September 2009
[ ] [ ] [ ] Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company [X] Part I – FINANCIAL INFORMATION Part II – OTHER INFORMATION § management’s plans and objectives for future operations; § existing cash flows being adequate to fund future operational needs; § future plans related to budgets, future capital requirements, market share growth, and anticipated capital projects and obligations; § the realization of net deferred tax assets; § the ability to curtail operating expenditures; § global statutory tax rates remaining unchanged; § the impact of future market changes due to exposure to foreign currency translations; § the possibility of certain policies, procedures, and internal processes minimizing exposure to market risk; § the impact of new accounting pronouncements on financial condition, results of operations, or cash flows; § the outcome of new or existing litigation matters; § the outcome of new or existing regulatory inquiries or investigations; and § other assumptions described in this report underlying such forward-looking statements. § overall growth or lack of growth in the nutritional supplements industry; § plans for expected future product development; § changes in manufacturing costs; § shifts in the mix of packs and products; § the future impact of any changes to global associate career and compensation plans or incentives; § the ability to attract and retain independent associates and members; § new regulatory changes that could affect operations and/or products; § the competitive nature of our business with respect to products and pricing; § publicity related to our products or network-marketing; and § the political, social, and economic climate. September 30, December 31, ASSETS (unaudited) Cash and cash equivalents $ 22,577 $ 30,945 Restricted cash 2,350 1,864 Accounts receivable, net of allowance of $16 and $23 in 2009 and 2008, respectively 287 291 Income tax receivable 3,025 3,531 Inventories, net 29,427 31,313 Prepaid expenses and other current assets 3,724 3,946 Deferred income tax assets 4,866 5,632 Total current assets 66,256 77,522 Property and equipment, net 29,547 36,202 Construction in progress 630 840 Long-term restricted cash 7,075 7,579 Other assets 2,516 1,456 Long-term deferred income tax assets 516 459 Total assets $ 106,540 $ 124,058 LIABILITIES AND SHAREHOLDERS’ EQUITY Current portion of capital leases $ 843 $ 131 Accounts payable 6,695 5,067 Accrued expenses 21,904 24,324 Commissions and incentives payable 14,030 11,453 Taxes payable 1,699 873 Current deferred tax liability 225 192 Deferred revenue 3,892 3,476 Total current liabilities 49,288 45,516 Capital leases, excluding current portion 1,272 155 Long-term deferred income tax liabilities 3,616 6,075 Other long-term liabilities 3,446 3,583 Total liabilities 57,622 55,329 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, 27,687,882 shares issued and 26,480,788 shares outstanding in 2009, and 27,667,882 shares issued and 26,460,788 shares outstanding in 2008. 3 3 Additional paid-in capital 41,243 40,753 Retained earnings 23,593 44,170 Accumulated other comprehensive loss (1,130 ) (1,406 ) Less treasury stock, at cost, 1,207,094 shares in 2009 and 2008 (14,791 ) (14,791 ) Total shareholders’ equity 48,918 68,729 Total liabilities and shareholders’ equity $ 106,540 $ 124,058 Three months ended Nine months ended 2009 2008 2009 2008 Net sales $ 71,295 $ 77,991 $ 219,640 $ 256,223 Cost of sales 11,923 11,105 35,944 37,014 Commissions and incentives 35,268 32,396 115,413 116,256 47,191 43,501 151,357 153,270 Gross profit 24,104 34,490 68,283 102,953 Operating expenses: Selling and administrative 17,748 18,753 53,403 63,349 Depreciation and amortization 3,085 3,172 9,357 9,225 Other operating 11,842 11,493 30,831 49,530 Total operating expenses 32,675 33,418 93,591 122,104 Income (loss) from operations (8,571 ) 1,072 (25,308 ) (19,151 ) Interest income 39 266 182 1,219 Other income (expense), net 859 (2,047 ) 822 (2,450 ) Loss before income taxes (7,673 ) (709 ) (24,304 ) (20,382 ) (Provision) benefit for income taxes (1,534 ) 280 4,785 7,134 Net loss $ (9,207 ) $ (429 ) $ (19,519 ) $ (13,248 ) Loss per share: Basic $ (0.35 ) $ (0.02 ) $ (0.74 ) $ (0.50 ) Diluted $ (0.35 ) $ (0.02 ) $ (0.74 ) $ (0.50 ) Weighted-average common shares outstanding: Basic 26,464 26,461 26,462 26,461 Diluted 26,464 26,461 26,462 26,461 Common Stock Additional Retained Accumulated Treasury stock Total Shares Par Shares Amounts Balance at December 31, 2008 26,461 $ 3 $ 40,753 $ 44,170 $ (1,406 ) 1,207 $ (14,791 ) $ 68,729 Tax shortfall from expiration of — — (13 ) — — — — (13 ) Proceeds from stock options 20 — 66 — — — — 66 Charge related to stock-based — — 437 — — — — 437 Declared dividends of $0.04 per — — — (1,058 ) — — — (1,058 ) Components of comprehensive loss: — — — — 276 — — 276 Net loss — — — (19,519 ) — — — (19,519 ) Total comprehensive loss (19,243 ) Balance at September 30, 2009 26,481 $ 3 $ 41,243 $ 23,593 $ (1,130 ) 1,207 $ (14,791 ) $ 48,918 Nine months ended 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (19,519 ) $ (13,248 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 9,357 9,225 Provision for doubtful accounts (7 ) 34 Provision for inventory losses 821 1,142 Loss on disposal of assets 94 468 Accounting charge related to stock-based compensation 437 597 Deferred income taxes (1,556 ) (3,150 ) Changes in operating assets and liabilities: Accounts receivable 12 298 Income tax receivable 517 (3,593 ) Inventories 1,265 (6,890 ) Prepaid expenses and other current assets 2,220 2,410 Other assets (1,022 ) (39 ) Accounts payable 1,630 (630 ) Accrued expenses (2,635 ) 3,636 Taxes payable 774 (5,635 ) Commissions and incentives payable 2,505 (1,721 ) Deferred revenue 399 (906 ) Net cash used in operating activities (4,708 ) (18,002 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,500 ) (4,452 ) Sale of investments — 20,350 Purchase of investments — (7,400 ) Change in restricted cash 389 1,610 Net cash provided by (used in) investing activities (2,111 ) 10,108 CASH FLOWS FROM FINANCING ACTIVITIES: Payment of cash dividends (1,058 ) (5,293 ) Proceeds from stock options 66 — Repayment of capital lease obligations (273 ) (82 ) Net cash used in financing activities (1,265 ) (5,375 ) Effect of exchange rate changes on cash and cash equivalents (284 ) 1,148 Net decrease in cash and cash equivalents (8,368 ) (12,121 ) Cash and cash equivalents at the beginning of period 30,945 47,103 Cash and cash equivalents at the end of period $ 22,577 $ 34,982 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid (refund received) $ (2,721 ) $ 2,546 Interest paid on capital leases $ 29 $ 13 $7.4 million and $8.5 million, respectively. The decrease in restricted cash was primarily related to the partial refund of direct selling insurance premiums in Korea. locations and certain intangible assets. Comprehensive Income (loss) and Accumulated Other Comprehensive Income ) September 30, 2009 December 31, 2008 (in thousands) Revenue related to undelivered packs and products $ 3,779 $ 3,228 Revenue related to a one-year magazine subscription and pack sales 93 133 Revenue related to future corporate-sponsored events 20 115 Total deferred revenue $ 3,892 $ 3,476 September 30, 2009 Sales reserve as of January 1, 2009 $ 719 Provision related to sales made in current period 2,475 Provision related to sales made in prior periods 106 Actual returns or credits related to current period (1,886 ) Actual returns or credits related to prior periods (808 ) Sales reserve as of September 30, 2009 $ 606 September 30, 2009 December 31, 2008 (in thousands) Raw materials $ 10,830 $ 13,715 Finished goods 19,641 18,275 Inventory reserves for obsolescence (1,044 ) (677 ) $ 29,427 $ 31,313 quarter. For the three months ended September 30, 2009 2008 Loss Shares Per share Loss Shares Per share Basic EPS: Net loss available to $ (9,207 ) 26,464 $ (0.35 ) $ (429 ) 26,461 $ (0.02 ) Effect of dilutive securities: — — — — — — Diluted EPS: Net loss available to $ (9,207 ) 26,464 $ (0.35 ) $ (429 ) 26,461 $ (0.02 ) For the nine months ended September 30, 2009 2008 Loss Shares Per share Loss Shares Per share Basic EPS: Net loss available to $ (19,519 ) 26,462 $ (0.74 ) $ (13,248 ) 26,461 $ (0.50 ) Effect of dilutive securities: — — — — — — Diluted EPS: Net loss available to $ (19,519 ) 26,462 $ (0.74 ) $ (13,248 ) 26,461 $ (0.50 ) grant before the plan expires on February 20, 2018. Three months Nine months 2009 2008 2009 2008 (in thousands) (in thousands) Total gross compensation expense $ 125 $ 163 $ 437 $ 576 Total tax benefit associated with compensation expense 24 31 97 116 Total net compensation expense $ 101 $ 132 $ 340 $ 460 Three months Year ending December 31, 2010 2011 2012 Total gross unrecognized compensation expense $ 109 $ 342 $ 191 $ 23 Tax benefit associated with unrecognized compensation expense 19 63 35 1 Total net unrecognized compensation expense $ 90 $ 279 $ 156 $ 22 EvenBetterNow, but with respect to ‘431, ‘104, and ‘220 Patents. In January 2009, the Securities and Exchange Commission issued Release No. 33-9002, “Interactive Data to Improve Financial Reporting.”The final rule requires companies to provide their financial statements and financial statement schedules to the Securities and Exchange Commission in interactive data format using the eXtensible Business Reporting Language (“XBRL”). The rule was adopted by the Securities and Exchange Commission to improve the ability of financial statement users to access and analyze financial data. The Securities and Exchange Commission adopted a phase-in schedule indicating when registrants must furnish interactive data. Under this schedule, the Company will be required to submit filings with financial statement information using XBRL commencing with our June 30, 2011 quarterly report on Form 10-Q. We ·Level ·Level ·Level 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 (in thousands) on a recurring basis as of Asset Level 1 Level 2 Level 3 Total Money Market Funds – Fidelity, US $ 6,264 $ — $ — $ 6,264 Interest bearing deposits – various banks, Korea 7,723 — — 7,723 Total assets $ 13,987 $ — $ — $ 13,987 Amounts included in: Cash and cash equivalents $ 7,833 $ — $ — $ 7,833 Long-term restricted cash 6,154 — — 6,154 Total $ 13,987 $ — $ — $ 13,987 Consolidated net sales shipped to customers in these locations, along with pack and product information for the three Three months Nine months Country 2009 2008 2009 2008 United States $ 34.0 47.7 % $ 40.0 51.3 % $ 109.7 49.9 % $ 137.3 53.6 % Japan 9.9 13.9 % 10.8 13.8 % 31.4 14.3 % 33.9 13.3 % Republic of Korea 6.9 9.7 % 8.4 10.8 % 19.2 8.8 % 27.4 10.7 % Canada 5.8 8.1 % 5.7 7.3 % 17.5 8.0 % 17.8 6.9 % Australia 5.7 8.0 % 6.4 8.2 % 16.7 7.6 % 20.8 8.1 % South Africa(1) 3.9 5.5 % 2.0 2.6 % 9.4 4.2 % 3.4 1.3 % Taiwan 1.4 2.0 % 1.2 1.5 % 4.8 2.2 % 3.7 1.4 % New Zealand 1.1 1.5 % 1.2 1.5 % 3.3 1.5 % 4.2 1.6 % Germany 0.9 1.3 % 0.8 1.0 % 2.6 1.2 % 3.0 1.2 % United Kingdom(2) 0.8 1.0 % 1.2 1.6 % 2.5 1.1 % 3.8 1.5 % Denmark 0.5 0.7 % 0.3 0.4 % 1.5 0.7 % 0.9 0.4 % Singapore(3) 0.4 0.6 % — — 1.0 0.5 % — — Totals $ 71.3 100 % $ 78.0 100 % $ 219.6 100 % $ 256.2 100 % Three months Nine months 2009 2008 2009 2008 (in millions) (in millions) Consolidated product sales $ 52.3 $ 61.1 $ 159.1 $ 199.7 Consolidated pack sales 15.5 13.2 50.2 45.5 Consolidated other, including freight 3.5 3.7 10.3 11.0 Consolidated total net sales $ 71.3 $ 78.0 $ 219.6 $ 256.2 Long-lived assets, which include property and equipment and construction in progress for the Company and its subsidiaries, reside in the following countries, as September 30, December 31, Country (in millions) Australia $ 0.3 $ 0.3 Japan 0.3 0.2 Republic of Korea 0.5 0.8 Switzerland 0.6 0.7 Taiwan 0.1 0.1 United Kingdom 0.1 0.1 United States 28.3 34.8 $ 30.2 $ 37.0 We review and analyze net sales by geographical location and by packs and products on a consolidated basis. Each of our subsidiaries sells the same types of products and exhibits similar economic characteristics, such as selling prices and gross margins. responsibilities are shared between these three officers to better serve our strategic objectives. We believe this new management structure will best utilize the diverse s kill sets of three of our most seasoned executives. The table below summarizes our consolidated operating results in dollars and as a percentage of net sales for the three months ended 2009 2008 Change from Total % of Total % of Dollar Percentage ( in thousands, except percentages) Net sales $ 71,295 100 % $ 77,991 100 % $ (6,696 ) (8.6 )% Cost of sales 11,923 16.7 % 11,105 14.2 % 818 7.4 % Commissions and incentives 35,268 49.6 % 32,396 41.6 % 2,872 8.9 % 47,191 66.2 % 43,501 55.8 % 3,690 8.5 % Gross profit 24,104 33.8 % 34,490 44.2 % (10,386 ) (30.1 )% Operating expenses: Selling and administrative expenses 17,748 24.9 % 18,753 24.0 % (1,005 ) (5.4 )% Depreciation and amortization 3,085 4.3 % 3,172 4.1 % (87 ) (2.7 )% Other operating costs 11,842 16.6 % 11,493 14.7 % 349 3.0 % Total operating expenses 32,675 45.8 % 33,418 42.8 % (743 ) (2.2 )% Loss from operations (8,571 ) (12.0 )% 1,072 1.4 % (9,643 ) (899.5 )% Interest income 39 0.1 % 266 0.3 % (227 ) (85.3 )% Other income (expense), net 859 1.2 % (2,047 ) (2.6 )% 2,906 142.0 % Loss before income taxes (7,673 ) (10.8 )% (709 ) (0.9 )% (6,964 ) 982.2 % Benefit for income taxes (1,534 ) (2.2 )% 280 0.4 % (1,814 ) (647.9 )% Net loss $ (9,207 ) (12.8 )% $ (429 ) (0.5 )% $ (8,778 ) 2,046.2 % 2009 2008 Change from Total % of Total % of Dollar Percentage ( in thousands, except percentages) Net sales $ 219,640 100 % $ 256,223 100 % $ (36,583 ) (14.3 )% Cost of sales 35,944 16.4 % 37,014 14.4 % (1,070 ) (2.9 )% Commissions and incentives 115,413 52.5 % 116,256 45.4 % (843 ) (0.7 )% 151,357 68.9 % 153,270 59.8 % (1,913 ) (1.2 )% Gross profit 68,283 31.1 % 102,953 40.2 % (34,670 ) (33.7 )% Operating expenses: Selling and administrative expenses 53,403 24.3 % 63,349 24.7 % (9,946 ) (15.7 )% Depreciation and amortization 9,357 4.3 % 9,225 3.6 % 132 1.4 % Other operating costs 30,831 14.0 % 49,530 19.4 % (18,699 ) (37.8 )% Total operating expenses 93,591 42.6 % 122,104 47.7 % (28,513 ) (23.4 )% Loss from operations (25,308 ) (11.5 )% (19,151 ) (7.5 )% (6,157 ) 32.1 % Interest income 182 0.1 % 1,219 0.5 % (1,037 ) (85.1 )% Other income (expense), net 822 0.4 % (2,450 ) (1.0 )% 3,272 133.6 % Loss before income taxes (24,304 ) (11.1 )% (20,382 ) (8.0 )% (3,922 ) 19.2 % Benefit for income taxes 4,785 2.2 % 7,134 2.8 % (2,349 ) (32.9 )% Net loss $ (19,519 ) (8.9 )% $ (13,248 ) (5.2 )% $ (6,271 ) 47.3 % Consolidated net sales shipped to customers by location for the three months ended 2009 2008 Country (in millions, except percentages) United States $ 34.0 47.7 % $ 40.0 51.3 % Japan 9.9 13.9 % 10.8 13.8 % Republic of Korea 6.9 9.7 % 8.4 10.8 % Canada 5.8 8.1 % 5.7 7.3 % Australia 5.7 8.0 % 6.4 8.2 % South Africa(1) 3.9 5.5 % 2.0 2.6 % Taiwan 1.4 2.0 % 1.2 1.5 % New Zealand 1.1 1.5 % 1.2 1.5 % Germany 0.9 1.3 % 0.8 1.0 % United Kingdom(2) 0.8 1.0 % 1.2 1.6 % Denmark 0.5 0.7 % 0.3 0.4 % Singapore(3) 0.4 0.6 % — — Totals $ 71.3 100 % $ 78.0 100 % follows 2009 2008 Country (in millions, except percentages) United States $ 109.7 49.9 % $ 137.3 53.6 % Japan 31.4 14.3 % 33.9 13.3 % Republic of Korea 19.2 8.8 % 27.4 10.7 % Canada 17.5 8.0 % 17.8 6.9 % Australia 16.7 7.6 % 20.8 8.1 % South Africa(1) 9.4 4.2 % 3.4 1.3 % Taiwan 4.8 2.2 % 3.7 1.4 % New Zealand 3.3 1.5 % 4.2 1.6 % Germany 2.6 1.2 % 3.0 1.2 % United Kingdom(2) 2.5 1.1 % 3.8 1.5 % Denmark 1.5 0.7 % 0.9 0.4 % Singapore(3) 1.0 0.5 % — — Totals $ 219.6 100 % $ 256.2 100 % sales. March 31, 2009. Three months Change Country Currency 2009 2008 Local Percentage Australia and Singapore(1) AUD 7.4 7.2 0.2 2.8 % Austria, Germany, EUR 0.6 0.6 — — Denmark DKK 2.4 1.7 0.7 41.2 % Japan JPY 921.0 1,148.4 (227.4 ) (19.8 )% Korea KRW 8,540.1 8,843.0 (302.9 ) (3.4 )% New Zealand NZD 1.6 1.7 (0.1 ) (5.9 )% Norway(2) NOK 0.2 — — — South Africa(3) ZAR 30.2 15.6 14.6 93.6 % Sweden(2) SEK 0.1 — — — Taiwan TWD 46.1 36.5 9.6 26.3 % United Kingdom GBP 0.5 0.6 (0.1 ) (16.7 )% Nine months Change Country Currency 2009 2008 Local Percentage Australia and Singapore AUD 23.7 22.8 0.9 3.9 % Austria, Germany, EUR 1.9 2.0 (0.1 ) (5.0 )% Denmark DKK 7.6 4.5 3.1 68.9 % Japan JPY 2,945.3 3,548.1 (602.8 ) (17.0 )% Korea KRW 25,012.7 27,642.3 (2,629.6 ) (9.5 )% New Zealand NZD 5.5 5.4 0.1 1.9 % Norway NOK 0.2 — — — South Africa ZAR 80.7 26.1 54.6 209.2 % Sweden SEK 0.1 — — — Taiwan TWD 159.0 115.4 43.6 37.8 % United Kingdom GBP 1.6 2.0 (0.4 ) (20.0 )% Three Months Nine Months Change Change 2009 2008 Dollar Percentage 2009 2008 Dollar Percentage Product sales $ 52.3 $ 61.1 $ (8.8 ) (14.4 )% $ 159.1 $ 199.7 $ (40.6 ) (20.3 )% Pack sales 15.5 13.2 2.3 17.4 % 50.2 45.5 4.7 10.3 % Other, including freight 3.5 3.7 (0.2 ) (5.4 )% 10.3 11.0 (0.7 ) (6.4 )% Total net sales $ 71.3 $ 78.0 $ (6.7 ) (8.6 )% $ 219.6 $ 256.2 $ (36.6 ) (14.3 )% Health Solutions Starter packs in several international markets; Pack Sales continuing independent associates. 2009 2008 New 151,000 28.3 % 140,000 25.9 % Continuing 383,000 71.7 % 400,000 74.1 % Total 534,000 100 % 540,000 100 % Three months ended 2009 2008 Q2 2009 Q1 2009 Q4 2008 New recruits 36,689 28,838 43,953 36,462 34,383 Percentage increase (decrease) for the third quarter of 2009 in comparison to the prior periods presented. 27.2 % (16.5 )% 0.6 % 6.7 % Three Months Change 2009 2008 Dollar Percentage (in millions, except percentages) New $ 11.0 $ 6.8 $ 4.2 61.8 % Continuing 4.5 6.4 (1.9 ) (30.0 )% Total $ 15.5 $ 13.2 $ 2.3 17.4 % Nine Months Change 2009 2008 Dollar Percentage (in millions, except percentages) New $ 32.1 $ 21.4 $ 10.7 50.0 % Continuing 18.1 24.1 (6.0 ) (24.9 )% Total $ 50.2 $ 45.5 $ 4.7 10.3 % Other Sales (i) sales of promotional materials; (ii) training and event registration fees; (iii) 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; (iv) freight revenue charged to our independent associates and members; and (v) a reserve for estimated sales refunds and returns. pack shipments. 2009. 2009. costs. credit card fees. respectively. Country 2009 2008 Australia 30 % 30 % Canada 33 % 33 % Japan 42 % 42 % Republic of Korea 24.2 % 27.5 % South Africa 28 % 28 % Switzerland 16.2 % 16.2 % Taiwan 25 % 25 % United Kingdom 28 % 28 % United States 37.5 % 37.5 % quarter. Although our cash has been impacted by net losses for most of 2009, we saw our costs, particularly commissions and incentives, return to more historical levels. Although we are contemplating alternative liquidity sources, remaining at these historical cost levels will be a key factor in our ability to generate sufficient cash from operations. In addition, in April 2010, we received a Federal income tax refund of $8.1 million. payments. operating liabilities. 2009 2008 Provided by (used in): (in millions) Operating activities $ (4.7 ) $ (18.0 ) Investing activities $ (2.1 ) $ 10.1 Financing activities $ (1.3 ) $ (5.4 ) 2010 will be sufficient to fund our current operations. There can be no assurance, however, that we will continue to generate cash flows at or above current levels. Certain events, such as the uncertainty of the worldwide economic environment, could impact our available cash or our ability to generate cash flows from operations. 2009. For the suspended. Declared date Date of record Date paid Total Amount of Dividends Dollar amount paid per common share May 20, 2009 June 3, 2009 June 29, 2009 $ 0.5 million $ 0.02 February 18, 2009 March 9, 2009 March 26, 2009 $ 0.5 million $ 0.02 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 Remaining 2009 2010 2011 2012 2013 2014 Thereafter Total Capital lease obligations $ 263 $ 875 $ 773 $ 330 $ 2 $ — $ — $ 2,243 Purchase obligations 4,638 7,867 5,108 2,585 1,050 2,100 — 23,348 Operating leases 898 2,877 1,518 1,296 1,143 786 1,741 10,259 Post-employment royalty 168 492 492 492 492 492 — 2,628 Employment agreements 727 1,932 22 — — — — 2,681 Texas Attorney General Settlement* 4,000* 1,000 — — — — — 5,000 Total commitments and obligations $ 10,694 $ 15,043 $ 7,913 $ 4,703 $ 2,687 $ 3,378 $ 1,741 $ 46,159 Estimated useful life Net carrying value at September 30, 2009 Office furniture and equipment 5 to 7 years $ 2.7 million Computer hardware 3 to 5 years 5.9 million Computer software 3 to 5 years 17.3 million Automobiles 3 to 5 years 0.1 million Leasehold improvements 2 to 10 years(1) 3.6 million Construction in progress(2) 0.6 million Total net carrying value at September 30, 2009 $ 30.2 million We amortize leasehold improvements over the shorter of the useful estimated life of the leased asset or the lease term. (2) Construction in progress includes We determined that no impairment indicators existed for the three months ended March 31, 2010. members are as follows: Accounting for Stock-Based Compensation January February March June September Estimated fair value per share of options granted: $ 1.24 $ 1.64 $ 1.26 $ 1.44 $ 2.01 Assumptions: Annualized dividend yield 2.85 % 2.27 % 2.87 % 2.67 % 1.05 % Risk-free rate of return 1.53 % 1.69 % 1.72 % 2.69 % 2.04 % Common stock price volatility 65.9 % 66.6 % 67.6 % 69.70 % 70.1 % Expected average life of stock options (in years) 4.5 4.5 4.5 4.5 4.5 Country (foreign currency name) Low High Weighted-Average Spot Australia (Dollar) 0.77930 0.87460 0.83244 0.87290 Austria, Germany, the Netherlands (Euro) 1.38950 1.47900 1.42918 1.45920 Canada (Dollar) 0.85820 0.93950 0.91035 0.92110 Denmark (Krone) 0.18660 0.19870 0.19204 0.19590 Japan (Yen) 0.01025 0.01119 0.01068 0.01112 New Zealand (Dollar) 0.62730 0.72460 0.67343 0.71730 Norway (Krone) 0.15280 0.17260 0.16355 0.17130 Republic of Korea (Won) 0.00076 0.00086 0.00081 0.00084 Singapore (Dollar) 0.68390 0.70860 0.69514 0.70520 South Africa (Rand) 0.12160 0.13610 0.12864 0.13500 Sweden (Krona) 0.12550 0.14670 0.13740 0.14270 Switzerland (Franc) 0.91710 0.97720 0.94086 0.96590 Taiwan (Dollar) 0.03020 0.03099 0.03052 0.03090 United Kingdom (British Pound) 1.58630 1.69690 1.64164 1.59220 Incorporated by Reference Exhibit Exhibit Description Form File No. Exhibit (s) Filing Date 3.1 Amended and Restated Articles of Incorporation of S-1 333-63133 3.1 October 28.1998 3.2 Fourth Amended and Restated Bylaws of Mannatech, dated 10-K 000-24657 3.2 March 16, 2007 3.3 First Amendment to the Fourth Amended and Restated 8-K 000-24657 3.1 December 6, 2007 4.1 Specimen Certificate representing Mannatech’s common S-1 333-63133 4.1 October 28, 1998 10.1 Separation and Release Agreement, dated July 17, 2009, 8-K 000-24657 10.1 July 21, 2009 31.1* Certification pursuant to Section 302 of the Sarbanes-Oxley * * * * 31.2* Certification pursuant to Section 302 of the Sarbanes-Oxley * * * * 32.1* Certification pursuant to Section 906 of the Sarbanes-Oxley * * * * 32.2* Certification pursuant to Section 906 of the Sarbanes-Oxley * * * * 101.INS** XBRL Instance Document ** ** ** ** 101.SCH** XBRL Taxonomy Extension Schema Document ** ** ** ** 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document ** ** ** ** 101.LAB** XBRL Taxonomy Extension Label Linkbase Document ** ** ** ** 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document ** ** ** ** 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document ** ** ** **10-Q10-QxOF 1934
OF1934September 30, 2009
March 31, 2010___________.___________.Charter)Charter)x[X] No o* Yes x[X] No ooxooo[ ] No xOctober 31, 2009,April 30, 2010, the number of shares outstanding of the registrant’s sole class of common stock, par value $0.0001 per share, was 26,480,788.26,490,466.
2009
2008 ASSETS (unaudited) Cash and cash equivalents $ 14,709 $ 17,367 Restricted cash 1,287 1,288 Accounts receivable, net of allowance of $26 and $17 in 2010 and 2009, respectively 453 664 Income tax receivable 8,973 8,075 Inventories, net 30,944 31,290 Prepaid expenses and other current assets 3,644 3,139 Deferred tax assets 2,762 2,662 Total current assets 62,772 64,485 Property and equipment, net 24,698 27,144 Construction in progress 304 317 Long-term restricted cash 6,159 7,201 Other assets 2,348 2,503 Long-term deferred tax assets 555 652 Total assets $ 96,836 $ 102,302 LIABILITIES AND SHAREHOLDERS’ EQUITY Current portion of capital leases $ 1,162 $ 847 Accounts payable 7,526 11,319 Accrued expenses 13,591 14,231 Commissions and incentives payable 11,934 10,624 Taxes payable 2,160 2,577 Current deferred tax liability 423 274 Deferred revenue 2,325 2,807 Total current liabilities 39,121 42,679 Capital leases, excluding current portion 777 1,068 Long-term deferred tax liabilities 3,070 3,923 Other long-term liabilities 5,110 3,348 Total liabilities 48,078 51,018 Commitments and contingencies Shareholders’ equity: Preferred stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding — — 3 3 Additional paid-in capital 41,672 41,442 Retained earnings 22,962 25,743 Accumulated other comprehensive loss (1,088 ) (1,113 ) Less treasury stock, at cost, 1,207,094 shares in 2010 and 2009 (14,791 ) (14,791 ) Total shareholders’ equity 48,758 51,284 Total liabilities and shareholders’ equity $ 96,836 $ 102,302 2010 2009 Net sales $ 60,665 $ 70,701 Cost of sales 8,625 11,731 Commissions and incentives 26,999 33,726 35,624 45,457 Gross profit 25,041 25,244 Operating expenses: Selling and administrative expenses 16,471 18,215 Depreciation and amortization 2,917 3,146 Other operating costs 8,545 9,562 Total operating expenses 27,933 30,923 Loss from operations (2,892 ) (5,679 ) Interest income (expense) (29 ) 74 Other income (expense), net 140 (1,418 ) Loss before income taxes (2,781 ) (7,023 ) (Provision) benefit for income taxes — 2,248 Net loss $ (2,781 ) $ (4,775 ) Loss per share: Basic $ (0.11 ) $ (0.18 ) Diluted $ (0.11 ) $ (0.18 ) Weighted-average common shares outstanding: Basic 26,482 26,461 Diluted 26,482 26,461
September 30,
September 30, Treasury stock Shares Shares Amounts Balance at December 31, 2009 26,481 $ 3 $ 41,442 $ 25,743 $ (1,113 ) 1,207 $ (14,791 ) $ 51,284 — — 209 — — — — 209 Proceeds from stock options exercised 7 — 21 — — — — 21 — — — — 25 — — 25 Net loss — — — (2,781 ) — — — (2,781 ) Total comprehensive loss (2,756 ) Balance at March 31, 2010 26,488 $ 3 $ 41,672 $ 22,962 $ (1,088 ) 1,207 $ (14,791 ) $ 48,758 ANDALL SUBSIDIARIESSTATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITYAND COMPREHENSIVE INCOME (LOSS)CASH FLOWS – (UNAUDITED)thousands, except per share information)thousands)
Outstanding
paid in
capital
earnings
other
comprehensive
loss
shareholders’
equity
Value
stock options
exercised
compensation
common share
Foreign currency translations 2010 2009 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss (2,781 ) (4,775 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 2,917 3,146 Provision for doubtful accounts 15 (12 ) Provision for inventory losses 101 250 Loss on disposal of assets 7 — Accounting charge related to stock-based compensation expense 209 139 Deferred income taxes (709 ) (53 ) Changes in operating assets and liabilities: Accounts receivable 198 8 Income tax receivable (893 ) (2,164 ) Inventories 347 628 Prepaid expenses and other current assets (146 ) (374 ) Other assets 170 24 Accounts payable (3,800 ) 781 Accrued expenses 1,104 (2,916 ) Taxes payable (445 ) (868 ) Commissions and incentives payable 1,276 2,664 Deferred revenue (482 ) (162 ) Net cash used in operating activities (2,912 ) (3,684 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (371 ) (718 ) Change in restricted cash 1,237 (204 ) Net cash provided by (used in) investing activities 866 (922 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payment of cash dividends — (529 ) Proceeds from stock options exercised 21 Repayment of capital lease obligations (406 ) (34 ) Net cash used in financing activities (385 ) (563 ) Effect of currency exchange rate changes on cash and cash equivalents (227 ) 625 Net decrease in cash and cash equivalents (2,658 ) (4,544 ) Cash and cash equivalents at the beginning of period 17,367 30,945 Cash and cash equivalents at the end of period 14,709 26,401 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid 543 625 Interest paid on capital leases 21 4 4CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)(in thousands)
September 30,See accompanying notes to unaudited consolidated financial statements.MANNATECH, INCORPORATED AND SUBSIDIARIESlocatedheadquartered 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”. The Company develops, markets, and sells high-quality, proprietary nutritional supplements, topical and skin care 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, Singapore, Austria, the Netherlands, Norway, and Sweden. (“associates”) purchase the Company’s products at published wholesale prices to either sell to retail 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.Company’sComp any’s consolidated financial information as of, and for, the periods presented. The Company cautions that its consolidated results of operations for an interim period are not necessarily indicative of its consolidated results of operations to be expected for its fiscal year. The December 31, 20082009 consolidated balance sheet was included in the audited consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 20082009 and filed with the United States Securities and Exchange Commission on March 12, 2009 (“200811, 2010 (the “2009 Annual Report”), which includes all disclosures required by GAAP. Therefore, these unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company included in the 20082009 Annual Report.September 30, 2009March 31, 2010 and December 31, 2008,2009, credit card receivables were $3.8$2.2 million and $3.3$2.8 million, respectively. Additionally, as of September 30, 2009March 31, 2010 and December 31, 2008,2009, cash and cash equivalents held in bank accounts in foreign countries totaled $11.8$10.4 million and $18.2$10.2 million, respectively.MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)North America,the United States and Canada, and (iii) Australia building lease collateral. As of September 30, 2009March 31, 2010 and December 31, 2008,2009, our total restricted cash was $9.4 million.September 30, 2009March 31, 2010 and December 31, 2008,2009, receivables consisted primarily of amounts due from members and independent associates. The Company periodically evaluates its receivables for collectability 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 September 30, 2009March 31, 2010 and December 31, 2008,2009, the Company held an allowance for doubtful accounts of less than $0.1 million. 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. The Company periodically reviews inventories for obsolescence and any inventories identified as obsolete are reserved or written off.September 30, 2009March 31, 2010 and December 31, 2008,2009, other assets of $2.5$2.3 million and $1.5$2.5 million primarily consisted of deposits for contracts and building leases in various locations.McAnalley’sMcAnalley& #8217;s employment agreement, which was two years. As of September 30, 2009,March 31, 2010, the Company’s liability related to this royalty agreement was $2.1$1.5 million, of which $0.3 million was currently due and included in accrued expenses. As of December 31, 2008,2009, the Company’s long-term liability related to this royalty agreement was $2.4$1.6 million, of which $0.4$0.3 million was currently due and included in accrued expenses.September 30, 2009March 31, 2010 and December 31, 2008,2009, accrued restoration costs related to these leases amounted to $0.4 million. At September 30, 2009March 31, 2010 and December 31, 2008,2009, the Company also recorded a long-term liability for an estimated deferred benefit obligation related to a deferred benefit plan for its Japan operations of $0.9 million and $0.8 million.million, respectively.MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)(Loss)(lossnonownernon-owner 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, Taiwan, Norway, and Sweden operations, and changes in the pension obligation for its Japanese employees.itsindividual products, sales of its starter and renewal packs, and shipping fees. Substantially all of the Company’s productsproduct and pack 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.The Company defers certain components of its revenue. Total deferred revenue consists of revenue received from: (i) sales of packs and products, which were shipped but not received by customers by period end; (ii) one-year magazine subscriptions; (iii) pack sales when the pack sale price exceeds the wholesale value of all individual components within the pack; and (iv) prepaid registration fees from customers planning to attend a future corporate-sponsored event. deferred revenue from shipped packs and products upon receipt by the customer. Corporate-sponsored event revenue is recognized when the event is held. All otherThe Company defers certain components of its revenue. At March 31, 2010 and December 31, 2009, the Company’s deferred revenue is recognized ratably over one year. Componentswas $2.3 million and $2.8 million, respectively, and consisted primarily of deferred revenue were as follows:received from: (i) sales of packs and products shipped but not received by the customers by period end; and (ii) prepaid registration fees from customers planning to attend a future corporate-sponsored event.
exceeding the wholesale value of individual components soldsixsix- 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. As of September 30, 2009For the three months ended March 31, 2010 our sales return reserve was composed of the following (in(in thousands):MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) March 31, 2010 Sales reserve as of January 1, 2010 595 Provision related to sales made in current period 841 Provision related to sales made in prior periods (65 ) Actual returns or credits related to current period (247 ) Actual returns or credits related to prior periods (534 ) Sales reserve as of March 31, 2010 $ 590 $3.6$3.1 million and $3.4$3.5 million for the three months ended September 30,March 31, 2010 and 2009, and 2008, respectively, and $10.6 and $11.2 million for the nine months ended September 30, 2009 and 2008, respectively. work in progress, and finished goods, including 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 at September 30, 2009March 31, 2010 and December 31, 2008,2009, consisted of the following:following (in thousands): March 31, 2010 December 31, 2009 Raw materials $ 9,999 $ 10,819 Finished goods 22,229 21,844 Inventory reserves for obsolescence (1,284 ) (1,373 ) $ 30,944 $ 31,290 three monthsthree-months ended March 31, 2010 and nine months ended September 30, 2009, the Company’s effective tax rate was 20.0%0% and 19.7%32%, respectively. For the three monthsthree-months ended March 31, 2010 and nine months ended September 30, 2008,2009, the Company’s effective income tax rate was 39.5% and 35.0%, respectively. determined based on the estimated annual effective income tax rate.decreaseeffective tax rate for the three and nine monthsthree-months ended September 30, 2009 as comparedMarch 31, 2010 was lower than what would have been expected if the federal statutory rate were applied to income before taxes. Items reducing the effective income tax rate included reductions due to the same periodsmix of income between tax jurisdictions, the change in 2008 was primarily due to additions to the valuation allowance forallowances associated with certain deferred tax assets, in response to continued operating losses and the uncertainty associated with forecasting future operating resultschange in reserves related to uncertain income tax positions. Items increasing the effective income tax rate included recognition of additional tax benefits in 2010 attributed to prior year and tax credit refund claims filed during the current economic environment.MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)September 30, 2009March 31, 2010 and 2008. For the three months ended September 30, 2009,2009. As of March 31, 2010, approximately 1.6 million shares of the Company’s common stock subject to options were excluded from diluted EPS calculations using an average closeclosing price of $3.73$3.32 per share, as their effect was antidilutive. For the three months ended September 30, 2008,As of March 31, 2009, 1.5 million shares of the Company’s common stock subject to options were excluded from diluted EPS calculations using an average closeclosing price of $5.20$3.14 per share, as their effect was antidilutive. The amounts below are rounded to the nearest thousands, except for per share amounts. For the three months ended March 31, 2010 2009
(numerator)
(denominator)
amount
(numerator)
(denominator)
amount
common shareholders (2,781 ) 26,482 (0.11 ) (4,775 ) 26,461 (0.18 )
Stock options — — — — — —
common shareholders plus
assumed conversions $ (2,781 ) 26,482 $ (0.11 ) $ (4,775 ) 26,461 $ (0.18 ) 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 nine months ended September 30, 2009 and 2008. For the nine months ended September 30, 2009, approximately 1.5 million shares of the Company’s common stock subject to options were excluded from diluted EPS calculations using an average close price of $3.48 per share, as their effect was antidilutive. For the nine months ended September 30, 2008, approximately 1.4 million shares of the Company’s common stock subject to options were excluded from diluted EPS calculations using an average close price of $6.11 per share, as their effect was antidilutive. The amounts below are rounded to the nearest thousands, except for per share amounts.
(numerator)
(denominator)
amount
(numerator)
(denominator)
amount
common shareholders
Stock options
common shareholders plus
assumed conversions10MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)Incentive stock options granted to shareholders owningShareholders who own 10% or more of the Company’s outstanding stock haveare granted incentive stock options at an exercise price whichthat may not be less than 110% of the fair market value of the Company’s common stock on the date of the grant and have a term no greater than five years.September 30, 2009,March 31, 2010, the 2008 Plan had 390,507301,819 stock options available for grant.During each ofFor the three months ended September 30,March 31, 2010 and 2009, and 2008, the Company granted 30,000 stock options. During the nine months ended September 30, 2009136,500 and 2008, the Company granted 305,000 and 376,095125,000 stock options, respectively. The fair values of stock options granted during the nine months ended September 30, 2009 ranged from $1.24 to $2.01 per share. The fair value of stock options granted during the ninethree months ended September 30, 2008March 31, 2010 was $2.03 per share. During the three months ended March 31, 2009 the fair value ranged from $1.85$1.24 to $2.81$1.64 per share. The Company recognized compensation expense as follows for the periodsthree months ended September 30:March 31 (in thousands): 2010 2009 Total gross compensation expense $ 209 $ 139 Total tax benefit associated with compensation expense 19 27 Total net compensation expense $ 190 $ 112 September 30, 2009,March 31, 2010, the Company expects to record compensation expense in the future as follows:
ending
December 31,
2009MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Year ending December 31, 2011 2012 Total gross unrecognized compensation expense $ 348 $ 326 $ 52 Tax benefit associated with unrecognized compensation expense 45 40 1 Total net unrecognized compensation expense $ 303 $ 286 $ 51 K.Y.C. Inc. d/b/a Techmedica Health Inc., Triton Nutra, Inc., Ionx Holdings, Inc., and John Does 1-30Country Life, LLC, et al., Case No. 3-06-CV-0471-BD (N.D. Tex.)3:10-cv-00533-O, United States District Court, Northern District of Texas, Dallas DivisionTheK.Y.C.Country Life, LLC; Country Life Manufacturing, LLC; EvenBetterNow, LLC; Micro Health Solutions, LLC; New Sun, Inc. d/b/a Techmedica Health,; Oasis Advanced Wellness, LLC; Roex, Inc. (“Techmedica”), Triton Nutra,; VDF FutureCeuticals, Inc., Ionx Holdings, Inc. (“Ionx”),; and John Does 1-30, pending in the United States District Court of the Northern District of Texas, Dallas Division. The lawsuit alleges1-20, alleging the defendants infringed United States Patent Nos. 6,929,807, 7,157,431, 7,196,064, 7,199,104, and 7,202,220, all entitled “Compositions of Plant Carbohydrates as Dietary Supplements,” and seeksseeking to stop thetheir manufacture, offer, and sale of defendants’ infringing glyconutritional products, as well as cessationdietary supplement products.defendants’ false advertising about our products, including Ambrotose®.On May 5, 2006, the Company initiated the lawsuitbeing served; three defendants have sought unopposed extensions of their answer deadlines; and two defendants have agreed to judgments against Techmedica, allegingthem for their infringement of the ‘807 Patent. After Techmedica claimed that Triton Nutra manufactured its glyconutritional products, the Company amended its complaint on February 6, 2007Patents-in-Suit. Specifically, VDF FutureCeuticals, Roex, and New Sun filed unopposed motions to add Triton Nutra as a defendant, as well as infringement claims related to the newly issued ‘431 Patent against both Techmedica and Triton Nutra. When Triton Nutra failed toextend their 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,deadline; the Court granted its unopposedtheir motions, and their answers are now due on April 26, May 7, and May 17, respectively.to liftand entered judgment for Mannatech against EvenBetterNow, finding that EvenBetterNow infringed the stay in this suit. The Company filed its Second Amended Complaint on September 18, 2008, adding Ionx and John Does 1-30 as defendants and infringement claims related to the ‘064, ‘104,‘807, ‘431, and ‘220 Patents and naming Activive as an additional infringing glyconutritional product. 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. On October 13, 2008, Techmedica and Ionx filed identical answers and counterclaims, which claim that the Company’s patents-in-suit are invalid, unenforceable, or otherwise not infringed by defendants.On August 28, 2009, in response to Defendants’ motion for claim construction, the United States Magistrate Judge issued Findings and Recommendations construing three disputed claim terms in the patents-in-suit. Defendants have objected to two of the Magistrate Judge’s recommended constructions, and the parties are briefing the Court on this issue. After the Court rules on these objections, the parties will jointly submit a proposed scheduling order to continue the discovery process and set a trial date.The Company will continue to vigorously prosecute this case. Given the precedent set by Mannatech v. Glycobiotics, the Company believes the likelihood of an unfavorable outcome is remote, and with no counterclaims seeking monetary damages, any potential loss is limited to an award of the defendants’ court costs.Mannatech, Inc. v. Boston Mountain Laboratories, Green Life, LLC, and Xiang Lo, Case No. 3:09-CV-01324-G (N.D. Tex)The Company filed a patent infringement lawsuit against Boston Mountain Laboratories d/b/a Natural Health Warehouse (“Boston Mountain”), Green Life, LLC (“Green Life”), and Xiang Lo a/k/a Andrew Lo (“Lo”) on July 15, 2009. The matter is pending in the United States District Court of the Northern District of Texas, Dallas Division. The lawsuit alleges the defendants infringed United States Patent Nos. 6,929,807, 7,157,431, 7,196,064, 7,199,104, and 7,202,220, all entitled “Compositions of Plant Carbohydrates as Dietary Supplements,” and seeks to stop Boston Mountain and Green Life from manufacturing, offering for sale and selling, of defendants’ infringing glyconutritional products. Xiang Lo isin the sole member of Green Life, and it is believed that Green Life was organized and is operated as an alter ego, i.e., a mere tool or business conduit, of Andrew Lo.MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)On September 23, 2009,United States, the Court granted a joint motion for entry of final judgment and permanent injunction, entering judgmentproduct named EvenBetterNow Glyconutrients. The Agreed Judgment enjoins EvenBetterNow, for the Company and against Boston Mountain Laboratories, Inc. The Final Judgment and Permanent Injunction enjoins Boston Mountain Laboratories for the durationterm of the patents-in-suitPatents-in-Suit, from (1) manufacturing(a) making, using, offering to sell, or selling BML Glyconutrient Formula, Glyco-8, Glycoessentials, Glyco-Essence, Glyconutrients, MG-3, and MG-3cotherwise distributing within the United States, or importing into the United States, the infringing product or colorable imitations thereof (the “Enjoined Products”); (2)(b) inducing infringement of the patents-in-suit;Patents-in-Suit by assisting others in making, using, offering to sell, selling, or (3)otherwise di stributing, within the United States, the Enjoined Products; and (c) supplying or causing to be supplied in or from the United States all or a substantial portion of the components of the Enjoined Products.After Green Life, LLC and Xiong Lo failed to answer the Company’s Complaint, on September 30, 2009, the Deputy ClerkCourt entered defaultAgreed Judgment against Green Life and Mr. Lo. The Company is now preparing its motion for entry of default judgment against them,Oasis Advanced Wellness, which will seekproposes the same injunctive relief securedterms as found in the Agreed Judgment against Boston Mountain.policies, or itspolicies. Additionally, 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.$5.7$1.8 million as of September 30, 2009March 31, 2010 for these matters, which is included in accrued expenses in its Consolidated Balance Sheet. Included in this amount is a $5.5 million accrual related to the Company’s settlement with the Texas Attorney General in early 2009. As part of the settlement, the Company agreed to refund up to $4.0 million to purchasers of the Company’s products between September 1, 2002 and August 1, 2007 who have not received commissions. Also included in the accrual is the Company’s estimate for a third-party claim administration fee associated with this matter.JuneOctober 2009, the FinancialFASB issued Accounting Standards Board (FASB) approvedUpdate No. 2009-13, “Revenue Recognition—Multiple Deliverable Revenue Arrangements” (“ASU 2009-13”). ASU 2009-13 updates the “existing multiple-element revenue arrangements guidance currently included in FASB Accounting Standards Codification”(“Codification”, “FASB ASC”)ASC 605-25. The revised guidance provides for two significant changes to the existing multiple element revenue arrangements guidance. The first change relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. The second change modifies the single source of authoritative generally accepted accounting principles (GAAP) and created a new Topic 105, Generally Accepted Accounting Principles,manner in which the General Principles and Objective Section oftransaction consideration is allocated across the Codification. Topic 105 isseparately identified deliverables. The revis ed guidance also expands the disclosures required for multiple-element revenue arrangements. The revised multiple-element revenue arrangements guidance will be effective for interim andthe first annual periods endingreporting period beginning on or after SeptemberJune 15, 2009, and its2010. The adoption didof ASU 2009-13 is not expected to have ana material impact on ourthe Company’s financial conditionposition or results of operations.ItIn February 2010, the FASB issued amended guidance to Topic 855 which no longer requires the disclosure ofthat an SEC filer disclose the date through which an entity has evaluated subsequent events and whether that date representshave been evaluated. The amended guidance did not change the daterequirement to evaluate subsequent events through the financial statements were issued or were available to be issued.filing dates. The adoption of Topic 855the new guidance did not have a material impact on the Company’s consolidated financial statements and disclosures.MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)In response to the current credit crisis, FASB updated three ASC Topics to address fair value measurement concerns as follows:•FASB ASC Topic 820, Fair Value Measurements and Disclosures, provides additional guidance on measuring the fair value of financial instruments when market activity has decreased and quoted prices may reflect distressed transactions;•FASB ASC Topic 320, Investments – Debt and Equity Securities,amends the other-than-temporary impairment guidance for debt securities; and•FASB ASC Topic 825, Financial Instruments, expands the fair value disclosures required for financial instruments to interim reporting periods for publicly traded companies, including disclosure of the significant assumptions used to estimate the fair value of those financial instruments.The adoption of the above mentioned amendments to the FASB ASC did not have a material impact on our financial condition, results of operations, and disclosures.arebegan furnishing financial information in XBRL format starting with thisour quarterly report on Form 10-Q.10-Q for the period ended September 30, 2009. As an earlierearly XBRL adopter, the Company may choose to discontinue furnishing XBRL data in the future until the required compliance date of June 30, 2011.The Company utilizes fair value measurements to record fair value adjustments to certain financial assets and to determine fair value disclosures.1—1 – Quoted unadjusted prices for identical instruments in active markets.2—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.3—3 – Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable, including assumptions developed by the Company.MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)September 30, 2009.March 31, 2010. The Company does not have any material financial liabilities or nonfinancial assets and liabilities that were required to be measured at fair value ono n a recurring basis at September 30, 2009. Level 1 Level 2 Level 3 Total $ 2,023 $ — $ — $ 2,023 5,214 — — 5,214 $ 7,237 $ — $ — $ 7,237 $ 2,045 $ — $ — $ 2,045 5,192 — — 5,192 $ 7,237 $ — $ — $ 7,237 onea single operating segment, consolidating all of its business units into a single reportable entity, as a seller of proprietary nutritional supplements, topical and skin care products, and weight-management products through its network-marketingnetwork marketing distribution channels operating in sixteen countries. Each of the Company’s business units sells similar packs and products and possesses similar economic characteristics, such as selling prices and gross margins. In each country, the Company markets its products and pays commissions and incentives in similar market environments. The Company’s management reviews its financial informationperformance by country and focuses its internal reporting and analysis ofanalyzes consolidated revenues by packs and product sales. The Company sells its products through its independent associates and distributes its productspro ducts through similar distribution channels in each country. No single independent associate has ever accounted for more than 10% of the Company’s consolidated net sales.eightnine physical locations and sells productproducts in sixteen different countries around the world. The eightnine physical locations are the United States, Canada, Switzerland, Australia, the United Kingdom, Japan, the Republic of Korea (South Korea), Taiwan, and Taiwan.South Africa. Each of the Company’s physical locations services different geographic areas. The United States, location processes orders for theCanada, Australia, United StatesKingdom and Canada. The Canadian location providesJapan offices provide administrative support to the Canadianits local markets and act as meeting locations for independent associates. The South Africa location, when opened for use in late May 2010, will also provide administrative support to its local market and actsact as a meeting location for independent associates. The United States location processes orders for the United States, Canada, and South Africa. The Australian locationloca tion processes orders for Australia, New Zealand, and Singapore. The Company’s United Kingdom location processes orders for the United Kingdom, Denmark, Germany, Austria, the Netherlands, Norway, and Sweden. The Company’sJapan, Republicmanageswas created to manage certain day-to-day business needs of non-North Americancertain international markets and coordinates the Company’sour continued global expansion.MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)and nine months ended September 30,March 31, 2010 and 2009 and 2008 are as follows (in(in millions, except percentages):_________________________Country 2010 2009 United States 27.8 45.8 % 36.5 51.5 % Japan 8.7 14.3 % 10.9 15.4 % Republic of Korea 5.4 8.9 % 5.5 7.8 % Canada 4.4 7.2 % 5.3 7.5 % Australia 5.2 8.6 % 5.2 7.4 % South Africa 3.2 5.3 % 2.3 3.3 % Taiwan 2.2 3.6 % 1.6 2.3 % New Zealand 1.0 1.6 % 1.0 1.4 % Germany 0.6 1.0 % 0.9 1.3 % United Kingdom 0.6 1.0 % 0.8 1.1 % Denmark 0.2 0.3 % 0.4 0.6 % Singapore 0.6 1.0 % 0.3 0.4 % 0.3 0.5 % — — % 0.3 0.5 % — — % 0.1 0.2 % — — % 0.1 0.2 % — — % Totals $ 60.7 100 % $ 70.7 100 % South Africa began operations in May 2008.(2) Net Sales for Austria, the Netherlands, Norway, and Sweden are included in the United Kingdom net sales total. We began operations in these four countries in September 2009. 2010 2009 Consolidated product sales 48.5 54.1 Consolidated pack sales 9.7 13.2 Consolidated other, including freight 2.5 3.4 Consolidated total net sales $ 60.7 $ 70.7 (3)Singapore began operations in November 2008.follows:
2009
200816Country Australia 0.3 0.3 Canada 0.1 0.1 Japan 0.2 0.3 Republic of Korea 0.5 0.6 Switzerland 0.5 0.5 Taiwan 0.1 0.1 United Kingdom 0.1 0.1 United States 23.2 25.5 Totals $ 25.0 $ 27.5 MANNATECH, INCORPORATED AND SUBSIDIARIESNOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)EVENTSAs required by the Subsequent Events Topic of the FASB ASC,EVENTevaluated all events or transactions that occurred after September 30, 2009 up through November 5, 2009, the datereceived a Federal income tax refund of $8.1 million. As of March 31, 2010, the Company issued these financial statements. During this periodrecorded the Company did not have any material recognizable subsequent events.anticipated refund in the income tax receivable line item on its Consolidated Balance Sheet.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations and nine months ended September 30, 2009March 31, 2010 as compared to the same periodsperiod in 2008.2009, and should be read in conjunction with Item I “Financial Statements” in Part I of this quarterly report on Form 10-Q. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech, Incorporated and all of our subsidiaries on a consolidated basis.network-marketingnetwork marketing system operating in the United States, Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, Singapore, Austria, the Netherlands, Norway, and Sweden. The United States, Canada, Australia, United Kingdom and Japan offices provide administrative support to its local markets and act as meeting locations for independent associates. The South Africa location, when opened for use in late May 2010, will also provide administrative support to its local market and act as a meeting location for independent associates. The United States location processes ordersorder s for the United States, Canada, and Canada.South Africa. The Australian location processprocesses orders for Australia, New Zealand, and Singapore. The United Kingdom location processes orders for the United Kingdom, Denmark, Germany, Austria, the Netherlands, Norway, and Sweden. The Japan, Republic of Korea, and Taiwan locations process orders for their local markets only. The Switzerland office was created to manage certain day-to-day business needs of non-North American markets and coordinates our continued global expansion.534,000485,000 independent associates and members who have purchased our products and/or packs within the last 12 months, which we refer to as current independent associates and members. New recruits and pack sales are regarded as leading indicators for the long-term success of our business. We define newNew recruits asinclude new independent associates and members who purchasedpurchasing our packs and products for the first time. We operate as a seller of nutritional supplements, topical and skin care products, and weight-management products through our network-marketing distribution channels operating in sixteen 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.network-marketingnetwork marketing distribution channels, the opportunities and challenges that affect us most are: recruitment of new and retention of existing independent associates and members, entry into new markets and growth of existing markets, niche market development, new product introduction, and investment in our infrastructure.2009.2009 and the first quarter of 2010. Significant reduction in consumers’ disposable income impacted our customers’ spending practices, causing a decline in our revenues.cutback ofreduction in other discretionary costs such as outside services, travel and overtime. We also reduced the level ofsuspended our quarterly cash dividend in 2008 and suspended the dividend in August of 2009 as we focus all funding on the growth of the business.2009. By establishing a culture of expense control and accountability, we achieved a significant decrease in operating costs in 2009expenses and positioned our business to generate incremental profit flow-through as sales increase.maintained that level of expense control through the first quarter of 2010. Our intent is to maintain a strong level of expense control and systematically review all expenditures with the goal of prudently managing our business. At the same time, we remain committed to our strategic plan of developing new, innovative, science-basedand scientifically-validated products, international expansion, strengtheningstren gthening financial results, and adding value to our shareholders and independent associates.on September 5th, beganare scheduled to begin selling products in Austria, the Netherlands, Norway and Sweden. Among available products are the company’s Advanced Ambrotose® capsules and powder, Ambrotose AO® capsules, Phytomatrix™ caplets, Plus™ tablets and OsoLean™ fat loss powder.Mexico in early 2011. Our expansion to 37 million people through the combined populations of these four additional markets increases our independent associates’ ability to build their businesses in Europe. Entry into these four countries complimentsMexico will complement our existing presence in the U.K., Germany and DenmarkNorth America while highlighting our continued focus on being a global company.expansion.2008, we introduced two new products in selected markets: Bounce-Back™ capsules and OsoLean™ powder. In response to a greater than expected demand for OsoLean™ powder, we introduced new convenient OsoLean™ single-use packets in the first quarter of 2009. Sales of both products remained strong in 2009 and OsoLean™ has proven to be the best selling product in our Weight and Fitness category. In the third quarter of 2009,2010, we launched our newest product, Essential Source™ Omega-3the Simply Delicious snack bar. The Simply Delicious bar is USDA (United States Department of Agriculture) Organic certified and is offered in two flavors – cherry pie and chocolate raspberry truffle. We are also scheduled to launch a new skin care line in the United States and South Africa. Omega-3 provides EPA/DHA essential fatty acids and its benefits have been well-documented and supported by scientists, doctors and nutritionists alike. second half of 2010.inherent health benefits,immune system and the digestive tract. Ambrotose®, a glyconutrient product originally launched in 1996, is still our Essential Source™ Omega-3 has other distinguishing characteristics such as ultra-purity, high EPA/DHA levels,best-selling product. Five additional clinical and a pleasant taste. It is made from one of the highest quality fish oils which is put through a proprietary molecular distillation process to ensure a pharmaceutical-grade standard of purity. Essential Source™ Omega-3 joins an established, successful line of innovative wellness products that address the nutritional needs of today’s savvy, health-conscious consumer. Essential Source™ Omega-3 ispre-clinical studies are scheduled to be available globally by December 2009. conducted in 2010.intend to launch additional new products in the fourth quarter of 2009.We strive to ensure all of our products meet the strictest guidelines for purity and are of exceptional quality. In the third quarter of 2009, Bounce-Back™ capsules received NSF certification. This is the ninth Mannatech product to receive this designation. NSF International is an independent, not-for-profit, public health certification organization that ensures a product’s label accurately reflects the contents of the supplement, that all ingredients are openly disclosed on the label and the product’s purity is acceptable. Additionally, NSF assesses each manufacturing site to ensure it complies with Good Manufacturing Practices; NSF will not certify a product unless the manufacturer meets these audits. NSF certifications exemplify our commitment to offering our customers the highest quality products. We intend to carry the NSF certification mark on the supplements’ labels and promotional materials to demonstrate compliance. We will continue to seek NSF certification on our entire product line to demonstrate the ultimate quality of Mannatech products.We continue to focus our efforts on increasing operational efficiency. We made certain changes tohave realigned our management structure in 2008 and 2009 to provide a stronger foundation for growth and better align our organization with our long-term goals. We believe that efficiencies gained from this organizational realignment will help us to improve cost controlsIn November of 2009, we created a new Senior Executive Office comprised of three executives, including Chief Financial Officer Steve Fenstermacher and distinguish us in the marketplace by adding emphasis to brand management, associate recruitment, supply chain excellence, new product development,Chief Science Officer Dr. Rob Sinnott as co-CEOs and international expansion. Claire Zevalkink, the newest member of our senior management team, joined Mannatech asRandy Bancino, senior vice president, as President of Global Business Operations and Expansion. As co-CEOs, Mr. Fenstermacher and Dr. Sinnott act collectively as our chief global marketing officer in September 2009. Ms. Zevalkink has extensive executive experience inofficers and are responsible for overall operations of the multi-level marketing industry that includes marketing, global brandCompany. Mr. Bancino reports to Mr. Fenstermacher and Dr. Sinnott. Various management brand communications, new business development and sales training. actions, new product introduction, international expansion, improved associate recruitment,financial discipline, and financial disciplineorganizational realignment will enable us to effectively manage through the challenging economy. We believe these recent changes to our business model will position us to support future long-term profitable growth.Results of OperationsSeptember 30,March 31, 2010 and 2009 and 2008.
2009 to 2008
dollars
net sales
dollars
net salesThe table below summarizes our consolidated operating results (in dollars and as a percentage of net sales for the nine months ended September 30, 2009 and 2008.
2009 to 2008
dollars
net sales
dollars
net sales 2010 2009 Dollar Percentage Net sales $ 60,665 100 % $ 70,701 100 % $ (10,036 ) (14.2 )% Cost of sales 8,625 14.2 % 11,731 16.6 % (3,106 ) (26.5 )% Commissions and incentives 26,999 44.5 % 33,726 47.7 % (6,727 ) (19.9 )% 35,624 58.7 % 45,457 64.3 % (9,833 ) (21.6 )% Gross profit 25,041 41.3 % 25,244 35.7 % (203 ) (0.8 )% Operating expenses: Selling and administrative expenses 16,471 27.2 % 18,215 25.8 % (1,744 ) (9.6 )% Depreciation and amortization 2,917 4.8 % 3,146 4.4 % (229 ) (7.3 )% Other operating costs 8,545 14.1 % 9,562 13.5 % (1,017 ) (10.6 )% Total operating expenses 27,933 46.0 % 30,923 43.7 % (2,990 ) (9.7 )% Loss from operations (2,892 ) (4.8 )% (5,679 ) (8.0 )% 2,787 (49.1 )% Interest income (expense) (29 ) 0.0 % 74 0.1 % (103 ) (139.2 )% Other income (expense), net 140 0.2 % (1,418 ) (2.0 )% 1,558 (109.9 )% Loss before income taxes (2,781 ) (4.6 )% (7,023 ) (9.9 )% 4,242 (60.4 )% (Provision) benefit for income taxes — 0.0 % 2,248 3.2 % (2,248 ) (100.0 )% Net loss $ (2,781 ) (4.6 )% $ (4,775 ) (6.8 )% 1,994 (41.8 )% Net Sales in Dollars and as a Percentage of Consolidated Net SalesSeptember 30,March 31, 2010 and 2009 and 2008 were as follows:_________________________(1)South Africa began operations (in May 2008.millions, except percentages)(2):sales for Sales in Dollars and as a Percentage of Consolidated Net SalesCountry 2010 2009 United States 27.8 45.8 % 36.5 51.5 % Japan 8.7 14.3 % 10.9 15.4 % Republic of Korea 5.4 8.9 % 5.5 7.8 % Canada 4.4 7.2 % 5.3 7.5 % Australia 5.2 8.6 % 5.2 7.4 % South Africa 3.2 5.3 % 2.3 3.3 % Taiwan 2.2 3.6 % 1.6 2.3 % New Zealand 1.0 1.6 % 1.0 1.4 % Germany 0.6 1.0 % 0.9 1.3 % United Kingdom 0.6 1.0 % 0.8 1.1 % Denmark 0.2 0.3 % 0.4 0.6 % Singapore 0.6 1.0 % 0.3 0.4 % 0.3 0.5 % — — 0.3 0.5 % — — 0.1 0.2 % — — 0.1 0.2 % — — Totals $ 60.7 100 % $ 70.7 100 % are included in the United Kingdom net sales total. We began operations in these four countries in September 2009.(3)Singapore began operations in November 2008.Consolidated net sales shipped to customers by location for the nine months ended September 30, 2009 and 2008 were as follows:_________________________(1)South Africa began operations in May 2008.(2)Net sales for Austria, the Netherlands, Norway, and Sweden are included in the United Kingdom net sales total. We began operations in these four countries in September 2009.(3)Singapore began operations in November 2008.and nine months ended September 30,March 31, 2010, our operations outside of the United States accounted for approximately 54.2% of our consolidated net sales, whereas in the same period in 2009, our operations outside of the United States accounted for approximately 52.3% and 50.1%, respectively,48.5% of our consolidated net sales, whereas in the same period in 2008, our operations outside of the United States accounted for approximately 48.7% and 46.4%, respectively, of our consolidated net sales.September 30, 2009March 31, 2010 decreased by $6.7$10.0 million, or 8.6%14.2%, to $71.3$60.7 million as compared to the same period in 2008.2009. Domestic sales decreased $6.0by $8.7 million, or 23.8%, to $27.8 million, while international sales decreased $0.7$1.3 million, or 3.9%, to $32.9 million for the three months ended September 30, 2009March 31, 2010 as compared to the same period in 2008. We continue2009. It is likely that negative publicity regarding litigation settled in February 2009 had a negative impact on our domestic sales. Sales in certain international markets have been adversely affected as a result of direct competition. The global financial crisis continues to see positive trends in net salesbe a major factor for the three months ended September 30, 2009decline in Canada, Taiwan, Denmark, and South Africa. However, these positive trends were more than offset by declines in other international andboth our domestic sales primarily due to the macro-economic factors negatively impacting our economy.Consolidated net sales for the nine months ended September 30, 2009 decreased by $36.6 million, or 14.3%, to $219.6 million, as compared to the same period in 2008. Domestic sales decreased $27.6 million and international sales decreased $9.0 million for the nine months ended September 30, 2009 as compared to the same period in 2008. The overall decline was partially offset by increasing sales in South Africa since it began operations in May 2008.unfavorablefavorable impact on our net sales of approximately $0.6 million and $9.5$3.9 million for the quarter and ninethree months ended September 30, 2009, respectively.March 31, 2010. The net sales impact is calculated as the difference between (1) the current period’s net sales in USD and (2) the current period’s net sales in local currencies converted to USD by applying average exchange rates for the same periods ended September 30, 2008.and nine months ended September 30,March 31, 2010 and 2009 and 2008 are as follows (in(in millions, except percentages)percentages):
currency
Netherlands(2) Three months Change
currency Currency 2010 2009 Percentage (1) AUD 6.5 8.2 (1.7 ) (20.7 )%
Netherlands(2) EUR 0.7 0.7 — — DKK 0.9 2.4 (1.5 ) (62.5 )% JPY 779.0 1,006.2 (227.2 ) (22.6 )% KRW 6,196.4 7,670.6 (1,474.2 ) (19.2 )% NZD 1.4 1.9 (0.5 ) (26.3 )% (2)(1) NOK 1.7 — — — (3) ZAR 23.5 22.8 0.7 3.1 % (2)(1) SEK 0.7 — — — TWD 69.2 53.6 15.6 29.1 % GBP 0.5 0.6 (0.1 ) (16.7 )% _________________________Singapore began operations in November 2008.(2) Norway, Austria, Sweden and the Netherlands began operations in September 2009.(3)South Africa began operations in May 2008.· changes in our sales prices; · changes in consumer demand; · changes in the number of independent associates and members; · changes in competitors’ products; · changes in economic conditions; · changes in regulations; · announcements of new scientific studies and breakthroughs; · introduction of new products; · discontinuation of existing products; · adverse publicity; · changes in our commissions and incentives programs; and · fluctuations in foreign currency exchange rates. Change 2010 2009 Dollar Percentage Product sales 48.5 54.1 (5.6 ) (10.4 )% Pack sales 9.7 13.2 (3.5 ) (26.5 )% Other, including freight 2.5 3.4 (0.9 ) (26.5 )% Total net sales $ 60.7 $ 70.7 $ (10.0 ) (14.2 )% sales prices;changes in consumer demand;changes in the number of independent associates and members;changes in competitors’ products;changes in economic conditions;changes in regulations;announcements of new scientific studies and breakthroughs;introduction of new products;discontinuation of existing products;adverse publicity;changes in our commissions and incentives programs; andfluctuations in foreign currency exchange rates.Our sales mix for the three and nine months ended September 30, was as follows (in millions, except percentages):Although there was an overall decrease in consolidated net sales for the three and nine months ended September 30, 2009, primarily due toconsisted of a declinedecrease in the volume of product sales, there was an increaseproducts and packs sold and a change in pack sales, creating a positive outlook for future product sales.the mix of packs and products sold. Pack sales generally correlate to new independent associates who purchase starter packs and with the number of continuing independent associates who purchase upgrade or renewal packs. However, there is not ano direct correlation between product sales and the number of new and continuing independent associates and members and the amount of product sales because independent associates and members utilize products at different volumes.September 30, 2009March 31, 2010 decreased $8.8$5.6 million, or 14.4%10.4%, to $52.3 million from $61.1 million as compared to the same period in 2008.2009. The decrease of $8.8$5.6 million was comprised of a decrease in existing product sales of $8.5$2.7 million, and a decrease in new productproducts sales of $0.3$2.9 million. Product sales for the nine months ended September 30, 2009 decreased $40.6 million, or 20.3%, to $159.1 million from $199.7 million as compared to the same periodWe implemented a 2-5% price increase in 2008. The decrease of $40.6 million was comprised of a decreasemost countries in existing product sales of $41.9 million, which was partially offset by a $1.3 million increase attributable to the introduction of new products, as set forth below.late January 2010. We believe the decrease in product sales was primarily due to the macro-economic factors negatively impacting our company.September 30, 2008:March 31, 2009:Mannatech Optimal Skin Care System products in certain international markets;· •Simply Delicious™ Snack Bars in United States and Canada;· · · North America, Australia, New Zealand, Japan, Korea, UK, Denmark, Germany,all of our markets;Taiwan, Singapore, South Africa, Austria, the Netherlands, Norway, and Sweden;Various promotional packages in US and Canada;Health Solutions Starter packs in Australia and Singapore;· •· · Korea and Japan;certain international markets;· •GI-Pro Balance™OsoLean™ Single Use Packets in North America andSouth Korea;· •Emprizone®HeartSmart™ tablets in Taiwan;Japan;Various Optimal Health products in Singapore;· •Emprizone®Optimal Skin Care products in Japan;Essential Source™ Omega 3 in North America and South Africa; and· Various Optimal Health, Weight and Fitness products in Austria, the Netherlands, Norway and Sweden; Various Optimal Health, Weight and Fitness products in Austria, the Netherlands, Norway and Sweden.requirements.Membersrequirements to continue to earn various commissions.also registerbe further analyzed as follows, for membership, which enables themthe three months ended March 31(in millions, except percentages): Change 2010 2009 Dollar Percentage New 6.2 7.5 (1.3 ) (17.3 )% Continuing 3.5 5.7 (2.2 ) (38.6 )% Total 9.7 13.2 $ (3.5 ) (26.5 )% purchase$9.7 million, as compared to $13.2 million for the same period in 2009. The overall decrease in total pack sales was composed of a decrease of $1.3 million related to a reduction of new independent associates purchasing starter packs and a decrease of $2.2 million related to a decline in the number of renewal and upgrade packs purchased by our products at a discount from published retail prices.September 30,March 31, 2010 and 2009 and 2008 were as follows:24follows (in millions except percentages and independent associate information):Although there 2010 2009 New 129,000 26.6 % 134,000 25.5 % Continuing 356,000 73.4 % 393,000 74.5 % Total 485,000 100 % 527,000 100 % 6,000,42,000 or 1.1%8.0%, in the net trailing 12-month independent associate activity as compared to the twelve months ended September 30, 2008, which was dueMarch 31, 2009. We are experiencing increased competition in certain international markets where competitors have launched operations and in some cases have made attempts to fewer continuingattract some of our independent associatesassociate field leaders. We plan to address new independent associate recruiting through additional incentives, new promotional support materials, and members, we had an increase in the number of new recruits. We consider new recruits to be a leading indicator of continued success through future product sales. Due to the increase in new recruits, there was an increase in the number of starter pack sales as compared to the same period in 2008; but the decline in continuing independent associates resulted in a corresponding decline in renewal and upgrade pack sales as compared to the same period in 2008. The $499 Premium/All-Star Pack was successfully launched in North America and South Africa in Januarycause-related charitable activities.had stronger than expected sales and is responsible for an improvement in recruiting as shown in the table below:
September 30,Our new recruits increased by 27.2% for the three months ended September 30, 2009 as compared to the three months ended September 30, 2008. These increases substantiate the success of the $499 Premium/All-Star Pack sold to our independent associates. During 2008 and 2009,2010, 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;· registered our most popular products with the appropriate regulatory agencies in all countries of operations; · focused on new product development; · explored new international markets; · launched an aggressive marketing and educational campaign; · strengthened compliance initiatives; · concentrated on publishing results of research studies and clinical trials related to our products; · 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 in many of our global markets; · introduced the $499 All-Star Pack into United States, Canada, and South Africa in January 2009; · introduced similar All-Star Packs into all other markets in January 2010; and · expanded into four new international markets in early fall of 2009. focused on new product development;explored new international markets;launched a new, aggressive marketing and educational campaign;strengthened compliance initiatives;concentrated on publishing results of research studies and clinical trials related to our products;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 in many of our global markets;introduced the $499 Premium/All-Star Pack into North America and South Africa in January 2009; andexpanded into four new international markets in early fall of 2009.Pack sales associated with the number of independent associates can be further analyzed as follows, for the three and nine months ended September 30:Total pack sales for the three and nine months ended September 30, 2009 increased by $2.3 million, or 17.4%, and $4.7 million, or 10.3%, respectively, as compared to the same periods in 2008. The overall increase in total pack sales was composed of an increase of $4.2 million and $10.7 million, respectively, related to a higher number of new independent associates purchasing starter packs, partially offset by a decrease of $1.9 million and $6.0 million, respectively, related to a decline in the number of renewal and upgrade packs purchased by our continuing independent associates.the following:•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;September 30, 2009March 31, 2010 decreased by $0.2$0.9 million to $3.5$2.5 million as compared to $3.7$3.4 million for the same period in 2008.2009. The decrease in other sales was a result ofprimarily due to a decrease in freight cost of $0.2 million, a decrease in Success Tracker™fees for product and training fees of $0.2 million, and a $0.1 million decrease in miscellaneous sales, all which was partially offset by a decline in sales refunds and returns of $0.3 million.Other sales for the nine months ended September 30, 2009 decreased by $0.7 million to $10.3 million as compared to $11.0 million for the same period in 2008. The decrease in other sales primarily consisted of a $1.4 decrease in freight fees due to the decrease in product shipments, as well as a $0.4 decrease in Success Tracker™ and training fees and a $0.1 million decrease in sales of promotional materials, partially offset by a net change in sales refunds and returns of $1.1 million and a $0.1 increase in associate services.September 30, 2009March 31, 2010 decreased by $10.4$0.2 million, or 30.1%0.8%, to $24.1$25.0 million as compared to $34.5$25.2 million for the same period in 2008.2009. For the three months ended September 30, 2009,March 31, 2010, gross profit as a percentage of net sales decreasedincreased to 33.8%41.3% as compared to 44.2%35.7% for the same period in 2008. The2009; this increase resulted from a decrease in gross profit was primarily due to an increase incost of sales, commissions, and incentives as a percentage of net sales as described in detail below.Gross profit for the nine months ended September 30, 2009 decreased by $34.7 million, or 33.7%, to $68.3 million as compared to $103.0 million for the same period in 2008. For the nine months ended September 30, 2009, gross profit as a percentage of net sales decreased to 31.1% as compared to 40.2% for the same period in 2008. The decrease in gross profit was primarily due to an increase in commission and incentives as a percentage of net sales.September 30, 2009 increasedMarch 31, 2010 decreased by 7.4%26.5%, or $0.8$3.1 million, to $11.9million$8.6 million as compared to $11.1$11.7 million for the same period in 2008.2009. The reduction in cost of sales was primarily due a decrease in finished product and pack cost, as well as freight cost, which was related to the decline in sales for the quarter. Cost of sales as a percentage of net sales for the three months ended September 30, 2009 increasedMarch 31, 2010 decreased to 16.7%14.2% as compared to 14.2%16.6% for the same period in 2008. This increase was a result of an increase in freight cost, as well as the level of discount carried by the $499 Premium/All-Star Pack.262009.Cost of sales during the nine months ended September 30, 2009 decreased by 2.9%, or $1.1 million, to $35.9million as compared to $37.0 million for the same period in 2008. Cost of sales as a percentage of net sales for the nine months ended September 30, 2009 increased to 16.4% as compared to 14.4% for the same period in 2008. This increase is primarily a result of an increase in freight cost, as well as the level of discount carried by the $499 Premium/All-Star Pack.September 30, 2009 increasedMarch 31, 2010 decreased by 9.1%19.1%, or $2.9$6.0 million, to $34.4$25.4 million as compared to $31.5$31.4 million for the same period in 2008.2009. For the three months ended September 30, 2009,March 31, 2010, commissions as a percentage of net sales increaseddecreased to 48.2%41.8% from 40.4%44.4% for the same period of 2008, which was due to the introduction of the new $499 Premium/All-Star Pack in January of 2009 and the related pack bonuses.Commission costs for the nine months ended September 30, 2009 decreased by 2.4%, or $2.7 million, to $107.8 million as compared to $110.5 million for the same period in 2008. For the nine months ended September 30, 2009, commissions as a percentage of net sales increased to 49.1% from 43.1% for the same period of 2008, which was due to the introduction of the new $499 Premium/All-Star Pack in January of 2009 and the related pack bonuses.In early September 2009, the parameters of the $499 Premium/All-Star Pack bonus plan were revised in order to bring overall commissions rates down to historical levels.September 30, 2009 remained level at $0.9March 31, 2010 decreased by 30.4%, or $0.7 million, to $1.6 million as compared to $2.3 million for the same period in 2008.2009. For the three months ended September 30, 2009,March 31, 2010, the costs of incentives, as a percentage of net sales increased slightlydecreased to 1.3%2.6% from 1.2 %3.3% for the same period of 2008.Incentive costs for the nine months ended September 30, 2009 increased by 31%, or $1.8 million, to $7.6 million as compared to $5.8 million for the same period in 2008. For the nine months ended September 30, 2009, the costs of incentives as a percentage of net sales increased to 3.5% from 2.3 % for the same period of 2008.The increase in total costs of the annual incentives was the result of the number of independent associates who qualified for the annual incentives, which increased in 2009 by 158.9% to 2,374 as compared to 917 in 2008. The increase in qualifiers for the annual incentive is primarily related to higher associate recruiting activity during the first nine months of 2009 and the introduction of the $499 Premium/All-Star Pack.September 30, 2009March 31, 2010 decreased by $1.0$1.7 million, or 5.4%9.6%, to $17.8$16.5 million as compared to $18.8$18.2 million for the same period in 2008.2009. As a percentage of net sales, selling and administrative expenses increased to 24.9%27.2% from 24.0%25.8% for the same period in 2008. The decrease in selling and administrative expenses was primarily due to a decrease in payroll and payroll-related costs.Selling and administrative expenses for the nine months ended September 30, 2009 decreased by $9.9 million, or 15.7%, to $53.4 million as compared to $63.3 million for the same period in 2008. As a percentage of net sales, selling and administrative expenses decreased to 24.3% from 24.7% for the same period in 2008.2009. The decrease in selling and administrative expenses consisted primarily of a $7.4$0.8 million decrease in payroll and payroll-related costs, due to staff reductions initiated in the second quarter of 2008 and first quarter of 2009, a $1.9$0.5 million decrease in marketing costs, related to corporate-sponsored events and costs associated with advertising materials and printing, and a $0.6$0.4 million decrease in freight costs related to a decrease in product shipments.September 30, 2009 was $3.1March 31, 2010 decreased by 7.3%, or $0.2 million, and remained relatively flatto $2.9 million as compared to the same period in 2008. However, as2009. As a percentage of net sales, depreciation and amortization expense increased slightly to 4.3%4.8% from 4.1%4.4% for the same period in 2008.272009.Depreciation and amortization expense for the nine months ended September 30, 2009 was $9.4 million and remained relatively flat as compared to the same period in 2008. However, as a percentage of net sales, depreciation and amortization expense increased slightly to 4.3%from 3.6% for the same period in 2008.the changes in our net sales.September 30, 2009 increasedMarch 31, 2010 decreased by $0.3$1.0 million, or 3.0%10.6%, to $11.8$8.5 million as compared to $11.5$9.6 million for the same period in 2008.2009. For the three months ended September 30, 2009,March 31, 2010, other operating costs as a percentage of net sales increased to 16.6%14.1% from 14.7%13.5% for the same period in 2008. The increase in other operating costs was primarily due to a $0.3 million increase in research and development expense as a result of product testing and clinical studies in the third quarter ended September 30, 2009 as compared to the same period in 2008.Other operating costs for the nine months ended September 30, 2009 decreased by $18.7 million, or 37.8%, to $30.8 million as compared to $49.5 million for the same period in 2008. For the nine months ended September 30, 2009, other operating costs as a percentage of net sales decreased to 14.0%from 19.4% for the same period in 2008.2009. The decrease in other operating costs was primarily due to a reduction in legal fees of $11.5 million, which was a result of litigation settlements. The decrease also consisted of a $4.2$0.8 million reduction in accounting and consulting fees $1.0 reduction in credit card fees, a $0.7 million reduction in travel expenses, a $0.3 million reduction in repairs and maintenance, a $0.2 reduction in royalties paid, and a $1.0 million reduction in miscellaneous operating costs, such as office telephone, supplies, computer equipment and software, postage, insurance, charitable contributions, and lease/rental costs; all slightly offset by an increasedecrease of $0.2 million in research and development expense.whereto the USUnited States dollar is considered functional currency, and revaluing the monetary accounts in United States, Switzerland, Japan, and the Republic of Korea, 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.September 30, 2009March 31, 2010 was $0.8$0.1 million, respectively, as compared to other expense, net of $2.0$1.4 million for the same periods in 2008.Other income, net for the nine months ended September 30, 2009, was $0.8 million, as compared to other expense of $2.5 million for the same periods in 2008.and nine months ended September 30:28March 31:Country 2010 2009 Australia 30.0 % 30.0 % Canada 33.0 % 33.0 % Denmark 25.0 % 25.0 % Japan 42.0 % 42.0 % Norway 28.0 % 28.0 % Republic of Korea 22.0 % 24.2 % Singapore 17.0 % 17.0 % South Africa 28.0 % 28.0 % Sweden 26.3 % 26.3 % Switzerland 16.2 % 16.2 % Taiwan 20.0 % 25.0 % United Kingdom 28.0 % 28.0 % United States 37.5 % 37.5 % September 30, 2009March 31, 2010 and December 31, 2008,2009, we maintained our valuation allowance for deferred tax assetsasset s totaling $4.9$2.6 million and $0.9$2.3 million, respectively, as we believe the “more likely than not” criterion for recognition and realization purposes, as defined in FASB ASC Topic 740, cannot be met.Country March 31, 2010 December 31, 2009 Switzerland 0.5 0.3 Taiwan 0.9 0.9 United States 1.2 1.1 Total $ 2.6 $ 2.3 September 30, 2009,March 31, 2010, our effective income tax rate decreased to 20.0%0.0% from 39.5%32.0% for the same period in 2008. The decrease was due to continued operating losses and uncertainty associated with forecasting future operating results in the current economic environment. 2009. For the nine monthsthree-months ended September 30,March 31, 2010 and 2009, ourthe Company’s effective income tax rate was determined based on the estimated annual effective income tax ratedecreased to 19.7% from 42.4% for the same period in 2008. The decreasethree-months ended March 31, 2010 was primarilylower than what would have been expected if the federal statutory rate were applied to income before taxes. Items reducing the effective income tax rate included reductions due to changes in management’s estimates for 2009 annual operating results, including the mix of income between tax jurisdictions, and the uncertaintychange in the valuation allowances associated with future recognition ofcertain deferred tax assets, and the change in countries withreserves related to uncertain income tax positions. Items increasing the effective income tax rate included recognition of additional tax benefits in 2010 attributable to prior year and tax credit refund claims filed during the current operating losses.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 September 30, 2009,March 31, 2010, we had $22.6$14.7 million in cash and cash equivalents that can be used, along with normal cash flows from operations, to fund any unanticipated shortfalls in future cash flows.September 30, 2009,March 31, 2010, our cash and cash equivalents decreased by 27.04%15.3%, or $8.4$2.7 million, to $22.6$14.7 million from $30.9$17.4 million as of December 31, 2008.2009. The decrease in cash and cash equivalents was primarilyis related to the current period loss, adjusted for noncash items, purchases of property and equipment and increases of payables due to the paymenttiming of dividends, and payments for litigation settlements of approximately $5.2 million. As of December 31, 2008, our investments had all been converted to cash equivalents.September 30, 2009,March 31, 2010, our working capital decreasedincreased by $15.0$1.8 million, or 47.0%8.5%, to $17.0$23.7 million from $32.0$21.8 million at December 31, 2008.2009. The decreaseincrease in working capital primarily relates to changes in short-term tax accounts, an increase in prepaid expense, a decrease in deferred revenues, partially offset by a decrease in cash and cash equivalents a decrease in inventory, and an increase in commissions, incentives, and accounts payable.ninethree months ended September 30:29March 31 (in millions): 2010 2009 Provided by (used in): Operating activities (2.9 ) (3.7 ) Investing activities 0.9 (0.9 ) Financing activities $ (0.4 ) (0.6 ) $4.7$2.9 million for the ninethree months ended September 30, 2009March 31, 2010 compared to cash used inby operating activities of $18.0$3.7 million for the same period in 2008.2009. By establishing a culture of expense control and accountability, we achieved a significant decrease in operating costscosts.2009.ninethree months ended September 30, 2009, cash used inMarch 31, 2010, our net investing activities was $2.1provided cash of $0.9 million as compared to using cash provided by investing activities of $10.1$0.9 million for the same period of 2008. In 2008, we sold investments for net proceeds of $13.0 million. The decrease in net proceeds from the sale of investments was partially offset by a net decrease in capital expenditures.Financing Activitiesninefirst three months ended September 30, 2009,of 2010, we used cash of $1.1$0.4 million to purchase capital assets as compared to purchasing $0.7 million in capital assets for the same period in 2009. In 2010, we had a decrease in restricted cash of $1.2 million as compared to an increase in restricted cash of $0.2 million for the same period in 2009.and $0.3 million for repayment of capital lease obligations. The amount ofthe same period in 2009. In August 2009, the quarterly cash useddividend was partially offset by the receipt of $0.1 million in stock option exercise transactions. For the nine months ended September 30, 2008, cash used to fund payment of dividends to our shareholders was $5.3 million.$0.09$0.02 per share for the first and second quarters of 2008, and $0.02 per share for the third and fourth quarters of 2008 and the first and second quarters of 2009. In the third quarter of 2009, the Board of Directors suspended the quarterly cash dividend payment to shareholders due to the recent company financial performance, protracted worldwide economic recession, and the internal funding needs of new initiatives designed to accelerate sales and associate recruitment of the company. During 2009 and 2008, we declared and paid the following dividends: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 our annual report on Form 10-K for the year ended December 31, 2008, for further discussion related to future payment of dividends.Declared date Date of record Date paid May 20, 2009 June 3, 2009 June 29, 2009 $ 0.5 million $ 0.02 February 18, 2009 March 9, 2009 March 26, 2009 $ 0.5 million $ 0.02 our possible payments of cash dividends, the possible repurchase of our common stock in the open market, and possible 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 willmay be required to modify our payment of future dividends and raise additional funds, which may not be available on favorable terms, if at all.September 30, 2009,March 31, 2010, for the years ending December 31: Remaining 2010 2011 2012 2013 2014 2015 Thereafter Total Capital lease obligations $ 864 $ 786 $ 343 $ 16 $ 14 $ 1 $ — $ 2,024 10,302 4,956 2,535 1,050 1,050 1,050 — 20,943 Operating leases 2,201 1,539 1,408 1,247 891 813 955 9,054 Post-employment royalty 409 492 492 492 369 — — 2,254 Employment agreements 1,702 432 — — — — — 2,134 Texas Attorney General Settlement 1,000 — — — — — — 1,000 Total commitments and obligations $ 16,478 $ 8,205 $ 4,778 $ 2,805 $ 2,324 $ 1,864 $ 955 $ 37,409 * 2009 payment related to the Texas Attorney General settlement is scheduled for November 5, 2009.proprietorshipthe proprietary nature of our products. Currently, we have four supply agreements that require minimum purchase commitments. We have opened discussionterminated one of these contracts for an asserted breach in 2009 and are now engaged in the arbitration process with a supplier about renegotiation of contract terms.the supplier. 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 purchasingpur chasing a raw material manufacturing facility to help control costs of our raw materials and help ensure quality control standards.conditionscondi tions 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 September 30, 2009: manufacturers, independent associates and members. As of September 30, 2009,March 31, 2010, net accounts receivable totaled $0.3$0.5 million. We simultaneously receive payment for an order when the order ships. If the payment is rejected or if it does not match the order total, a receivable is created. We periodically review receivables for realizability and base collectability upon assumptions, historical trends, and recent account activities. If our estimates regarding estimated collectability are inaccurate or consumer trends change in an unforeseen manner, we may be exposed to additional write-offs or bad debts. As of September 30, 2009,March 31, 2010, we had an allowance for doubtful accounts of less than $0.1 million. 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 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.costsco sts in our consolidated statement of operations.thet he 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, at that time the periodic depreciation expense is adjusted prospectively, based on the new remaining useful life of the fixed asset.September 30, 2009,March 31, 2010, the estimated useful lives and net carrying values of fixed assets were as follows: Estimated useful life Net carrying value at March 31, 2010 Office furniture and equipment 5 to 7 years 2.3 million Computer hardware 3 to 5 years 4.9 million Computer software 3 to 5 years 14.1 million Automobiles 3 to 5 years 0.1 million Leasehold improvements 3.3 million Construction in progress 0.3 million Total net carrying value at March 31, 2010 $ 25.0 million (1) fixed assets, leasehold improvements and internally-developed software costs. The estimatedOnce 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 dependent upon asset classification once placed in service.September 30, 2009,March 31, 2010, we recorded $0.1 million in taxes payable and less than a $0.1$2.0 million in other long-term liabilities on our consolidated balance sheet related to uncertain income tax positions. As required by theFASB ASC Topic 740, Income Taxes, Topic of FASB ASC, 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.juris dictions. 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.September 30, 2009,March 31, 2010, we maintained a valuation allowance for deferred tax assets arising from our operations in various jurisdictions because they did not meet the “more likely than not”criteria as defined by the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes. In addition, as of September 30, 2009,March 31, 2010, we had deferred tax assets, after valuation allowance, totaling $9.5$6.4 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. The decrease in deferred tax assets, after valuation allowance from $12.0 million as of June 30, 2009 to $9.5 million as of September 30, 2009 was primarily due to the uncertainty of net operating losses in jurisdictions being utilized in subsequent years. As with other deferred tax assets, those benefits may not be realized if our assumptions and estimates change, which could affect our effective income tax rate and cash flows in the period of discovery or resolution.shipping fees.corporate-sponsored events. 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 salestransaction taxes. TotalWe recognize revenue from shipped packs and products upon receipt by the customer. We recognize revenue related to future corporate-sponsored events when the event is held. Our deferred revenue primarily 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)(ii) 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 September 30, 2009,March 31, 20 10, total deferred revenue was $3.9$2.3 million. Significant changes in the pricing structure of our packs or our shipping methods 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 indeferrals.while keeping the sales price of the packs the same,and products and believe we would have to defer additional revenueoffer a reasonable and recognize the additional deferred revenue over one year.We have three differentindustry-standard product return policies: (i) a policy forto all of our retail customers, (ii) a policy for our independent members, and (iii) a policy for our independent associates.customers. We do not resell returned product. Retail customers mayRefunds are not processed until proper approval is obtained. All refunds must be processed and returned in the same form of payment that was originally used in the sale. Each country in which we operate has specific product return any ofguidelines. However, we generally allow our independent associates and members to exchange products within 180 days of purchase, toas long as the original independent associate who sold the product, and such associate is required to provide the retail customer with a full cash refund. The independent associate may receive a replacement product by forwarding proof of the refund to us. 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 his or her membership terminated. Independent associatesproducts are allowed to return an order within one year of the purchase date upon terminating their associate accounts. If an independent associate returns a product unopened and in good salable condition, the independent associate returning the product may receivecondition. In addition, in August 2007, we changed our sales return policy from 90% to a full refund. We may also allow an independent associate to receive a full 100% refundsatisfaction guarantee policy for the first 180 days following athe product’s purchase; however, any commissions earned will be deducted from the refund. After 180 days from the purchase date, anpurchase. Our return policies for our retail customers and our independent associate may not request a refund,associates and is allowed an exchange only; however, if abuse of the return policy is found, an independent associate may be terminated.· · sixsix- 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 1.5% or less of our gross sales.ninethree months ended September 30, 2009,March 31, 2010, our assumptions and estimates used for the calculated fair value of stock options granted in 20092010 were as follows:
2009
grant
2009
grant
2009
grant
2009
grant
2009
grantHistorically, our estimates and underlying assumptions have not materially deviated from our actual reported results and rates. However, the Estimated fair value per share of options granted: $ 2.03 Assumptions: Annualized dividend yield 0.00 % Risk-free rate of return 2.16 % Common stock price volatility 71.1 % Expected average life of stock options (in years) 4.5 If actual results are not consistent with the assumptions we use,Therefore, 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 September 30, 2009,March 31, 2010, using our current assumptions and estimates, we anticipate recognizing $0.7 million in gross compensation expense through 2012 related to unvested stock options outstanding.September 30, 2009,March 31, 2010, we had 390,507301,819 shares available for grant in the future.Unaudited Consolidated Financial Statement,Statements, which is incorporated herein by reference.Canada.South Africa. The Australian location processprocesses orders for Australia, New Zealand, and Singapore. The United Kingdom location processes orders for the United Kingdom, Denmark, Germany, Austria, the Netherlands, Norway, and Sweden. The Japan, Republic of Korea, and Taiwan locations process orders for their local markets only. We translate our revenues and expenses in foreign markets using an average rate.StatesStat es dollar, for each of these countries as of and for the ninethree months ended September 30, 2009March 31, 2010 were as follows:Country (foreign currency name) Low High Average Spot Australia (Dollar) 0.86560 0.93050 0.90363 0.91950 Austria, Germany, the Netherlands (Euro) 1.33260 1.45130 1.38559 1.34550 Canada (Dollar) 0.93220 0.98920 0.96101 0.98150 Denmark (Krone) 0.17910 0.19520 0.18612 0.18080 Japan (Yen) 0.01074 0.01128 0.01103 0.01079 New Zealand (Dollar) 0.68780 0.74190 0.70937 0.71110 Norway (Krone) 0.16510 0.17800 0.17085 0.16740 Republic of Korea (Won) 0.00085 0.00091 0.00088 0.00089 Singapore (Dollar) 0.70340 0.72090 0.71292 0.71500 South Africa (Rand) 0.12810 0.13730 0.13353 0.13570 Sweden (Krona) 0.13370 0.14250 0.13922 0.13790 Switzerland (Franc) 0.92260 0.98300 0.94652 0.93980 Taiwan (Dollar) 0.03106 0.03163 0.03132 0.03146 United Kingdom (British Pound) 1.48750 1.63820 1.56144 1.50720 ChiefCo-Chief Executive OfficerOfficers (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 ourou r principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.September 30, 2009,March 31, 2010, 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.2008,2009, which could materially affect our business or our consolidated financial position, results of operations, and cash flows. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be insignificant also may become materially adverse or may affect our business in the future or our consolidated financial position, results of operations, or cash flows.MANNATECH, INCORPORATEDMannatech, Incorporated By: November 5, 2009/S/ WAYNE L. BADOVINUSWayne L. BadovinusPresidentBy: ExecutiveScience OfficerNovember 5, 2009/S/ STEPHEN D. FENSTERMACHERStephen D. FenstermacherExecutive Vice President and Global Chief Financial Officer(principal financial officer)
Number
Mannatech, dated May 19, 1998.
August 8, 2001 (Corrected).
Bylaws of Mannatech, effective November 30, 2007.
stock, par value $0.0001 per share.
between Mannatech, Incorporated, and
Terri F. Maxwell.
Act of 2002, of the Chief Executive Officer of Mannatech.
Act of 2002, of the Chief Financial Officer of Mannatech.
Act of 2002, of the Chief Executive Officer of Mannatech.
Act of 2002, of the Chief Financial Officer of Mannatech. Incorporated by Reference Exhibit Description Form File No. Exhibit (s) Filing Date 3.1 S-1 333-63133 3.1 October 28.1998 3.2 10-K 000-24657 3.2 March 16, 2007 3.3 8-K 000-24657 3.1 December 6, 2007 4.1 S-1 333-63133 4.1 October 28, 1998 31.1* * * * * 31.2* * * * * 32.1* * * * * 32.2* * * * * 101.INS** XBRL Instance Document ** ** ** ** 101.SCH** XBRL Taxonomy Extension Schema Document ** ** ** ** 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document ** ** ** ** 101.LAB** XBRL Taxonomy Extension Label Linkbase Document ** ** ** ** 101.PRE** XBRL Taxonomy Extension Presentation Linkbase Document ** ** ** ** 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document ** ** ** **