, 2006, we recorded a net transaction gain from our foreign operations of $1.1 million as compared to a net transaction loss of $1.9 million for the same period in 2005.
Provision for Income Taxes
Provision for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates by jurisdiction are as follows:
| | | | | Country | | For the year ended December 31, 2006 | | For the year ended December 31, 2005 | United States | | 37.5% | | 38% | Australia | | 30% | | 30% | United Kingdom | | 30% | | 30% | Japan | | 42% | | 42% | Republic of Korea | | 27.5% | | 25% | Taiwan | | 25% | | 25% |
* | For 2006 and 2005, the United States statutory income tax rates include a federal income tax rate of 35% and an average state income tax rate of 2.5% for 2006 and 3.0% for 2005. |
Approximately one-third of our total consolidated net sales are derived from our international operations and subject to applicable country-specific statutory income tax rates. Income from our international operations is subject to taxation in the countries in which we operate. Although we may receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not be able to fully utilize our foreign income tax credits in the United States.
We use the recognition and measurement provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, (“FAS 109”), to account for income taxes. The provisions of FAS 109 require a company to record a valuation allowance when the “more likely than not” criterion for realizing net deferred tax assets cannot be met. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realizability of such deferred tax assets to evaluate the need for a valuation allowance in each tax jurisdiction. As of December 31, 2006 and 2005, we maintained our valuation allowance for deferred tax assets in the Republic of Korea and Taiwan totaling $1.1 million and $0.7 million, respectively, as we believe the “more likely than not” criterion for recognition and realization purposes, as defined in FAS 109, cannot be met.
The dollar amount of the provisions for income taxes is directly impacted by our profitability and a change in the mix of taxable income between countries. For the year ended December 31, 2006, our effective income tax rate decreased to 32.1% from 37.0% as compared to the same period in 2005. Our 2006 effective income tax rate decreased as compared to 2005 because of an increase in favorable permanent differences, as well as a change in the mix of taxable income between countries.
During 2006, we realized a significant favorable permanent difference in research and experimentation income tax credits, which favorably impacted our effective income tax rate.
Seasonality
We believe the impact of seasonality on our consolidated results of operations is minimal. We have experienced and believe we will continue to experience variations on our quarterly results of operations in response to, among other things: the timing of the introduction of new products and incentives; our ability to attract and retain associates and members;
the timing of our incentives and contests; the general overall economic outlook; the outcome of certain lawsuits; the perception and acceptance of network-marketing; and the consumer perception of our products and overall operations. As a result of these and other factors, our quarterly results may vary significantly in the future. Period-to-period comparisons should not be relied upon as an indication of future performance since we can give no assurances that revenue trends in new markets, as well as in existing markets, will follow our historical patterns. The market price of our common stock may also be adversely affected by the above factors. Liquidity and Capital Resources Our principal use of cash is to pay for operating expenses, including commissions and incentives, capital assets, inventory purchases, fundingand international expansion and payment ofto pay quarterly cash dividends. We generally fund our business objectives, operations, and expansion of our operations through net cash flows from operations rather than incurring long-term debt. We plan to continue to fund our needs through net cash flows from operations. At December 31, 2007,2008, we have $47.1had $30.9 million in cash and cash equivalents and $13.0 million in investments, whichthat can be used, along with our normal cash flows from operations, to fund any unanticipated shortfalls in future cash flows. Cash and Cash Equivalents and Investments At
As of December 31, 2007,2008, our cash and cash equivalents increaseddecreased by 3.0%34.3%, or $1.4$16.2 million, to $30.9 million from $47.1 million as compared to $45.7 million atof December 31, 2006.2007. The increasedecrease in cash and cash equivalents was directly attributableis related to the current operationsperiod loss, adjusted for noncash items, the acquisition of additional inventory, purchases of property and salesequipment, the decrease in accrued expenses due to the timing of investmentspayments, the decrease in taxes payable due to our net tax benefit position, and the payment of $12.4 million,dividends, which was offset by fundingconversion of our ERP system, paymentlong-term investments to cash and cash equivalents in 2008 and the favorable impact of dividendsforeign currency on our cash balances, primarily in Korea. As of December 31, 2008, our investments have all been converted to our investors, and restricting additional cash.cash equivalents as compared to an investment balance of $13.0 million as of December 31, 2007. Working Capital Working capital represents total current assets less total current liabilities. At December 31, 2007,2008, our investments decreasedworking capital increased by 49.0%$6.4 million, or 25.0%, or $12.4to $32.0 million to $13.0 million as compared to $25.4from $25.6 million at December 31, 2006. Our investments can be readily liquidated, if necessary,2007. The increase in working capital primarily relates to help fund operations. Working Capital
Working capital accounts includea decrease in accrued expenses and taxes payable and an increase in inventory, partially offset by a decrease in cash and cash equivalents, receivables, inventories, prepaid expenses, deferred revenues, payables, and accrued expenses. At December 31, 2007, our working capital decreased by $3.2 million, or 11.2%, to $25.6 million from $28.8 million at December 31, 2006. The decrease in working capital is primarily related to the use of current assets to fund capital expenditures, the accrual for ongoing litigation, offset by the sale of long-term investments. Although we can give no assurances, we believe our working capital will remain relatively unchanged as we monitor our existing cash flow needs with our current long-term investment strategy.equivalents.
Net Cash Flows Our net consolidated cash flows consist of the following, for the years ended December 31: | | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | Provided by (used in): | | | (in millions) | | | (in millions) | | Operating activities | | $ | 17.8 | | | $ | 39.9 | | | $ | 43.0 | | | $ | (19.9 | ) | | $ | 17.8 | | $ | 39.9 | | Investing activities | | ($ | 7.8 | ) | | ($ | 35.7 | ) | | ($ | 15.6 | ) | | $ | 7.2 | | $ | (7.8 | ) | | $ | (35.7 | ) | Financing activities | | ($ | 9.4 | ) | | ($ | 14.0 | ) | | ($ | 13.8 | ) | | $ | (5.9 | ) | | $ | (9.4 | ) | | $ | (14.0 | ) |
The operating, investing, and financing activities are described in more detail below.
Operating Activities For the years ended December 31, 2008, 2007, 2006, and 2005,2006, our net operating activities used cash of $19.9 million and provided cash of $17.8 million $39.9 million, and $43.0$39.9 million, respectively. For the years ended December 31, 2008, 2007, 2006, and 2005,2006, net earnings adjusted for noncash activities used cash of $0.8 million and provided cash of $16.8 million $44.0 million, and $36.8$44.0 million, respectively, and our working capital accounts used cash of $19.0 million, provided (used) cash of $1.0 million, ($4.1 million), and $6.2 million.used cash of $4.1 million, respectively. We expect that our net operating cash flows in 20082009 will continue to be sufficient to fund our current operations and future quarterly cash dividends. There can be no assurance, however, that we will continue to generate cash flows at or above current levels, or will continue to declare and pay dividends. Certain events, such as an unfavorable outcome against us with respect to current litigation, could impact our available cash or our ability to generate cash flows from operations. See “Risk Factors—We are not required to pay dividends, and our boardBoard of directorsDirectors could decide not to declare a dividend or could reduce the amount of the dividend at any time” in Item 1A of this Form 10-K for further discussion related to future payment of dividends. Investing Activities For the years ended December 31, 2008, 2007, 2006, and 2005,2006, our net investing activities provided cash of $7.2 million and used cash of $7.8 million $35.7 million, and $15.6$35.7 million, respectively. In 2008, we converted our long-term investments to cash and cash equivalents, providing cash of $13.0 million, which was partially offset by the acquisition of capital assets of $5.6 million. In 2007, we used cash of $13.4 million to purchase capital assets and $6.8 million as collateral for credit card payments in the Republic of Korea, which was partially offset by sales of investments of $12.4 million. In 2006, we used cash of $26.7 million to purchase capital assets, $8.0 million to purchase investments, and $3.6 million as collateral for credit card payments in the Republic of Korea, which was partially offset by releasing $2.6 million of restricted cash to operations related to the expiration of a letter of credit for our travel incentive. In 2005, we used cash of $13.1 million to purchase capital assets and $0.3 million to purchase investments, which was partially offset by releasing $2.3 million of restricted cash from collateral related to our travel incentive. Capital asset purchases included capitalized costs associated with the development of our new ERP system. In 2004, we substantially completed the development of Phase I of our new ERP system. In 2005, we began configuring Phase II and in April 2007 we implemented Phase II. In the second and third quarters of 2007, we completed further stabilization activities and added additional functionality to our ERP system. For the year ended December 31, 2007, we capitalized $3.7 million for the ERP system.
In 2008,2009, we anticipate using cash of between $10 and $15up to $5.0 million to purchase other capital assets for use in our operations, for expansion of our corporate facilities and for planned international expansion. In 2009, we anticipate using cash up to approximately $5.0 million for litigation settlement payments. Financing Activities In 2008, we used cash of $5.9 million to fund our net financing activities. During 2008, we used cash of $5.8 million to fund payment of quarterly cash dividends to our shareholders and used cash of $0.1 million to repay capital leases. In 2007, we used cash of $9.4 million to fund our net financing activities. During 2007, we used cash of $9.5 million to fund payment of quarterly cash dividends to our shareholders and used cash of $0.1 million to repay capital leases. These uses of cash were partially offset by receiving cash of $0.1 million and recording an income tax benefit of $0.1 million related to option holders exercising their stock options. In 2006, we used cash of $14.0 million to fund our net financing activities. During 2006, we used cash of $8.5 million to pay quarterly cash dividend payments to shareholders, used cash of $7.0 million to purchase our common stock in the open market, and used cash of $0.1 million to repay capital leases. These uses of cash were partially offset by receiving cash of $1.1 million and recording an income tax benefit of $0.5 million related to option holders exercising their stock options. In 2005, we used cash of $13.8 million to fund our net financing activities. During 2005, we used cash of $7.0 million to purchase our common stock in the open market and used cash of $7.6 million to fund quarterly cash dividend payments to shareholders. These uses of cash were partially offset by receiving cash of $0.8 million from option holders exercising their stock options.
General Liquidity and Cash Flows We continue to
Historically, we generate positive cash flows from operations and believe our existing liquidity and cash flows from operations are adequate to fund our normal expected future business operations, our estimated payments of cash dividends, the repurchase of our common stock in the open market, and international expansion costs for the next 12 to 24 months. However, if our existing capital resources or cash flows become insufficient to meet current business plans, projections, and existing capital requirements, we wouldwill be required to modify our payment of future dividends and raise
additional funds, which may not be available on favorable terms, if at all. See “Risk Factors—We are not required to pay dividends, and our boardBoard of directorsDirectors could decide not to declare a dividend or could reduce the amount of the dividend at any time” in Item 1A of this Form 10-K for further discussion related to future payment of dividends. Contractual Obligations. The following summarizes our future commitments and obligations associated with various agreements and contracts as of December 31, 2007,2008, for the years ending December 31: | | | 2008 | | 2009 | | 2010 | | 2011 | | 2012 | | Thereafter | | Total | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | Thereafter | | Total | | | (in thousands) | | (in thousands) | Capital lease obligations | | $ | 126 | | $ | 126 | | $ | 121 | | $ | 31 | | | — | | | — | | $ | 404 | | $ | 143 | | $ | 125 | | $ | 34 | | $ | 3 | | $ | — | | $ | — | | $ | 305 | Purchase obligations | | | 9,556 | | | 4,208 | | | 1,694 | | | 1,050 | | | 1,050 | | | 3,150 | | | 20,708 | | | 9,090 | | | 7,715 | | | 4,956 | | | 2,535 | | | 1,050 | | | 2,100 | | | 27,446 | Operating leases | | | 3,279 | | | 1,777 | | | 1,139 | | | 774 | | | 781 | | | 3,314 | | | 11,064 | | | 2,849 | | | 2,338 | | | 1,211 | | | 1,196 | | | 1,097 | | | 2,527 | | | 11,218 | Post-employment royalty | | | 492 | | | 492 | | | 492 | | | 492 | | | 492 | | | 985 | | | 3,445 | | | 492 | | | 492 | | | 492 | | | 492 | | | 492 | | | 492 | | | 2,952 | Employment agreements | | | 1,407 | | | 206 | | | — | | | — | | | — | | | — | | | 1,613 | | | 2,607 | | | 573 | | | 22 | | | — | | | — | | | — | | | 3,202 | FIN 48 obligations, including interest and penalties(1) | | | 1,096 | | | — | | | — | | | — | | | — | | | 496 | | | 1,592 | | Other contractual obligations | | | 100 | | | — | | | — | | | — | | | — | | | — | | | 100 | | | | | | | | | | | | | | | | | | Total commitments and obligations | | $ | 16,056 | | $ | 6,809 | | $ | 3,446 | | $ | 2,347 | | $ | 2,323 | | $ | 7,945 | | $ | 38,926 | | $ | 15,181 | | $ | 11,243 | | $ | 6,715 | | $ | 4,226 | | $ | 2,639 | | $ | 5,119 | | $ | 45,123 | | | | | | | | | | | | | | | | |
(1) | The timing of future payments of our uncertain tax positions of $1.6 million is uncertain. See Note 8 to the consolidated financial statements for further discussion. |
We have maintained purchase commitments with certain of our raw material suppliers to purchase minimum quantities and helpto ensure exclusivity of our raw materials and proprietorship of our products. Currently, we have four supply agreements that require minimum purchase commitments. We expect to exceed our minimum monthly-required purchase commitments. We also maintain other supply agreements and manufacturing agreements to protect our products, regulate product costs, and help ensure quality control standards. These agreements do not require us to purchase any set minimums. We have no present commitments or agreements with respect to acquisitions or purchases of any manufacturing facilities; however, management from time to time explores the possibility of the benefits of purchasing a raw material manufacturing facility to help control costs of our raw materials and help ensure quality control standards. In 2005, we substantially completed the first phase of our fully-integrated internally-developed software system and designed the second phase of our fully integrated global internally developed software system. In 2007, we completed the design and customization of Phase II of our fully-integrated internally-developed software system which began in 2006. In 2008, capital expenditures are expected to be between $10 million and $15 million.
Off–Balance Sheet Arrangements We do not have any special-purpose entity arrangements, nor do we have any off-balance sheet arrangements. Market Risks Please see “Quantitative and Qualitative Disclosure about Market Risk” under Item 7A of this Form 10-K for additional information about our Market Risks. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The application of GAAP requires us to make estimates and assumptions that affect the reported values of assets and liabilities at the date of our financial statements, the reported amounts of revenues and expenses during the reporting period, and the related disclosures of contingent assets and liabilities. We use estimates throughout our financial statements, which are influenced by management’s judgment and uncertainties. Our estimates are based on historical trends, industry standards, and various other assumptions that we believe are applicable and reasonable under the circumstances at the time the consolidated financial statements are prepared. Our Audit Committee reviews our critical accounting policies and estimates. We continually evaluate and review our policies related to the portrayal of our consolidated financial position and consolidated results of operations that require the application of significant judgment by our management. We also analyze the need for certain estimates, including the need for such items as allowance for doubtful accounts, inventory reserves, long-lived fixed assets and capitalization of internal-use software development costs, reserve for uncertain income tax positions and tax valuation allowances, revenue recognition, sales returns, and deferred revenues, accounting for stock-based compensation, and contingencies and litigation. Historically, our estimates and assumptionsactual results have not materially deviated from our estimates. However, we caution readers that actual results could differ from our estimates and assumptions applied in the preparation of our consolidated financial statements. If circumstances change relating to the various assumptions or conditions used in our estimates, we could experience an adverse effect on our financial position, results of operations, and cash flows. We have identified the following applicable critical accounting policies and estimates as of December 31, 2007:2008:
Allowance for Doubtful Accounts Accounts receivable consists of receivables from manufacturers, independent associates, and members and are carried at their estimated collectible amounts. As of December 31, 2007,2008, net accounts receivable totaled $0.6$0.3 million. Historically, estimates for doubtful accounts have been immaterial. However, in April 2007, with the implementation of our ERP system, we nowWe simultaneously receive payment for an order when the order ships, and the new ERP system creates a receivable for the payment ifships. If the payment is rejected or if it does not match the order total.total, a receivable is created. We periodically review receivables for realizability and base collectibilitycollectability upon assumptions, historical trends, and recent account activities. If our estimates regarding estimated collectibilitycollectability are inaccurate or consumer trends change in an unforeseen manner, we may be exposed to additional write-offs or bad debts. As of December 31, 2007,2008, we havehad an allowance for doubtful accounts of $0.9less than $0.1 million. Inventory Reserves Inventory consists of raw materials, work in progress, finished goods, and promotional materials that are stated at the lower of cost (using standard costs that approximate average costs) or market. We record the amounts charged by the vendors as the costs of inventory. Typically, the net realizable value of our inventory is higher than the aggregate cost. Determination of net realizable value can be complex and, therefore, requires a high degree of judgment. In order for management to make the appropriate determination of net realizable value, the following items are considered: inventory turnover statistics, current selling prices, seasonality factors, consumer demand, regulatory changes, competitive pricing, and performance of similar products. If we determine the carrying value of inventory is in excess of estimated net realizable value, we write down the value of inventory to the estimated net realizable value. We also review inventory for obsolescence in a similar manner and any inventory identified as obsolete is reserved or written off. Our determination of obsolescence is based on assumptions about the demand for our products, product expiration dates, estimated future sales, and general future plans. We monitor actual sales compared to original projections, and if actual sales are less favorable than those originally projected by us, we record an additional inventory reserve or write-down. Historically, our estimates have been close to our actual reported amounts. However, if our estimates regarding fair market value or obsolescence are inaccurate or consumer demand for our products changes in an unforeseen manner, we may be exposed to additional material losses or gains in excess of our established estimated inventory reserves. Generally, we carry inventory reserves ranging between $0.3 million and $0.6 million. At December 31, 2008 and 2007, the carrying value of our inventory was $23.7 million. reserves were $0.7 million and $0.5 million, respectively.Long Lived Fixed Assets and Capitalization of Software Development Costs In addition to capitalizing long lived fixed asset costs, we also capitalize costs associated with internally-developedinternally developed software projects (collectively “fixed assets”) and amortize such costs over the estimated useful lives of such fixed assets. Fixed assets are carried at cost, less accumulated depreciation computed using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized over the shorter of the remaining lease terms or the estimated useful lives of the improvements. Expenditures for maintenance and repairs are charged to operations as incurred. If a fixed asset is sold or otherwise retired or disposed of, the cost of the fixed asset and the related accumulated depreciation or amortization is written off and any resulting gain or loss is recorded in other operating costs in our consolidated statement of operations. We review our fixed assets for impairment whenever an event or change in circumstances indicates the carrying amount of an asset or group of assets may not be recoverable, such as plans to dispose of an asset before the end of its previously estimated useful life. Our impairment review includes a comparison of future projected cash flows generated by the asset, or group of assets, with its associated net carrying value. If the net carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent the carrying amount exceeds the fair value. The fair value is determined by calculating the discounted expected future cash flows using an estimated risk-free rate of interest. Any identified impairment losses are recorded in the period in which the impairment occurs. The carrying value of the fixed asset is adjusted to the new carrying value and any subsequent increases in fair value of the fixed asset are not recorded. In addition, if we determine the estimated remaining useful life of the asset should be reduced from our original estimate, the periodic depreciation expense is adjusted prospectively, based on the new remaining useful life of the fixed asset. The impairment calculation requires us to apply judgment and estimates concerning future cash flows, strategic plans, useful lives, and discount rates. If actual results are not consistent with our estimates and assumptions, we may be exposed to an additional impairment charge, which could be material to our results of operations. In addition, if accounting standards change, or if fixed assets become obsolete, we may be required to write off any unamortized costs of fixed
assets; or if estimated useful lives change, we would be required to accelerate depreciation or amortization periods and recognize additional depreciation expense in our consolidated statement of operations. Historically, our estimates and assumptions related to the carrying value and the estimated useful lives of our fixed assets have not materially deviated from actual results. As of December 31, 2007,2008, the estimated useful lives and net carrying values of fixed assets are as follows: | | | | | | | | Estimated useful life | | Net carrying value at December 31, 20072008
| Office furniture and equipment | | 5 to 7 years | years | | $ 3.2 | 3.3 million | Computer hardware and software | | 3 to 5 years | years | 35.7 | | 28.7 million | Automobiles | | 3 to 5 years | years | | | 0.1 million | Leasehold improvements | | 2 to 10 | years(1) | | 3.8 | 4.1 million | Construction in progress | | 2 to 10 | years(2) | | 1.6 | 0.8 million | | | | | | Total net carrying value at December 31, 20072008 | | | | | $44.4 | 37.0 million | | | | | |
_____________________________ (1) | We amortize leasehold improvements over the shorter of the useful estimated life of the leased asset or the lease term. |
(2) | Construction in process includes fixed assets, leasehold improvements and internally-developedinternally developed software costs. Once placed in service, leasehold improvements will be amortized over the shorter of an asset’s useful life or the remaining lease term. Once the internally-developed software is placed in service, it will be amortized over three to five years. |
The net carrying costs of fixed assets and construction in progress are exposed to impairment losses if our assumptions and estimates of their carrying values change, there is a change in estimated future cash flow, or there is a change in the estimated useful life of the fixed asset. Uncertain Income Tax Positions and Tax Valuation Allowances As of December 31, 2007,2008, we recorded $1.1$0.5 million in taxes payable and $0.5$0.1 million in other long-term liabilities on our consolidated balance sheet related to uncertain income tax positions. As required by FIN 48, we use judgments and make estimates and assumptions related to evaluating the probability of uncertain income tax positions. We base our estimates and assumptions on the potential liability related to an assessment of whether the income tax position will “more likely than not”be sustained in an income tax audit. We are also subject to periodic audits from multiple domestic and foreign tax authorities related to income tax, sales and use tax, personal property tax, and other forms of taxation. These audits examine our tax positions, timing of income and deductions, and allocation procedures across multiple jurisdictions. As part of our evaluation of these tax issues, we establish reserves in our consolidated financial statements based on our estimate of current probable tax exposures. Depending on the nature of the tax issue, we could be subject to audit over several years. Therefore, our estimated reserve balances and liability related to uncertain income tax positions may exist for multiple years before the applicable statute of limitations expires or before an issue is resolved by the taxing authority. We believe our tax liabilities related to uncertain tax positions are based upon reasonable judgment and estimates; however, if actual results materially differ, our effective income tax rate and cash flows could be affected in the period of discovery or resolution. We also review the estimates and assumptions used in evaluating the probability of realizing the future benefits of our deferred tax assets and record a valuation allowance when we believe that a portion or all of the deferred tax assets may not be realized. If we are unable to realize the expected future benefits of our deferred tax assets, we are required to provide a valuation allowance. We use our past history and experience, overall profitability, future management plans, and current economic information to evaluate the amount of valuation allowance to record. As of December 31, 2007,2008, we maintained a valuation allowance for deferred tax assets arising from our operations in Taiwan because they did not meet the“more likely than not” criteria as defined by the recognition and measurement provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” In addition, as of December 31, 2007,2008, we had deferred tax assets, after valuation allowance, totaling $6.9$8.1 million, which may not be realized if our assumptions and estimates change, which would affect our effective income tax rate and cash flows in the period of discovery or resolution. Revenue Recognition and Deferred Revenue We derive revenues from sales of our products, sales of our starter and renewal packs, and shipping fees. Substantially all of our product and pack sales are made to independent associates at published wholesale prices. We also
sell products to independent members at discounted published retail prices. We record revenue net of any sales taxes. Total deferred revenue consists of (i) revenue received from sales of packs and products shipped but not received by the customers at period end; (ii) revenue received for a one-year magazine subscription; (iii) revenue received from pack sales when the pack sale price exceeds the wholesale value of all individual components within the pack; and (iv) revenue received from prepaid registration fees from customers planning to attend a future corporate-sponsored event. We recognize deferred revenue from shipped packs and products upon receipt by the customer. We recognize deferred revenue related to future corporate-sponsored events when the event is held. All other deferred revenue is recognized over one year. At December 31, 2007,2008, total deferred revenue was $4.8$3.5 million. Although we have no immediate plans to significantly changeSignificant changes in the contentspricing structure of our packs or our shipping methods any such change in the future could result in additional revenue deferrals or cause us to recognize deferred revenue over a longer period of time. For example, if we were to decrease the number of items included in our packs while keeping the sales price of the packs the same, we would have to defer additional revenue and recognize the additional deferred revenue over one year. We have three different product return policies: (i) a policy for our retail customers, (ii) a policy for our independent members, and (iii) a policy for our independent associates. Retail customers may return any of our products, within 180 days of purchase, to the original independent associate who sold the product, whoand such associate is then required to provide the retail customer with a full cash refund. The independent associate may then forwardreceive a replacement product by forwarding proof of the refund to us to receive a replacement product. Membersus. Independent members may return an order to us within 180 days of the purchase date without membership termination or restocking fees. After 180 days from the date of purchase, the independent member may not receive a refund and is allowed an exchange only, and may, if abuse of the return policy is found, have theirhis or her membership terminated. An independent associate isIndependent associates are allowed to return an order within one year of the purchase date upon terminating their associate account.accounts. If thean independent associate returns a product is returned unopened and in good salable condition, the independent associate returning the product may receive a full refundrefund. We may also allow thean independent associate to receive a full 100% refund for the first 180 days following thea product’s purchase. After 180 days from the purchase date, thean independent associate may not request a refund, and is allowed an exchange only; however, if abuse of the return policy is found, thean independent associate may be terminated. Historically, sales returns estimates have not materially deviated from actual sales returns. Based upon our return policies, we estimate a sales return reserve for expected sales refunds based on our historical experience over a rolling six- month period. If actual results differ from our estimated sales returns reserves due to various factors, the amount of revenue recorded each period could be materially affected. Historically, our sales returns have not materially changed through the years as the majority of our customers who return their merchandise do so within the first 90 days after the original sale. Sales returns have averaged 1%1.5% or less of our gross sales and for the year ended December 31, 20072008 were composed of the following (in thousands): | | | | | Sales reserve as of December 31, 2006 | | $ | 444 | | Current provision related to sales made in 2007 | | | 4,683 | | Current provision related to sales made prior to 2007 | | | 417 | | Actual returns or credits in 2007 related to 2007 | | | (4,111 | ) | Actual returns or credits in 2007 related to prior periods | | | (861 | ) | | | | | | Sales reserve as of December 31, 2007 | | $ | 572 | | | | | | |
Sales reserve as of December 31, 2007 | | $ | 572 | | Current provision related to sales made in 2008 | | | 4,339 | | Current provision related to sales made prior to 2008 | | | 359 | | Actual returns or credits in 2008 related to 2008 | | | (3,625 | ) | Actual returns or credits in 2008 related to prior periods | | | (926 | ) | Sales reserve as of December 31, 2008 | | $ | 719 | |
The 100% satisfaction guarantee sales return policy for the first 180 days following a product’s purchase was implemented in August 2007. As a result of this change sales returns increased during the last part of the year. We have increased our sales reserve at December 31, 2007, accordingly.
Accounting for Stock-Based Compensation We grant stock options to our employees and board members. At the date of grant, we determine the fair value of a stock option award and recognize compensation expense over the requisite service period, which is generally the vesting period of such stock option award, which is two to four years. The fair value of the stock option award is calculated using the Black-Scholes option-pricing model, (“calculated fair value”). The Black-Scholes option-pricing model requires us to apply judgment and use highly subjective assumptions, including expected stock option life, expected volatility, expected average risk-free interest rates, and expected forfeiture rates. For the year ended December 31, 2007,2008, our assumptions and estimates used for the calculated fair value of stock options granted in 20072008 were as follows: average dividend yield between 2.3% and 4.9%;
54 expected average risk-free interest rate between 4.2% and 4.7%;
expected market price volatility between 67.7% and 68.3%;
| January 2008 grant | | February 2008 grant | | March 2008 grant | | June 2008 grant #1 | | June 2008 grant #2 | | August 2008 grant | | November 2008 grant #1 | | November 2008 grant #2 | | November 2008 grant #3 | | Estimated fair value per share of options granted: | $ | 2.11 | | $ | 2.26 | | $ | 2.81 | | $ | 2.06 | | $ | 2.06 | | $ | 1.85 | | $ | 1.03 | | $ | 0.98 | | $ | 1.06 | | Assumptions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Annualized dividend yield | | 6.08 | % | | 5.63 | % | | 4.83 | % | | 5.96 | % | | 5.97 | % | | 3.48 | % | | 3.20 | % | | 3.20 | % | | 3.16 | % | Risk-free rate of return | | 3.06 | % | | 2.67 | % | | 2.48 | % | | 3.17 | % | | 3.57 | % | | 2.97 | % | | 1.76 | % | | 1.76 | % | | 1.90 | % | Common stock price volatility | | 63.80 | % | | 61.90 | % | | 62.70 | % | | 60.40 | % | | 59.80 | % | | 60.10 | % | | 62.60 | % | | 62.60 | % | | 63.40 | % | Expected average life of stock options (in years) | | 4.5 | | | 4.5 | | | 4.5 | | | 4.5 | | | 4.5 | | | 4.5 | | | 4.5 | | | 4.5 | | | 4.5 | |
expected forfeiture rate of 0%;
expected average life of stock options of 4.5 years;
the calculated fair value of stock options granted of $3.07 to $7.76 per share; and
the percentage of options’ calculated fair value compared to its exercise price of 42.0% to 49.7%.
Historically, theour estimates for ourand underlying assumptions have not materially deviated from our actual reported results and rates. However, the assumptions we use are based on our best estimates and involve inherent uncertainties based on market conditions that are outside of our control. If actual results are not consistent with the assumptions we use, the stock-based compensation expense reported in our consolidated financial statements may not be representative of the actual economic cost of stock-based compensation. For example, if actual employee forfeitures significantly differ from our estimated forfeitures, we may be required to make an adjustment to our consolidated financial statements in future periods. As of December 31, 2007,2008, using our current assumptions and estimates, we anticipate recognizing $1.0$0.9 million in gross compensation expense through 20102011 related to unvested stock options outstanding. If we grant additional stock options in the future, we would be required to recognize additional compensation expense over the vesting period of such stock options in our consolidated statement of operations. Gross compensation expense would equal the calculated fair value of such stock options, which is dependent on the assumptions used to calculate such fair value, but generally ranges between 42%34% to 69% of the exercise price multiplied by the number of stock options awarded. As of December 31, 2007,2008, we had 99,561596,224 shares available for grant in the future. Contingencies and Litigation Each quarter, we evaluate the need to establish a reserve for any legal claims or assessments. We base our evaluation on our best estimates of the potential liability in such matters. The legal reserve includes an estimated amount for any damages and the probability of losing any threatened legal claims or assessments. The legal reserve is developed in consultation with our general and outside counsel and is based upon a combination of litigation and settlement strategies. Although we believe that our legal reserves and accruals are based on reasonable judgments and estimates, actual results could differ, which may expose us to material gains or losses in future periods. If actual results differ, if circumstances change, or if we experience an unanticipated adverse outcome of any legal action, including any claim or assessment, we would be required to recognize the estimated amount that could reduce net income, earnings per share, and cash flows. Recent Financial Accounting Standards Board StatementsPronouncements FIN 48SFAS 157.In JulySeptember 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FAS 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. In 2007, we recorded $0.8 million to retained earnings related to adopting FIN 48 in the first quarter of 2007.
FIN 48-1. Effective January 1, 2007, we adopted the FASB Staff Position (“FSP”) No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,” (FSP FIN 48-1), which was issued on May 2, 2007. FSP FIN 48-1 amends FIN 48 to provide guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The term “effectively settled” replaces the term “ultimately settled” when used to describe recognition, and the terms “settlement” or “settled” replace the terms “ultimate settlement” or “ultimately settled” when used to describe measurement of a tax position under FIN 48. FSP FIN 48-1 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is
not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The adoption of FSP FIN 48-1 did not have an impact on the accompanying consolidated financial statements.
FAS 157. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “FairFair Value Measurements”, (“FAS 157”).Measurements, or SFAS 157. The provisions of FASSFAS 157 define fair value, establish a framework for measuring fair value in generally accepted accounting principles and expand disclosures about fair value measurements. The provisions of FASSFAS 157 are effective for fiscal years beginning after November 15, 2007. The2007, with the exception of nonfinancial assets and liabilities that are not currently recognized or disclosed at fair value in the financial statements on a recurring basis, for which SFAS 157 is effective for fiscal years beginning after November 15, 2008. Our adoption of FASSFAS 157 on January 1, 2008 did not have a significant effect on our consolidated financial position, results of operations, or cash flows. See Note 4 (“Fair Value”) to the consolidated financial statements included in this report for more information.
FASSFAS 159. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”, (“FASSFAS 159”). FASSFAS 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses on that item shall
be reported in current earnings at each subsequent reporting date. FASSFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the company elects for similar types of assets and liabilities. FASSFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted. WeAs of January 1, 2008, we did not elect the fair value option for any items permitted under FASSFAS 159. FASSFAS 141(R).In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations”Business Combinations, (“FASor SFAS 141(R)”). FASSFAS 141(R) replaces FAS StatementSFAS No. 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree, and the goodwill acquired in an acquisition. The StatementSFAS 141(R), also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FASSFAS 141(R) is effective for acquisitions in fiscal years beginning after December 15, 2008. We are currently assessingwill apply SFAS 141(R) prospectively to business combinations for which the acquisition date is on or after January 1, 2009.
SFAS 160In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. As of December 31, 2008, the Company did not have any minority interests, therefore the adoption of SFAS No. 160 is not expected to have an impact of FAS 141(R) on ourthe Company’s consolidated financial statements. FSP 140-3On February 20, 2008, the FASB issued FASB Staff Position (“FSP”) on Financial Accounting Standards (“FSP 140-3”), “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”. The FSP provides guidance on the accounting for a transfer of a financial asset and a repurchase financing. Repurchase financing is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties (or consolidated affiliates of either counterparty), that is entered into contemporaneously with, or in contemplation of, the initial transfer. The FSP is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company does not currently utilize repurchase financing; therefore, the implementation of this FSP is not expected to have a material impact on the Company’s financial position or results of operations. SFAS 161In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosure about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”, (“SFAS 161”). This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The Company currently does not participate in any derivative instruments or hedging activities as defined under SFAS 133 and, therefore, the adoption of SFAS 161 will not have any impact on the Company’s consolidated financial statements. FSP 142-3In April 2008, the FASB issued FASB Staff Position on Financial Accounting Standard (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007) “Business Combinations” and other U.S. generally accepted accounting principles. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company will apply this FSP prospectively to intangible assets acquired after January 1, 2009. The adoption of FSP 142-3 is not expected to have a material impact on the Company’s consolidated financial position and results of operations. SFAS 162In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations. From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies, which we adopt as of the specified effective date. Unless otherwise discussed, we believe the impact of recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk We do not engage in trading market risk sensitive instruments and do not purchase investments as hedges or for purposes “other than trading” that are likely to expose us to certain types of market risk, including interest rate, commodity price, or equity price risk. Although we have investments, we believe there has been no material change in our exposure to interest rate risk. We have not issued any debt instruments, entered into any forward or futures contracts, purchased any options, or entered into any swap agreements. We are exposed to other market risks, including changes in currency exchange rates as measured against the United States dollar. Because the change in value of the United States dollar measured against foreign currency may affect our consolidated financial results, changes in foreign currency exchange rates could positively or negatively affect our results as expressed in United States dollars. For example, when the United States dollar strengthens against foreign currencies in which our products are sold or weakens against foreign currencies in which we may incur costs, our consolidated net sales and/or related costs and expenses could be adversely affected. We believe inflation has not had a material impact on our consolidated operations or profitability. We expanded into Canada in 1996, into Australia in 1998, into the United Kingdom in 1999, into Japan in 2000, into New Zealand in 2002, into the Republic of Korea in 2004, into Taiwan and Denmark in 2005, and into Germany in 2006.2006, and into South Africa and Singapore in 2008. Our United States operation services shipments tolocation processes orders for the United States, Canada, while ourand South Africa. The Australian operation services shipments tolocation process orders for Australia, New Zealand and ourSingapore. The United Kingdom operation services shipments tolocation processes orders for the United Kingdom, Denmark and Germany. We translate our revenues and expenses in foreign markets using either a current (spot) rate or weighted-averageaverage rate. We maintain policies, procedures, and internal processes in an effort to help monitor any significant market risks and we do not use any financial instruments to manage our exposure to such risks. We assess the sensitivityanticipated foreign currency working capital requirements of our earningsforeign operations and maintain a portion of our cash and cash flows to variability in currency exchange rates by applying an appropriate range of potential rate fluctuations to our assets, obligations, and projected transactionsequivalents denominated in foreign currencies.currencies sufficient to satisfy most of these anticipated requirements. We caution that we cannot predict with any certainty our future exposure to such currency exchange rate fluctuations or the impact, if any, such fluctuations may have on our future business, product pricing, operating expenses, and on our consolidated financial position, results of operations, or cash flows. However, to combat such market risk, we closely monitor our exposure to currency fluctuations. The foreign currencies in which we currently have exposure to foreign currency exchange rate risk include the currencies of Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, and Germany.Singapore. The current (spot) rate, weighted-averageaverage currency exchange rates, and the low and high of such currency exchange rates as compared to the United States dollar, for each of these countries as of and for the year ended December 31, 20072008 were as follows: | Country (foreign currency name) | | Low | | High | | Weighted- Average | | Spot | | Low | | High | | Average | | Spot | | Australia (Dollar) | | $ | 0.77230 | | $ | 0.93480 | | $ | 0.83899 | | $ | 0.87670 | | $ | 0.61270 | | $ | 0.97760 | | $ | 0.85297 | | $ | 0.69070 | | Canada (Dollar) | | $ | 0.84380 | | $ | 1.09390 | | $ | 0.93565 | | $ | 1.01940 | | $ | 0.77390 | | $ | 1.02230 | | $ | 0.94410 | | $ | 0.81830 | | Denmark (Krone) | | $ | 0.17320 | | $ | 0.19960 | | $ | 0.18399 | | $ | 0.19750 | | $ | 0.16800 | | $ | 0.21390 | | $ | 0.19734 | | $ | 0.18950 | | Germany (Euro) | | $ | 1.29060 | | $ | 1.48590 | | $ | 1.37074 | | $ | 1.47290 | | $ | 1.24910 | | $ | 1.59520 | | $ | 1.47134 | | $ | 1.40970 | | Japan (Yen) | | $ | 0.00807 | | $ | 0.00926 | | $ | 0.00850 | | $ | 0.00891 | | $ | 0.00893 | | $ | 0.01134 | | $ | 0.00970 | | $ | 0.01107 | | New Zealand (Dollar) | | $ | 0.67920 | | $ | 0.80810 | | $ | 0.73649 | | $ | 0.77520 | | $ | 0.52860 | | $ | 0.81690 | | $ | 0.71461 | | $ | 0.57910 | | Republic of Korea (Won) | | $ | 0.00105 | | $ | 0.00113 | | $ | 0.00108 | | $ | 0.00107 | | $ | 0.00066 | | $ | 0.00108 | | $ | 0.00093 | | $ | 0.00079 | | Singapore (Dollar) | | | $ | 0.65310 | | $ | 0.74190 | | $ | 0.70769 | | $ | 0.69350 | | South Africa (Rand) | | | $ | 0.08769 | | $ | 0.14910 | | $ | 0.12327 | | $ | 0.10600 | | Switzerland (Franc) | | | $ | 0.81700 | | $ | 1.01670 | | $ | 0.92644 | | $ | 0.94730 | | Taiwan (Dollar) | | $ | 0.02989 | | $ | 0.03103 | | $ | 0.03044 | | $ | 0.03077 | | $ | 0.02981 | | $ | 0.03332 | | $ | 0.03175 | | $ | 0.03050 | | United Kingdom (British Pound) | | $ | 1.92560 | | $ | 2.10500 | | $ | 2.00181 | | $ | 1.99730 | | $ | 1.44790 | | $ | 2.03110 | | $ | 1.85518 | | $ | 1.44790 | |
Item 8. Financial Statements and Supplementary Data Our Consolidated Financial Statements and Supplementary Data required by this Item 8 are set forth in Item 15, beginning on page F-1 of this report. The following table sets forth our unaudited quarterly Consolidated Statements of Operations data for the periods indicated. In our opinion, this information has been prepared on the same basis as our audited consolidated financial statements set forth in this report and includes all adjustments that are considered necessary to present fairly this information in accordance with generally accepted accounting principles. The reader should read this information in conjunction with “Item 15.— – Consolidated Financial Statements and related Notes” – beginning on page F-1 of this report. | | | Mar. 31, 2007 | | June 30, 2007 | | Sept. 30, 2007 | | Dec. 31, 2007(1) | | Mar. 31, 2006 | | June 30, 2006 | | Sept. 30, 2006 | | Dec. 31, 2006 | | Mar. 31, 2008 | | June 30, 2008(1) | | Sept. 30, 2008 | | Dec. 31, 2008(2) | | Mar. 31, 2007 | | June 30, 2007 | | Sept. 30, 2007 | | Dec. 31, 2007(3) | | | (in millions, except per share information) | | (in millions, except per share information) | | Net sales | | $ | 104.8 | | $ | 111.2 | | $ | 96.8 | | $ | 99.9 | | | $ | 99.0 | | $ | 104.8 | | $ | 99.5 | | $ | 106.8 | | $ | 91.5 | | $ | 86.8 | | $ | 78.0 | | $ | 76.4 | | $ | 104.9 | | $ | 111.7 | | $ | 96.9 | | $ | 99.2 | | Gross profit | | $ | 43.2 | | $ | 42.9 | | $ | 38.7 | | $ | 39.1 | | | $ | 39.0 | | $ | 44.1 | | $ | 42.1 | | $ | 44.2 | | $ | 36.1 | | $ | 32.4 | | $ | 34.5 | | $ | 31.5 | | $ | 43.2 | | $ | 43.4 | | $ | 38.8 | | $ | 38.4 | | Income (loss) before income taxes | | $ | 10.4 | | $ | 2.6 | | $ | 2.1 | | ($ | 4.7 | ) | | $ | 9.3 | | $ | 13.4 | | $ | 12.7 | | $ | 12.2 | | $ | (2.8 | ) | $ | (16.9 | ) | $ | (0.7 | ) | $ | 2.2 | | $ | 10.5 | | $ | 2.6 | | $ | 2.1 | | $ | (4.7 | ) | Provision (benefit) for income taxes | | $ | 3.5 | | $ | 1.1 | | $ | 0.4 | | ($ | 1.1 | ) | | $ | 3.4 | | $ | 4.8 | | $ | 3.0 | | $ | 4.1 | | $ | (0.5 | ) | $ | (6.4 | ) | $ | (0.3 | ) | $ | 1.6 | | $ | 3.5 | | $ | 1.1 | | $ | 0.4 | | $ | (1.1 | ) | Net income (loss) | | $ | 6.9 | | $ | 1.5 | | $ | 1.7 | | ($ | 3.6 | ) | | $ | 5.9 | | $ | 8.6 | | $ | 9.7 | | $ | 8.2 | | $ | (2.3 | ) | $ | (10.5 | ) | $ | (0.4 | ) | $ | 0.6 | | $ | 7.0 | | $ | 1.5 | | $ | 1.7 | | $ | (3.6 | ) | Earnings (loss) per share: | | | | | | | | | | | | | | | | | | Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | 0.26 | | $ | 0.06 | | $ | 0.07 | | ($ | 0.13 | ) | | $ | 0.22 | | $ | 0.32 | | $ | 0.37 | | $ | 0.31 | | $ | (0.09 | ) | $ | (0.40 | ) | $ | (0.02 | ) | $ | 0.02 | | $ | 0.26 | | $ | 0.06 | | $ | 0.07 | | $ | (0.13 | ) | | | | | | | | | | | | | | | | | | | | Diluted | | $ | 0.26 | | $ | 0.06 | | $ | 0.07 | | ($ | 0.13 | ) | | $ | 0.22 | | $ | 0.31 | | $ | 0.36 | | $ | 0.30 | | $ | (0.09 | ) | $ | (0.40 | ) | $ | (0.02 | ) | $ | 0.02 | | $ | 0.26 | | $ | 0.06 | | $ | 0.07 | | $ | (0.13 | ) | | | | | | | | | | | | | | | | | | | |
(1) | (1) | We recorded $12.5 million of estimated legal costs related to ongoing litigation matters in the second quarter of 2008. |
| (2) | We reversed $5.4 million of estimated legal costs related to the preliminary settlement of litigation matters in the fourth quarter of 2008. |
| (3) | We recorded $4.7 million of estimated legal costs related to ongoing litigation matters in the fourth quarter of 2007. |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure As disclosed in the Company’sour Current Report on Form 8-K, filed on October 18, 2007, and Amendment No. 1 thereto, filed on October 24, 2007, the Companywe dismissed Grant Thornton LLP as itsour independent registered public accountants and engaged BDO Seidman, LLP, effective October 18, 2007, to act as itsour independent registered public accountants. There were no disagreements with Grant Thornton LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures. In connection with
On September 5, 2008, we disclosed in a Form 8-K and press release the receipt by us and our Chief Financial Officer and Chairman of the Audit Committee of notices, commonly referred to as “Wells Notices” from the Staff of the SEC relating to the timing and completeness of our October 2007 Form 8-K disclosure regarding our dismissal of Grant Thornton LLP as our independent registered public accountants. The Wells Notices stemmed from an informal inquiry commenced by the Company has received informal inquiries from NASDAQ andSEC with respect to the Securities and Exchange Commission (“SEC”). Asdisclosure of the date of filing our Form 10-K, NASDAQdismissal. In a letter dated October 31, 2008 and received on November 4, 2008, the SEC haveStaff informed us that it has now concluded its investigation and has determined not completed their informal inquires.to recommend enforcement action against us or the individuals.
Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act of 1934, as amended (as defined in Exchange Act Rules 13(a) and 15(d)-15(e)), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting During the quarter ended December 31, 2007,2008, there were no changes in our internal control over our financial reporting that we believe materially affected, or are reasonably likely to materially affect our internal control over financial reporting. During the second half of 2007, we continued to refine and enhance our new ERP system, which was implemented during the second quarter of 2007. This refinement/enhancement has involved various changes to internal processes and control procedures over financial reporting; however, our internal controls over financial reporting have not been materially affected.
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company.Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our consolidated financial statements would be prevented or detected. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2007.2008. BDO Seidman, LLP has also audited our internal control over financial reporting and its report is included below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Mannatech, Incorporated Coppell, Texas We have audited Mannatech, Incorporated’s and subsidiaries (the Company) internal control over financial reporting as of December 31, 2007,2008, based on criteria established inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’scompany’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Mannatech, Incorporated and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,2008, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Mannatech, Incorporated and subsidiaries as of December 31, 2008 and 2007 and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the year thentwo years in the period ended December 31, 2008 and our report dated March 14, 2008,11, 2009 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP Dallas, Texas March 14, 200811, 2009
Item 9B. Other Information None. PART III
The information required by Items 10, 11, 12, 13, and 14 of Part III is incorporated by reference to our definitive proxy statement to be filed with the United States Securities and Exchange Commission no later than April 29, 2008.30, 2009. PART IV Item 15. Exhibits and Financial Statement Schedules
(a) | Documents filed as a part of the report:Item 15. | Exhibits and Financial Statement Schedules |
(a) Documents filed as a part of the report: 1.1. Consolidated Financial Statements The following financial statements and the Reports of Independent Registered Public Accounting Firms are filed as a part of this report on the pages indicated: | | | Index to Consolidated Financial Statements | | F-1 | Reports of Independent Registered Public Accounting Firms | | F-2 | Consolidated Balance Sheets as of December 31, 20072008 and 20062007 | | F-4 | Consolidated Statements of Operations for the years ended December 31, 2008, 2007,
2006, and 20052006 | | F-5 | Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the years ended December 31, 2008, 2007, 2006, and 20052006 | | F-6 | Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007,
2006, and 20052006 | | F-7 | Notes to Consolidated Financial Statements | | F-8 |
2.2. Financial Statement Schedule The financial statement schedule required by this item is included as an Exhibit to this Annual Report on Form 10-K. Report of Independent Registered Public Accounting Firm on Financial Statement ScheduleSchedule. 3.3. Exhibit List See Index to Exhibits following our Consolidated Financial Statements contained in this Annual Report on Form 10-K.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 17, 2008
| | Mannatech, Incorporated | Mannatech, Incorporated Dated: March 12, 2009
| | By: | /s/ Wayne L. Badovinus
| | | By: | | /S/ TERRY L. PERSINGER | | | Terry L. Persinger | | | | | Wayne L. Badovinus President and Chief Executive Officer (principal executive officer)
|
POWER OF ATTORNEY The undersigned directors and officer of Mannatech, Incorporated hereby constitute and appoint Larry Jobe and Gerald Gilbert, and each of them, with the power to act without the other and with full power of substitution and resubstitution, our true and lawful attorneys-in fact and agents with full power to execute in our name and behalf in the capacities indicated below any and all amendments to this report and to file the same, with all exhibits and other documents relating thereto and hereby ratify and confirm all that such attorneys-in-fact, or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities indicated on March 17, 2008.indicated: Signature | | Title | | Date | Signature
| | Title
| | | /s/ Wayne L. Badovinus | | President and Chief Executive Officer (principal executive officer) | | March 12, 2009 | /S/ TERRYWayne L. PERSINGER Badovinus
Terry L. Persinger
| | President, Chief Executive Officer, and Director (principal executive officer) | | | | | | | | /S/ STEPHEN D. FENSTERMACHER s/ Stephen D. Fenstermacher | | SeniorExecutive Vice President and Chief Financial Officer (principal accounting officer) | | | March 12, 2009 | /S/ SAMUEL L. CASTER Stephen D. Fenstermacher
| Samuel L. Caster
| | | | | /s/ J. Stanley Fredrick | | Chairman of the Board | | | March 12, 2009 | /S/ J. STANLEY FREDRICK
J. Stanley Fredrick | | Lead Director | | | | | | | | /S/ PATRICIA A. WIER s/ Patricia A. Wier | | Director | | | March 12, 2009 | Patricia A. Wier | | | | | | /S/ ALAN D. KENNEDY Alans/ Allan D. Kennedy
| | Director | | | March 12, 2009 | Allan D. Kennedy | | | | | | /S/ GERALD E. GILBERT s/ Gerald E. Gilbert | | Director | | | March 12, 2009 | Gerald E. Gilbert | | | | | | /S/ ROBERT C. BLATTBERG, PH. D. s/ Robert C. Blattberg, Ph. D.Ph.D. | | Director | | | March 12, 2009 | Robert C. Blattberg, Ph.D. | | | | | | /S/ MARLIN RAY ROBBINS s/ Marlin Ray Robbins | | Director | | | March 12, 2009 | Marlin Ray Robbins | | | | | | /S/ LARRY A. JOBE s/ Larry A. Jobe | | Director | | March 12, 2009 | Larry A. Jobe | | | | | | /s/ Robert Toth | | Director | | March 12, 2009 | Robert Toth | | | | | |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Mannatech, Incorporated Coppell, Texas We have audited the accompanying consolidated balance sheet of Mannatech, Incorporated and subsidiaries (the Company) as of December 31, 2008 and 2007 and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mannatech, Incorporated and subsidiaries at December 31, 2007, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 8 to the consolidated financial statements, the Company has adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109 effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2008, expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Dallas, Texas
March 14, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Mannatech, Incorporated
We have audited the accompanying consolidated balance sheet of Mannatech, Incorporated (a Texas corporation) and subsidiaries as of December 31, 2006 and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2006.2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mannatech, Incorporated and subsidiaries as ofat December 31, 2006,2008 and 2007 and the results of their operations and their cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the periodUnited States of America. As discussed in Notes 9 and 2 to the consolidated financial statements, the Company has adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes– An Interpretation of FASB Statement No. 109 effective January 1, 2007 and Statement of Financial Accounting Standard No. 157Fair Valueas of January 1, 2008. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Mannatech Incorporated's internal control over financial reporting as of December 31, 2008, based on criteria established inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 11, 2009 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP Dallas, Texas March 11, 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Mannatech, Incorporated We have audited the accompanying consolidated statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows of Mannatech, Incorporated (a Texas corporation) and subsidiaries for the year ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows. We believe that our audit of the statements of income, changes in shareholders’ equity and comprehensive income, and cash flows provides a reasonable basis for our opinion. In our opinion, the consolidated statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows referred to above present fairly, in all material respects, the results of operations and cash flows of Mannatech, Incorporated and subsidiaries for the year ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 11 to the consolidated financial statements, the Company has adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 123(R),Share-Based Payment, effective January 1, 2006. As discussed in Note 10 to the consolidated financial statements, the Company also adopted FASB Statement of Financial Accounting Standards No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans: An Amendment of FASB Statements No. 87, 88, 106, and 132R, effective December 31, 2006. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Mannatech, Incorporated and subsidiaries’ internal control over financial reporting as of December 31, 2006, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 16, 2007 expressed an unqualified opinion on both management’s assessment of Mannatech, Incorporated’s internal control over financial reporting and on Mannatech, Incorporated’s internal control over financial reporting. /s/ Grant Thornton LLP Dallas, Texas March 16, 2007
MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share information) | | | December 31, | | | December 31, | | | | 2007 | | 2006 | | | 2008 | | 2007 | | ASSETS | | | | | | | | | | Cash and cash equivalents | | $ | 47,103 | | | $ | 45,701 | | | $ | 30,945 | | $ | 47,103 | | Restricted cash | | | 340 | | | | 2,251 | | | | 1,864 | | | 340 | | Accounts receivable, net of allowance of $877 and $0 in 2007 and 2006, respectively | | | 618 | | | | 999 | | | Accounts receivable, net of allowance of $23 and $877 in 2008 and 2007, respectively | | | | 291 | | | 618 | | Income tax receivable | | | 2,136 | | | | 2,155 | | | | 3,531 | | | 2,136 | | Inventories, net | | | 23,706 | | | | 23,923 | | | | 31,313 | | | 23,706 | | Prepaid expenses and other current assets | | | 6,053 | | | | 4,323 | | | | 3,946 | | | 6,053 | | Deferred tax assets | | | 1,789 | | | | 1,478 | | | | 5,632 | | | 1,789 | | | | | | | | | | Total current assets | | | 81,745 | | | | 80,830 | | | | 77,522 | | | 81,745 | | Long-term investments | | | 12,950 | | | | 25,375 | | | | — | | | 12,950 | | Property and equipment, net | | | 42,818 | | | | 16,523 | | | | 36,202 | | | 42,818 | | Construction in progress | | | 1,594 | | | | 24,725 | | | | 840 | | | 1,594 | | Long-term restricted cash | | | 11,726 | | | | 3,132 | | | | 7,579 | | | 11,726 | | Other assets | | | 1,470 | | | | 1,372 | | | | 1,456 | | | 1,470 | | Long-term deferred tax assets | | | 151 | | | | 278 | | | | 459 | | | 151 | | | | | | | | | | Total assets | | $ | 152,454 | | | $ | 152,235 | | | $ | 124,058 | | $ | 152,454 | | | | | | | | | | | | | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | Current portion of capital leases | | $ | 110 | | | $ | 92 | | | $ | 131 | | $ | 110 | | Accounts payable | | | 3,637 | | | | 3,339 | | | | 5,067 | | | 3,637 | | Accrued expenses | | | 30,315 | | | | 26,841 | | | | 24,324 | | | 30,315 | | Commissions and incentives payable | | | 11,139 | | | | 15,511 | | | | 11,453 | | | 11,139 | | Taxes payable | | | 6,198 | | | | 3,556 | | | | 873 | | | 6,198 | | Current deferred tax liability | | | | 192 | | | — | | Deferred revenue | | | 4,769 | | | | 2,697 | | | | 3,476 | | | 4,769 | | | | | | | | | | Total current liabilities | | | 56,168 | | | | 52,036 | | | | 45,516 | | | 56,168 | | Capital leases, excluding current portion | | | 261 | | | | 349 | | | | 155 | | | 261 | | Long-term royalties due to an affiliate | | | 2,440 | | | | 2,879 | | | | 2,024 | | | 2,440 | | Long-term deferred tax liabilities | | | 5,165 | | | | 7,444 | | | | 6,075 | | | 5,165 | | Other long-term liabilities | | | 1,565 | | | | 730 | | | | 1,559 | | | 1,565 | | | | | | | | | | Total liabilities | | | 65,599 | | | | 63,438 | | | | 55,329 | | | 65,599 | | | | | | | | | | | Commitments and contingencies | | | | | | | | | | | | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | | | Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding | | | — | | | | — | | | | — | | | — | | Common stock, $0.0001 par value, 99,000,000 shares authorized, 27,667,882 shares issued and 26,460,788 shares outstanding in 2007 and 27,617,081 shares issued and 26,409,987 shares outstanding in 2006 | | | 3 | | | | 3 | | | Common stock, $0.0001 par value, 99,000,000 shares authorized, 27,667,882 shares issued and 26,460,788 shares outstanding in 2008 and 27,667,882 shares issued and 26,460,788 shares outstanding in 2007 | | | | 3 | | | 3 | | Additional paid-in capital | | | 40,146 | | | | 38,941 | | | | 40,753 | | | 40,146 | | Retained earnings | | | 62,620 | | | | 66,393 | | | | 44,170 | | | 62,620 | | Accumulated other comprehensive loss | | | (1,123 | ) | | | (1,749 | ) | | | (1,406 | ) | | (1,123 | ) | | | | | | | | | | 83,520 | | | 101,646 | | | | | 101,646 | | | | 103,588 | | | Less treasury stock, at cost, 1,207,094 shares in 2007 and 2006 | | | (14,791 | ) | | | (14,791 | ) | | | | | | | | | | Less treasury stock, at cost, 1,207,094 shares in 2008 and 2007 | | | | (14,791 | ) | | (14,791 | ) | Total shareholders’ equity | | | 86,855 | | | | 88,797 | | | | 68,729 | | | 86,855 | | | | | | | | | | Total liabilities and shareholders’ equity | | $ | 152,454 | | | $ | 152,235 | | | $ | 124,058 | | $ | 152,454 | | | | | | | | | |
See accompanying notes to consolidated financial statements.
MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share information) | | | | | | | | | | | | | | | For the years ended December 31, | | | | 2007 | | | 2006 | | | 2005 | | Net sales | | $ | 412,678 | | | $ | 410,069 | | | $ | 389,383 | | Cost of sales | | | 59,765 | | | | 58,461 | | | | 58,028 | | Commissions and incentives | | | 189,067 | | | | 182,215 | | | | 172,151 | | | | | | | | | | | | | | | | | | 248,832 | | | | 240,676 | | | | 230,179 | | | | | | | | | | | | | | | Gross profit | | | 163,846 | | | | 169,393 | | | | 159,204 | | | | | | Operating expenses: | | | | | | | | | | | | | Selling and administrative expenses | | | 84,298 | | | | 71,892 | | | | 65,923 | | Depreciation and amortization | | | 10,236 | | | | 4,960 | | | | 3,905 | | Other operating costs | | | 61,703 | | | | 48,467 | | | | 43,766 | | | | | | | | | | | | | | | Total operating expenses | | | 156,237 | | | | 125,319 | | | | 113,594 | | | | | | | | | | | | | | | | | | | Income from operations | | | 7,609 | | | | 44,074 | | | | 45,610 | | Interest income | | | 2,700 | | | | 2,513 | | | | 1,778 | | Other income (expense), net | | | 180 | | | | 1,101 | | | | (1,940 | ) | | | | | | �� | | | | | | | | Income before income taxes | | | 10,489 | | | | 47,688 | | | | 45,448 | | | | | | Provision for income taxes | | | (3,895 | ) | | | (15,298 | ) | | | (16,801 | ) | | | | | | | | | | | | | | Net income | | $ | 6,594 | | | $ | 32,390 | | | $ | 28,647 | | | | | | | | | | | | | | | Earnings per common share: | | | | | | | | | | | | | Basic | | $ | 0.25 | | | $ | 1.22 | | | $ | 1.06 | | | | | | | | | | | | | | | Diluted | | $ | 0.25 | | | $ | 1.19 | | | $ | 1.03 | | | | | | | | | | | | | | | Weighted-average common shares outstanding: | | | | | | | | | | | | | Basic | | | 26,443 | | | | 26,598 | | | | 26,990 | | | | | | | | | | | | | | | Diluted | | | 26,893 | | | | 27,219 | | | | 27,771 | | | | | | | | | | | | | | |
| For the years ended December 31, | | 2008 | | 2007 | | 2006 | Net sales | $ | 332,703 | | | $ | 412,678 | | | $ | 410,069 | | Cost of sales | | 48,564 | | | | 59,765 | | | | 58,461 | | Commissions and incentives | | 149,595 | | | | 189,067 | | | | 182,215 | | | | 198,159 | | | | 248,832 | | | | 240,676 | | Gross profit | | 134,544 | | | | 163,846 | | | | 169,393 | | | | | | | | | | | | | | Operating expenses: | | | | | | | | | | | | Selling and administrative expenses | | 81,077 | | | | 84,298 | | | | 71,892 | | Depreciation and amortization | | 12,310 | | | | 10,236 | | | | 4,960 | | Other operating costs | | 55,656 | | | | 61,703 | | | | 48,467 | | Total operating expenses | | 149,043 | | | | 156,237 | | | | 125,319 | | | | | | | | | | | | | | Income (loss) from operations | | (14,499 | ) | | | 7,609 | | | | 44,074 | | Interest income | | 1,604 | | | | 2,700 | | | | 2,513 | | Other income (expense), net | | (5,303 | ) | | | 180 | | | | 1,101 | | Income (loss) before income taxes | | (18,198 | ) | | | 10,489 | | | | 47,688 | | | | | | | | | | | | | | (Provision) benefit for income taxes | | 5,570 | | | | (3,895 | ) | | | (15,298 | ) | Net income (loss) | $ | (12,628 | ) | | $ | 6,594 | | | $ | 32,390 | | | | | | | | | | | | | | Earnings (loss) per common share: | | | | | | | | | | | | Basic | $ | (0.48 | ) | | $ | 0.25 | | | $ | 1.22 | | Diluted | $ | (0.48 | ) | | $ | 0.25 | | | $ | 1.19 | | | | | | | | | | | | | | Weighted-average common shares outstanding: | | | | | | | | | | | | Basic | | 26,461 | | | | 26,443 | | | | 26,598 | | Diluted | | 26,461 | | | | 26,893 | | | | 27,219 | |
See accompanying notes to consolidated financial statements.
MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (in thousands, except per share information) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock Outstanding | | Additional paid in capital | | | Retained earnings | | | Accumulated other comprehensive income (loss) | | | Treasury stock | | | Total shareholders’ equity | | | | Shares | | | Par value | | | | | Shares | | Amounts | | | Balance at December 31, 2004 | | 27,041 | | | $ | 3 | | $ | 34,917 | | | $ | 21,672 | | | $ | 195 | | | 74 | | ($ | 562 | ) | | $ | 56,225 | | Proceeds from stock options exercised | | 244 | | | | — | | | 799 | | | | — | | | | — | | | — | | | — | | | | 799 | | Tax benefit from exercise of stock options | | — | | | | — | | | 822 | | | | — | | | | — | | | — | | | — | | | | 822 | | Tender of common stock to exercise stock options | | 33 | | | | — | | | 231 | | | | — | | | | — | | | 12 | | | (231 | ) | | | — | | Benefit related to stock options and warrants | | — | | | | — | | | (70 | ) | | | — | | | | — | | | — | | | — | | | | (70 | ) | Repurchase of common stock | | (580 | ) | | | — | | | — | | | | — | | | | — | | | 580 | | | (6,998 | ) | | | (6,998 | ) | Declared dividends of $0.29 per share | | — | | | | — | | | — | | | | (7,814 | ) | | | — | | | — | | | — | | | | (7,814 | ) | Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | — | | | | — | | | — | | | | — | | | | (1,310 | ) | | — | | | — | | | | (1,310 | ) | Unrealized gain from investments classified as available for sale, net of tax of $15 | | — | | | | — | | | — | | | | — | | | | 17 | | | — | | | — | | | | 17 | | Net income | | — | | | | — | | | — | | | | 28,647 | | | | — | | | — | | | — | | | | 28,647 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 27,354 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2005 | | 26,738 | | | | 3 | | | 36,699 | | | | 42,505 | | | | (1,098 | ) | | 666 | | | (7,791 | ) | | | 70,318 | | Proceeds from stock options exercised | | 213 | | | | — | | | 1,050 | | | | — | | | | — | | | — | | | — | | | | 1,050 | | Tax benefit from exercise of stock options | | — | | | | — | | | 497 | | | | — | | | | — | | | — | | | — | | | | 497 | | Charge related to stock-based compensation | | — | | | | — | | | 695 | | | | | | | | | | | | | | | | | | 695 | | Repurchase of common stock | | (541 | ) | | | — | | | — | | | | — | | | | — | | | 541 | | | (7,000 | ) | | | (7,000 | ) | Declared dividends of $0.32 per share | | — | | | | — | | | — | | | | (8,502 | ) | | | — | | | — | | | — | | | | (8,502 | ) | Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | — | | | | — | | | — | | | | — | | | | (622 | ) | | — | | | — | | | | (622 | ) | Unrealized gain from investments classified as available-for-sale, net of tax of $9 | | — | | | | — | | | — | | | | — | | | | 15 | | | — | | | — | | | | 15 | | Charge related to adopting FAS 158, net of tax of $30 | | — | | | | — | | | — | | | | — | | | | (44 | ) | | — | | | — | | | | (44 | ) | Net income | | — | | | | — | | | — | | | | 32,390 | | | | — | | | — | | | — | | | | 32,390 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 31,739 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2006 | | 26,410 | | | | 3 | | | 38,941 | | | | 66,393 | | | | (1,749 | ) | | 1,207 | | | (14,791 | ) | | | 88,797 | | Proceeds from stock options exercised | | 51 | | | | — | | | 157 | | | | — | | | | — | | | — | | | — | | | | 157 | | Tax benefit from exercise of stock options | | — | | | | — | | | 100 | | | | — | | | | — | | | — | | | — | | | | 100 | | Charge related to stock-based compensation | | — | | | | — | | | 948 | | | | — | | | | — | | | — | | | — | | | | 948 | | Cumulative impact of a change in accounting for income tax uncertainties pursuant to FIN 48 | | — | | | | — | | | — | | | | (845 | ) | | | — | | | — | | | — | | | | (845 | ) | Declared dividends of $0.36 per share | | — | | | | — | | | — | | | | (9,522 | ) | | | — | | | — | | | — | | | | (9,522 | ) | Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | — | | | | — | | | — | | | | — | | | | 613 | | | — | | | — | | | | 613 | | Pension obligations, net of tax of $8 | | — | | | | — | | | — | | | | — | | | | 12 | | | — | | | — | | | | 12 | | Unrealized gain from investments classified as available-for-sale, net of tax | | — | | | | — | | | — | | | | — | | | | 1 | | | — | | | — | | | | 1 | | Net income | | — | | | | — | | | — | | | | 6,594 | | | | — | | | — | | | — | | | | 6,594 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,220 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2007 | | 26,461 | | | $ | 3 | | $ | 40,146 | | | $ | 62,620 | | | ($ | 1,123 | ) | | 1,207 | | ($ | 14,791 | ) | | $ | 86,855 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock Outstanding | | Additional paid in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | Total shareholders’ equity | | Shares | | Par value | | | | | Shares | | Amounts | | Balance at December 31, 2005 | | 26,738 | | $ | 3 | | $ | 36,699 | | $ | 42,505 | | $ | (1,098 | ) | 666 | | $ | (7,791 | ) | $ | 70,318 | | Proceeds from stock options exercised | | 213 | | | — | | | 1,050 | | | — | | | — | | — | | | — | | | 1,050 | | Tax benefit from exercise of stock options | | — | | | — | | | 497 | | | — | | | — | | — | | | — | | | 497 | | Charge related to stock-based compensation | | — | | | — | | | 695 | | | | | | | | | | | | | | 695 | | Repurchase of common stock | | (541 | ) | | — | | | — | | | — | | | — | | 541 | | | (7,000 | ) | | (7,000 | ) | Declared dividends of $0.32 per share | | — | | | — | | | — | | | (8,502 | ) | | — | | — | | | — | | | (8,502 | ) | Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | — | | | — | | | — | | | — | | | (622 | ) | — | | | — | | | (622 | ) | Unrealized gain from investments classified as available-for-sale, net of tax of $9 | | — | | | — | | | — | | | — | | | 15 | | — | | | — | | | 15 | | Charge related to adopting FAS 158, net of tax of $30 | | — | | | — | | | — | | | — | | | (44 | ) | — | | | — | | | (44 | ) | Net income | | — | | | — | | | — | | | 32,390 | | | — | | — | | | — | | | 32,390 | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | 31,739 | | Balance at December 31, 2006 | | 26,410 | | | 3 | | | 38,941 | | | 66,393 | | | (1,749 | ) | 1,207 | | | (14,791 | ) | | 88,797 | | Proceeds from stock options exercised | | 51 | | | — | | | 157 | | | — | | | — | | — | | | — | | | 157 | | Tax benefit from exercise of stock options | | — | | | — | | | 100 | | | — | | | — | | — | | | — | | | 100 | | Charge related to stock-based compensation | | — | | | — | | | 948 | | | — | | | — | | — | | | — | | | 948 | | Cumulative impact of a change in accounting for income tax uncertainties pursuant to FIN 48 | | — | | | — | | | — | | | (845 | ) | | — | | — | | | — | | | (845 | ) | Declared dividends of $0.36 per share | | — | | | — | | | — | | | (9,522 | ) | | — | | — | | | — | | | (9,522 | ) | Components of comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | — | | | — | | | — | | | — | | | 613 | | — | | | — | | | 613 | | Pension obligations, net of tax of $8 | | — | | | — | | | — | | | — | | | 12 | | — | | | — | | | 12 | | Unrealized gain from investments classified as available-for-sale, net of tax | | — | | | — | | | — | | | — | | | 1 | | — | | | — | | | 1 | | Net income | | — | | | — | | | — | | | 6,594 | | | — | | — | | | — | | | 6,594 | | Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | 7,220 | | Balance at December 31, 2007 | | 26,461 | | | 3 | | | 40,146 | | | 62,620 | | | (1,123 | ) | 1,207 | | | (14,791 | ) | | 86,855 | | Tax shortfall from expiration of stock options | | — | | | — | | | (120 | ) | | — | | | — | | — | | | — | | | (120 | ) | Charge related to stock-based compensation | | — | | | — | | | 727 | | | — | | | — | | — | | | — | | | 727 | | Declared dividends of $0.22 per share | | — | | | — | | | — | | | (5,822 | ) | | — | | — | | | — | | | (5,822 | ) | Components of comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation | | — | | | — | | | — | | | — | | | (318 | ) | — | | | — | | | (318 | ) | Pension obligations, net of tax of $26 | | — | | | — | | | — | | | — | | | 35 | | — | | | — | | | 35 | | Net loss | | — | | | — | | | — | | | (12,628 | ) | | — | | — | | | — | | | (12,628 | ) | Total comprehensive loss | | | | | | | | | | | | | | | | | | | | | | (12,911 | ) | Balance at December 31, 2008 | | 26,461 | | $ | 3 | | $ | 40,753 | | $ | 44,170 | | $ | (1,406 | ) | 1,207 | | $ | (14,791 | ) | $ | 68,729 | |
See accompanying notes to consolidated financial statements.
MANNATECH, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) | | | For the years ended December 31, | | For the years ended December 31, | | | 2007 | | | 2006 | | | 2005 | | 2008 | | 2007 | | 2006 | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | Net income | | $ | 6,594 | | | $ | 32,390 | | | $ | 28,647 | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | Net income (loss) | | $ | (12,628 | ) | | $ | 6,594 | | $ | 32,390 | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | Depreciation and amortization | | | 10,236 | | | | 4,960 | | | | 3,905 | | | 12,310 | | | | 10,236 | | | 4,960 | | Provision for inventory losses | | | 568 | | | | 320 | | | | 338 | | | 1,321 | | | | 568 | | | 320 | | Provision for doubtful accounts | | | 877 | | | | 150 | | | | — | | | 23 | | | | 877 | | | 150 | | Loss on disposal of assets | | | 39 | | | | 127 | | | | 75 | | | 468 | | | | 39 | | | 127 | | Tax benefit from exercise of stock options | | | — | | | | — | | | | 822 | | | Accounting charge related to stock-based compensation expense | | | 948 | | | | 695 | | | | (70 | ) | | 727 | | | | 948 | | | 695 | | Deferred income taxes | | | (2,440 | ) | | | 5,360 | | | | 3,087 | | | (3,062 | ) | | | (2,440 | ) | | | 5,360 | | Accrued interest on receivable | | | — | | | | (7 | ) | | | (9 | ) | | — | | | | — | | | (7 | ) | Changes in operating assets and liabilities: | | | | | | | | | | | | | | | | | Accounts receivable | | | (495 | ) | | | (441 | ) | | | (161 | ) | | 316 | | | | (495 | ) | | | (441 | ) | Income tax receivable | | | 28 | | | | (2,174 | ) | | | — | | | (1,395 | ) | | | 28 | | | (2,174 | ) | Inventories | | | (337 | ) | | | (4,456 | ) | | | (7,163 | ) | | (9,512 | ) | | | (337 | ) | | | (4,456 | ) | Prepaid expenses and other current assets | | | (1,730 | ) | | | (847 | ) | | | (300 | ) | | 1,927 | | | | (1,730 | ) | | | (847 | ) | Other assets | | | (76 | ) | | | (228 | ) | | | 9 | | | (9 | ) | | | (76 | ) | | | (228 | ) | Accounts payable | | | 276 | | | | (2,136 | ) | | | 3,279 | | | 1,407 | | | | 276 | | | (2,136 | ) | Accrued expenses and taxes payable | | | 5,646 | | | | 7,318 | | | | 5,905 | | | (10,848 | ) | | | 5,646 | | | 7,318 | | Commissions and incentives payable | | | (4,430 | ) | | | (104 | ) | | | 3,144 | | | 362 | | | | (4,430 | ) | | | (104 | ) | Deferred revenue | | | 2,072 | | | | (1,015 | ) | | | 1,456 | | | (1,295 | ) | | | 2,072 | | | (1,015 | ) | | | | | | | | | | | | Net cash provided by operating activities | | | 17,776 | | | | 39,912 | | | | 42,964 | | | | | | | | | | | | | | Net cash provided by (used in) operating activities | | | (19,888 | ) | | | 17,776 | | | 39,912 | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | Acquisition of property and equipment | | | (13,409 | ) | | | (26,720 | ) | | | (13,114 | ) | | (5,614 | ) | | | (13,409 | ) | | | (26,720 | ) | Proceeds from sale of assets | | | — | | | | 18 | | | | — | | | 3 | | | | — | | | 18 | | Decrease in restricted cash | | | — | | | | 2,636 | | | | 209 | | | Increase in restricted cash | | | (6,854 | ) | | | (3,609 | ) | | | (2,467 | ) | | Change in restricted cash | | | (139 | ) | | | (6,854 | ) | | | (973 | ) | Sale of investments | | | 12,424 | | | | — | | | | — | | | 20,350 | | | | 12,424 | | | — | | Purchase of investments | | | — | | | | (8,011 | ) | | | (276 | ) | | (7,400 | ) | | | — | | | (8,011 | ) | | | | | | | | | | | | Net cash used in investing activities | | | (7,839 | ) | | | (35,686 | ) | | | (15,648 | ) | | | | | | | | | | | | | Net cash provided by (used in) investing activities | | | 7,200 | | | | (7,839 | ) | | | (35,686 | ) | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | Tax benefit from exercise of stock options | | | 100 | | | | 497 | | | | — | | | — | | | | 100 | | | 497 | | Proceeds from stock options exercised | | | 157 | | | | 1,050 | | | | 799 | | | — | | | | 157 | | | 1,050 | | Payment of cash dividends | | | (9,522 | ) | | | (8,502 | ) | | | (7,563 | ) | | (5,822 | ) | | | (9,522 | ) | | | (8,502 | ) | Repayment of capital lease obligation | | | (107 | ) | | | (78 | ) | | | (11 | ) | | (115 | ) | | | (107 | ) | | | (78 | ) | Repurchase of common stock | | | — | | | | (7,000 | ) | | | (6,998 | ) | | — | | | | — | | | (7,000 | ) | | | | | | | | | | | | Net cash used in financing activities | | | (9,372 | ) | | | (14,033 | ) | | | (13,773 | ) | | (5,937 | ) | | | (9,372 | ) | | | (14,033 | ) | | | | | | | | | | | | Effect of currency exchange rate changes on cash and cash equivalents | | | 837 | | | | (699 | ) | | | (1,534 | ) | | 2,467 | | | | 837 | | | (699 | ) | | | | | | | | | | | | Net increase (decrease) in cash and cash equivalents | | | 1,402 | | | | (10,506 | ) | | | 12,009 | | | (16,158 | ) | | | 1,402 | | | (10,506 | ) | Cash and cash equivalents at the beginning of year | | | 45,701 | | | | 56,207 | | | | 44,198 | | | 47,103 | | | | 45,701 | | | 56,207 | | | | | | | | | | | | | Cash and cash equivalents at the end of year | | $ | 47,103 | | | $ | 45,701 | | | $ | 56,207 | | $ | 30,945 | | | $ | 47,103 | | $ | 45,701 | | | | | | | | | | | | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | | Income taxes paid, net | | $ | 5,291 | | | $ | 14,139 | | | $ | 4,913 | | $ | 1,266 | | | $ | 4,146 | | $ | 14,139 | | Interest paid on capital leases | | $ | 21 | | | $ | 17 | | | $ | — | | $ | 17 | | | $ | 21 | | $ | 17 | | SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | Summary of non-cash investing and financing activities: | | | | | | | | | | | | Fixed assets acquired through capital leases | | $ | 37 | | | $ | 496 | | | $ | — | | $ | 30 | | | $ | 37 | | $ | 496 | | Treasury shares tendered to exercise stock options | | $ | — | | | $ | — | | | $ | 231 | | | Declaration of dividends | | $ | — | | | $ | — | | | $ | 2,139 | | | Unrealized gains from investments | | $ | 1 | | | $ | 15 | | | $ | 17 | | $ | — | | | $ | 1 | | $ | 15 | | Plan benefit obligation related to adopting FAS 158 | | $ | — | | | $ | 44 | | | $ | — | | | |
See accompanying notes to consolidated financial statements.
MANNATECH, INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Mannatech, Incorporated (together with its subsidiaries, the “Company”), located in Coppell, Texas, was incorporated in the state of Texas on November 4, 1993 and is listed on the NASDAQ Global Select Market under the symbol “MTEX”. Mannatech, Incorporated (together with its subsidiaries, the “Company”)The Company develops, markets, and sells high-quality, proprietary nutritional supplements, skin care and topical products, and weight-management products that are primarily sold to independent associates and members located in the United States, Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, and Germany.Singapore. Independent associates (“associates”) purchase the Company’s products at published wholesale prices for the primary purpose of personal consumption and/or saleto either sell to retail customers.customers or consume personally. Members purchase the Company’s products at a discount from published retail prices primarily for personal consumption. The Company cannot distinguish its personal consumption sales from its other sales because it has no involvement in its products after delivery, other than usual and customary product warranties and returns. Only independent associates are eligible to earn commissions and incentives. Principles of Consolidation The consolidated financial statements and footnotes include the accounts of the Company and all of its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates In preparing
The preparation of the Company’s consolidated financial statements in conformityaccordance with accounting principles generally accepted in the United States requires the use of America, management is required to make certain estimates and assumptions that could affect itsthe reported amountsvalue of assets, liabilities, revenues and expenses duringexpenses. These estimates are based on historical experience and various other factors. The Company continually evaluates the reporting periods,information used to make these estimates as well as disclosures aboutthe business and economic environment change. Historically, actual results have not varied materially from the Company’s estimates. The Company does not currently anticipate a significant change in its contingent assets and liabilities. Significant estimates for the Company include inventory obsolescence, deferred revenues, sales returns, and valuation allowance for deferred tax assets.assumptions related to these estimates. Actual results couldmay differ from such estimates.these estimates under different assumptions or conditions. Cash and Cash Equivalents The Company considers all highly liquid investments including credit card receivables, with original maturities of three months or less to be cash equivalents. As of December 31, 2007 and 2006, cash and cash equivalents held in bank accounts in foreign countries totaled $40.6 million and $33.8 million, respectively. The Company includes in its cash and cash equivalents credit card receivables due from its credit card processor, as the cash proceeds from credit card receivables are generally received within 24 to 72 hours after receiving the approval code from the credit card processor.hours. As of December 31, 20072008 and 2006,2007, credit card receivables were $3.3 million and $2.6 million, respectively. Additionally, as of December 31, 2008 and $3.72007, cash and cash equivalents held in bank accounts in foreign countries totaled $18.2 million and $40.6 million, respectively. Restricted Cash The Company is required to restrict cash related tofor i) direct selling insurance premiums and credit card sales in the Republic of Korea, which as of December 31, 2007ii) reserve on credit card sales in North America, and 2006 was $11.5 million and $2.9 million, respectively. In addition, the Company is required to restrict cash related to its Canada operations, which as of December 31, 2007 and 2006 was $0.3 million and $0.4 million, respectively. The Company also restricts cash related to a term deposit in an Australian bank, totaling $0.2 million, as collateral for its Australian building lease. The restricted term deposit is expected to be renewed through March 2008, when the Australianiii) Australia building lease expires. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company offers an annual travel incentive for its independent associates who qualify for its annual travel incentive. The North American travel incentive for 2007 was a cruise. The cruise ship company requires a letter of credit as a security deposit.collateral. As of December 31, 2008 and 2007, and 2006, the Company hadour total restricted cash of $0was $9.4 million and $1.9$12.0 million, respectively, held as collateral for this letter of credit.respectively.
Accounts Receivable Accounts receivable are carried at their estimated collectible amounts. Beginning in April 2007, with the implementation of the Company’s ERP system, receivablesReceivables are created upon shipment of an order if the credit card payment is rejected or does not match the order total. As of December 31, 2008 and 2007, receivables consisted primarily of amounts due from members and associates. As of December 31, 2006, receivables consisted of a receivable due from a bank and payments due from manufacturers for purchases of raw material inventories. The Company periodically evaluates its receivables for collectibilitycollectability based on historical experience, recent account activities, and the length of time receivables are past due and writes-off receivables when they become uncollectible. At December 31, 20072008 and 2006,2007, the Company held an allowance for doubtful accounts of $0.9less than $0.1 million and $0,$0.9 million, respectively. In addition, at December 31, 2007, and 2006, accounts receivable included a receivable due from MannaRelief, a relatedthen-related party, of $0.1 and $0.2 million, respectively, and a fully-reserved note receivable due from an affiliate of approximately $0.2 million.$0.1million.
Long-Term Investments The Company accounts for its investments in accordance with the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (��(“FAS 115”). Under FAS 115, debt securities that have readily determinable fair values are classified in three categories: held-to-maturity, trading, or available-for-sale. The Company’s investments are all categorized as available-for-sale and are recorded at fair value, which is determined based on quoted market prices with unrealized gains and losses included in shareholders’ equity, net of tax. Any decline in the market value of an investment that is deemed to be other-than-temporary results in an impairment to reduce the carrying amount to fair value, recorded to earnings and establishing a new cost basis for the investment. The Company records any realized gains and losses on sales of its investments in other income (expense), net in its accompanying Consolidated Statements of Operations, based on the specific identification method. Property and Equipment Property and equipment are stated at cost, less accumulated depreciation and amortization computed using the straight-line method over the estimated useful life of each asset. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the improvements. Expenditures for maintenance and repairs are charged to expense as incurred. The cost of property and equipment sold or otherwise retired and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in other operating costs in the accompanying Consolidated Statements of Operations. The estimated useful lives of fixed assets are as follows: | | | | | Estimated useful life | Office furniture and equipment | | 5 to 7 | years | Computer hardware and software | | 3 to 5 | years | Automobiles | | 3 to 5 | years | Leasehold improvements | | 2 to 10 | years | Construction in progress | | 2 to 10 | years |
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Property and equipment are reviewed for impairment whenever an event or change in circumstances indicates that the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes a comparison of future projected cash flows generated by the asset or group of assets with its associated net carrying value. If the net carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent the carrying amount of the asset exceeds its fair value. Inventories Inventories consist of raw materials, work in progress, finished goods, and promotional materials that are stated at the lower of cost (on a weighted-average basis) or market.market (using standard costs that approximate average costs). The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are reserved or written off. Other Assets As of December 31, 20072008 and 2006,2007, other assets of $1.5 million primarily consisted of deposits for building leases in various locations totaling $1.5 million and $1.4 million, respectively.locations. Commissions and Incentives Independent associates earn commissions and incentives based on their direct and indirect commissionable net sales over 13 business periods. Each business period equals 28 days. The Company accrues commissions and incentives when earned by independent associates and pays certain of its commissions related toon product sales three weeks following the business period end and pays commissions related toon its pack sales five weeks following the business period end.
Long-Term Royalty Liability In August 2003, the Company entered into a Long-Term Post-Employment Royalty Agreement with Dr. Bill McAnalley, the Company’s former Chief Science Officer, pursuant to which the Company is required to pay Dr. McAnalley, or his heirs, royalties for ten years beginning September 2005 through August 2015. Quarterly payments related to this Long-Term Post-Employment Royalty Agreement are based on certain applicable annual global product sales by the Company in excess of $105.4 million. At the time the Company entered into this Long-Term Post-Employment Royalty Agreement, it was considered a post-employment benefit and the Company was required to measure and accrue the present value of the estimated future royalty payments related to the post-employment royalty benefit and recognize it over the life of Dr. McAnalley’s employment agreement, which was two years. As of December 31, 2008, the Company’s liability related to this royalty agreement was $2.4 million, of which $0.4 million was currently due and included in accrued expenses. Other Long-Term Liabilities At December 31, 2007 and 2006, the Company maintained building
Certain operating leases for itsthe Company’s regional office facilities located incontain a restoration clause that requires the United Kingdom, Japan,Company to restore the Republicpremises to its original condition. As of Korea,December 31, 2008 and Taiwan and2007, accrued restoration costs related to these leases totalingamounted to $0.4 million and $0.2 million, respectively.million. At December 31, 20072008 and 2006,2007, the Company also recorded a long-term liability for an estimated deferred benefit obligation related to itsa deferred benefit plan for its Japan operations of $0.5$0.8 million and $0.4$0.5 million, respectively. Income Taxes The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. The Company evaluates the probability of realizing the future benefits of its deferred tax assets and provides a valuation allowance for the portion of any deferred tax assets where the likelihood of realizing an income tax benefit in the future does not meet the more likely than not criterion for recognition. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue Recognition The Company’s revenues arerevenue is derived from sales of its products, sales of its starter and renewal packs, and shipping fees. Substantially all of the Company’s product sales are soldmade to independent associates at published wholesale prices and to members at discounted published retail prices. The Company recognizes revenue upon receipt of packs and products by its customers. The Company records revenue net of any sales taxes and records a reserve for expected sales returns based on its historical experience. In July 2007, the Company amended its sales return policy to remove the 10% restocking fee previously charged to returns made within 180 days of purchase, which increased sales returns during the last few months of the year. The Company increased the sales reserve accordingly. The Company defers certain components of its revenue. Total deferred revenue consists of revenue received from: i) from sales of packs and products which were shipped but not received by the customers by period end; ii) related to a one-year magazine subscription;subscriptions; iii) from pack sales when the pack sale price exceededexceeds the wholesale value of all individual components within the pack; and iv) related to prepaid registration fees from customers planning to attend a future corporate-sponsored event. The Company recognizes deferred revenue related tofrom shipped packs and products upon receipt by the customer. The Company recognizes deferredCorporate-sponsored event revenue related to future corporate-sponsored eventsis recognized when the event is held. All other deferred revenue is recognized ratably over one year. Components of deferred revenue are as follows, as of December 31: | | | 2007 | | 2006 | | 2008 | | 2007 | | | (in thousands) | | (in thousands) | Revenue related to undelivered packs and products | | $ | 4,406 | | $ | 1,934 | | $ | 3,228 | | $ | 4,406 | Revenue related to one-year magazine subscription and pack sales exceeding the wholesale value of individual components sold | | | 141 | | | 419 | | | 133 | | | 141 | Revenue related to future corporate-sponsored events | | | 222 | | | 344 | | | 115 | | | 222 | | | | | | | Total deferred revenue | | $ | 4,769 | | $ | 2,697 | | $ | 3,476 | | $ | 4,769 | | | | | | |
We estimate a sales return reserve for expected sales refunds based on our historical experience over a rolling six- month period. If actual results differ from our estimated sales returns reserves due to various factors, the amount of revenue recorded each period could be materially affected. Historically, our sales returns have not materially changed through the years as the majority of our customers return their merchandise within the first 90 days after the original sale. Sales returns have averaged 1.5% or less of our gross sales and for the years ended December 31, 2008 and 2007, were composed of the following (in thousands): | 2008 | | 2007 | Sales reserve as of January 1 | $ | 572 | | | $ | 444 | | Provision related to sales made in current year | | 4,339 | | | | 4,683 | | Provision related to sales made in prior periods | | 359 | | | | 417 | | Actual returns or credits related to current year | | (3,625 | ) | | | (4,111 | ) | Actual returns or credits related to prior periods | | (926 | ) | | | (861 | ) | Sales reserve as of December 31 | $ | 719 | | | $ | 572 | | | | | | | | | | |
Shipping and Handling Costs The Company records freight and shipping fees collected from its customers as revenue. The Company records inbound freight as a component of inventory and cost of sales and records shipping and handling costs associated with shipping products to its customers as selling and administrative expenses. Total shipping and handling costs included in selling and administrative expenses were approximately $15.1 million, $18.8 million, $18.6 million, and $18.2$18.6 million for the years ended December 31, 2008, 2007, 2006, and 2005,2006, respectively. Advertising Costs The Company expenses advertising and promotions in selling and administrative expenses when incurred. Advertising and promotional expenses were approximately $8.6 million, $11.5 million, $10.3 million, and $8.7$10.3 million for the years ended December 31, 2008, 2007, 2006, and 2005,2006, respectively. Educational and promotional items, called sales aids, are sold to independent associates to assist in their sales efforts and are generally included in inventories and charged to cost of sales when sold. Accounting for Stock-Based Compensation The Company currently has threeone active stock-based compensation plans, all ofplan, which werewas approved by its shareholders.shareholders at its 2008 Annual Shareholder’s meeting held on June 18, 2008. The Company generally grants stock options to its employees, consultants, and board members with an exercise price equal to MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the closing price of its common stock on the date of grant with a term no greater than 10 years. Generally, stock options vest over two or three years. Employees and directorsIncentive stock options granted to shareholders who own 10% or more of the Company’s outstanding stock are granted incentive stock options at an exercise price that may not be less than 110% of the closing price of the Company’s common stock on the date of grant and have a term no greater than five years, and vest over four years. At the date of grant, the Company determines the fair value of the stock option award and recognizes compensation expense over the requisite service period, which is generally the vesting period of the award. The fair value of the stock option award is calculated using the Black-Scholes option-pricing model. Research and Development Costs The Company expenses research and development costs when incurred. Research and development costs related to new product development, enhancement of existing products, clinical studies and trials, Food and Drug Administration compliance studies, general supplies, internal salaries, third-party contractors, and consulting fees were approximately $5.0 million, $6.6 million, $6.5 million, and $5.0$6.5 million for the years ended December 31, 2008, 2007, 2006, and 2005,2006, respectively. Salaries and contract labor are included in selling and administrative expenses and all other research and development costs are included in other operating costs. Software Development Costs The Company capitalizes qualifying internal payroll and external contracting and consulting costs related to the development of internal use software that are incurred during the application development stage, which includes design of
the software configuration and interfaces, coding, installation, and testing. Costs incurred during the preliminary project along with post-implementation stages of internal use software are expensed as incurred. The Company amortizes such costs over the estimated useful life of the software, which is three orto five years once the software has been placed in service. The Company capitalized software development costs Concentration Risk A significant portion of approximately $4.5 million, $18.4 million,the Company’s revenue is derived from core Ambrotose® complex products, which include the Ambrotose® products and $12.1 million in 2007, 2006, and 2005, respectively. Amortization expense related to capitalized software development costs was approximately $5.9 million, $1.5 million, and $1.1 million forAdvanced Ambrotose® products. For the years ended December 31, 2008 and 2007, 2006,revenue from the core Ambrotose® products accounted for 35.9% and 2005,38.1% of the Company’s consolidated net sales, respectively. Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, investments, receivables, and restricted cash. The Company utilizes financial institutions that the Company considers to be of high credit quality. Fair Value of Financial Instruments The fair value of the Company’s financial instruments, including cash and cash equivalents, restricted cash, time deposits, investments, receivables, deferred revenues, payables, and accrued expenses, approximate their carrying values due to their relatively short maturities. Investments are classified as available-for-sale and carried at fair value.See Note 4 (“Fair Value”) for more information. Comprehensive Income (loss) and Accumulated Other Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources and includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company’s comprehensive income (loss) consists of the Company’s net income (loss), foreign currency translation adjustments from its Japan, Republic of Korea, and Taiwan operations, changes in the pension obligation for its Japanese employees MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and unrealized gains/losses from investments classified as available-for-sale, and in the year ended December 31, 2006, a charge related to the adoption of Financial Accounting Standards Board (“FASB”) Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”). Foreign Currency Translation The Company’s Australian and United Kingdom subsidiaries are operating as limited-risk service providers and the United States dollar is considered to be theirthe functional currency.currency for the majority of the Company’s foreign subsidiaries. As a result, nonmonetary assets and liabilities are translated at their approximate historical rates, monetary assets and liabilities are translated at exchange rates in effect at the end of the year, and revenues and expenses are translated at weighted-average exchange rates for the year. Transaction gains and (losses) totaled approximately $(5.2) million, $0.2 million, and $1.1 million, and ($1.9 million), for the years ended December 31, 2008, 2007, 2006, and 2005,2006, respectively, and are included in other income (expense), net in the Company’s Consolidated Statements of Operations. The Company considers the Japanese Yenlocal currency is the functional currency of its Japanese subsidiary, the Korean Won the functional currency of itsour subsidiaries in Japan, Republic of Korea, subsidiary, and the Taiwan dollar the functional currency of its Taiwan subsidiary because it conducts substantially all of its business in these countries’ currencies.Taiwan. These subsidiaries’ assets and liabilities are translated into United States dollars at exchange rates existing at the balance sheet dates, revenues and expenses are translated at weighted-average exchange rates, and shareholders’ equity and intercompany balances are translated at historical exchange rates. The foreign currency translation adjustment is recorded as a separate component of shareholders’ equity and is included in accumulated other comprehensive income (loss).
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS FIN 48. In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FAS 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. In 2007, the Company recorded $0.8 million to retained earnings related to adopting FIN 48 in the first quarter of 2007.
FIN 48-1SFAS 157. Effective January 1, 2007, the Company adopted the FASB Staff Position (“FSP”) No. FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48,” (FSP FIN 48-1), which was issued on May 2, 2007. FSP FIN 48-1 amends FIN 48 to provide guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The term “effectively settled” replaces the term “ultimately settled” when used to describe recognition, and the terms “settlement” or “settled” replace the terms “ultimate settlement” or “ultimately settled” when used to describe measurement of a tax position under FIN 48. FSP FIN 48-1 clarifies that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The adoption of FSP FIN 48-1 did not have an impact on the accompanying consolidated financial statements.
FAS 157.In September 2006, the FASBFinancial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, “FairFair Value Measurements”, (“FAS 157”).Measurements, or SFAS 157. The provisions of FASSFAS 157 define fair value, establish a framework for
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
measuring fair value in generally accepted accounting principles and expand disclosures about fair value measurements. The provisions of FASSFAS 157 are effective for fiscal years beginning after November 15, 2007. The anticipated2007, with the exception of nonfinancial assets and liabilities that are not currently recognized or disclosed at fair value in the financial statements on a recurring basis, for which SFAS 157 is effective for fiscal years beginning after November 15, 2008. Our adoption of FASSFAS 157 on January 1, 2008 did not have a significant effect on the Company’sour consolidated financial position, results of operations, or cash flows. See Note 4 (“Fair Value”) to the consolidated financial statements included in this report for more information. FASSFAS 159. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115”, (“FASSFAS 159”). FASSFAS 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses on that item shall be reported in current earnings at each subsequent reporting date. FASSFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes the company elects for similar types of assets and liabilities. FASSFAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted. The CompanyAs of January 1, 2008, we did not elect the fair value option for any items permitted under FASSFAS 159.
SFAS 141(R)FAS 141(R).In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations”Business Combinations, (“FASor SFAS 141(R)”). FASSFAS 141(R) replaces FAS StatementSFAS No. 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree, and the goodwill acquired in an acquisition. FASSFAS 141(R) also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FASSFAS 141(R) is effective for acquisitions in fiscal years beginning after December 15, 2008. TheWe will apply SFAS 141(R) prospectively to business combinations for which the acquisition date is on or after January 1, 2009. SFAS 160In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 changes the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. As of December 31, 2008, the Company did not have any minority interests, therefore the adoption of SFAS No. 160 is currently assessingnot expected to have an impact on the impact of FAS 141(R) on ourCompany’s consolidated financial statements. FSP 140-3On February 20, 2008, the FASB issued FASB Staff Position (“FSP”) on Financial Accounting Standards (“FSP 140-3”), “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions”. The FSP provides guidance on the accounting for a transfer of a financial asset and a repurchase financing. Repurchase financing is a repurchase agreement that relates to a previously transferred financial asset between the same counterparties (or consolidated affiliates of either counterparty), that is entered into contemporaneously with, or in contemplation of, the initial transfer. The FSP is effective for financial statements issued for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company does not currently utilize repurchase financing; therefore, the implementation of this FSP is not expected to have a material impact on the Company’s financial position or results of operations. SFAS 161In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosure about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133”, (“SFAS 161”). This statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. The Company currently does not participate in any derivative instruments or hedging activities as defined under SFAS 133 and, therefore, the adoption of SFAS 161 will not have any impact on the Company’s consolidated financial statements. FSP 142-3In April 2008, the FASB issued FASB Staff Position on Financial Accounting Standard (“FSP”) No. 142-3, “Determination of the Useful Life of Intangible Assets”, which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of intangible assets under SFAS No. 142 “Goodwill and Other Intangible Assets”. The intent of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of the expected cash flows used to measure the fair value of the asset under SFAS No. 141 (revised 2007) “Business Combinations” and other U.S. generally accepted accounting principles. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company will apply this FSP prospectively to intangible assets acquired after January 1, 2009. The adoption of FSP 142-3 is not expected to have a material impact on the Company’s consolidated financial position and results of operations. SFAS 162In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. The implementation of this standard will not have a material impact on the Company’s consolidated financial position and results of operations. From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies, which the Company adoptswe adopt as of the specified effective date. Unless otherwise discussed, the Company believeswe believe the impact of recently issued standards that are not yet effective will not have a material impact on itsour consolidated financial statements upon adoption. NOTE 3: INVESTMENTS The Company classifies its investments as available-for-sale. As of December 31, 2008, the Company had no investments. As of December 31, 2007, and 2006, the Company’s investments consisted of the following: | | | | | | | | | | | | | | | | | | | | 2007 | | 2006 | | | Amortized cost | | Net unrealized gain (loss) | | Fair value | | Amortized cost | | Net unrealized gain (loss) | | | Fair value | | | (in thousands) | City, state, or federal agency backed obligations | | $ | 12,950 | | — | | $ | 12,950 | | $ | 25,376 | | (1 | ) | | $ | 25,375 | | | | | | | | | | | | | | | | | | | Total investments, classified as long-term | | $ | 12,950 | | — | | $ | 12,950 | | $ | 25,376 | | (1 | ) | | $ | 25,375 | | | | | | | | | | | | | | | | | | |
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | December 31, 2007 | | | | Amortized cost | | Net unrealized gain (loss) | | | Fair value | | | | (in thousands) | | City, state, or federal agency backed obligations | | $ | 12,950 | | $ | — | | $ | 12,950 | Total investments, classified as long-term | | $ | 12,950 | | $ | — | | $ | 12,950 | | | | | | | | | | | | | |
The fair value of the Company’s investments by contractual maturity as of December 31, 2007, is as follows:
| | | | | | 2007 | | | (in thousands) | Due in one year or less | | $ | — | Due between one and five years | | | — | Due after ten years | | | 12,950 | | | | | | | $ | 12,950 | | | | |
Proceeds from the sale of investment securities available for sale were $12.4$13.0 million in 2007.first quarter of 2008. NOTE 4: FAIR VALUE The Company utilizes fair value measurements to record fair value adjustments to certain financial assets and to determine fair value disclosures. SFAS 157 establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories: Level 1—Quoted unadjusted prices for identical instruments in active markets. • Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all observable inputs and significant value drivers are observable in active markets. • Level 3—Model derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.
The primary objective of the Company’s investment activities is to preserve principal while maximizing yields without significantly increasing risk. The investment instruments held by the Company are money market funds and interest bearing deposits for which quoted market prices are readily available. The Company considers these highly liquid investments to be cash equivalents. These investments are classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets. The table below presents the recorded amount of financial assets measured at fair value on a recurring basis as of December 31, 2008. The Company does not have any material financial liabilities that were required to be measured at fair value on a recurring basis at December 31, 2008. | | Level 1 | | Level 2 | | Level 3 | | Total | Assets | | | | | | | | | Money Market Funds – Fidelity, US | | $ $ | 8,217 | | $ $ | — | | $ $ | — | | $ $ | 8,217 | Overnight Investment Sweep– Chase, US | | 4,818 | | — | | — | | 4,818 | Interest bearing deposits – various banks, Korea | | 8,560 | | — | | — | | 8,560 | Total assets | | $ $ | 21,595 | | $ $ | — | | $ $ | — | | $ $ | 21,595 | Amounts included in: | | | | | | | | | | | | | Cash and cash equivalents | | $ $ | 14,930 | | $ $ | — | | $ $ | — | | $ $ | 14,930 | Long-term restricted cash | | | 6,665 | | | — | | | — | | | 6,665 | Total | | $ | 21,595 | | $ | — | | $ | — | | $ | 21,595 |
NOTE 5: INVENTORIES Inventories consist of raw materials, work in progress, and finished goods, including sales aids.promotional materials. Work in progress includes raw materials shipped to a third-party manufacturer to process into certain finished goods. The Company provides an allowance for any slow-moving or obsolete inventories. Inventories as of December 31, 20072008 and 2006,2007, consisted of the following: | | | 2007 | | 2006 | | 2008 | | 2007 | | | (in thousands) | | (in thousands) | | Raw materials | | $ | 8,846 | | $ | 5,188 | | $ | 13,715 | | | $ | 8,846 | | Work in progress | | | 134 | | | 2,598 | | | — | | | | 134 | | Finished goods, less inventory reserves for obsolescence of $526 in 2007 and $392 in 2006 | | | 14,726 | | | 16,137 | | Finished goods | | | | 18,275 | | | | 15,252 | | Inventory reserves for obsolescence | | | | (677 | ) | | | (526 | ) | | | | | | | $ | 31,313 | | | $ | 23,706 | | | | $ | 23,706 | | $ | 23,923 | | | | | | | |
NOTE 5:6: PROPERTY AND EQUIPMENT As of December 31, 20072008 and 2006,2007, property and equipment consisted of the following: | | | 2007 | | 2006 | | 2008 | | 2007 | | | (in thousands) | | (in thousands) | Office furniture and equipment | | $ | 9,975 | | | $ | 8,421 | | $ | 10,951 | | $ | 9,975 | | Computer hardware and software | | | 55,634 | | | | 24,362 | | | Computer hardware | | | 13,947 | | | 11,768 | | Computer software | | | 44,927 | | | 43,866 | | Automobiles | | | 158 | | | | 85 | | | 128 | | | 158 | | Leasehold improvements | | | 10,805 | | | | 9,296 | | | 11,886 | | | 10,805 | | | | | | | | | | 81,839 | | | 76,572 | | | | | 76,572 | | | | 42,164 | | | Less accumulated depreciation and amortization | | | (33,754 | ) | | | (25,641 | ) | | (45,637 | ) | | (33,754 | ) | | | | | | | | | Property and equipment, net | | | 42,818 | | | | 16,523 | | | 36,202 | | | 42,818 | | Construction in process | | | 1,594 | | | | 24,725 | | | 840 | | | 1,594 | | | | | | | | | $ | 37,042 | | $ | 44,412 | | | | $ | 44,412 | | | $ | 41,248 | | | | | | | | | | |
At December 31, 2008, construction in progress consisted of capitalized software costs of $0.5 million and $0.3 million for in-process leasehold improvements for its corporate facility. At December 31, 2007, construction in progress
consisted of capitalized internally-developed software costs of $1.2 million, computer hardware not yet placed in service of $0.2 million, and $0.2 million for in-process leasehold improvements for its corporate facility. At December 31, 2006, construction in progress consisted of MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
capitalized internally-developed software costs of $24.6 million and $0.1 million for in-process leasehold improvements for its corporate facility. The Company placed its internally-developed software in service during 2007.
NOTE 6:7: CAPITAL LEASE OBLIGATIONS As of December 31, 20072008 and 2006,2007, the net book value of leased assets was $0.4 million and $0.5 million, respectively,$0.4million for equipment leased under threefive non-cancelable capital leases. The leases provide for monthly payments over the next four years. The future minimum lease payments(in thousands)are as follows: | 2008 | | $ | 126 | | | 2009 | | | 126 | | $ | 143 | | 2010 | | | 121 | | | 125 | | 2011 | | | 31 | | | 34 | | 2012 | | | — | | | 3 | | | | | | | Total future minimum lease payments | | | 404 | | | 305 | | Less: Amounts representing interest (effective interest rate 5.804%) | | | (33 | ) | | | | | | | Less: Amounts representing interest (effective interest rate 5.8%) | | | (19 | ) | Present value of minimum lease payments | | | 371 | | | 286 | | Current portion of capital lease obligations | | | (110 | ) | | (131 | ) | | | | | | Long-term portion of capital lease obligations | | $ | 261 | | $ | 155 | | | | | | |
NOTE 7:8: ACCRUED EXPENSES As of December 31, 20072008 and 2006,2007, accrued expenses consisted of the following: | | | 2007 | | 2006 | | 2008 | | 2007 | | | (in thousands) | | (in thousands) | Accrued inventory purchases | | $ | 4,849 | | $ | 5,574 | | $ | 3,069 | | $ | 4,849 | Accrued compensation | | | 5,495 | | | 5,998 | | | 3,841 | | | 5,495 | Accrued royalties | | | 504 | | | 543 | | | 387 | | | 504 | Accrued sales and other taxes | | | 1,114 | | | 1,200 | | | 1,448 | | | 1,114 | Other accrued operating expenses | | | 4,519 | | | 4,722 | | | 4,273 | | | 4,519 | Customer deposits and sales returns | | | 575 | | | 3,518 | | | 729 | | | 575 | Accrued travel expenses related to corporate events | | | 3,993 | | | 2,583 | | | 1,181 | | | 3,993 | Fixed asset purchases | | | 1,811 | | | 1,413 | | | 409 | | | 1,811 | Accrued legal and accounting fees | | | 7,455 | | | 1,290 | | | 8,987 | | | 7,455 | | | | | | | $ | $24,324 | | $ | 30,315 | | | $ | 30,315 | | $ | 26,841 | | | | | | | |
NOTE 8:9: INCOME TAXES The components of the Company’s income (loss) before income taxes are attributable to the following jurisdictions for the years ended December 31: | | | | | | | | | | | | | 2007 | | 2006 | | | 2005 | | | (in thousands) | United States | | $ | 1,747 | | $ | 49,455 | | | $ | 40,848 | Foreign | | | 8,742 | | | (1,767 | ) | | | 4,600 | | | | | | | | | | | | | | $ | 10,489 | | $ | 47,688 | | | $ | 45,448 | | | | | | | | | | | |
| 2008 | | 2007 | | 2006 | | (in thousands) | United States | $ | (20,297 | ) | | $ | 1,747 | | | $ | 49,455 | | Foreign | | 2,099 | | | | 8,742 | | | | (1,767 | ) | | $ | (18,198 | ) | | $ | 10,489 | | | $ | 47,688 | | | | | | | | | | | | | | |
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The components of the Company’s income tax provision (benefit) for the years ended December 31 are as follows: | | | | | | | | 2008 | | 2007 | | 2006 | | Current provision (benefit): | | | (in thousands) | | Federal | | | $ | (3,876 | ) | | $ | 3,022 | | $ | 8,838 | | State | | | | (95 | ) | | | 362 | | 708 | | Foreign | | | | 1,583 | | | | 2,995 | | | | 327 | | | | 2007 | | 2006 | | 2005 | | | (2,388 | ) | | | 6,379 | | | | 9,873 | | | | (in thousands) | | Current provision: | | | | | | | | Deferred provision (benefit): | | | | | | | | | | | | Federal | | $ | 3,022 | | | $ | 8,838 | | | $ | 10,880 | | | (2,411 | ) | | | (2,494 | ) | | | 5,693 | | State | | | 362 | | | | 708 | | | | 746 | | | (299 | ) | | | (182 | ) | | 417 | | Foreign | | | 2,995 | | | | 327 | | | | 2,014 | | | (472 | ) | | | 192 | | | | (685 | ) | | | | | | | | | | | | (3,182 | ) | | | (2,484 | ) | | | 5,425 | | | | | 6,379 | | | | 9,873 | | | | 13,640 | | $ | (5,570 | ) | | $ | 3,895 | | | $ | 15,298 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred provision (benefit): | | | | | | | | Federal | | | (2,494 | ) | | | 5,693 | | | | 1,892 | | State | | | (182 | ) | | | 417 | | | | 175 | | Foreign | | | 192 | | | | (685 | ) | | | 1,094 | | | | | | | | | | | | | | | (2,484 | ) | | | 5,425 | | | | 3,161 | | | | | | | | | | | | | | $ | 3,895 | | | $ | 15,298 | | | $ | 16,801 | | | | | | | | | | | |
A reconciliation of the Company’s effective income tax rate and the United States federal statutory income tax rate is summarized as follows, for the years ended December 31: | | | 2007 | | 2006 | | 2005 | | | 2008 | | 2007 | | 2006 | Federal statutory income taxes | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % | | 35.0 | % | State income taxes, net of federal benefit | | 1.6 | | | 1.5 | | | 1.3 | | | 0.4 | | | 1.6 | | | 1.5 | | Difference in foreign and United States tax on foreign operations | | (0.6 | ) | | (0.2 | ) | | 1.5 | | | (0.6 | ) | | (0.6 | ) | | (0.2 | ) | Effect of changes in valuation allowance for net operating loss carryforwards | | (3.1 | ) | | 0.8 | | | 1.1 | | | (1.1 | ) | | (3.1 | ) | | 0.8 | | Research and experimentation income tax credits | | — | | | (3.2 | ) | | — | | | — | | | — | | | (3.2 | ) | Effect of change in FIN 48 (net) | | | 5.5 | | | 1.1 | | | — | | Other | | 4.2 | | | (1.8 | ) | | (1.9 | ) | | (8.6 | ) | | 3.1 | | | (1.8 | ) | | | | | | | | | | | | 30.6 | % | | 37.1 | % | | 32.1 | % | | | 37.1 | % | | 32.1 | % | | 37.0 | % | | | | | | | | | | | | | | | | | | | | | |
For 2008, the Company’s effective income tax rate was lower than what would be expected if the federal statutory income tax rate were applied to income before taxes primarily because of favorable differences from foreign operations. For 2007, the Company’s effective income tax rate was higher than what would be expected if the federal statutory income tax rate were applied to income before income taxes primarily because of unfavorable permanent items from foreign operations. The tax rate difference for 2006 was primarily due to filing for research and experimentation income tax credits totaling $1.6 million for 2002 through 2005 activities. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)F-17
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities consisted of the following at December 31: | | | 2007 | | 2006 | | | 2008 | | 2007 | | | (in thousands) | | | (in thousands) | | Deferred tax assets: | | | | | | | | | | | | Current: | | | | | | | | | | | | Deferred revenue | | $ | 160 | | | $ | 286 | | | $ | 63 | | $ | 160 | | Inventory capitalization | | | 258 | | | | 281 | | | | 554 | | | 258 | | Inventory reserves | | | 220 | | | | 147 | | | | 128 | | | 220 | | Accrued expenses | | | 1,228 | | | | 974 | | | | 4,314 | | | 1,228 | | Net operating loss carryforward for its Japan subsidiary | | | — | | | | 626 | | | Net operating loss | | | | 152 | | | — | | Other | | | 577 | | | | 457 | | | | 1,407 | | | 577 | | | | | | | | | | Total current deferred tax assets | | | 2,443 | | | | 2,771 | | | | 6,618 | | | 2,443 | | | | | | | | | | Noncurrent: | | | | | | | | | | | | Depreciation and amortization | | | 429 | | | | 975 | | | | — | | | 429 | | Net operating loss carryforward for its Republic of Korea and Taiwan subsidiaries(1) | | | 743 | | | | 1,069 | | | Deferred royalty for affiliate | | | 1,087 | | | | 1,253 | | | Net operating loss carryforward for its Taiwan subsidiary(1) | | | | 932 | | | 743 | | Deferred royalty | | | | 904 | | | 1,087 | | Non-cash accounting charges related to stock options and warrants | | | 565 | | | | 310 | | | | 386 | | | 565 | | Accrued expenses | | | 1,997 | | | | — | | | | 28 | | | 1,997 | | Other | | | 341 | | | | 379 | | | | 156 | | | 341 | | | | | | | | | | Total noncurrent deferred tax assets | | | 5,162 | | | | 3,986 | | | | 2,406 | | | 5,162 | | | | | | | | | | Total deferred tax assets | | | 7,605 | | | | 6,757 | | | | 9,024 | | | 7,605 | | Valuation allowance | | | (743 | ) | | | (1,069 | ) | | | (932 | ) | | (743 | ) | | | | | | | | | Total deferred tax assets, net of valuation allowance | | $ | 6,862 | | | $ | 5,688 | | | $ | 8,092 | | $ | 6,862 | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | Current: | | | | | | | | | | | | Prepaid expenses | | $ | 659 | | | $ | 748 | | | $ | 789 | | $ | 659 | | Other | | | — | | | | 545 | | | | 406 | | | — | | | | | | | | | | Total current deferred tax liabilities | | | 659 | | | | 1,293 | | | | 1,195 | | | 659 | | Noncurrent: | | | | | | | | | | | | Internally-developed software | | | 9,428 | | | | 10,079 | | | | 7,038 | | | 9,428 | | Depreciation and amortization | | | | 35 | | | — | | Other | | | — | | | | 4 | | | | — | | | — | | | | | | | | | | Total noncurrent deferred tax liabilities | | | 9,428 | | | | 10,083 | | | | 7,073 | | | 9,428 | | | | | | | | | | Total deferred tax liabilities | | $ | 10,087 | | | $ | 11,376 | | | $ | 8,268 | | $ | 10,087 | | | | | | | | | | | | | | | |
(1) | (1) | The net operating loss for the Company’s Taiwan subsidiary, totaling $0.7$0.9 million, will expire between the years 2011 and 2013. The net operating loss for the Republic of Korea was fully utilized in 2007.2015. |
At December 31, 20072008 and 2006,2007, the Company’s valuation allowance was $0.7$0.9 million and $1.1$0.7 million, respectively. FAS 109 requires that a valuation allowance be established when the“more likely than not” criterion that all or a portion of net deferred tax assets will not be realized. A review of all positive and negative evidence of realizability must be considered in determining the need for a valuation allowance. Furthermore, the weight given to the potential effect of such evidence should be commensurate with the extent to which it can be objectively verified. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The $0.9 million and $0.7 million valuation allowance at December 31, 2008 and 2007, represented a full reserve against the Company’s net deferred tax asset related to its Taiwan operations, as the Company believed the“more likely than not” criterion for recognition purposes could not be met. At December 31, 2006, the valuation allowance related to Republic of Korea and Taiwan operations was $0.6 million and $0.5 million, respectively, as the Company believed the“more likely than not”criterion could not be met. During 2007, the valuation allowance related to the Republic of Korea was eliminated as the Company fully utilized the previous net operating loss. At December 31, 20072008 and 2006,2007, the Company did not record a provision for any United States or foreign withholding taxes on its undistributed earnings related to its foreign subsidiaries because it is the intention of the Company to reinvest its undistributed earnings indefinitely in its foreign operations. Generally, such earnings become subject to United States income tax upon the remittance of dividends and under certain other circumstances. At December 31, 2007,2008, it is not practicable to estimate the amount of deferred tax liability on such undistributed earnings. Net deferred tax assets (liabilities) are classified in the accompanying Consolidated Balance Sheets of December 31 as follows: | | | | | | | | | | | 2007 | | | 2006 | | | | (in thousands) | | Current deferred tax assets | | $ | 1,789 | | | $ | 1,478 | | Noncurrent deferred tax assets | | | 151 | | | | 278 | | Noncurrent deferred tax liabilities | | | (5,165 | ) | | | (7,444 | ) | | | | | | | | | | Net deferred tax liabilities | | ($ | 3,225 | ) | | ($ | 5,688 | ) | | | | | | | | | |
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | 2008 | | 2007 | | | | (in thousands) | Current deferred tax assets | | $ | 5,632 | | | $ | 1,789 | | Noncurrent deferred tax assets | | | 459 | | | | 151 | | Current deferred tax liabilities | | | (192 | ) | | | — | | Noncurrent deferred tax liabilities | | | (6,075 | ) | | | (5,165 | ) | Net deferred tax liabilities | | $ | (176 | ) | | $ | (3,225 | ) |
On January 1, 2007, the Company adopted FIN 48, which prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements, uncertain tax positions that it has taken or expects to take on a tax return. FIN 48 requires that a company recognize in its financial statements the impact of tax positions that meet a “more likely than not” threshold, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. Upon adoption of FIN 48 on January 1, 2007, the Company recorded a $0.8 million change to retained earnings and other long-term liabilities. As of December 31, 2007,2008, the Company recorded $1.1$0.5 million in taxes payable and $0.5$0.1 million in other long-term liabilities related to uncertain income tax positions and income tax reserves associated with various audits. At December 31, 2007,2008, the Company had gross tax-affected unrecognized tax benefits of $1.6$0.6 million that, if recognized, would impact the effective tax rate. The Company recognizes penalties and interest charges related to unrecognized tax benefits in current tax expense. During the year ended December 31, 2007,2008, the Company recorded $0.6 million associated with the examination of certain prior refund claims and interest related to unrecognized tax benefits of approximately $0.1$0.3 million to current tax expense and $0.2a reduction of $1.3 million due to retained earnings,expiration of statutes, for a total of $0.3$0.6 million recorded in the Consolidated Balance Sheet. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows, for the yearyears ended December 31, 2008 and 2007: | | | 2008 | | 2007* | | | 2007 | | (in thousands) | | | (in thousands) | | Balance as of January 1, 2007 | | $ | 845 | | Balance as of January 1 | | $ | 1,592 | | | $ | 1,473 | | Additions for tax positions related to the current year | | | — | | 17 | | | | — | | Additions for tax positions of prior years | | | 747 | | 254 | | | | 119 | | Reductions of tax positions of prior years | | | — | | (1,267 | ) | | | — | | Settlements | | | — | | — | | | | — | | | | | | Balance as of December 31, 2007 | | $ | 1,592 | | | | | | Balance as of December 31 | | $ | 596 | | | $ | 1,592 | |
* The balance at January 1, 2007, consisted of $0.8 million recorded to retained earnings and other long-term liabilities for the adoption of FIN 48 and an additional $0.6 related to reserves for the examination of certain prior refund claims.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. As of December 31, 2007,2008, the tax years that remained subject to examination by a major tax jurisdiction for the Company’s most significant subsidiaries were as follows: | | | Jurisdiction | | Open Years | Japan | | 2002-20072003-2008 | Republic of Korea | | 2004-20072004-2008 | United States | | 2002-20072002-2008 | Switzerland | | 2008 | Taiwan | | 2004-2008 |
The Company anticipates that it is reasonably possible that the $1.1$0.6 million of unrecognized income tax benefits could decrease in 20082009 due to the closure of tax years by expiration of the statute of limitations. The decrease may have a materially favorable impact on the Company’s consolidated financial statements. NOTE 9:10: TRANSACTIONS WITH RELATED PARTIES AND AFFILIATES Agreement with J. Stanley Fredrick In November 2003, the Company entered into a Lock-Up Agreement whereby the Company paysagreed to pay Mr. J. Stanley Fredrick, the Company’s Lead Director on itsChairman of the Board of Directors and a major shareholder, $185,000 per year for his agreement not to sell or transfer his shares to an outside party unless approved by the Company’s Board of Directors. In June 2004, the Company’s Board of Directors authorized Mr. Fredrick to sell up to MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
350,000 shares of his stock and as a result, during 2004, Mr. Fredrick sold 350,000 shares of his common stock in the open market. In December 2006, Mr. Fredrick transferred 1,400,000 shares of his Company stock to a family partnership for estate planning purposes. As of December 31, 20072008 and 2006,2007, Mr. Fredrick beneficially owned 3,150,000 shares of the Company’s common stock.
In November 2003, On March 6, 2009, the Lock-up Agreement was terminated by mutual agreement of the Company also agreed to payand Mr. Fredrick $0.1 million annually to act as its Lead Director for its Board of Directors. In 2006, the Company agreed to pay Mr. Fredrick for attendance at its Board of Directors and Committee meetings. During 2007 and 2006, Mr. Fredrick was paid approximately $0.1 million related to attendance at Company Board meetings.Fredrick.
Agreement with Fredrick Media, LLC On November 16, 2005, the Company entered into a consulting services agreement with Fredrick Media, LLC, which is owned by Mr. Landen Fredrick, son of Mr. J. Stanley Fredrick. Through May 2006, the Company paid Fredrick Media, LLC approximately $0.1 million related to this consulting agreement and then terminated the consulting agreement and hired Mr. Landen Fredrick as its Senior Director of Associate Initiatives. Consulting Fees with Dr. Axford and Clinical Studies with St. George’s Hospital
St. George’s Hospital & Medical School, in London, England, employs Dr. John Axford, a former director of the Company, who resigned from the Company’s Board of Directors effective September 6, 2007. Dr. Axford servedserves as the principal investigator in the Company’s funded clinical trials for St. George’s Hospital & Medical School. In June 2004,Most recent agreement between the Company signed a three-year agreement totaling $0.7 million withand St. George’s Hospital & Medical School to fund research costs related to a clinical trial involving one of the Company’s products. This trial was concludedsigned in 2007 and all related amounts have been paid. In January 2007 the Company entered into anotherfor a total amount of $0.5 million. The agreement with St. Georges Hospital & Medical School totaling $0.5 million to help fundis for a three-year clinical trial called “Ambrotoserelated to a dosing and optimization study on the Company’s Ambrotose® Dosing and Optimization Studies.” Dr. Axford will also serve as principal investigator for this clinical study. As of complex technology. Through December 31, 2007, the Company had made payments ofpaid $0.3 million in relation to the study and recorded an additional $0.2 million in accrued liabilities.this agreement.
During 2005,
From time to time, Mannatech engages Dr. Axford to provide certain consulting services. Consulting fees paid by the Company paid Dr. Axford $30,000 for consulting fees related to certain research and development services. In April 2006, the Company entered into a one year Letter of Understanding with Dr. Axford. In March 2007, the Company extended this agreement for an additional year. Under the terms of the agreement, the Company agreed to pay Dr. Axford $1,500 a day for fees associated with speaking or acting as a Company spokesman at any of its company-sponsored events. Duringduring 2007 and 2006 the Company paid Dr. Axford $51,000 and $34,000, respectively, related to this agreement. Agreements with Dr. Bill McAnalley
On August 7, 2005, the two-year employment agreement with Dr. Bill McAnalley, who served as the Company’s Chief Science Officer, expired. As a result, the Company entered into a Release Agreement and a one-year Consulting Agreement, in which the Company was required to pay Dr. McAnalley a total of $0.9 million. In August 2006, the Company amended the original Consulting Agreement to reduce the monthly payments and extend the agreement terms through August 8, 2007. The Company paid Dr. McAnalley $0.3 million, $0.5 million, and $0.4 million during the years ended December 31, 2007, 2006, and 2005, respectively, in connection with services provided under these Consulting Agreements.
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)were immaterial.
In August 2003, the Company entered into a Royalty Agreement with Dr. McAnalley. The Company agreed to pay Dr. McAnalley an annual royalty of three tenths of one percent (0.003) of the calculated incremental net products sold per year. This Royalty Agreement ended in August 2005, when Dr. McAnalley’s employment agreement expired. For the year ended December 31, 2005, the Company paid Dr. McAnalley $0.3 million related to this Royalty Agreement that expired in August 2005.
In August 2003, the Company also entered into a Long-Term Post-Employment Royalty Agreement with Dr. McAnalley, pursuant to which the Company is required to pay Dr. McAnalley or his heirs royalties for ten years, beginning September 2005 through August 2015. Quarterly payments related to this Long-Term Post-Employment Royalty Agreement are based on certain applicable annual global product sales, by the Company, in excess of $105.4 million. At the time the Company entered into this Long-Term Post-Employment Royalty Agreement, it was considered a post-employment benefit and the Company was required to measure and accrue the present value of the estimated future royalty payments related to the post-employment royalty benefit and recognize it over the life of Dr. McAnalley’s employment agreement, which was 2 years. As of December 31, 2007 and 2006, the Company accrued a long-term liability related to this Royalty Agreement of $2.9 million and $3.3 million, respectively, of which $0.5 million was currently due and included in accrued expenses at the end of each year.
Transactions involving Samuel Caster Mr. Samuel Caster, the Company’s founder, major stockholder, and former Chairman of the Board, founded MannaRelief in 1999 and served as its Chairman from 1999 through August 2007. MannaRelief is a 501(c)(3) charitable organization that provides charitable services for children. Donald Herndon, the Company’s former Vice President of Field Services, also served on MannaRelief’s boardBoard of directorsDirectors through late 2007. Mr. Herndon is the brother-in-law of Mr. Caster and the brother-in-law of Terry L. Persinger, who is the Company’s President and Chief Executive Officer and a member of the Company’s Board of Directors. Historically, the Company has made cash donations to MannaRelief, sold products to MannaRelief at cost plus shipping and handling charges, and shipped products purchased by MannaRelief to its chosen recipients. In addition, certain Company employees and consultants periodically volunteer to work or host various fund raising projects and
events for MannaRelief at no cost to MannaRelief. The Company has made cash donations and sold products to MannaRelief at cost plus shipping and handling, as follows: | | | 2007 | | 2006 | | 2005 | 2008 | | 2007 | | 2006 | Sold Products | | $ | 1.0 million | | $ | 1.4 million | | $ | 1.4 million | $ | 0.8 | million | | $ | 1.0 | million | | $ | 1.4 | million | Contributed Cash Donations | | $ | 0.9 million | | $ | 0.7 million | | $ | 0.4 million | $ | 0.8 | million | | $ | 0.9 | million | | $ | 0.7 | million |
Certain Transactions with Ray Robbins Mr. Ray Robbins is a member of the Company’s Board of Directors and a major shareholder. Mr. Robbins holds four positions in the Company’s associate global downline network-marketing system related to the cancellation of an agreement between the Company and Mr. Robbins in June 1999. Mr. Robbins also holds other positions in the Company’s associate global downline network-marketing system. The Company pays commissions and incentives to its independent associates and during 2008, 2007, 2006, and 2005,2006, the Company paid commissions and incentives to Mr. Robbins totaling $3.4 million, $3.8 million, $3.4 million, and $3.1$3.4 million, respectively. In addition, several of Mr. Robbins’ family members are independent associates and were paid associate commissions and earned aggregate incentives of approximately $0.3$0.5 million, $0.6 million, and $0.3$0.6 million for 2008, 2007, 2006, and 2005,2006, respectively. All commissions and incentives paid to Mr. Robbins and his family members were paid in accordance with the Company’s global associate career and compensation plan. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
NOTE 10:11: EMPLOYEE BENEFIT PLANS Employee Retirement Plan Effective May 9, 1997, the Company adopted a Defined Contribution 401(k) and Profit Sharing Plan (the “401(k) Plan”) for its United States employees. The 401(k) Plan covers all full-time employees who have completed three months of service and attained the age of twenty-one. United States employees can contribute up to 100 percent of their annual compensation but are limited to the maximum annual dollar amount allowable under the Internal Revenue Code. In 2005, the Company increased itsThe 401(k) plan permits matching contribution for the 401(k) Plan from 25% to 50% on each one dollar of contribution, up to six percent of the participating employees’ compensation, not to exceed 100 percent of the employees’ first 15% of annual compensation. In addition, the Company may makeand discretionary contributions to the 401(k) Plan.employer contributions. The Company’s matching contributions for its United States employees vest ratably over a five-year period. Contributions made byDuring the years ended December 31, 2008, 2007, and 2006, the Company to its 401(k) Plan werecontributed approximately $0.5$0.4 million, $0.4$0.5 million, and $0.4 million, in 2007, 2006, and 2005, respectively.respectively, to the 401(k) Plan for matching contributions. The Company also sponsors a non-U.S. defined benefit plan covering its employees in its Japan subsidiary (“the Benefit Plan”). Pension benefits under the Benefit Plan are based on years of service and annual salary. The Company utilizes actuarial methods required by Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”, (“FASSFAS 87”). Statement of Financial Accounting Standards No. 88,“Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” (“FAS(“SFAS 88”) and Statement of Financial Accounting Standards No. 132,“Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FAS StatementsSFAS No. 87, 88, and 106” (“FASSFAS 132 (R)”), to account for the Benefit Plan. As of December 31, 2006, the Company adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FAS StatementsSFAS No. 87, 88, 106, and 132(R),” (“FASSFAS 158”). Inherent in the application of these actuarial methods are key assumptions, including, but not limited to, discount rates and expected long-term rates of return on plan assets. Changes in the related Benefit Plan costs may occur in the future due to changes in the underlying assumptions, changes in the number and composition of plan participants, and changes in the level of benefits provided. The Company uses a measurement date of December 31 to evaluate and record any post-retirement benefits related to the Benefit Plan. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Projected Benefit Obligation and Fair Value of Plan Assets The Benefit Plan’s projected benefit obligation and valuation of plan assets are as follows for the years ended December 31: | | | | | | | | | | 2007 | | | 2006 | | | (in thousands) | Projected benefit obligation: | | | | | | | | Balance, beginning of year | | $ | 430 | | | $ | 313 | Service cost | | | 136 | | | | 98 | Interest cost | | | 11 | | | | 7 | Liability (gains) and losses | | | (17 | ) | | | 12 | Benefits paid to participants | | | (28 | ) | | | — | Foreign currency | | | 21 | | | | — | | | | | | | | | Balance, end of year | | $ | 553 | | | $ | 430 | | | | | | | | | | | | Plan assets: | | | | | | | | Fair value, beginning of year | | $ | — | | | $ | — | Company contributions | | | 27 | | | | — | Benefits paid to participants | | | (27 | ) | | | — | | | | | | | | | Fair value, end of year | | $ | — | | | $ | — | | | | | | | | |
| | 2008 | | 2007 | Projected benefit obligation: | | (in thousands) | Balance, beginning of year | | $ | 553 | | | $ | 430 | | Service cost | | | 194 | | | | 142 | |
| | | | | | | | | | | 2007 | | | 2006 | | | | (in thousands) | | Funded status of the Benefit Plan as of December 31: | | | | | | | | | Benefit obligation | | ($ | 553 | ) | | ($ | 430 | ) | Fair value of plan assets | | | — | | | | — | | | | | | | | | | | Excess of benefit obligation over fair value of plan assets | | ($ | 553 | ) | | ($ | 430 | ) | | | | | | | | | | | | | | | 2007 | | | 2006 | | | | (in thousands) | | Amounts recognized in the accompanying Consolidated Balance Sheets consist of, as of December 31: | | | | | | | | | Accrued benefit liability | | ($ | 496 | ) | | ($ | 356 | ) | Transition obligation | | | (57 | ) | | | (74 | ) | | | | | | | | | | Net amount recognized in the consolidated balance sheets | | ($ | 553 | ) | | ($ | 430 | ) | | | | | | | | | | Non-current liabilities | | ($ | 553 | ) | | ($ | 430 | ) | | | | | | | | | |
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| | | | | | | | | | | | | Years Ended December 31, | | | 2007 | | | 2006 | | 2005 | | | (in thousands) | Other changes recognized in other comprehensive income | | | | | | | | | | | Net periodic cost | | $ | 151 | | | $ | 109 | | $ | 126 | Other changes in plan assets and benefit obligations | | | — | | | | — | | | — | Current year actuarial loss (gain) | | | (17 | ) | | | — | | | — | Current year prior service benefit | | | — | | | | — | | | — | Amortization of actuarial loss (gain) | | | — | | | | — | | | — | Amortization of transition obligation | | | (4 | ) | | | — | | | — | Foreign currency | | | 4 | | | | — | | | — | | | | | | | | | | | | Total recognized in other comprehensive income | | | (17 | ) | | | — | | | — | | | | | | | | | | | | Total | | $ | 134 | | | $ | 109 | | $ | 126 | | | | | | | | | | | |
F-21 | | | | | | | | | | | As of December 31, | | | | 2007 | | | 2006 | | | | (in thousands) | | Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss: | | | | | | | | | Net actuarial loss | | $ | — | | | ($ | 17 | ) | Transition obligation | | | (57 | ) | | | (57 | ) | | | | | | | | | | Total recognized in accumulated other comprehensive loss | | ($ | 57 | ) | | ($ | 74 | ) | | | | | | | | | |
| | | | | 2008 estimated amounts amortized from accumulated other comprehensive income (loss), net into net periodic cost (in thousands)
| | | | | Transition obligation
| | ($ | 4 | ) |
| | | | | | | | | As of December 31, | | | 2007 | | 2006 | | | (in thousands) | Aggregate Benefit Plan information and accumulated benefit obligation in excess of plan assets: | | | | | | | Projected benefit obligation | | $ | 553 | | $ | 430 | Accumulated benefit obligation | | | 311 | | | 232 | Fair value of plan assets | | | — | | | — |
Interest cost | | | 16 | | | | 11 | | Liability (gains) and losses | | | (56 | ) | | | (17 | ) | Benefits paid to participants | | | (50 | ) | | | (29 | ) | Foreign currency | | | 135 | | | | 16 | | Balance, end of year | | $ | 792 | | | $ | 553 | | | | | | | | | | | Plan assets: | | | | | | | | | Fair value, beginning of year | | $ | — | | | $ | — | | Company contributions | | | 50 | | | | 29 | | Benefits paid to participants | | | (50 | ) | | | (29 | ) | Fair value, end of year | | $ | — | | | $ | — | |
Funded status of the Benefit Plan as of December 31: | 2008 | | 2007 | | (in thousands) | | Benefit obligation | $ | (792 | ) | | $ | (553 | ) | Fair value of plan assets | | — | | | | — | | Excess of benefit obligation over fair value of plan assets | $ | (792 | ) | | $ | (553 | ) |
Amounts recognized in the accompanying Consolidated Balance Sheets consist of, as of December 31: | 2008 | | 2007 | | (in thousands) | Accrued benefit liability | $ | (783 | ) | | $ | (496 | ) | Transition obligation | | (9 | ) | | | (57 | ) | Net amount recognized in the consolidated balance sheets | $ | (792 | ) | | $ | (553 | ) | Non-current liabilities | $ | (792 | ) | | $ | (553 | ) |
| | Years Ended December 31, | | | 2008 | | 2007 | | 2006 | Other changes recognized in other comprehensive income (loss) | | (in thousands) | Net periodic cost | | $ | 215 | | | $ | 157 | | | $ | 109 | | Other changes in plan assets and benefit obligations | | | — | | | | — | | | | — | | Current year actuarial loss (gain) | | | (56 | ) | | | (17 | ) | | | — | | Current year prior service benefit | | | — | | | | — | | | | — | | Amortization of actuarial loss (gain) | | | — | | | | — | | | | — | | Amortization of transition obligation | | | (5 | ) | | | (4 | ) | | | — | | Total recognized in other comprehensive income (loss) | | | (61 | ) | | | (21 | ) | | | — | | Total | | $ | 154 | | | $ | 136 | | | $ | 109 | |
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive gain/loss: | | As of December 31, | | | 2008 | | 2007 | | | (in thousands) | Net actuarial gain/loss | | $ | 57 | | | $ | — | | Transition obligation | | | (66 | ) | | | (57 | ) | Total recognized in accumulated other comprehensive loss | | $ | (9 | ) | | $ | (57 | ) |
2009 estimated amounts amortized from accumulated other comprehensive income (loss), net into net periodic cost (in thousands) | | | | Transition obligation | | $ | (5 | ) | | | | | |
| | As of December 31, | | | 2008 | | 2007 | | | (in thousands) | Aggregate Benefit Plan information and accumulated benefit obligation in excess of plan assets: | | | | | | Projected benefit obligation | | $ | 792 | | $ | 553 | | Accumulated benefit obligation | | | 476 | | | 311 | | Fair value of plan assets | | | — | | | — | |
The weighted-average assumptions to determine the benefit obligation and net cost are as follows: | | | | | | | | | 2007 | | | 2006 | | Discount rate | | 2.5 | % | | 2.5 | % | Rate of increase in compensation levels | | 3.0 | % | | 3.0 | % |
| | 2008 | | 2007 | Discount rate | | 2.5 | % | | 2.5 | % | Rate of increase in compensation levels | | 3.0 | % | | 3.0 | % | | | | | | | | |
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Components of Expense Pension expense for the Benefit Plan is included in selling, general and administrative expenses in the Consolidated Statements of Operations and is comprised of the following for the years ended December 31: | | | 2007 | | 2006 | | 2005 | | 2008 | | 2007 | | 2006 | | | (in thousands) | | (in thousands) | Service cost | | $ | 136 | | $ | 98 | | $ | 113 | | $ | 194 | | $ | 142 | | $ | 98 | Interest cost | | | 11 | | | 7 | | | 8 | | | 16 | | | 11 | | | 7 | Amortization of transition obligation | | | 4 | | | 4 | | | 4 | | | 5 | | | 4 | | | 4 | Amortization of unrecognized loss | | | — | | | — | | | 1 | | | — | | | — | | | — | | | | | | | | | Total pension expense | | $ | 151 | | $ | 109 | | $ | 126 | | $ | 215 | | $ | 157 | | $ | 109 | | | | | | | | | | | | | | | | | |
Estimated Benefits and Contributions The Company expects to contribute approximately $3,000$75,000 to the plan in 2008.2009. As of December 31, 2007,2008, benefits expected to be paid by the Benefit Plan for the next fiveten years and thereafter areis approximately as follows(in thousands): | 2008 | | $ | 3 | | 2009 | | | 4 | $ | 75 | 2010 | | | 5 | | 5 | 2011 | | | 7 | | 7 | 2012 | | | 8 | | 9 | Thereafter | | | 176 | | | | | | 2013 | | | 11 | Next five years | | | 229 | Total expected benefits to be paid | | $ | 203 | $ | 336 | | | | |
NOTE 11:12: STOCK OPTION PLANSPLAN Summary of Stock PlansPlan The Company currently has threeone active stock-based compensation plans, all ofplan, which werewas approved by its shareholders. The Company generally grants stock options to its employees, consultants, and board members at the fair market value of its common stock, on the date of grant, with a term no greater than ten years. The Company has not granted any stock options to non-employees other than its non-employee board members. The stock options generally vest over two or three years. Shareholders who own 10% or more of the Company’s outstanding stock are granted incentive stock options at an exercise price that may not be less than 110% of the fair market value of the Company’s common stock on the date of grant and have a term no greater than five years, and vest over four years. The Company’s stock-based compensation plans are as follows: In May 1997, the Company’s Board of Directors approved its 1997 Stock Option Plan (the “1997 Plan”), which provides incentive and nonqualified stock options to employees and non-employees. The Company reserved 2,000,000 shares of its common stock for issuance pursuant to the stock options granted under its 1997 Plan. No options granted under this plan will remain exercisable later than ten years after the date of grant. The 1997 Plan expired in May 2007 and as a result no more options may be granted under the 1997 Plan.
In May 1998, the Company’s Board of Directors approved its 1998 Stock Option Plan (the “1998 Plan”), which provides incentive and non-qualified stock options to employees. The Company reserved
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| 1,000,000 shares of its common stock for issuance pursuant to the stock options granted under its 1998 Plan. No options granted under this plan will remain exercisable later than ten years after the date of grant. As of December 31, 2007, the 1998 Plan has 25,167 stock options available for grant before the plan expires in May 2008.
|
In June 2000, the Company’s Board of Directors approved its 2000 Stock Option Plan (the “2000 Plan”), which provides incentive and nonqualified stock options to employees and non-employees. The Company reserved 2,000,000 shares of its common stock for issuance pursuant to the stock options granted under its 2000 Plan. No options granted under this plan will remain exercisable later than ten years after the date of grant. As of December 31, 2007, the 2000 Plan has 74,394 stock options available for grant before the plan expires in June 2010.
In February 2007, the Company’s Board of Directors approved the 2007 Stock Incentive Plan (“the 2007 Plan”), and in June 2007, its shareholders ratified the 2007 Plan. However, in July 2007, the Company determined that the number of shares reported as reserved for issuance under existing stock plans and the number of shares reserved for issuance under outstanding but unexercised awards was incorrectly stated in the 2007 Plan and the Company’s Proxy Statement as 1,234,985 and 235,808, respectively, but should have been reported as 224,687 and 1,227,485, respectively. It is not clear that inclusion of the mistaken share numbers had any material impact on the shareholders’ vote to ratify the 2007 Plan; however, the Company decided not to implement the 2007 Plan as a result of the discrepancy and elected instead to adopt a new plan, the 2008 Stock Incentive Plan.
In February 2008, the Company’s Board of Directors approved its 2008 Stock Incentive Plan (the “2008"2008 Plan”), which reserves, for issuance shares of the Company’s common stock for incentive and nonqualified stock options and restricted stock grants to its employees, board members, and nonemployees. The 2008 Plan reservesconsultants, up to 1,000,000 shares of the Company’sits common stock for such purposes, plus any shares that were reserved under the Company’s existingthen-existing, unexpired stock plans andplan for which options had not yet been issued plus any shares underlying outstanding options under the existingthen-existing stock plansoption plan that terminate without having been exercised in full. The 2008 Plan will be submitted for approval towas approved by the Company’s shareholders of record at its 2008 Annual Shareholders’ meeting, to beMeeting held on June 18, 2008. As of December 31, 2008, the 2008 Plan has 596,224 stock options available for grant before the plan expires on February 20, 2018. A summary of changes in stock options outstanding for the 1997, 1998, and 2000 Plans (collectively, “the Stock Option Plans”) during the year ended December 31, 2007,2008, is as follows: | | | 2007 | 2008 | | | | Number of Options (in thousands) | | Weighted average exercise price | | Weighted average remaining contractual life (in years) | | Aggregate intrinsic value (in thousands) | Number of Options (in thousands) | | Weighted average exercise price | | Weighted average remaining contractual life (in years) | | Aggregate intrinsic value (in thousands) | | Outstanding at beginning of year | | 1,199 | | | $ | 7.13 | | | | | 1,300 | | $ | 7.41 | | | | | Granted | | 203 | | | $ | 9.65 | | | | | 576 | | $ | 4.82 | | | | | Exercised | | (51 | ) | | $ | 3.10 | | | | | — | | | — | | | | | Forfeited or expired | | (51 | ) | | $ | 13.98 | | | | | (306 | ) | $ | 8.64 | | | | | | | | | | | | | | | | Outstanding at end of year | | 1,300 | | | $ | 7.41 | | 4.5 | | $ | 1,564 | 1,570 | | $ | 6.22 | | 5.7 | | N/A* | | | | | | | | | | | | Options exercisable at year end | | 1,016 | | | $ | 6.52 | | 3.3 | | $ | 1,564 | 936 | | $ | 6.69 | | 3.4 | | N/A* | | | | | | | | | | | | | | | | | | | |
* At December 31, 2008, all outstanding options were out-of-the-money. The Company generally issues new shares upon the exercise of options. Options exercised during the years ended December 31, 2007 2006, and 20052006, had a total intrinsic value, calculated as the difference between the exercise date stock price and the exercise price of the option of approximately $0.6 million and $2.1 million, and $3.0 million, respectively. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) No options were exercised in 2008.
Pro Forma Disclosures Under FAS 123 for Periods Prior to 2006
Prior to January 1, 2006, the Company applied disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, (“FAS 123”). In accordance with the provisions of FAS 123, the Company continued to account for stock options granted to its employees and Board of Directors using the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations, (“APB 25”) and accordingly did not recognize compensation expense for stock options issued to employees and board members for those options granted where the stock price was equal to or less than the exercise price on date of grant. For disclosure purposes, the Company used the Black-Scholes option pricing model to calculate the related compensation expense for stock options granted as if it had applied the fair value recognition provisions of FAS 123. The following table illustrates the effect on the Company’s consolidated net income and earnings per share for the year ended December 31, 2005 as if the Company had applied the fair value recognition provisions of FAS 123 to all of its outstanding stock options.
| | | | | | | December 31, 2005 | | | | (in thousands, except per share information) | | Consolidated net income, as reported | | $ | 28,647 | | Subtract: Stock-based employee compensation income included in reported net income, net of related tax effect of $27 | | | (43 | ) | Deduct: Total stock-based employee compensation expense determined under fair value based method for all stock options, net of related tax effect of $302 | | | (493 | ) | | | | | | Pro forma consolidated net income | | $ | 28,111 | | | | | | | Basic Earnings Per Share: | | | | | As reported | | $ | 1.06 | | Pro forma | | $ | 1.04 | | Diluted Earnings Per Share: | | | | | As reported | | $ | 1.03 | | Pro forma | | $ | 1.01 | |
Valuation and Expense Information Under FAS 123(R) Effective January 1, 2006, the Company adopted FAS 123(R) and selected the modified prospective method to initially report all of its related stock-based compensation expense in its consolidated financial statements. Under the modified prospective method, the Company was not required to restate its prior periods’ consolidated financial statements, but was required to estimate and disclose the fair value for all of its previously issued and outstanding stock options granted to employees and board members using a fair-value based option-pricing model. Under the provisions of FAS 123(R), the Company is also required to measure and recognize compensation expense related to any outstanding and unvested stock options previously granted, and thereafter recognize, in its consolidated financial statements, compensation expense related to any new stock options granted after implementation using a calculated fair-value based option-pricing model. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company uses the Black-Scholes option-pricing model to calculate the fair value of all of its stock options and its assumptions are based on historical information. The following assumptions were used to calculate the compensation expense and the calculated fair value of stock options granted each year: | | | | | | | | | | | | 2007 | | | 2006 | | | 2005 | | Dividend yield: | | 2.3 – 4.9 | % | | 2.6 | % | | 1.5 | % | Risk-free interest rate: | | 4.2 – 4.7 | % | | 4.3 | % | | 3.8 | % | Expected market price volatility: | | 67.7 – 68.3 | % | | 62.0 | % | | 84.3 | % | Forfeiture rate | | 0 | % | | 0 | % | | 0 | % | Average expected life of stock options: | | 4.5 years | | | 4 years | | | 7 years | |
| 2008 | | 2007 | | 2006 | Dividend yield: | 3.2 — 6.1 | % | | 2.3 — 4.9 | % | | 2.6 | % | Risk-free interest rate: | 1.8 —3.6 | % | | 4.2 — 4.7 | % | | 4.3 | % | Expected market price volatility: | 59.8 — 63.8 | % | | 67.7 — 68.3 | % | | 62.0 | % | Average expected life of stock options: | 4.5 years | | 4.5 years | | 4 years | | | | | | | | | | | | | |
The computation of the expected volatility assumption used in the Black-Scholes calculations for new grants is based on historical volatilities of the Company’s stock. The expected life assumptions are based on the Company’s historical employee exercise and forfeiture behavior. The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2008, 2007, and 2006 was $1.74, $4.39, and 2005 was $4.39, $5.55 and $10.00 per share, respectively. The total fair value of shares vested during the years ended December 31, 2008, 2007, and 2006 and 2005 was $0.7 million, $0.9 million, $0.6 million, and $0.7$0.6 million, respectively. Since the adoption of FAS 123(R) on January 1, 2006, the
The Company recorded the following amounts related to the expense of the fair values of options vested throughoutduring the years ended December 31, 2008, 2007, and 2006: | | | | | | | | | 2007 | | 2006 | | | (in thousands) | Selling, general and administrative expenses and Income from operations before income taxes | | $ | 1,060 | | $ | 682 | Provision for income taxes | | | 325 | | | 256 | | | | | | | | Net income | | $ | 735 | | $ | 426 | | | | | | | |
| 2008 | | 2007 | | 2006 | | (in thousands) | Selling, general and administrative expenses and Income (loss) from operations before income taxes | $ | 706 | | $ | 1,060 | | $ | 682 | Provision/Benefit for income taxes | | (79 | ) | | 325 | | | 256 | Net income (loss) | $ | 785 | | $ | 735 | | $ | 426 |
As of December 31, 2007,2008, the Company had approximately $1.0$0.9 million of total unrecognized compensation expense related to stock options currently outstanding, to be recognized in future years, ending December 31, as follows: | | | | | | | Total gross unrecognized compensation expense | | Total tax benefit associated with unrecognized compensation expense | | Total net unrecognized compensation expense | | | Total gross unrecognized compensation expense | | Total tax benefit associated with unrecognized compensation expense | | Total net unrecognized compensation expense | (in millions) | | | (in millions) | | 2008 | | $ | 0.6 | | $ | 0.2 | | $ | 0.4 | | 2009 | | | 0.3 | | | 0.1 | | | 0.2 | $ | 0.5 | | | $ | 0.1 | | | $ | 0.4 | | 2010 | | | 0.1 | | | — | | | 0.1 | | 0.3 | | | | 0.1 | | | | 0.2 | | 2011 | | | 0.1 | | | | — | | | | 0.1 | | | | | | | | | $ | 0.9 | | | $ | 0.2 | | | $ | 0.7 | | | | $ | 1.0 | | $ | 0.3 | | $ | 0.7 | | | | | | | | | |
NOTE 12:13: COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases certain office space, automobiles, computer hardware, and warehouse equipment under various noncancelable operating leases. Some of these leases have renewal options. All of the Company’s leases MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
expire at various times through December 2016. The Company also leases equipment under various month-to-month cancelable operating leases. TotalFor each year ended December 31, 2008 and 2007, total rent expense was approximately $4.1 million, $3.9 million, and $3.8$3.9 million for the yearsyear ended December 31, 2007, 2006, and 2005, respectively.2006.
Approximate future minimum rental commitments for non-cancelable operating leases(in millions)are as follows: | Years ending December 31, | | | | 2008 | | $ | 3.3 | | 2009 | | | 1.8 | $ | 2.9 | 2010 | | | 1.1 | | 2.3 | 2011 | | | 0.8 | | 1.2 | 2012 | | | 0.8 | | 1.2 | 2013 | | | 1.1 | Thereafter | | | 3.3 | | 2.5 | | | | $ | 11.2 | | | $ | 11.1 | | | | | |
Purchase Commitments The Company maintains supply agreements with its suppliers and manufacturers. Some of the supply agreements contain exclusivity clauses and/or minimum annual purchase requirements. Purchase agreements with suppliers that contain minimum purchase clauses are as follows: | •
| | In March 2004,In May 2008, the Company entered into a five year Supply Agreement with Coradji PTY Limited to purchase a raw material used in the Company’s Ambrotose AO® product. Under the terms of the Supply Agreement, the Company is required to purchase a minimum annual quantity through February 2009. In November 2005, this Supply Agreement was amended to reduce the first year minimum quantity purchase from $0.4 million to $0.2 million, as the supplier’s harvest of this raw material was limited, which reduced the amount available for purchase. In April 2006, this Supply Agreement was further amended to reduce the second year minimum quantity purchase from $0.4 million to $0.2 million. As of December 31, 2007, the Company is required to purchase an aggregate of $0.4 million through 2009.
|
In August 2007, the Company entered into a new two year Supply Agreement with Marinova PTY Limited to purchase raw materials used in its products.products through 2012. Under the terms of the Supply Agreement, the Company is required to purchase a minimum annual quantity over the twofour years of the agreement. As of December 31, 2007,2008, the Company is required to purchase an aggregate of $5.2$8.4 million through 2009.2012.
| • | | In January 2006, the Company entered into a five-year Supply Agreement with Larex, Inc. to exclusively purchase Arabinogalactan, an important component used in the formulation of its Ambrotose® complex. In order to retain exclusive rights to purchase Arabinogalactan, the Company is required to purchase a minimum monthly quantity over the five year agreement. As of December 31, 2007,2008, the Company is required to purchase an aggregate of $1.9$1.3 million through 2010. |
In March 2006, the Company entered into a ten yearten-year supply agreement to purchase plant-derived mineral nutrition products from InB:Biotechnologies, Inc. As of December 31, 2007,2008, the Company is required to purchase an aggregate of $8.4$7.4 million through 2016. In June of 2008, the company entered into a three-year supply agreement with Improve U.S.A. to purchase an aloe vera powder. As of December 31, 2008, under the terms of the agreement, the Company is required to purchase an aggregate of $10.3 million through 2011. | •
| | In January 2007, the Company entered into a three-year supply agreement with Carrington Labs to purchase Manapol®, a raw material component used in the formulation of its Ambrotose® complex. As of December 31, 2007, under the terms of the agreement, the Company is required to purchase an aggregate of $4.7 million through 2008.
|
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Royalty and Consulting Agreements In 2001, the Company entered into a royalty agreement with a high level associate and shareholder, whereby the Company agreed to pay royalties totaling $1.6 million related to the sale of certain sales aids developed by the associate and sold by the Company totaling $1.6 million.Company. Pursuant to this royalty agreement, the Company has paid an aggregate of $1.3$1.4 million through December 31, 2007.2008. The Company also utilizes royalty agreements with individuals and entities to provide compensation for items such as reprints of articles or speeches relating to the Company, sales of promotional videos featuring sports personalities, and promotional efforts used by the Company for product sales or attracting new associates. The Company paid royalties for such royalty agreements of approximately $0.5$0.3 million, $0.3$0.5 million, and $0.3 million in 2008, 2007, 2006, and 2005,2006, respectively. Employment Agreements The Company has non-cancellable employment agreements with certain executives. If the employment relationships were terminated with these executives, as of December 31, 2007,2008, the Company would continue to be indebted to the executives for $1.6$3.2 million, payable through 2009.2011.
NOTE 13:14: LITIGATION Securities Class Action Lawsuits The
Beginning in the third quarter of 2005, the Company has beenwas sued in the following three purported securities class actions, which were consolidated into a single cause of action lawsuits, each of which remained pending at December 31, 2007: First, on August 1, 2005, Mr. styledJonathan Crowell, filed a putative class action lawsuit against the Companyet al. v. Mannatech, et al., and Mr. Samuel L. Caster, its Chief Executive Officer, on behalf of himself and all others who purchased or otherwise acquired the Company’s common stock between August 10, 2004 and May 9, 2005, inclusive, and who were damaged thereby.
Second, on August 30, 2005, Mr. Richard McMurry filed a class action lawsuit against the Company, Mr. Caster, Mr. Terry L. Persinger, the Company’s President and Chief Operating Officer, and Mr. Stephen D. Fenstermacher, the Company’s Chief Financial Officer.
Third, on September 5, 2005, Mr. Michael Bruce Zeller filed a class action lawsuit against the Company, Mr. Caster, Mr. Persinger, and Mr. Fenstermacher.
These three lawsuits were initially filed and consolidated in the United States District of New Mexico. On January 29, 2007, the consolidated action was transferred to the United States District Court for the Northern District of Texas, Dallas Division, and on March 29, 2007, upon joint motion of the parties, was transferred to the docket of United States District Judge Ed Kinkeade. The Mannatech Group, consisting of Mr. Austin Chang, Ms. Naomi S. Miller, Mr. John Ogden, and the Plumbers and Pipefitters Local 51 Pension Fund, has been appointedNo. 3:07-cv-00238-K, as lead plaintiffs, Coughlin Stoia Geller Rudman & Robbins LLP has been appointed as lead counsel, and Provost Umphrey LLP has been appointed local counsel for the putative class.
On July 12, 2007, Lead Plaintiff for the putative class filed a Second Amended Consolidated Class Action Complaint, which is substantively similar to the Amended Consolidated Class Action Complaint filed on March 22, 2007, and reporteddisclosed in the Company’s previous filings, but expands the class period to July 5, 2007, and adds references to an enforcement lawsuit discussed below, which was filed by the Texas Attorney General against the Company on July 5, 2007, and the subsequent drop in the Company’s stock price.
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company filed a motion to dismiss the Second Amended Consolidated Class Action Complaint on August 27, 2007, arguing that the complaint did not meet the heightened pleading standards of the Private Securities Litigation Reform Act. Lead Plaintiffs filed their Opposition Brief on December 20, 2007, and the Company filed its Reply Brief in Support of its Motion on January 22, 2008.
Formal Mediation was conducted before Judge Daniel Weinstein in California on November 20, 2007, involving the Company, the individual Defendants in all pending securities and derivativefilings. These lawsuits and counsel for plaintiffs in both the securities class action and the various derivative actions. Informal discussions between the parties and Judge Weinstein continued thereafter. The parties continue to discuss the potential for settlement.
Shareholder Derivative Lawsuits
The Company has also been sued in the following five purported derivative actions, which remained pending at December 31, 2007:2008. The consolidated complaint alleged violations of Sections 10(b), Rule 10b-5 and Section 20(a) of the Exchange Act through alleged artificial inflation of the value of the Company’s stock by knowingly allowing independent contractors to recklessly misrepresent the efficacy of the Company’s products during the purported class period. Without admitting any liability or wrongdoing of any kind, the Company entered into a settlement with the Lead Plaintiffs resolving all claims in the litigation, and agreed to authorize payment to the plaintiff class of $11.25 million. The Company paid $2.27 million in cash as part of the settlement, and the remainder was funded by our insurer.
Preliminary approval of the settlement was granted by the Court on December 12, 2008. First,On March 10, 2009, the court granted final approval for the settlement and entered a final judgment.
Shareholder Derivative Lawsuits Five purported derivative actions have also been brought by shareholders on the Company’s behalf against certain current and former directors, as disclosed in the Company’s previous filings. Two purported derivative actions were filed by shareholders Norma Middleton and Frances Nystrom on October 18, 2005 a shareholder derivative lawsuit was filed by Norma Middleton, Derivatively and on Behalf of Nominal Defendant, Mannatech, Incorporated, against Samuel L. Caster, Terry L. Persinger, Donald A. Buchholz, J. Stanley Fredrick, Gerald E. Gilbert, Alan D. Kennedy, Marlin Ray Robbins, and Patricia A. Wier,January 13, 2006, respectively, in the United States District Court for the Northern District of Texas, Dallas Division. Second,Texas. In addition, three purported derivative actions were brought by shareholders Kelly Schrimpf, Duncan Gardner, and Frances Nystrom on January 11, 2006, a shareholder derivative action was filed by Kelly Schrimpf, DerivativelyApril 25, 2007, and on Behalf of Nominal Defendant, Mannatech, Incorporated, against Samuel L. Caster, Terry L. Persinger, Steven W. Lemme, and Stephen D. FenstermacherJuly 23, 2007, respectively, in the 44th and 162nd Judicial District Court of Dallas County, Texas.
Third, on January 13, 2006, a shareholder derivative action was filed by Frances Nystrom, Derivatively and on Behalf All five actions remained pending at December 31, 2008, but have since been settled with entry of Nominal Defendant, Mannatech, Incorporated, against Samuel L. Caster, Terry L. Persinger, Stephen D. Fenstermacher, John Stuart Axford, J. Stanley Fredrick, Gerald E. Gilbert, Alan D. Kennedy, Marlin Ray Robbins, Patricia A. Wier, and Donald A. Buchholz in the United States District Court for the Northern Districtfinal judgement or orders of Texas.dismissal.
Fourth, on April 25, 2007, a shareholder derivative action was filed by Duncan Gardner, Derivatively and on Behalf of Nominal Defendant, Mannatech, Incorporated, against Samuel L. Caster, Terry L. Persinger, Stephen D. Fenstermacher, J. Stanley Fredrick, Patricia A. Wier, Alan D. Kennedy, Gerald E. Gilbert, John Stuart Axford, Marlin Ray Robbins, and Larry A. Jobe in the 162nd District Court of Dallas County, Texas.
Fifth, on July 23, 2007, a shareholder derivative action was filed by Frances Nystrom, Derivatively and On Behalf of Mannatech, Incorporated against Samuel L. Caster, Terry L. Persinger, Stephen D. Fenstermacher, Stephen Boyd, John Stuart Axford, J. Stanley Fredrick, Gerald E. Gilbert, Alan D. Kennedy, Marlin Ray Robbins, Patricia A. Wier, Larry A. Jobe, Bill H. McAnalley and Donald A. Buchholz in the 44th District Court of Dallas County, Texas.
Shortly after the commencement of the class action litigation, theThe first three of these actions were filed. These threederivative lawsuits makemade allegations similar to the allegations of the shareholder class action litigation described above. The Schrimpf state court lawsuit remains stayed, and administratively closed subject to being reopened, pending the outcome of the Middleton federal lawsuit, the first-filedlast two derivative action.
The Special Litigation Committee appointed by the Company’s Independent Directors to review the allegationslawsuits made by Middleton, Schrimpf, and Nystrom determined that it is in the best interests of the Company
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
to dismiss those derivative lawsuits. The Company filed motions to dismiss the Middleton and Nystrom complaints on March 12, 2007, seeking dismissal under Federal Rule 12(b)(6) and Texas Business Corporation Act article 5.14. The plaintiffs were required to file their responses by July 31, 2007, but the parties agreed to extend the response date until 60 days after the Court rules on the plaintiffs’ pending motions to compel, and motions to that effect were filed on July 31, 2007 by each plaintiff. The motions to set a revised briefing schedule, and the motions to compel, remain pending before the Court. The Court administratively closed the Middleton and Nystrom cases on April 18, 2007.
The Gardner action, which was filed on April 25, 2007, and the second Nystrom action, which was filed July 23, 2007, make allegations with regard to theour funding of various research projects by the Company. Both lawsuits are consistent with demand letters sent on behalf of both shareholders, and noted in theprojects. The Company’s previous filings. The Special Litigation Committee appointed to review theseof the Board of Directors reviewed the allegations made by Gardnercontained in each of the five derivative lawsuits and Nystrom has determined that continuation of the Gardner and Nystrom lawsuits is not in the best interests of the Company. While the Gardner and Nystron state court lawsuits have been stayed pending review by the Special Litigation Committee pursuant to Texas Business Corporation Act article 5.14, the determination of the Committee has been communicated to the courts andthey should be dismissed or compromised.
On June 13, 2008, the Company anticipates the stays will be lifted. On January 9, 2008, counsel for Norma Middleton filed a Notice of Settlement with the Court statingannounced that the partiesit had reached a settlement. This notice was corrected by a joint filing on January 10, 2008, stating thatfinal settlement communications betweenwith all derivative plaintiffs and defendants were ongoing, but no finalplaintiffs. This settlement agreement had been reached withresolves all the claims in each of the five pending derivative lawsuits. Without admitting any party. At this time, those negotiations are still ongoing.
Plaintiffs in the consolidated putative class actions and in the shareholder derivative actions seek an unspecified amountliability or wrongdoing of compensatory damages, interest, and costs, including legal and expert fees.
In response to these actions,any kind, the Company continueshas implemented, or agreed to work with its experienced securities litigation counsel to vigorously defend itself and its officers and directors.implement certain corporate governance changes. The Company also believes this typeagreed to cover the derivative plaintiffs’ counsels’ fees and expenses up to a sum of litigation is inherently unpredictable. It should$850,000. This settlement payment would be noted thatfunded by the Company’s insurer. Preliminary approval of the settlement was given on October 2, 2008, and notice of the settlement was subsequently distributed to shareholders. On January 13, 2009, the federal court held a court must certify a class before a case can proceed as a class hearing and granted final approval of the settlement and judgment dismissing theMiddletonandNystromfederal derivative actions. Pursuant to the settlement, the secondNystromaction lawsuitwas dismissed on January 13, 2009, theGardneraction was dismissed on February 2, 2009, and thattheSchrimpfaction was dismissed on February 3, 2009 by the determination has not been made in the consolidated securities cases. The Company believes these types of repetitive lawsuits (seeking class action status) are common in today’s litigious society and many reputable companies have successfully defended themselves against such litigation.respective Texas state court.
Texas Attorney General’s Lawsuit The Company has also beenwas sued in an enforcement action (referenced above) that was filed by the Texas Attorney General’s Office on July 5, 2007. In that lawsuit, the State of Texas sued Mannatech, Incorporated,the Company, MannaRelief Ministries, Samuel L. Caster, the Fisher Institute, and Reginald McDaniel for alleged violations of the Texas Food, Drug, and CosmeticsCosmetic Act and the Texas Deceptive Trade Practices Act. The allegations, consistent with the allegations made by the securities class action and derivative plaintiffs, primarily concernconcerned the marketing of the Company’sour products by itsour independent associates. The action seeks temporary and permanent injunctive relief, statutorily-prescribed civil monetary penalties, and After extended negotiations, the restoration of money or other property allegedly taken from persons by means of unlawful acts or practices, or alternatively, damages to compensate for such losses. The Company has continued discussionsannounced that it reached a settlement on February 26, 2009 with representatives of the Attorney General’s Office regarding the enforcement action. Without admitting any wrongdoing or violations of Texas law, the Company agreed to attemptrefund up to resolve the concerns raised in the petition. $4 million to members only who purchased Mannatech products betweenMANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)F-27
September 1, 2002 and August 1, 2007, and to pay $2 million to cover fees and expenses of Texas regulators. The settlement does not include any fine or penalty against Mannatech. The settlement is reflected in our Agreed Final Judgment that was entered by the court on February 26, 2009. As part of the agreed settlement, Mannatech and its agents are enjoined from any future violations of certain provisions of the Texas Food, Drug, and Cosmetic Act and the Texas Deceptive Trade Practices Act. The Company also implemented certain corporate governance changes required by the Texas Attorney General’s Office, and have agreed to implement certain additional changes and programs to provide for comprehensive monitoring and compliance regarding representations, advertisement, and labeling of our products and the research associated with those products. In addition, the Company has agreed to implement certain policies regarding the relationship between Mannatech and MannaRelief Ministries, and the conduct of Mannatech-sponsored events and web sites. The Company has also agreed to make certain periodic reports to the Texas Attorneys General’s Office regarding the implementation and results of the changes made pursuant to the agreed judgment. Mr. Caster, who resigned as Chairman on January 30, 2009, also entered into an agreed settlement on February 26, 2009 with the Attorney General’s Office settling the enforcement action against him. As part of that agreed judgment, Mr. Caster, without admitting any wrongdoing or violations of Texas law, has agreed to pay a fine of $1 million, and is enjoined from serving as an officer, director, or employee of Mannatech for a period of five years; provided, however, Mr. Caster is not prohibited by his settlement from acting as an independent consultant to the Company provided that he comply with the terms of the settlement between the Company and the Texas Attorney General, including that he report directly to the Company’s CEO. Pursuant to the requirements of the Company’s articles of incorporation and bylaws, the Company has agreed to indemnify Mr. Caster for the amount of the fine and for any other expenses relating to this matter. Potential SEC Enforcement Action In a letter dated August 29, 2008, otherwise known as a “Wells notice,” the Staff of the Securities and Exchange Commission (the “Staff”) indicated to the Company that they intended to recommend that a civil injunctive action or cease and desist proceeding be commenced against Mannatech, as well as Stephen Fenstermacher, the Chief Financial Officer, and Larry Jobe, the Chairman of the Audit Committee of the Board of Directors. The Staff asserted that the Company and the named individuals violated Section 13(a) of the Exchange Act of 1934 and Rules 13a-11 and 12b-20 thereunder, by failing to file an SEC Form 8-K within four days of the date of the termination of Grant Thornton, L.L.P. as the Company’s independent accountant. The receipt of the Wells notice was disclosed in a Form 8-K filed with the SEC on September 5, 2008. The Company’s response to the Wells notice, along with the responses of Mr. Fenstermacher and Mr. Jobe, were submitted to the Staff on October 3, 2008. The Company, Mr. Fenstermacher, and Mr. Jobe were notified in letters dated October 31, 2008, that the Staff had completed its investigation and would not recommend that any enforcement action be taken by the SEC. Mannatech disclosed the termination of the SEC’s investigation in a Form 8-K filed with the SEC on November 5, 2008. Patent Infringement Litigation The Company currently has the following twoone patent infringement suitssuit on file: Mannatech, Incorporated v. Glycobiotics International, Inc. On March 16, 2006, the Company first filed a patent infringement lawsuit against Glycobiotics International, Inc. for alleged infringement of its utility United States Patent No. 6,929,807 (“Compositions of Plant Carbohydrates as Dietary Supplements”) in the United States District Court of the Northern District of Texas, Dallas Division. On February 9, 2007, the Company filed an Amended Complaint, which adds patent infringement claims relating to its utility United States Patent No. 7,157,431 (also entitled “Compositions of Plant Carbohydrates as Dietary Supplements”).
In the Amended Complaint, the Company seeks to stop Glycobiotics from manufacturing, offering, and selling its infringing glyconutritional product marketed under the brand name “Glycomannan.” The Amended Complaint also alleges claims for unfair competition and business disparagement because of false and misleading statements made by Glycobiotics in connection with its marketing and sale of Glycomannan.
Glycobiotics answered the Company’s Amended Complaint on February 20, 2007, asserting various affirmative defenses and three counterclaims alleging anticompetitive conduct under the Sherman Act in connection with the market for arabinogalactan. Following extensive discovery by the Company, and the disclosure of an expert refuting the allegations contained in the counterclaims, on August 6, 2007, Glycobiotics filed a stipulated motion to dismiss all of its counterclaims.
The Court conducted a hearing on June 22, 2007 on Glycobiotics’ Motion for Markman Claim Construction on the patents-at-issue. The Court issued an Order on June 26, 2007 construing the terms of the patents-at-issue in the Company’s favor. On July 12, 2007, Glycobiotics filed a Motion for Reconsideration of the Court’s Markman Order. The Company opposed the Motion for Reconsideration and the Court denied the motion on July 16, 2007.
In December 2007, the Court denied the parties’ cross-motions for partial summary judgment and set the case for trial on May 5, 2008. The Company continues to vigorously prosecute the case and believes the likelihood of an unfavorable outcome is remote.
Mannatech, Incorporated v. K.Y.C. Inc. d/b/a Techmedica Health Inc., Triton Nutra, Inc., Ionx Holdings, Inc., and John Does 1-30
On May 5, 2006, theThe Company also filed a patent infringement lawsuit against K.Y.C. Inc. d/b/a Techmedica Health™Health, Inc. (“Techmedica”), Triton Nutra, Inc., or Techmedica, for alleged infringement of its utility United States Patent No. 6,929,807Ionx Holdings, Inc. (“Compositions of Plant Carbohydrates as Dietary Supplements”Ionx”), and John Does 1-30, pending in the United States District Court of the Northern District of Texas, Dallas Division. The Original Complaint sought to stop Techmedica from manufacturing, offering, and selling its infringing glyconutritional product marketed underlawsuit alleges the brand name “Nutratose.” The Original Complaint also alleged claims for unfair competition and business disparagement because of false and misleading statements made by Techmedica in connection with its marketing and sale of Nutratose.
In response to the Company’s discovery requests, Techmedica Health claimed that Triton Nutra, Inc. manufactures the glyconutritional product that it markets and sells under the brand name Nutratose. Shortly thereafter, thedefendants infringed United States Patent Nos. 6,929,807, 7,157,431, 7,196,064, 7,199,104, and Trademark Office issued United States Patent No. 7,157,431 (also7,202,220, all entitled “Compositions of Plant Carbohydrates as Dietary Supplements”)Supplements,” and seeks to stop the manufacture, offer, and sale of defendants’ infringing glyconutritional products, as well as cessation of defendants’ false advertising about our products, including Ambrotose®. Accordingly,
On May 5, 2006, the Company initiated the lawsuit against Techmedica, alleging infringement of the ‘807 Patent. After Techmedica claimed that Triton Nutra manufactured its glyconutritional products, the Company amended its complaint on February 6, 2007 the Company filed its Amended Complaint, which namedto add Triton Nutra as an additionala defendant, as well as infringement claims related to the original newlyMANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)F-28
claims and added infringement claims relating to the new patent
issued ‘431 Patent against both Techmedica Health and Triton Nutra. Pending Triton Nutra’s appearance in the case, the Company and Techmedica Health filed a Joint Motion to Lift the Scheduling Order on February 15, 2007 to allow all parties to coordinate on a new scheduling order. The Court granted the Joint Motion on February 16, 2007. AfterWhen Triton Nutra failed to answer the Amended Complaint, the Company requested, and the Clerk of Court entered, default against Triton Nutra on May 3, 2007.
On August 10, 2007, the Court stayed the case pending entry of judgment in the Company’s earlier patent infringement suit against Glycoproducts International, Inc. f/k/a Glycobiotics International, Inc. (“Glycobiotics”). During the stay, on February 28, 2008, a federal grand jury indicted Techmedica Health and its president for violations of federal drug distribution laws, wire and mail fraud, and money laundering. The government is seeking any property derived from these activities, including over $17 million in cash and various real estate and other property. After the indictment, Ionx purchased all of the assets of Techmedica, including its inventory of glyconutritional products, and began selling these products on the internet under the assumed name Micronutra Health. Following the Company’s successful prosecution of its patent infringement suit against Glycobiotics, on July 30, 2008, the Court granted its unopposed motion to lift the stay in this suit. The Company also soughtfiled its Second Amended Complaint on September 18, 2008, adding Ionx and John Does 1-30 as defendants and infringement claims related to continue its case againstthe ‘064, ‘104, and ‘220 Patents, and naming Activive as an additional infringing glyconutritional product. On October 13, 2008, Techmedica Health, seeking discovery onand Ionx filed identical answers and counterclaims, which claim that the patent infringement and business disparagement claims. In response, Techmedica Health filed a Motion to Stay Proceedings and for a Protective Order from Deposition Notice on May 2, 2007, which sought to stayCompany’s patents-in-suit are invalid, unenforceable, or otherwise not infringed by defendants. The parties are currently following the case until after a judgment is issuedschedule set by the Court in the Glycobiotics case. The Court granted the motion on August 10, 2007. Once judgment has issued in the Glycobiotics case,Second Amended Scheduling Order. To date, the Company intendshas served the defendants with its preliminary infringement contentions and the defendants have served the Company with their preliminary invalidity contentions. The parties have also exchanged a list of claim terms to be construed along with a proposed construction of each disputed claim term. In the Company’s preliminary infringement contentions, it identified nine infringing products: Nutratose, Activive, Candidol, Claritose, Lupazol, Respitrol, Rhumatol, Synaptol, and Viratrol. In its deposition on October 10, 2008, Techmedica’s corporate representative testified that all nine identified products are comprised of the same encapsulated ingredients. The Company will continue to vigorously prosecute this casecase. Given the precedent set byMannatech v. Glycobiotics, the Company continues to judgment and believesbelieve the likelihood of an unfavorable outcome is remote. Withremote, and with no pending counterclaims the Company’sseeking monetary damages, its potential loss is limited to an award of the defendants’ court costs. DPT Litigation
On November 8, 2007, DPT Laboratories, Ltd. (“DPT”)December 12, 2008, the defendant filed a lawsuit againstSpecial Appearance challenging the CompanyCourt’s personal jurisdiction. On February 16, 2009, the Court heard oral argument and overruled the defendant’s special appearance, which will keep the case in the 224th Judicial District Court of BexarDallas County, Texas alleging suit on a sworn account, breach of contract, promissory estoppel, quantum meruit, and unjust enrichment. This lawsuit arose from an agreement between DPT and the Company that addressed the manner in which DPT would reformulate and manufacture the Company’s North American skin care line. DPT claimed the Company breached the agreement by canceling open purchase orders and sought $1.6 million in damages.Texas. The Company answered DPT’s petition on January 18, 2008, asserting various affirmative defenses and three counterclaims alleging breach of contract, promissory estoppel, and negligent misrepresentation.will continue to vigorously prosecute this case. The Company claimed that DPT failedbelieves the likelihood of an unfavorable outcome is remote, and with no counterclaims, any potential loss is limited to perform services under the agreement by manufacturing a defective product that the Company had to recall and failing to manufacture the skin care line by the requested deadline. The Company sought $4.8 million in lost profits from the anticipated salesan award of the skin care line and $0.6 million in costs related to the recall of the defective product.defendant’s court costs. On February 27, 2008, the parties entered into a settlement agreement, and on March 5, 2008, an Agreed Order of Dismissal with Prejudice was entered with the Court. Terms of the settlement are confidential pursuant to the settlement agreement.
Litigation in General The Company also has several other pending claims incurred in the normal course of business. In the Company’s opinion, such claims can be resolved without any material adverse effect on its consolidated financial position, results of operations, or cash flows. The Company maintains certain liability insurance; however, certain costs of defending lawsuits, such as those below the insurance deductible amount, are not covered by or only partially covered by its insurance policies, or its insurance carriers could refuse to cover certain of these claims in whole or in part. The Company accrues costs to defend itself from litigation as it is incurred or as it becomes determinable. The outcome of litigation may not be assured, and despite management’s views of the merits of any litigation, or the reasonableness of ourthe Company’s estimates and reserves, the Company’s financial statements could nonetheless be materially affected by an adverse judgment. The Company believes it has adequately reserved for MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the contingencies arising from the above legal matters where an outcome was deemed to be probable, and the loss amount could be reasonably estimated. While it is not possible to predict with certainty what liability or damages the Company might incur in connection with any of the above-described lawsuits, based on the advice of counsel and a management review of the existing facts and circumstances related to these lawsuits, the Company has accrued $5.3$7.5 million as of December 31, 20072008 for these matters, which is included in accrued expenses on our Consolidated Balance Sheet. During the fourth quarter of 2008, the Company revised its estimates of costs accrued for legal expenses based on the most recent information to date. This resulted in a reduction in the accrual of approximately $5.5 million which was recorded in the fourth quarter.
NOTE 14:15: SHAREHOLDERS’ EQUITY Preferred Stock On April 8, 1998, the Company amended its Articles of Incorporation to reduce the number of authorized shares of common stock from 100.0 million to 99.0 million and the Company authorized 1.0 million shares of preferred stock with a par value of $0.01 per share. No shares of preferred stock have ever been issued or outstanding. Treasury Stock On June 30, 2004, the Company’s Board of Directors authorized the Company to repurchase, in the open market, up to 5% of its outstanding shares, or approximately 1.3 million shares, of its common stock to help manage any dilutive effects of its common stock in the open market. On August 28, 2006, a second program permitting the Company to purchase, in the open market, up to $20 million of its outstanding shares was approved by theour Board of Directors. As of December 31, 2007,2008, the Company had repurchased the following number of shares of its common stock in the open market: | Month purchased | | Number of common shares purchased in the open market | | Approximate cost | | Average price paid per share | Number of common shares purchased in the open market | | Approximate cost | | Average price paid per share | May 2005 | | 190,850 | | $ | 3.0 million | | $ | 15.71 | 190,850 | | $ | 3.0 | million | | $ | 15.71 | September 2005 | | 182,626 | | | 2.0 million | | $ | 10.95 | 182,626 | | | 2.0 | million | | $ | 10.95 | October 2005 | | 207,023 | | | 2.0 million | | $ | 9.66 | 207,023 | | | 2.0 | million | | $ | 9.66 | May 2006 | | 73,955 | | | 1.0 million | | $ | 13.52 | 73,955 | | | 1.0 | million | | $ | 13.52 | June 2006 | | 253,289 | | | 3.0 million | | $ | 11.84 | 253,289 | | | 3.0 | million | | $ | 11.84 | July 2006 | | 144,840 | | | 2.0 million | | $ | 13.81 | 144,840 | | | 2.0 | million | | $ | 13.81 | August 2006 | | 68,861 | | | 1.0 million | | $ | 14.52 | 68,861 | | | 1.0 | million | | $ | 14.52 | | | | | | | | | Total | | 1,121,444 | | $ | 14.0 million | | $ | 12.48 | 1,121,444 | | $ | 14.0 | million | | $ | 12.48 | | | | | | | | |
As of December 31, 2007,2008, the maximum number of shares available for repurchase under the June 2004 plan, previously approved by the Company’s Board of Directors, was 196,124. The Company is also authorized to purchase up to $20 million of its outstanding common stock, in the open market, under its August 2006 program. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss), net, which is displayed in the Consolidated Statement of Shareholders’Shareholder’s Equity, represents net earnings (loss) plus the results of certain shareholders’ equity changes not reflected in the consolidated statements of operations. Such items include unrealized gains/losses from investments, foreign currency translation, and certain pension and postretirement benefit obligations. MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)F-30
The after-tax components of Accumulatedaccumulated other comprehensive income (loss), are as follows: | | | | | | | | | | Unrealized Gain (Loss) From Investments | | Foreign Currency Translation | | Pension Postretirement Benefit Obligation | | Accumulated Other Comprehensive Income (Loss), Net | | | | Unrealized Gain (Loss) From Investments | | Foreign Currency Translation | | Pension and Postretirement Benefit Obligation | | Accumulated Other Comprehensive Income (Loss), Net | | | | | (in thousands) | | | Balance as of December 31, 2004 | | ($ | 33 | ) | | $ | 228 | | | $ | — | | | $ | 195 | | | Current-period change | | | 17 | | | | (1,310 | ) | | | — | | | | (1,293 | ) | | | | | | | | | | | | | | | | (in thousands) | | | Balance as of December 31, 2005 | | | (16 | ) | | | (1,082 | ) | | | — | | | | (1,098 | ) | | $ | (16 | ) | $ | (1,082 | ) | $ | — | | $ | (1,098 | ) | Current-period change | | | 15 | | | | (622 | ) | | | (44 | ) | | | (651 | ) | | | 15 | | | (622 | ) | | (44 | ) | | (651 | ) | | | | | | | | | | | | | | | Balance as of December 31, 2006 | | | (1 | ) | | | (1,704 | ) | | | (44 | ) | | | (1,749 | ) | | | (1 | ) | | (1,704 | ) | | (44 | ) | | (1,749 | ) | Current-period change | | | 1 | | | | 613 | | | | 12 | | | | 626 | | | | 1 | | | 613 | | | 12 | | | 626 | | Balance as of December 31, 2007 | | | | — | | | (1,091 | ) | | (32 | ) | | (1,123 | ) | Current-period change | | | | — | | | (318 | ) | | 35 | | | (283 | ) | Balance as of December 31, 2008 | | | | — | | $ | (1,409 | ) | $ | 3 | | $ | (1,406 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance as of December 31, 2007 | | | — | | | ($ | 1,091 | ) | | ($ | 32 | ) | | ($ | 1,123 | ) | | | | | | | | | | | | | | | |
NOTE 15:16: EARNINGS (LOSS) PER SHARE Basic Earnings (Loss) Per Share (“EPS”) calculations are based on the calculated weighted-average number of the Company’s common shares outstanding during the period. Diluted EPS calculations are based on the calculated weighted-average number of common shares and dilutive common share equivalents outstanding during each period. The following data shows the amounts used in computing the Company’s EPS and their effect on the Company’s weighted-average number of common shares and dilutive common share equivalents for the years ended December 31, 2008, 2007 2006 and 2005.2006. For 2008, approximately 1.3 million of the Company’s common stock options were excluded from its diluted EPS calculation using average close price of $5.37 per share, as their effect was anti-dilutive. For 2007, approximately 0.4 million of the Company’s common stock options were excluded from its diluted EPS calculation using a weighted-averagean average close price of $11.60 per share, as their effect was antidilutive.anti-dilutive. For 2006, approximately 0.1 million of the Company’s common stock options were excluded from its diluted EPS calculation using a weighted-averagean average close price of $15.87 per share, as their effect was antidilutive. For 2005, approximately 0.1 million of the Company’s common stock options were excluded from its diluted EPS calculation using a weighted-average close price of $12.01 per share, as their effect was antidilutive.anti-dilutive. The amounts are rounded to the nearest thousands, except per share amounts. | | | 2007 | | 2006 | | 2005 | | 2008 | | 2007 | | 2006 | | | | Income (Numerator) | | Shares (Denominator) | | Per Share Amount | | Income (Numerator) | | Shares (Denominator) | | Per Share Amount | | Income (Numerator) | | Shares (Denominator) | | Per Share Amount | | Income/Loss (Numerator) | | Shares (Denominator) | | Per Share Amount) | | Income (Numerator) | | Shares (Denominator) | | Per Share Amount | | Income (Numerator) | | Shares (Denominator) | | Per Share Amount | | Basic EPS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income available to common shareholders | | $ | 6,594 | | 26,443 | | $ | 0.25 | | $ | 32,390 | | 26,598 | | $ | 1.22 | | | $ | 28,647 | | 26,990 | | $ | 1.06 | | | Net income (loss) available to common shareholders | | $ | (12,628 | ) | 26,461 | | $ | (0.48 | ) | $ | 6,594 | | 26,443 | | $ | 0.25 | | $ | 32,390 | | 26,598 | | $ | 1.22 | | Effect of dilutive securities – | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock options | | | — | | 354 | | | — | | | — | | 515 | | | (0.03 | ) | | | — | | 673 | | | (0.03 | ) | | — | | — | | | — | | | — | | 354 | | | — | | | — | | 515 | | | (0.03 | ) | Stock warrants(1) | | | — | | 96 | | | — | | | — | | 106 | | | — | | | | — | | 108 | | | — | | | — | | — | | | — | | | — | | 96 | | | — | | | — | | 106 | | | — | | Diluted EPS: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income available to common shareholders plus assumed conversions | | $ | 6,594 | | 26,893 | | $ | 0.25 | | $ | 32,390 | | 27,219 | | $ | 1.19 | | | $ | 28,647 | | 27,771 | | $ | 1.03 | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) available to common shareholders plus assumed conversions | | $ | (12,628 | ) | 26,461 | | $ | (0.48 | ) | $ | 6,594 | | 26,893 | | $ | 0.25 | | $ | 32,390 | | 27,219 | | $ | 1.19 | |
(1) | In 2001, as part of a separation agreement, the Company granted an officer 213,333 warrants for common stock, at exercise prices ranging from $1.75 to $4.00 per share. The stock warrants vested immediately and expire_________________________ (1) In 2001, as part of a separation agreement, the Company granted an officer 213,333 stock warrants for common stock at exercise prices ranging from $1.75 to $4.00 per share. The stock warrants vested immediately and expired on February 28, 2008. |
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s quarterly cash dividend increased todividends were $0.09 per share in 2007 fromfor the first and second quarters of 2008 and $0.02 per share for the third and fourth quarters of 2008.The Company paid $0.09 and $0.08 per share in 2006.quarterly cash dividends in 2007 and 2006, respectively. The dividend policy is periodically re-evaluated based on consolidated results of operations, financial position, cash requirements, and other relevant factors. NOTE 16:17: SEGMENT INFORMATION The Company conducts its business within one industry segment. No single independent associate has ever accounted for more than 10% of the Company’s consolidated net sales. The Company aggregates all of its operating units because it operates as a single reportable segment as a seller of nutritional supplements and skin care products through its network-marketing distribution channels operating in teneleven countries. In each country, the Company markets its products and pays commissions and incentives in similar market environments. The Company’s management reviews its financial information by country and focuses its internal reporting and analysis of revenues by packs and product sales. The Company sells its products through its independent associates and distributes its products through similar distribution channels in each country. Each of the Company’s operations sells similar packs and products and possesses similar economic characteristics, such as selling prices and gross margins. The Company operates in sixseven physical locations and sells productsproduct in tentwelve different countries around the world. The sixseven physical locations includeare the United States, Switzerland, Australia, the United Kingdom, Japan, the Republic of Korea (South Korea), and Taiwan. Each of the Company’s physical locations serviceservices different geographicalgeographic areas. The United States parentlocation processes orders for Canada; however, productsthe United States, Canada, and packs sold in Canada are shipped through a third-party distribution facility located in Canada.South Africa. The Company’s Australian location processes orders for both Australia, and New Zealand, and the orders are shipped for Australia and New Zealand through a third-party distribution facility located in Australia.Singapore. The Company’s United Kingdom location processes and ships orders for the United Kingdom, Denmark and Germany. All The Company’s Switzerland office manages certain day-to-day business needs of non-North American markets and coordinates the Company’s active subsidiaries are fully operating subsidiaries, except for Australia and the United Kingdom. The Company’s Australian and United Kingdom subsidiaries operate as limited-risk service providers and are responsible for providing management, marketing and administrative services, processing and shipping orders, and overseeing the payment of cost of sales and commissions for processed orders on behalf of their parent operating in the United States. For these services, the limited-risk service providers are paid a management fee from their United States parent, which is eliminated in the Company’s consolidated financial statements. In addition to the processing and shipping of orders in the United States and Canada, the United States parent owns all of the sales and inventories and accrues all commissions and costs related to activities in New Zealand, Australia, the United Kingdom, Denmark, and Germany.
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)continued global expansion.
By country of operation, consolidated net sales shipped to customers in these locations, along with pack and product information for the years ended December 31, are as follows: | | | 2007 | | 2006 | | 2005 | | 2008 | | 2007 | | 2006 | | | | (in millions, except percentages) | | (in millions, except percentages) | | United States | | $ | 244.5 | | 59.2 | % | | $ | 271.4 | | 66.2 | % | | $ | 259.4 | | 66.6 | % | $ | 176.9 | | 53.1 | % | | $ | 244.5 | | 59.2 | % | | $ | 271.4 | | 66.2 | % | Canada | | | 27.4 | | 6.6 | % | | | 28.6 | | 7.0 | % | | | 28.0 | | 7.2 | % | | 23.6 | | 7.1 | % | | | 27.4 | | 6.6 | % | | | 28.6 | | 7.0 | % | Australia | | | 29.4 | | 7.1 | % | | | 30.5 | | 7.4 | % | | | 35.7 | | 9.2 | % | | 26.1 | | 7.8 | % | | | 29.4 | | 7.1 | % | | | 30.5 | | 7.4 | % | United Kingdom | | | 6.7 | | 1.6 | % | | | 7.5 | | 1.8 | % | | | 8.9 | | 2.3 | % | | 4.7 | | 1.4 | % | | | 6.7 | | 1.6 | % | | | 7.5 | | 1.8 | % | Japan | | | 42.3 | | 10.3 | % | | | 41.4 | | 10.1 | % | | | 35.4 | | 9.1 | % | | 44.8 | | 13.5 | % | | | 42.3 | | 10.3 | % | | | 41.4 | | 10.1 | % | New Zealand | | | 6.9 | | 1.7 | % | | | 8.9 | | 2.2 | % | | | 14.6 | | 3.7 | % | | 5.2 | | 1.6 | % | | | 6.9 | | 1.7 | % | | | 8.9 | | 2.2 | % | Republic of Korea | | | 44.0 | | 10.7 | % | | | 12.4 | | 3.0 | % | | | 4.6 | | 1.2 | % | | 35.7 | | 10.7 | % | | | 44.0 | | 10.7 | % | | | 12.4 | | 3.0 | % | Taiwan* | | | 5.4 | | 1.3 | % | | | 3.7 | | 0.9 | % | | | 2.3 | | 0.6 | % | | Denmark** | | | 1.5 | | 0.4 | % | | | 3.4 | | 0.8 | % | | | 0.5 | | 0.1 | % | | Germany*** | | | 4.6 | | 1.1 | % | | | 2.3 | | 0.6 | % | | | — | | — | % | | | | | | | | | | | | | | | | | | | Taiwan | | | 5.2 | | 1.6 | % | | | 5.4 | | 1.3 | % | | | 3.7 | | 0.9 | % | Denmark | | | 1.2 | | 0.4 | % | | | 1.5 | | 0.4 | % | | | 3.4 | | 0.8 | % | Germany* | | | 3.8 | | 1.1 | % | | | 4.6 | | 1.1 | % | | | 2.3 | | 0.6 | % | South Africa** | | | 5.5 | | 1.7 | % | | | — | | — | | | | — | | — | | Totals | | $ | 412.7 | | 100 | % | | $ | 410.1 | | 100 | % | | $ | 389.4 | | 100 | % | $ | 332.7 | | 100 | % | | $ | 412.7 | | 100 | % | | $ | 410.1 | | 100 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
* | Taiwan began operations in June 2005. |
** | United Kingdom began shipping products to Denmark in August 2005. |
*** | United Kingdom began shipping products to Germany in March 2006. |
** South Africa began operations in May 2008. | | | | | | | | | | | | 2007* | | 2006 | | 2005 | | | (in millions) | Consolidated product sales | | $ | 316.9 | | $ | 309.1 | | $ | 284.8 | Consolidated pack sales | | | 79.0 | | | 80.7 | | | 87.8 | Consolidated other, including freight | | | 16.8 | | | 20.3 | | | 16.8 | | | | | | | | | | | Total | | $ | 412.7 | | $ | 410.1 | | $ | 389.4 | | | | | | | | | | |
F-32 * | In April 2007, we began operating our new ERP system, which allowed us to separately quantify deferred revenue associated with sales of packs and products that were shipped but not yet received by customers. As a result, in April 2007, we began recording deferred revenue related to packs with pack sales and deferred revenue associated with products with product sales. For the year ended December 31, 2007, we recorded deferred revenue of ($3.9 million) for product sales and $0 for pack sales. For the year ended December 31, 2006, we recorded deferred revenue of $1.0 million related to packs and products shipped but not yet received by customers in other sales rather than in the applicable pack or product sales category because our previous computer system could not separately differentiate deferred revenue associated with packs and products. |
| 2008 | | 2007 | | 2006 | | (in millions) | Consolidated product sales | $ | 260.5 | | $ | 316.9 | | $ | 309.1 | Consolidated pack sales | | 57.7 | | | 79.0 | | | 80.7 | Consolidated other, including freight* | | 14.5 | | | 16.8 | | | 20.3 | Total | $ | 332.7 | | $ | 412.7 | | $ | 410.1 |
____________________________ * In April 2007, the Company began operating its new Enterprise Resource Planning (“ERP”) System, which allowed it to separately quantify deferred revenue associated with sales of packs and products that were shipped but not yet received by customers. As a result, in April 2007, the Company began recording deferred revenue related to packs with pack sales and deferred revenue associated with products with product sales. For the three months ended March 31, 2007 and the year ended December 31, 2006, other sales included $1.9 million and $1.0 million respectively, related to the change in deferred revenue for packs and products shipped but not yet received by customers, rather than in the applicable pack or product sales category. Long-lived assets, which include property and equipment and construction in progress for the Company and its subsidiaries, as of December 31, reside in the following countries, as follows: | | | | | | | | | 2007 | | 2006 | | | (in millions) | Country | | | | | | | Australia | | $ | 0.3 | | $ | 0.2 | Japan | | | 0.2 | | | 0.3 | Republic of Korea | | | 1.0 | | | 0.6 | Taiwan | | | 0.1 | | | 0.2 | United Kingdom | | | 0.3 | | | 0.5 | United States | | | 42.5 | | | 39.4 | | | | | | | | | | $ | 44.4 | | $ | 41.2 | | | | | | | |
MANNATECH, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| 2008 | | 2007 | Country | (in millions) | Australia | $ | 0.3 | | $ | 0.3 | Japan | | 0.2 | | | 0.2 | Republic of Korea | | 0.8 | | | 1.0 | Switzerland | | 0.7 | | | — | Taiwan | | 0.1 | | | 0.1 | United Kingdom | | 0.1 | | | 0.3 | United States | | 34.8 | | | 42.5 | | $ | 37.0 | | $ | 44.4 |
NOTE 17:18: SUBSEQUENT EVENTS On February 22, 2008,26, 2009, Mannatech, Incorporated (“Mannatech”) announced that it reached a settlement with the Texas Attorney General’s office of an enforcement action filed by the Texas Attorney General in July 2007. The lawsuit related to regulatory compliance and sales practices that predominantly took place from 2002 to 2006. Under the proposed settlement, Mannatech will pay $6 million, of which $4 million is designated for restitution to consumers and $2 million is designated to cover fees and expenses of Texas regulators. The settlement does not include any fine or penalty. As part of the agreed final judgment, Mannatech and its agents are enjoined from any future violations of certain provisions of the Texas Food, Drug, and Cosmetic Act and the Texas Deceptive Trade Practices Act. On January 30, 2009, Sam Caster, the founder of the Company, resigned from the Company’s Board of Directors. Mr. Caster served as the Chairman of the Board of the Company’s Board of Directors and as a member of the Company’s Science Committee. The Company’s Board of Directors has elected lead director Stan Fredrick to replace Mr. Caster as the Chairman of the Board. On February 18, 2009, the Company’s Board of Directors declared a cash dividend of $0.09$0.02 per share of Mannatech’s common stock,stock. The cash dividend is payable on Friday,Tuesday, March 28, 2008,26, 2009 to Mannatech’s shareholders of record atas of the close of business on Friday,Monday, March 7, 2008.9, 2009. On March 5, 2008,
The supplier of one major product component announced in February 2009 that the Company entered into a settlement agreement on a legal matter. See note 13 aboveprocessing facility was closed and manufacturing of the component would cease. Mannatech owns extensive inventory of this component and believes that its needs for further information. the next twelve months or more will be covered by these stocks. Alternate sources of supply for this component are currently being explored.
INDEX TO EXHIBITS | | | | | | | | | | | | | | | Incorporated by Reference | Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit (s) | | Filing Date | 3.1 | | Amended and Restated Articles of Incorporation of Mannatech, dated May 19, 1998. | | S-1 | | 333-63133 | | 3.1 | | October 28, 1998 | 3.2 | | Fourth Amended and Restated Bylaws of Mannatech, dated August 8, 2001 (Corrected). | | 10-K | | 000-24657 | | 3.2 | | March 16, 2007 | 3.3 | | First Amendment to the Fourth Amended and Restated Bylaws of Mannatech, effective November 30, 2007. | | 8-K | | 000-24657 | | 3.1 | | December 6, 2007 | 4.1 | | Specimen Certificate representing Mannatech’s common stock, par value $0.0001 per share. | | S-1 | | 333-63133 | | 4.1 | | October 28, 1998 | 10.1 | | Amended and Restated 1997 Stock Option Plan, dated August 7, 2004. | | 10-K | | 000-24657 | | 10.1 | | March 15, 2004 | 10.2 | | Amended and Restated 1998 Incentive Stock Option Plan, dated August 7, 2004. | | 10-K | | 000-24657 | | 10.1 | | March 15, 2004 | 10.3 | | Amended and Restated 2000 Option Plan, dated August 7, 2004. | | 10-K | | 000-24657 | | 10.1 | | March 15, 2004 | 10.4 | | Form of Indemnification Agreement between Mannatech and each member of the board of directors of Mannatech Korea Ltd., dated March 3, 2004. | | 10-Q | | 000-24657 | | 10.2 | | August 9, 2004 | 10.5 | | Form of Indemnification Agreement between Mannatech, and its board of directors, dated September 10, 1998. | | S-1 | | 333-63133 | | 10.8 | | September 10, 1998 | 10.6 | | Commercial Lease Agreement between Mannatech and MEPC Quorum Properties II Inc., dated November 7, 1996, as amended by the First Amendment thereto dated May 29, 1997 and the Second Amendment thereto dated November 13, 1997. | | S-1 | | 333-63133 | | 10.13 | | September 10, 1998 | 10.7 | | Second Amendment to the Commercial Lease Agreement between Mannatech and Texas Dugan Limited Partnership, dated September 22, 2005. | | 10-Q | | 000-24657 | | 10.1 | | November 9, 2005 | 10.8 | | Commercial Lease Agreement between Mannatech and MEPC Quorum Properties II Inc., dated May 29, 1997 as amended by the First Amendment thereto dated November 6, 1997. | | S-1 | | 333-63133 | | 10.14 | | September 10, 1998 | 10.9 | | Third Amendment to the Commercial Lease Agreement between Mannatech and Texas Dugan Limited Partnership, dated September 22, 2005. | | 10-Q | | 000-24657 | | 10.2 | | November 9, 2005 | 10.10 | | Trademark License and Supply Agreement between Mannatech and Carrington Laboratories, Inc., dated January 25, 2007, (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | | 8-K | | 000-24657 | | 10.1 | | January 31, 2007 | 10.11 | | Supply Agreement between Mannatech (International) Limited and Marinova Pty. Limited, effective August 9, 2007 and dated May 7, 2007, (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act). | | 10-Q | | 000-24657 | | 10.3 | | May 10, 2007 |
| | Incorporated by Reference | Exhibit Number | Exhibit Description | Form | File No. | Exhibit (s) | Filing Date | 3.1 | Amended and Restated Articles of Incorporation of Mannatech, dated May 19, 1998. | S-1 | 333-63133 | 3.1 | October 28, 1998 | 3.2 | Fourth Amended and Restated Bylaws of Mannatech, dated August 8, 2001 (Corrected). | 10-K | 000-24657 | 3.2 | March 16, 2007 | 3.3 | First Amendment to the Fourth Amended and Restated Bylaws of Mannatech, effective November 30, 2007. | 8-K | 000-24657 | 3.1 | December 6, 2007 | 4.1 | Specimen Certificate representing Mannatech’s common stock, par value $0.0001 per share. | S-1 | 333-63133 | 4.1 | October 28, 1998 | 10.1 | Amended and Restated 1997 Stock Option Plan, dated August 7, 2004. | 10-K | 000-24657 | 10.1 | March 15, 2004 | 10.2 | Amended and Restated 1998 Incentive Stock Option Plan, dated August 7, 2004. | 10-K | 000-24657 | 10.1 | March 15, 2004 | 10.3 | Amended and Restated 2000 Option Plan, dated August 7, 2004. | 10-K | 000-24657 | 10.1 | March 15, 2004 | 10.4 | 2008 Stock Incentive Plan. | DEF 14A | 000-24657 | Appendix B | April 29, 2008 | 10.5 | Form of Indemnification Agreement between Mannatech and each member of the Board of Directors of Mannatech Korea Ltd., dated March 3, 2004. | 10-Q | 000-24657 | 10.2 | August 9, 2004 | 10.6 | Form of Indemnification Agreement between Mannatech, and its Board of Directors, dated September 10, 1998. | S-1 | 333-63133 | 10.8 | September 10, 1998 | 10.7 | Commercial Lease Agreement between Mannatech and MEPC Quorum Properties II Inc., dated November 7, 1996, as amended by the First Amendment thereto dated May 29, 1997 and the Second Amendment thereto dated November 13, 1997. | S-1 | 333-63133 | 10.13 | September 10, 1998 | 10.8 | Second Amendment to the Commercial Lease Agreement between Mannatech and Texas Dugan Limited Partnership, dated September 22, 2005. | 10-Q | 000-24657 | 10.1 | November 9, 2005 | 10.9 | Commercial Lease Agreement between Mannatech and MEPC Quorum Properties II Inc., dated May 29, 1997 as amended by the First Amendment thereto dated November 6, 1997. | S-1 | 333-63133 | 10.14 | September 10, 1998 | 10.10 | Third Amendment to the Commercial Lease Agreement between Mannatech and Texas Dugan Limited Partnership, dated September 22, 2005. | 10-Q | 000-24657 | 10.2 | November 9, 2005 | 10.11 | Trademark License and Supply Agreement between Mannatech and Carrington Laboratories, Inc., dated January 25, 2007. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | 8-K | 000-24657 | 10.1 | January 31, 2007 | 10.12 | Supply Agreement between Mannatech (International) Limited and Marinova Pty. Limited, effective August 9, 2007 and dated May 7, 2007, (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act). | 10-Q | 000-24657 | 10.3 | May 10, 2007 | 10.13 | Amendment to Purchase Agreement between Mannatech and Marinova PTY, Limited, dated May 6, 2008 (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act). | 10-Q | 000-24657 | 10.4 | August 11, 2008 | 10.14 | Purchase Agreement between Mannatech and Larex, Inc., dated January 1, 2006. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | 10-K | 000-24657 | 10.18 | March 16, 2006 | 10.15 | Purchase Agreement between Mannatech and Wellness Enterprises, LLC, dated February 1, 2006. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | 10-K | 000-24657 | 10.19 | March 16, 2006 |
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| | | | | | | | | | | | | | | Incorporated by Reference | Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit (s) | | Filing Date | 10.12 | | Purchase Agreement between Mannatech and Larex, Inc., dated January 1, 2006. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | | 10-K | | 000-24657 | | 10.18 | | March 16, 2006 | 10.13 | | Purchase Agreement between Mannatech and Wellness Enterprises, LLC, dated February 1, 2006. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | | 10-K | | 000-24657 | | 10.19 | | March 16, 2006 | 10.14 | | Supply Agreement between Mannatech and Coradji PTY. Limited, dated March 29, 2004. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | | 10-Q/A | | 000-24657 | | 10.1 | | March 29, 2005 | 10.15 | | Supply License Agreement between Mannatech and InB:Biotechnologies, Inc., dated March 22, 2006. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | | 10-Q | | 000-24657 | | 10.2 | | May 10, 2006 | 10.16 | | Initial Commercial Supply and Manufacturing Agreement between Mannatech and Fine Chemetics, Inc., dated March 29, 2006. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | | 10-Q | | 000-24657 | | 10.3 | | May 10, 2006 | 10.17 | | Release Agreement between Mannatech and Dr. Bill McAnalley, dated August 9, 2005. | | 8-K | | 000-24657 | | 99.1 | | August 10, 2005 | 10.18 | | Consulting Agreement between Mannatech and Dr. Bill McAnalley, dated August 9, 2005. | | 8-K | | 000-24657 | | 99.2 | | August 10, 2005 | 10.19 | | Amendment to Consulting Agreement between Dr. Bill McAnalley and Mannatech, dated August 15, 2006. | | 8-K | | 000-24657 | | 99.1 | | August 16, 2006 | 10.20 | | Employment Agreement between Mannatech and Mr. Terry L. Persinger, dated November 1, 1999. | | 10-K | | 000-24657 | | 10.25 | | March 30, 2000 | 10.21 | | First Amendment to the Employment Agreement between Mannatech and Mr. Terry L. Persinger, dated January 1, 2002. | | 10-K | | 000-24657 | | 10.17 | | April 1, 2002 | 10.22 | | Second Amendment to the Employment Agreement between Mannatech and Mr. Terry L. Persinger, dated June 7, 2004. | | 10-Q | | 000-24657 | | 10.1 | | August 9, 2004 | 10.23 | | Third Amendment to the Employment Agreement between Mannatech and Mr. Terry L. Persinger, dated January 1, 2006. | | 10-K | | 000-24657 | | 10.28 | | March 16, 2006 | 10.24 | | Fourth Amendment to the Employment Agreement between Mannatech and Mr. Terry L. Persinger, dated November 20, 2006. | | 8-K | | 000-24657 | | 99.1 | | November 21, 2006 | 10.25 | | Employment Agreement between Robert A. Sinnott, Ph.D. and Mannatech, dated October 5, 2007. | | 8-K | | 000-24657 | | 10.3 | | October 11, 2007 |
i ii
| | | | | | | | | | | | | | | Incorporated by Reference | Exhibit Number | | Exhibit Description | | Form | | File No. | | Exhibit (s) | | Filing Date | 10.26 | | Employment Agreement between John W. Price and Mannatech, effective August 31, 2007, dated August 29, 2007 | | 8-K | | 000-24657 | | 10.1 | | August 30, 2007 | 10.27 | | Employment Agreement between Mannatech and Mr. Samuel L. Caster, dated January 23, 2006. | | 10-K | | 000-24657 | | 10.32 | | March 16, 2006 | 10.28 | | Employment Agreement between Stephen D. Fenstermacher and Mannatech, dated October 5, 2007. | | 8-K | | 000-24657 | | 10.2 | | October 11, 2007 | 10.29 | | Employment Agreement between Terence L. O’Day and Mannatech, dated October 5, 2007 | | 8-K | | 000-24657 | | 10.1 | | October 11, 2007 | 10.30 | | Employment Agreement between B. Keith Clark and Mannatech, dated October 5, 2007. | | 8-K | | 000-24657 | | 10.4 | | October 11, 2007 | 10.31 | | Lock-up Agreement between Mannatech and J. Stanley Fredrick, dated November 6, 2003. | | 10-K | | 000-24657 | | 10.36 | | March 15, 2004 | 10.32 | | Consulting Agreement between Mannatech and Fredrick Media LLC, dated November 16, 2005. | | 8-K | | 000-24657 | | 99.1 | | November 21, 2005 | 10.33 | | Consulting Agreement between Bettina Simon and Mannatech, dated June 1, 2006. | | 8-K | | 000-24657 | | 99.1 | | June 2, 2006 | 10.34 | | Follow-Up Agreement to Letter of Intent Agreement between Mannatech and Jett, dated September 10, 2001. | | 10-Q | | 000-24657 | | 10.4 | | November 14, 2001 | 10.35 | | Letter of Understanding between Mannatech and Dr. John Axford, dated April 19, 2006. | | 8-K | | 000-24657 | | 99.1 | | April 21, 2006 | 10.36 | | Extension of the Letter of Spokesperson Arrangement between Mannatech and Dr. John Axford, dated February 18, 2007. | | 8-K | | 000-24657 | | 99.1 | | February 21, 2007 | 10.37 | | Employment Agreement between Alfredo Bala and Mannatech, effective October 1, 2007, dated September 18, 2007. | | 8-K | | 000-24657 | | 10.1 | | September 24, 2007 | 10.38 | | Amendment to Employment Agreement between Alfredo Bala and Mannatech, dated October 11, 2007. | | 8-K | | 000-24657 | | 10.1 | | October 17, 2007 | 10.39* | | Clinical Research Agreement dated January 3, 2007 by and between St. George’s Hospital Medical School (trading as St George’s, University of London), and Mannatech, Inc. | | * | | * | | * | | * | 14.1 | | Code of Ethics | | 10-K | | 000-24657 | | 14.1 | | March 16, 2007 | 21* | | List of Subsidiaries | | * | | * | | * | | * | 23.1* | | Consent of BDO Seidman, LLP | | * | | * | | * | | * | 23.2* | | Report of Independent Registered Public Accounting Firm on Financial Statement Schedule | | * | | * | | * | | * | 23.3* | | Consent of Grant Thornton LLP | | * | | * | | * | | * | 23.4* | | Report of Independent Registered Public Accounting Firm on Financial Statement Schedule | | * | | * | | * | | * | 24* | | Power of Attorney, which is included on the signature page of this annual report on Form 10-K. | | * | | * | | * | | * | 31.1* | | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Mannatech. | | * | | * | | * | | * |
| | Incorporated by Reference | Exhibit Number | Exhibit Description | Form | File No. | Exhibit (s) | Filing Date | 10.16 | Supply Agreement between Mannatech and Coradji PTY. Limited, dated March 29, 2004. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | 10-Q/A | 000-24657 | 10.1 | March 29, 2005 | 10.17 | Supply License Agreement between Mannatech and InB:Biotechnologies, Inc., dated March 22, 2006. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | 10-Q | 000-24657 | 10.2 | May 10, 2006 | 10.18 | Initial Commercial Supply and Manufacturing Agreement between Mannatech and Fine Chemetics, Inc., dated March 29, 2006. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | 10-Q | 000-24657 | 10.3 | May 10, 2006 | 10.19 | Supply Agreement between Mannatech, Incorporated, and Improve U.S.A., Inc., effective June 1, 2008, and executed May 2, 2008. (Portions of this exhibit were omitted pursuant to a confidential treatment request submitted pursuant to Rule 24b-2 of the Exchange Act.) | 8-K | 000-24657 | 10.1 | May 8, 2008 | 10.20 | Amended and Restated Employment Agreement between Terry L. Persinger and Mannatech, dated June 16, 2008. | 8-K | 000-24657 | 10.1 | June 20, 2008 | 10.21 | Employment Agreement between Robert A. Sinnott, Ph.D. and Mannatech, dated October 5, 2007. | 8-K | 000-24657 | 10.3 | October 11, 2007 | 10.22 | Employment Agreement between Mannatech and Mr. Samuel L. Caster, dated January 23, 2006. | 10-K | 000-24657 | 10.32 | March 16, 2006 | 10.23 | Employment Agreement between Stephen D. Fenstermacher and Mannatech, dated October 5, 2007. | 8-K | 000-24657 | 10.2 | October 11, 2007 | 10.24* | First Amendment to Employment Agreement between Stephen D. Fenstermacher and Mannatech, dated December 18, 2008. | * | * | * | * | 10.25 | Employment Agreement between Terence L. O’Day and Mannatech, dated October 5, 2007. | 8-K | 000-24657 | 10.1 | October 11, 2007 | 10.26 | Employment Agreement between B. Keith Clark and Mannatech, dated October 5, 2007. | 8-K | 000-24657 | 10.4 | October 11, 2007 | 10.27 | Employment Agreement between Wayne L. Badovinus and Mannatech, dated June 4, 2008. | 8-K | 000-24657 | 10.1 | June 9, 2008 | 10.28 | Employment Agreement between Terri F. Maxwell and Mannatech, dated August 28, 2008. | 8-K | 000-24657 | 10.1 | September 2, 2008 | 10.29 | Lock-up Agreement between Mannatech and J. Stanley Fredrick, dated November 6, 2003. | 10-K | 000-24657 | 10.36 | March 15, 2004 | 10.30 | Termination of Lock-up Agreement between Mannatech and J. Stanley Fredrick, dated March 6, 2009. | 8-K | 000-24657 | 10.1 | March 10, 2009 | 10.31 | Follow-Up Agreement to Letter of Intent Agreement between Mannatech and Jett, dated September 10, 2001. | 10-Q | 000-24657 | 10.4 | November 14, 2001 | 10.32 | Letter of Understanding between Mannatech and Dr. John Axford, dated April 19, 2006. | 8-K | 000-24657 | 99.1 | April 21, 2006 | 10.33 | Extension of the Letter of Spokesperson Arrangement between Mannatech and Dr. John Axford, dated February 18, 2007. | 8-K | 000-24657 | 99.1 | February 21, 2007 | 10.34 | Employment Agreement between Alfredo Bala and Mannatech, effective October 1, 2007, dated September 18, 2007. | 8-K | 000-24657 | 10.1 | September 24, 2007 | 10.35 | Amendment to Employment Agreement between Alfredo Bala and Mannatech, dated October 11, 2007. | 8-K | 000-24657 | 10.1 | October 17, 2007 | 10.36 | Clinical Research Agreement dated January 3, 2007 by and between St. George’s Hospital Medical School (trading as St George’s, University of London), and Mannatech, Inc. | 10-K | 000-24657 | 10.39 | March 17,2008 | 14.1 | Code of Ethics. | 10-K | 000-24657 | 14.1 | March 16, 2007 | 21* | List of Subsidiaries. | * | * | * | * | 23.1* | Consent of BDO Seidman, LLP. | * | * | * | * | 23.2* | Report of Independent Registered Public Accounting Firm on Financial Statement Schedule. | * | * | * | * |
iii
| | | | | | | | | | | | | | | Incorporated by Reference | Exhibit Number
| | Exhibit Description | | Form | | File No. | Exhibit (s) | Exhibit
(s)
| | Filing Date | 31.2*23.3* | Consent of Grant Thornton LLP. | * | * | * | * | 23.4* | Report of Independent Registered Public Accounting Firm on Financial Statement Schedule. | * | * | * | * | 24* | Power of Attorney, which is included on the signature page of this annual report on Form 10-K. | * | * | * | * | 31.1* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Mannatech. | * | * | * | * | 31.2* | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer of Mannatech. | * | * | * | * | | * | | * | 32.1* | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer of Mannatech. | * | * | * | * | | * | | * | 32.2* | | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer of Mannatech. | * | * | * | * | | * | | * | 99.3* | | Financial Statement schedule regarding Valuation and Qualifying AccountsAccounts. | * | * | * | * | | * | | * |
iv* Filed herewith.
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