10-K 1 form10-k_12312010.htm ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2010 form10-k_12312010.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-K

[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
or
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to ________

Commission File No. 000-24657
MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)

 
Texas
(State or other Jurisdiction of Incorporation or Organization)
 
75-2508900
(I.R.S. Employer Identification No.)
600 S. Royal Lane, Suite 200, Coppell, Texas
(Address of Principal Executive Offices)
75019
(Zip Code)

 
Registrant’s Telephone Number, including Area Code: (972) 471-7400
 
Securities Registered Pursuant to Section 12(b) of the Act:  None
 
Securities Registered Pursuant to Section 12(g) of the Act:
 
Common Stock, par value $0.0001 per share
Title of each class
 
   Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ]   No [X]
 
   Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [  ]   No [X]
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.              Yes [X] No [ ]
 
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [X] No [  ]
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]
 
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 

Large accelerated filer [   ]
Accelerated filer [   ]
Non-accelerated filer [   ]
Smaller reporting company [X]
 

 
   Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ]   No [X]
 

At June 30, 2010, the aggregate market value of the common stock held by non-affiliates of the Registrant was $31,365,883 based on the closing sale price of $1.99, as reported on the NASDAQ Global Market.
 
   The number of shares of the Registrant’s common stock outstanding as of March 4, 2011 was 26,490,466 shares.
 

Documents Incorporated by Reference

Mannatech, Incorporated incorporates information required by Part III (Items 10, 11, 12, 13, and 14) of this report by reference to its definitive proxy statement for its 2011 annual shareholders’ meeting to be filed pursuant to  Regulation 14A no later than 120 days after the end of its fiscal year.

 
 

 

TABLE OF CONTENTS


 
Page
   
Part I
 
 
 
 
 
 
 
   
Part II
 
 
 
 
 
 
 
 
 
   
Part III
 
 
 
 
 
 
   
Part IV
 
 
   




 
 

 


Certain disclosures and analysis in this Form 10-K, including information incorporated by reference, may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, (“the Exchange Act”), and the Private Securities Litigation Reform Act of 1995 that are subject to various risks and uncertainties. Opinions, forecasts, projections, guidance, or other statements other than statements of historical fact are considered forward-looking statements and reflect only current views about future events and financial performance. Some of these forward-looking statements include statements regarding:

·  
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.

Although we believe that the expectations included in these forward-looking statements are reasonable, these forward-looking statements are subject to certain events, risks, assumptions, and uncertainties, including those discussed below and in the “Risk Factors” section in Item 1A of this Form 10-K, and elsewhere in this Form 10-K and the documents incorporated by reference herein. If one or more of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results and developments could materially differ from those expressed in or implied by such forward-looking statements. For example, any of the following factors could cause actual results to vary materially from our projections:

·  
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 may affect operations 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.

Forward-looking statements generally can be identified by use of phrases or terminology such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “approximates,” “predicts,” “projects,” “potential,” and “continues” or other similar words or the negative of such terms and other comparable terminology. Similarly, descriptions of Mannatech’s objectives, strategies, plans, goals, or targets contained herein are also considered forward-looking statements. Readers are cautioned when considering these forward-looking statements to keep in mind these risks, assumptions, and uncertainties and any other cautionary statements in this report, as all of the forward-looking statements contained herein speak only as of the date of this report.

Unless stated otherwise, all financial information throughout this report and in the Consolidated Financial Statements and related Notes include Mannatech, Incorporated and all of its subsidiaries on a consolidated basis and may be referred to herein as “Mannatech,” “the Company,” “its,” “we,” “our,” or “their.”

Our products are not intended to diagnose, cure, treat, or prevent any disease and any statements about our products contained in this report have not been evaluated by the Food and Drug Administration, also referred to herein as the FDA.

 
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PART I
Item 1. Business

Overview

Mannatech is a global wellness solution provider, which was incorporated and began operations in November 1993. We develop and sell innovative, high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products that target optimal health and wellness. We currently sell our products 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, Sweden and, beginning January 24, 2011, Mexico. We conduct our business as a single operating segment and primarily sell our products and packs through a network of independent associates and members. As of December 31, 2010, we had approximately 403,000 independent associates and members who have purchased our products and packs within the last 12 months.

We sell our products through network marketing, which we believe is the most cost-effective way to quickly and effectively introduce our products and communicate information about our business to the global marketplace. Network marketing minimizes upfront costs, as compared to conventional marketing methods, and allows us to be more responsive to the ever-changing overall market conditions, as well as continue to research and develop high quality products and focus on controlled successful international expansion. We believe the network marketing channel also allows us to effectively communicate the potential benefits and unique properties of our proprietary products to our consumers. In addition, network marketing provides our business-building independent associates with an avenue to supplement their income and develop financial freedom by building their own business centered on our business philosophies and unique products.

Since our initial public offering in February 1999, our common stock has traded on the NASDAQ Global Market (formerly the NASDAQ National Market) under the symbol “MTEX”. Information for each of our five most recent fiscal years, with respect to our net sales, results of operations, and identifiable assets is set forth in “Item 6. – Selected Financial Data” of this report.

Available Information

We make available free of charge on our Internet website (https://www.mannatech.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and certain other information filed or furnished with the Securities and Exchange Commission, (“the SEC”), as soon as reasonably practicable after electronically filing, or furnishing such material. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers, including Mannatech, that electronically file with the SEC at http://www.sec.gov. Additionally, such materials are available in print upon the written request of any shareholder to our principle executive office located at 600 S. Royal Lane, Suite 200, Coppell, Texas 75019, Attention: Investor Relations, or by contacting our investor relations department at (972) 471-6512 or IR@mannatech.com.

Business Segment, Products and Product Development

Business Segment. We conduct our business as a single operating segment – primarily through sales of nutritional supplements, topical and skin care products, and weight management products through network marketing distribution channels in seventeen countries. For more information with respect to the financial results and conditions of our business segment, including financial information about geographic areas, see Note 16 to our consolidated financial statements.

Products. Scientists have discovered that a healthy body consists of many sophisticated components working in harmony to achieve optimal health and wellness and requires cellular communication to function at an optimal level. In its most basic form, a body’s internal communication occurs at the cellular level, and is referred to as cell-to-cell communication. Scientists also discovered that there are more than 200 monosaccharides, also called sugar molecules, which form naturally. Specific monosaccharides are considered vital components for cellular communication in the human body. Furthermore, scientists discovered that these monosaccharides attach themselves to certain proteins, which then form a molecule called glycoprotein. Harper’s Biochemistry, a leading and nationally recognized biochemistry reference, has recognized that these molecules are found in human glycoproteins, and are believed to be essential in helping to promote and provide effective cell-to-cell communication in the human body.
 
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A significant portion of our revenue is derived from our core Ambrotose® complex products which include the Ambrotose® products and Advanced Ambrotose® products. Revenue from the core Ambrotose® products were as follows for the years ended December 31, 2010 and 2009 (in thousands, except percentages):

 
2010
   
2009
 
Sales by
product
 
% of total
net sales
   
Sales by
product
 
% of total
net sales
 
Advanced Ambrotose®
$
61,458
 
26.9
%
 
$
65,360
 
22.6
%
Ambrotose®
 
19,078
 
  8.4
%
   
25,413
 
  8.8
%
Total
$
80,536
 
35.3
%
 
$
90,773
 
31.4
%

The history of our proprietary ingredients and products is as follows:

·  
In 1994, we developed and began selling our first products containing Manapol®, an ingredient formulated to support cell-to-cell communication.
 
·  
In 1996, we enhanced our products based on the study of glycoproteins and our scientists developed our own proprietary compound, Ambrotose® complex, which we patented. Our Ambrotose® complex is a blend of polysaccharides (composed of monosaccharides) that helps provide support for the immune system.
 
·  
In 2001, we broadened our proprietary ingredients by developing the Ambroglycin® blend, a balanced food-mineral matrix which helps deliver nutrients to the body and which is used in our proprietary Catalystand  Glycentials® vitamin/mineral supplements.
 
·  
In 2004, we introduced our proprietary blend of antioxidant nutrients, MTech AO Blend®, which is used in our proprietary antioxidant Ambrotose AO® product.
 
·  
In 2006, we introduced a unique blend of plant-based minerals, natural vitamins, and standardized phytochemicals for use in our proprietary PhytoMatrix® product. We also introduced a compound used in reformulated Advanced Ambrotose® complex. This compound allows a more potent concentration of the full range of mannose-containing polysaccharides occurring naturally in aloe to be produced in a stable powdered form.
 
·  
In 2007, we introduced into the United States market our skin care line of products that supports skin’s natural texture, beauty, and elasticity. We also launched our PhytoMatrix® caplets, Advanced Ambrotose® capsules and Manna•Bears supplement into international markets.
 
·  
In 2008, we introduced a proprietary proteolytic enzyme and phytosterol dietary supplement that supports the body’s natural recovery processes associated with physical activity in our BounceBack capsules. We also introduced a proprietary version of whey protein peptide technology that assists targeted fat loss when combined with exercise and a healthy diet in our OsoLean powder.
 
·  
In 2009, we introduced our Essential Source Omega-3, which features EPA/DHA essential acids, PhytoBurst Nutritional Chews formulated with vitamins, minerals, and phytonutrients from food-sourced ingredients, and GI-ProBalance Slimstick in Korea, which is a synbiotic digestive product containing probiotics, prebiotics, and digestive enzymes. In addition, we improved our Ambrotose® products to include beta-Carotene.
 
·  
In 2010, we launched our Simply Delicious Snack Bars and our Mannatech LIFT Skin Care System, which is paraben-free and formulated to give skin a more natural youthful appearance. We also expanded several previously launched products from our domestic line to our international markets.
 
Our product philosophy focuses on a full spectrum of quality nutritional and personal care products aimed at promoting and maintaining optimal health and wellness. We focus on producing products that are from all-natural sources, with no synthetic or chemically derived additives. There are three major categories of our products:

 
Health, which offers a variety of nutritional supplements that aid in optimizing overall health and wellness. This category includes a variety of daily nutritional supplements, health solutions for children, and additional nutrients designed to help keep specific body systems at optimal levels.

 
Weight and Fitness, which offers products designed to curb appetite and burn fat, build lean muscle tissue, and support recovery from overexertion.

 
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Skin Care, which offers several products that are formulated with more than 30 botanical ingredients, contain our Jeunesse 7 proprietary blend – a unique combination of montmorillonite and glyconutrients, and are designed to give the skin a more natural youthful appearance by moisturizing, hydrating and reducing the appearance of fine lines and wrinkles.

The following table summarizes our products by category:

Product Category
Representative Products
 Health
Ambrotose® complex, Ambrotose AO®, Advanced Ambrotose®, PhytoMatrix®, Glyco-Bears®, MannaBears, Catalyst, PLUS, Manna-C, CardioBALANCE®, ImmunoSTART®, BounceBack, MannaCLEANSE, PhytAloe®, GI-Pro®, GI-Zyme®, Essential Source Omega-3, PhytoBurst Nutritional Chews, GI Pro Balance Slimstick, and Simply Delicious Snack Bars(1).
 Weight and Fitness
OsoLean, Accelerator3, FiberSlim®, GlycoSlim®, AmbroStart®, SPORT, and EM·PACT®.
 Skin Care
Emprizone®, FIRM with Ambrotose®, LIFT™ Exfoliating Facial Cleanser, LIFT™ Multiphase Serum, LIFT™ Day Moisturizer, LIFT™ Night Repair Crème, and LIFT™ Body Lotion.
   
_________________________
    (1) We plan to discontinue Simply Delicious Snack Bars in 2011.

Product Development. Our product committee continues to focus on potential new products and compounds that help target or promote overall health and wellness. When considering new products and compounds, our product committee considers the following criteria:

·  
marketability and proprietary nature of the product;
 
·  
demand for the product;
 
·  
competitors’ products;
 
·  
regulatory considerations;
 
·  
availability of ingredients; and
 
·  
data supporting claims of efficacy and safety.

To maintain a flexible operating strategy and the ability to increase production capacity, we contract with third-parties to manufacture all of our products, which allows us to effectively respond to fluctuations in demand with minimal investment and helps control our operating costs. We believe our suppliers and manufacturers are capable of meeting our current and projected inventory requirements over the next several years. However, as a safety measure, we continue to identify and approve alternative suppliers and manufacturers to ensure that our global demands are met in a timely manner and to help minimize any risk of business interruption.

Industry Overview

Nutrition Industry

We operate in the nutritional supplement industry and distribute and sell our products through our own global network marketing channel. The nutritional supplement industry is fast-paced, highly fragmented, and intensely competitive. It includes companies that manufacture and distribute products that are intended to enhance the body’s performance and well-being. Nutritional supplements include vitamins, minerals, dietary supplements, herbs, botanicals, and compounds derived therefrom. Prior to 1990, all dietary supplements in the United States were tightly regulated by the FDA and only included essential nutrients such as vitamins, minerals, and proteins. In 1990, the Nutrition Labeling and Education Act expanded the category to include “herbs or similar nutritional substances”, but the FDA maintained control over pre-market approval. However, in 1994, the Dietary Supplement Health and Education Act of 1994 (“DSHEA”) was passed in the United States, drastically changing the dietary supplement marketplace. The DSHEA was instrumental in expanding the category of dietary supplements to further include herbal and botanical supplements and ingredients such as
 
4

 
ginseng, fish oils, enzymes, and various mixtures of these ingredients. Under DSHEA, vendors of dietary supplements are now able to educate consumers regarding the effects of certain component ingredients.

Nutritional supplements are available through mass-market retailers, drug stores, supermarkets, discount stores, health food stores, mail order companies, and direct sales organizations. Direct selling, of which network marketing is a significant segment, has grown significantly and has been enhanced in the past decade as a distribution channel due to advancements in technology and communications resulting in improved product distribution and faster dissemination of information.

Direct Selling/Network marketing Channel

Since the 1990s, the direct selling and network marketing sales channel has grown in popularity and general acceptance, including acceptance by prominent investors and capital investment groups who have invested in direct selling companies. This has provided direct selling companies with additional recognition and credibility in the growing global marketplace. In addition, many large corporations have diversified their marketing strategy by entering the direct selling arena. Several consumer-product companies have launched their own direct selling businesses with international operations often accounting for the majority of their revenues. Consumers and investors are beginning to realize that direct selling provides unique opportunities and a competitive advantage in today’s markets. Businesses are able to quickly communicate and develop strong relationships with their customers, bypass expensive ad campaigns, and introduce products and services that would otherwise be difficult to promote through traditional distribution channels such as retail stores. Direct selling is a channel of distribution with healthy cash flow, high return on invested capital, and long-term prospects for global expansion. According to the worldwide direct sales data published by the World Federation of Direct Selling Association, in 2009 there were approximately 74 million global direct sellers who collectively generated annual retail sales of $117.6 billion.

Operating Strengths

 
1.
High-Quality, Innovative, Proprietary Products. We base our product concept on the scientific belief that certain glyconutrients, also known as monosaccharides or sugar molecules, are essential for maintaining a healthy immune system. We believe the addition of effective nutritional supplements to a well-balanced diet, coupled with an effective exercise program, will enhance and help maintain optimal health and wellness. We focus on producing products that are from all-natural sources with no synthetic or chemically derived additives. We formulate our products with predominately naturally-occurring, plant-derived, carbohydrate-based, safe ingredients that are designed to use nutrients working through normal physiology to help achieve and maintain optimal health and wellness, rather than developing common synthetic, carbohydrate-based products.

We believe that our patented proprietary blend Ambrotose® complex included in many of our products distinguishes us as a leader in the global nutritional supplements industry and that no other combination of vitamins, minerals, amino acids, or herbals can provide the benefits found in Ambrotose® complex. We also believe the use of unique compounds found in our products allows us to effectively differentiate and distinguish our products from those of our competitors.

 
2.
Research and Development Efforts. We are steadfast in our commitment to quality-driven research and development. We use systematic processes for the research and development of our unique proprietary product formulas, as well as the identification of quality suppliers and manufacturers. Our research and quality assurance programs are outlined on our corporate websites www.mannatechscience.org, https://www.mannatech.com, and www.allaboutmannatech.com.

Dr. Robert Sinnott, our co-CEO and chief science officer, leads our team of experienced researchers and scientists. This team continually reviews the latest published research data, attends scientific conferences, and draws upon its vast knowledge and expertise to develop new products and support existing ones. In addition, this team works in collaboration with other research firms, universities, institutes, and scientists. Our products have been the focus of numerous pre-clinical and clinical studies.


Some of our more recent collaborative research projects include:
 
 
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1)  
In November 2010, the Nutrition Journal published a randomized, doubleblind, placebocontrolled crossover trial investigating the antioxidant effects of Ambrotose AO® capsules in healthy, exercise-trained and untrained men and women. In this study, scientists showed that Ambrotose AO® (4 capsules/day for 3 weeks) significantly increased two measures of antioxidant capacity—Oxygen Radical Absorbance Capacity (ORAC) and Trolox Equivalent Antioxidant Capacity (TEAC)—in the blood of healthy men and women at rest. ORAC and TEAC are standard methods for assessing the impact of dietary factors on blood antioxidant status. This study, conducted by Professor Richard Bloomer and scientists at the University of Memphis, also supports the safety of Mannatech’s Ambrotose AO® supplement at a daily dose of 4 capsules, through measurement of complete blood count, metabolic and lipid panel, and supports prior evidence for Ambrotose AO® capsules to enhance blood antioxidant capacity in healthy individuals at rest and following exercise.

2)  
In September 2010, Stephens & Associates, a privately owned worldwide research organization and a leading investigational site of clinical trials for cosmetic testing and dermatological and women’s health studies, published results of a 12-week clinical usage study and a number of clinical safety studies performed on the new Mannatech LIFT™ skin care system. Clinical testing revealed improvements in skin, firmness, radiance, smoothness and the appearance of fine lines and wrinkles after 8 and 12 weeks and demonstrated that all tested products were well-tolerated, non-comedogenic, and did not cause allergic contact dermatitis.

3)  
In April 2010, BMC Complementary and Alternative Medicine published a study demonstrating that Ambrotose AO® capsules significantly increased serum oxygen radical absorbance capacity (ORAC) in a population of healthy adults by 36.5%. The five-week combined Phase 1 and 2 open label, forced titration dose response study provides additional evidence that Ambrotose AO® capsules are safe and most effective at 4 capsules/day. The study was led by Professor Stephen Myers, PhD, BMed, ND, Director of the Australian Centre for Complementary Medicine Education and Research (ACCMER).

4)  
Also in April 2010, using state-of-the-art human gastrointestinal tract simulations and microbiological analyses, scientists from Ghent University and ProDigest (a company that specializes in gastrointestinal research) published their findings in the International Journal of Food Microbiology, which demonstrated that Ambrotose® complex and Advanced Ambrotose® powder exerted positive prebiotic effects. Both products were well-fermented throughout the entire simulated colon and they encouraged the growth of healthful Bifidobacteria species. The products also appeared to enhance the growth of species belonging to a group of bacteria called Bacteroidetes, which are associated with body weight management.

5)  
In March 2010, the Journal of the International Society of Sports Nutrition published a randomized, double-blind, placebo-controlled, crossover trial investigating the effect of creatine-free EM•PACT® sports drink on the aerobic performance of 29 healthy college students. This study, led by Professor Allyn Byars at Angelo State University, showed that a single serving of creatine-free EM•PACT® sports drink significantly improved subjects’ maximal oxygen consumption, time to exhaustion, and estimated non-protein fat substrate utilization.

6)  
In January 2010,  Developmental Neuropsychology published a randomized, double-blind, placebo-controlled study led by Dr. Talitha Best at Flinders University. This 12-week study found that healthy middle-aged adults who took one teaspoon of Ambrotose® complex twice daily performed significantly better on memory tasks and overall had a more positive mood.
 
 
6

 
To support our research and development efforts, we have strategic alliances with our suppliers, consultants, and manufacturers, which allow us to effectively identify and develop high-quality, innovative, proprietary products that increase our competitive advantage in the marketplace.

Our research and development efforts include developing and maintaining quality standards, supporting development efforts for new ingredients and compounds, and improving or enhancing existing products or ingredients. In addition, our research and development team identifies other quality-driven suppliers and manufacturers for both our global and regional needs.

 
3.
Quality Assurance Program. We use qualified manufacturing contractors to produce, test, and package our finished products. These contractors must strictly adhere to our quality standards for all markets. Our quality assurance program is designed to comply with the following regulations:

·  
the FDA’s current Good Manufacturing Practice for manufacturing, packaging, labeling, or holding operations for dietary supplements;
 
·  
the FDA’s Good Manufacturing Practices for human food;
 
·  
the requirements of the Natural Health Products Directorate of Canada;
 
·  
the Korean Food and Drug Administration; and
 
·  
Certification by the Therapeutic Goods Administration of Australia (“TGA”) when necessary.
 

We have established a quality assurance program designed to ensure compliance with regulatory requirements and to ensure that proper controls are maintained in the manufacturing, evaluation, packaging, storage, and distribution of our products. These controls include a comprehensive supplier quality program that requires frequent audits and surveillances, third-party certifications, and product monitoring.

A team of professionals, many of whom have extensive experience in the pharmaceutical industry, leads our in-house quality assurance program and continually monitors the quality assurance aspects of our products, including the production process. Our quality assurance professionals develop quality standards for raw material, components and products, and perform tests and inspections to ensure that products are safe and of high quality.

We require our dietary supplements to be packaged with seals to help minimize the risk of tampering. We also perform stability studies under controlled and accelerated temperature storage conditions to ensure the accuracy of the shelf life of our products.

We submit our products for testing by independent laboratories:

·  
Nine products are certified according to the NSF/ANSI 173 Dietary Supplement Standard—the only American National Standard for dietary supplements. This certification ensures that this product contains only the ingredients indicated on the label and is free of impurities, and that Good Manufacturing Practices were used in the manufacturing facility.
 
·  
Ten products are certified Kosher by OU Kosher, the trademark with the highest certification standards worldwide.
 
·  
Twenty-six products are certified gluten-free by Covance Laboratories.
 

 
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4.
High-Caliber, Industry-Leading Independent Associates. Our global team of independent associates is comprised of dedicated, hard working, high-caliber, compliance-oriented individuals, many of whom have been associated with the network marketing industry for decades and have been loyal to us since our beginning in 1993. To capitalize on their wealth of knowledge and experience, we sponsor a panel of independent associates, called the “North American Associate Advisory Council”, and a panel of international independent associates, called the “Global Advisory Council” (collectively called the “Advisory Council”), which help identify and effectively relay the needs of our independent business-building associates to us. The members of the Advisory Council are elected by their peers and serve a three-year term. The Advisory Council meets periodically with our team of senior management to recommend changes, discuss issues, and provide new ideas or concepts, including a full spectrum of innovative ideas for additional quality-driven nutritional supplements aimed at maintaining optimal health and wellness.

 
5.
Support Philosophy for Our Independent Associates and Members. We are fully committed to providing the highest level of support services to our independent associates and members and believe that we meet expectations and build customer loyalty through the following:

·  
providing efficient order processing centers to support operations;
 
·  
offering highly-personalized and responsive customer service;
 
·  
offering a 100% satisfaction guarantee product return policy for the first 180 days following the product’s purchase;
 
·  
providing comprehensive corporate websites (http://www.mannatech.com, www.allaboutmannatech.com, www.mannatechscience.org, www.mannathink.com), that provide instant access to Internet ordering, marketing, technical and educational information, and unique and innovative marketing tools;
 
·  
offering free personalized websites for our independent associates;
 
·  
maintaining an extensive web-based downline management system called Success Tracker that provides access to web conferencing and downline organization reporting for our independent associates at minimal costs;
 
·  
offering, in the United States and Canada, a new effective online business tool called MannaCastSM, which includes StoryCastTM, Mannapages®, and Success Tracker, and supports associates in managing and expanding business at minimal costs;
 
·  
offering updated training/orientation and compliance programs for our independent associates;
 
·  
providing strategically based distribution fulfillment centers to ensure products are shipped on time and at minimal cost;
 
·  
inviting customer input on innovative product ideas, which is gathered and tabulated on www.mannathink.com;
 
·  
sponsoring comprehensive training about our products and promotional materials, and offering a full spectrum of comprehensive educational materials; and
 
·  
sponsoring several marketing events, designed to provide information, education, and motivation for our dedicated business-building associates and to help stimulate business development. These events provide an interactive venue for introducing new products and services and allow interaction between our management teams, outside researchers, and independent associates.

 
6.
Flexible Operating Strategy. We believe efficiency, focus, and flexibility are paramount to our operations. For over a decade, we have contracted with third parties to supply and manufacture our proprietary raw materials and products, which we believe allows us to minimize capital expenditures, capitalize on such parties’ expertise, and build additional resources for strategic alliances in the areas of distribution and logistics, product registration, and export requirements. By contracting with various suppliers and manufacturers and by outsourcing distribution for all of our foreign operations, except Europe, we believe we can quickly adapt operations to current demands in a timely, efficient, and cost-effective manner. We monitor the performance of our third party contractors to ensure they maintain a high quality of service. In addition, we identify alternative sources for our raw materials suppliers and finished goods manufacturers to help prevent any risk of interruption in production should any existing contractors become unable to perform satisfactorily.
 
 
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7.
Experience and Depth of Our Management Team and Board of Directors. Our management team includes 7 individuals with over 95 years combined experience in the direct selling industry. We believe our team of executives has extensive experience in all aspects of business operations and is highly focused on our success. Our Board of Directors is composed of seven directors, including five independent directors. We believe our board members have a wealth of knowledge and experience in most aspects of our business operations and are especially well versed in network marketing, finance, nutritional products, regulatory matters, and corporate governance. Our entire management team is committed to delivering high-quality products and superior service.

Business Strategy

Our long-term goal is to be one of the world’s leading network marketing companies founded on the best science-based proprietary products, along with a powerful global independent network distribution model. To achieve our goal, we believe we must focus on the following business priorities:

·  
Attracting New Independent Associates and Retaining Existing Independent Associates. We continually examine our global associate career and compensation plan and periodically offer incentives, such as our annual travel incentives, in order to attract, motivate, and retain independent associates. We believe our global associate career and compensation plan encourages greater associate retention, motivation, and productivity.
 
·  
Carefully Planning and Executing New Market Entries. In order to expand efficiently around the globe, we must continue to present maximum opportunity to our current associates as well as those who will join us in the future.
 
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Developing New Products and Enhancing Existing Products. We continue to focus on new areas for future product development. We continue our research efforts and strive to ensure that all of our products are made from high quality, effective ingredients that contain one or more of our proprietary compounds, which we believe supports our goal to be a cutting-edge industry leader. We expect that any future products we develop will further complement and enhance our existing products.
 
·  
Strengthening our Financial Results and Adding Value to Our Shareholders and Independent Associates. We focus on improving financial results by striving to increase our revenues in both our domestic and foreign operations and to control our operating costs.

Intellectual Property

Trademarks. We pursue registrations for all trademarks associated with our key products and protection of our legal rights concerning our trademarks. As of December 31, 2010, we had 41 registered trademarks in the United States and three trademark applications pending with the United States Patent and Trademark Office. At December 31, 2010, we also had 465 registered trademarks in 31 countries and 80 trademark applications pending in foreign jurisdictions. Globally, the protection available in foreign jurisdictions may not be as extensive as the protection available to us in the United States. Where available, we rely on common law trademark rights to protect our unregistered trademarks, even though such rights do not provide us with the same level of protection as afforded by a United States federal trademark registration. Common law trademark rights are limited to the geographic area in which the trademark is actually used. A United States federal trademark registration enables us to stop infringing use of the trademark by a third party anywhere in the United States provided the unauthorized third party user does not have superior common law rights in the trademark within a specific geographical area of a particular state or region prior to the date our mark federally registers.

Patents. We applied for patent protection in various countries for formulations and use of compositions and methods that relate to our Ambrotose® complex. As of December 31, 2010, we had obtained 48 patents for technology related to the Ambrotose® formulation, five of which are in the United States and the remainder of which are in 29 foreign jurisdictions. We have one Manapol patent in Canada. We also have 15 pending patent applications in the United States; two relate to our Ambrotose® complex technology and four of relate to our antioxidant technology. The other patent applications relate to (i) PhytoMatrix®, a vitamin and mineral supplement; (ii) our Rapid Saccharide Biomarker Assay; (iii) our Processing of Natural Saccharide Polysaccharides (Probiotic and Prebiotic); and (iv) Soluable Fiber patent. We have 103 patent applications pending in 29 foreign jurisdictions. Depending on the jurisdiction, an issued patent grants us certain rights to prevent others from making, offering to sell, using, importing or selling the patented subject matter for the term of the patent. The exclusionary rights of these patents are national in scope. Until a patent is approved and issued, we cannot exclude others from making, using, selling, offering to sell, or importing a product that falls within the scope of the claims in the application.
 
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Associate Distribution System

Overview. Our sales philosophy is to distribute our products through network marketing channels where consumers purchase products for personal consumption or resale. Members purchase our products for personal use at a discounted retail value, but do not participate in our global associate career and compensation plan. Independent associates purchase our products at a discounted wholesale value and are eligible to participate in our global associate career and compensation plan. All of our associates are independent contractors. We provide each new independent associate with our policies and procedures that require the independent associates to comply with regulatory guidelines and act in a consistent and professional manner.

Our revenues are heavily dependent upon the retention and productivity of independent associates who help us achieve long-term growth. We believe the introduction of new innovative incentives, such as travel incentives, will continue to motivate our independent associates and help expand our global purchasing base. We remain actively committed to expanding the number of our independent associates through recruitment, support, motivation, and incentives. We had approximately 403,000 and 513,000 independent associates and members purchasing our products and packs within the 12 months ended December 31, 2010 and 2009, respectively.

We offer a 10% discount to independent associates and members who enroll in our automatic monthly order program to promote operating efficiencies, through which our independent associates can receive a standing order every four weeks and our members can receive a standing order once a month. Automatic monthly orders, on average, account for approximately 80% of our total orders placed during a calendar month.

Independent Associate Development. Network marketing consists of enrolling individuals who build a network of independent associates, members, and retail customers who purchase products. We support our independent associates by providing an array of support services that can be tailored to meet individual needs, including:

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offering educational meetings and corporate-sponsored events that emphasize business-building and compliance related information;
 
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sponsoring various informative and science-based conference calls, web casts, and seminars;
 
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providing automated services through the Internet and telephone that offer a full spectrum of information and business-building tools;
 
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maintaining an efficient decentralized ordering and distribution system;
 
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providing highly personalized and responsive order processing and customer service support accessible by multiple communication channels including telephone, Internet, or e-mail;
 
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offering 24-hour, seven days a week access to information and ordering through the Internet;
 
·  
offering Success TrackerTM, a customized business-building genealogy system, which contains graphs, maps, alerts, reports, and web video conferencing for our independent associates;
 
·  
offering the MannaCastSM suite of online business tools in the United States and Canada, which includes Success TrackerTM, MannaPages®, and StoryCastTM; and
 
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providing a wide assortment of business-building and educational materials to help stimulate product sales and simplify enrollment.

We provide product and network marketing training and education for new independent associates. For example, we offer a unique global orientation/training program that integrates audio, video, and graphics so that associates can customize their own marketing and training program. This training program provides systematic and uniform training related to our products and related global regulatory requirements, global associate career and compensation plan, and various methods of conducting business, including ethics and compliance. We also offer a variety of brochures, monthly newsletters, and other promotional materials to associates to assist in their sales efforts, training, and continuing education. We continually update our training and promotional materials to provide our associates with the most current information and motivational tools.

Our global associate career and compensation plan consists of eight independent associate achievement levels; from lowest to highest, these include regional, national, executive, presidential, bronze, silver, gold, and platinum. These achievement levels are determined by the growth and volume of the independent associates’ direct and indirect
 
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commissionable net sales, as well as expanding their networks, which are all assigned a point volume. Promotional materials and training aids are not assigned a point volume. This point volume system, referred to as our global seamless downline structure, allows independent associates to build their network by expanding their existing downlines into all international markets. Our global associate career and compensation plan is intended to comply with all applicable governmental regulations that govern the various aspects of payments to independent associates in each country.

Based upon our knowledge of industry-related network marketing compensation plans, we believe our global associate career and compensation plan remains strong in the industry and is currently among the most financially rewarding plans offered. Together, our commissions and incentives range from 44% to 50% of our consolidated net sales.

Our global associate career and compensation plan pays various types of commissions and incentives based upon a point system that calculates a percentage of the independent associate’s commissionable direct and indirect net sales and the attainment of certain associate achievement levels. All payments to our independent associates are made after they have earned their commissions. We believe our global associate career and compensation plan fairly compensates our independent associates at every stage of building their business by quickly rewarding an independent associate for both the breadth and depth of their global seamless downline structure.

Our global associate career and compensation plan identifies and pays 17 types of incentive commissions to our qualified independent associates, which are based on the following:

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generating product sales from an independent associate’s global downline to earn certain achievement levels;
 
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enrolling new independent associates or members who place a product order;
 
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obtaining certain achievement levels and enrolling other independent associates in a downline who place monthly automatic orders;
 
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obtaining and developing certain achievement levels within their downline organizations to qualify for additional bonuses;
 
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building a team of six qualified independent associates in their global downlines who order products regularly; and
 
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various other incentive programs, including periodic travel incentives.

Management of Independent Associates. We actively monitor our independent associates’ sales of our products and the promotion of certain business opportunities by requiring our independent associates to abide by our policies and procedures. However, we have limited control over the actions of our independent associates. To aid in our monitoring efforts, we provide each independent associate with a copy of our policies and procedures prior to or upon signing up as an independent associate. We also use various media formats to distribute changes to our mandatory policies and procedures, including our corporate website, conference calls, educational meetings, corporate events, seminars, and webcasts.

Our legal/compliance department, in cooperation with other departments and associates, periodically evaluates the conduct of our independent associates and the need for new or revised policies and procedures. Our monitoring efforts include reviewing associates’ websites, promotional materials, and meetings. Our legal/compliance program assists in maintaining high ethical standards among our independent associates, which helps our independent associates in their sales efforts.

To help manage our associates, our legal/compliance department periodically monitors independent associates’ websites for content. In addition, associates may use our anonymous compliance reporting system to report non-compliant websites to the compliance department, which then further investigates such websites. In an effort to decrease the number of independent websites owned by our independent associates and to preserve and protect our trademarks, we offer a standardized personal Mannapages® Internet website, which helps our independent associates with their sales efforts and provides consistent, standardized information, and education.

 
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Our legal/compliance program also provides our independent associates with a standardized and anonymous complaint process. When a complaint is filed against an independent associate, our legal/compliance department conducts a mandatory investigation of the allegations, if applicable. Depending on the nature of the violation, we may suspend or terminate the non-compliant associate’s agreement or we may impose various sanctions, including written warnings, probation, withholding commissions, and termination of associate status. We will terminate any associate’s agreement for making claims that our products can treat, cure, mitigate or prevent any disease, unless such claim is de minimus and isolated.

Product Return Policy. We stand behind our packs and products and believe we offer a reasonable and industry-standard product return policy to all of our customers. We do not resell returned products. Refunds 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 guidelines. However, we allow our independent associates and members to exchange products as long as the products are unopened and in good condition. Our return policies for our retail customers and our independent associates and members are as follows:

 
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Retail Customer Product Return Policy. This policy allows a retail customer to return any of our products to the original independent associate who sold the product and receive a full cash refund by the independent associate for the first 180 days following the product’s purchase if located in the United States, Canada, and South Africa, and for the first 90 days following the product’s purchase in the remaining countries. The independent associate may then return or exchange the product based on the independent associate product return policy.
 
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Independent Associate and Member Product Return Policy. This policy allows the independent associate or member to return an order within one year of the purchase date upon terminating his/her account. If an independent associate or member returns a product unopened and in good condition, he/she may receive a full refund minus a 10% restocking fee. We may also allow the independent associate or member to receive a full satisfaction guarantee refund if they have tried the product and are not satisfied for any reason, excluding promotional materials. This satisfaction guarantee refund applies in the United States, Canada, and South Africa only for the first 180 days following the product’s purchase, and applies in the remaining countries for the first 90 days following the product’s purchase; however, any commissions earned by an independent associate will be deducted from the refund. If we discover abuse of the refund policy, we may terminate the independent associates’ or member’s account.

Information Technology Systems

Our information technology and e-commerce systems include a transaction-processing database, financial systems, an associate management system, and comprehensive management tools that are designed to:

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minimize the time required to process orders and distribute products;
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provide customized ordering information;
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quickly respond to information requests, including providing detailed and accurate information to independent associates about qualification and downline activity;
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provide detailed reports about paid commissions and incentives;
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support order processing and customer service departments; and
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help monitor, analyze, and report operating and financial results.

To complement our transaction database, we developed a comprehensive management tool called Success Tracker that is used both internally and by our independent associates to manage and optimize their business organizations. With this tool, independent associates have constant access to graphs, maps, alerts, and reports on the status of their individual organizations, which helps to optimize their earnings.

We also maintain a written service continuity disaster recovery plan that was developed using the guidelines published by the National Institute of Standards of Technology to minimize the risk of loss due to any interruption in business. Our disaster recovery plan encompasses all critical aspects of our business and identifies contacts and resources. Additionally, we perform daily backup procedures and proactively monitor various software, hardware, and network infrastructure systems. We also perform routine maintenance procedures and periodically upgrade our software and hardware to help ensure that our systems work efficiently and effectively and to minimize the risk of business interruption.
 
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Although we maintain an extensive disaster recovery plan, a long-term failure or impairment of any of our information technology systems could adversely affect our ability to conduct day-to-day business. Please see “Risk Factors – If our information technology system fails, our operations could suffer.”

We continue to enhance our information technology, websites, and e-commerce platforms to remain competitive and efficient. We launched a new website in 2009, which we believe has been more reliable and was designed to be more user-friendly than our preceding one. At December 31, 2010 and 2009, net capitalized software cost balances were $9.0 million and $15.7 million, respectively.

Government Regulations

Domestic Regulations. In the United States, governmental regulations, laws, administrative determinations, court decisions, and similar legal requirements at the federal, state, and local levels regulate companies, such as ours, and network marketing activities. Such regulations address, among other things:

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direct selling and network marketing systems;
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transfer pricing and similar regulations affecting the amount of foreign taxes and customs duties paid;
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taxation of independent associates and requirements to collect taxes and maintain appropriate records;
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how a company manufactures, packages, labels, distributes, imports, sells, and stores products;
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product ingredients;
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product claims;
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advertising; and
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the extent to which companies may be responsible for claims made by independent associates.

The following governmental agencies regulate various aspects of our business and our products in the United States:

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the FDA;
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the Federal Trade Commission (“FTC”);
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the Consumer Product Safety Commission;
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the Department of Agriculture;
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the Environmental Protection Agency;
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the United States Postal Service;
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state attorney general offices; and
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various agencies of the states and localities in which our products are sold.

The FDA regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution, and sale of foods, dietary supplements, over-the-counter drugs, medical devices, and pharmaceuticals. In January 2000, the FDA issued a final rule called “Statements Made for Dietary Supplements Concerning the Effect of the Product on the Structure or Function of the Body”. In the rule and its preamble, the FDA distinguished between permitted claims under the Federal Food, Drug and Cosmetic Act (“the Act”) relating to the effect of dietary supplements on the structure or functions of the body, and impermissible direct or implied claims of the effect of dietary supplements on any disease. In June 2007, the FDA issued a rule, as authorized under the Act, that defined current Good Manufacturing Practices in the manufacture and holding of dietary supplements. Effective January 1, 2006, legislation required specific disclosures in labeling where a food, including a dietary supplement, contains an ingredient derived from any of eight named allergens. Legislation passed at the end of 2006 now requires us to report to the FDA any reports of “serious adverse events” associated with the use of a dietary supplement or an over-the-counter drug that is not covered by new drug approval reporting.

The Dietary Supplement Health and Education Act of 1994, referred to as DSHEA, revised the provisions of the Federal Food, Drug and Cosmetic Act concerning the composition and labeling of dietary supplements and statutorily created a new class entitled “dietary supplements.” Dietary supplements include vitamins, minerals, herbs, amino acids, and other dietary substances used to supplement diets. A majority of our products are considered dietary supplements as outlined in the Act, which requires us to maintain evidence that a dietary supplement is reasonably safe. A manufacturer of dietary supplements may make statements concerning the effect of a supplement or a dietary ingredient on the structure or any function of the body, in accordance with the regulations described above. As a result, we make such statements with respect to our products. In some cases, such statements must be accompanied by a statutory statement that the claim has not been evaluated by the FDA, and the product is not intended to treat, cure, mitigate, or prevent any disease, and the FDA must be notified of such claim within 30 days of first use.
 
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The FDA oversees product safety, manufacturing, and product information, such as claims on a product’s label, package inserts, and accompanying literature. The FDA has promulgated regulations governing the labeling and marketing of dietary and nutritional supplement products. The regulations include:

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the identification of dietary or nutritional supplements and their nutrition and ingredient labeling;
 
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requirements related to the wording used for claims about nutrients, health claims, and statements of nutritional support;
 
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labeling requirements for dietary or nutritional supplements for which “high potency,” “antioxidant,” and “trans-fatty acids” claims are made;
 
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notification procedures for statements on dietary and nutritional supplements; and
 
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pre-market notification procedures for new dietary ingredients in nutritional supplements.

We develop and maintain product substantiation dossiers, which contain the scientific literature pertinent to each product and its ingredients. An independent scientist reviews these dossiers, which provide the scientific basis for product claims. We periodically update our substantiation program for evidence for each of our product claims and notify the FDA of certain types of performance claims made in connection with our products.

In certain markets, including the United States, specific claims made with respect to a product may change the regulatory status of a product. For example, a product sold as a dietary supplement but marketed as a treatment, prevention, or cure for a specific disease or condition would likely be considered by the FDA or other regulatory bodies as unapproved and thus an illegal drug. To maintain the product’s status as a dietary supplement, its labeling and marketing must comply with the provisions in DSHEA and the FDA’s extensive regulations. As a result, we have procedures in place to promote and assure compliance by our employees and independent associates related to the requirements of DSHEA, the Food, Drug and Cosmetic Act, and various other regulations.

Dietary supplements are also subject to the Nutrition, Labeling and Education Act and various other acts that regulate health claims, ingredient labeling, and nutrient content claims that characterize the level of nutrients in a product. These acts prohibit the use of any specific health claim for dietary supplements unless the health claim is supported by significant scientific research and is pre-approved by the FDA.

The FTC and other regulators regulate marketing practices and advertising of a company and its products. In the past several years, regulators have instituted various enforcement actions against numerous dietary supplement companies for false and/or misleading marketing practices, as well as misleading advertising of products. These enforcement actions have resulted in consent decrees and significant monetary judgments against the companies and/or individuals involved. Regulators require a company to convey product claims clearly and accurately and further require marketers to maintain adequate substantiation for their claims. More specifically, the FTC requires such substantiation to be competent and reliable scientific evidence and requires a company to have a reasonable basis for the expressed and implied product claim before it disseminates an advertisement. A reasonable basis is determined based on the claims made, how the claims are presented in the context of the entire advertisement, and how the claims are qualified. The FTC’s standard for evaluating substantiation is designed to ensure that consumers are protected from false and/or misleading claims by requiring scientific substantiation of product claims at the time such claims are first made. The failure to have this substantiation violates the Federal Trade Commission Act.

Due to the diverse scope of regulations applicable to our products and the various regulators enforcing these requirements, determining how to conform to all requirements is often open to interpretation and debate. However, our policy is to fully cooperate with any regulatory agency in connection with any inquiries or other investigations. We can make no assurances that regulators will not question our actions in the future, even though we continue to make efforts to comply with all applicable regulations, inquiries, and investigations.
 
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International Regulations. We are also subject to extensive regulations in each country in which we operate. Currently we sell our products in Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, Singapore, Austria, the Netherlands, Norway, Sweden and, beginning January 24, 2011, Mexico. Some of the country-specific regulations include the following:

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the National Provincial Laws, Natural Health Product Regulations of Canada, and the Federal Competition Act in Canada;
 
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the Therapeutic Goods Administration and the Trade Practices Act in Australia;
 
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federal and state regulations in Australia;
 
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national regulations including the Local Trading Standards Offices in the United Kingdom;
 
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regulations from the Ministry of International Trade and Industry in Japan;
 
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regulations from the Commerce Commission and the Fair Trade Act of 1993 in New Zealand;
 
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the Fair Trade Commission, which oversees the Door to Door Sales Act and the Health and Functional Food Act enforced by the Korea Food and Drug Administration in the Republic of Korea;
 
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the Fair Trade Law, which is enforced by the Taiwan Fair Trade Commission and the Administration of Food Hygiene, Health Food Products Administration Act enforced by the Taiwan Department of Health;
 
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the Danish Health Board, the Danish Marketing Practice Act, the Danish Consumer Ombudsman, the Danish Executive Order on Dietary Supplements, the Guidelines for food supplements, and the Danish Act on Foodstuffs in Denmark;
 
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the German Unfair Competition Act, German Regulation on food supplements, and German Law on food and feed;
 
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regulations governing business practices in South Africa;
 
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the Consumer Protection Act, the Sale of Food Act, and various regulations that are governed by the Ministry of Trade and Industry in Singapore;
 
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the Austrian Trade Law (1994), the Food Safety and Consumer Protection Law (2006), and the Food Code in Austria;
 
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the Food and Consumer Products and the Unfair Trade Practices Act, Door to Door Selling Act and Provisions of the General Dutch Civil Code relating to terms and conditions and misleading advertising in the Netherlands;
 
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the Consumer Sales Act, Marketing Practices Act, Distance and Doorstep Sales Act, the Product Liability Act, Product Safety Act, the Companies Act and the Food Act in Sweden;
 
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the Law on Marketing and Contract Conditions, the Law on Repentance Right, the Statutory Order on Self Inspection of Food Provisions, the Law on Food products and Food Safety, and various guidelines from the Norwegian Consumers Agency on telephone selling and internet marketing, in Norway;
 
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various European Union (“EU”) regulations and pronouncements address both our selling activities and the sale of food supplements in EU member nations, however, at the current time the local statutes and regulations stated above are ascendant to the EU pronouncements if in conflict; and
 
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the Health Law and various Official Mexican Standards, the consumer protection law, the Mexican Corporate law, the Foreign Investment Law, the Federal Labor law in Mexico, as well as various municipal and state regulations and codes.
 
Regulations Regarding Network Marketing System and Our Products. Our network marketing system and our global associate career and compensation plan are also subject to a number of governmental regulations including various federal and state statutes administered by the FTC, various state authorities, and foreign government agencies. The legal requirements governing network marketing organizations are directed, in part, to ensure that product sales are ultimately made to consumers. In addition, earnings within a network marketing company must be based on the sale of products rather than compensation for (i) the recruitment of distributors or associates, (ii) investments in the organization, or (iii) other non-retail sales-related criteria. For instance, some countries limit the amount associates may earn from commissions on sales by other distributors or independent associates that are not directly sponsored by that distributor or independent
 
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associate. Prior to expanding our operations into any foreign jurisdiction, we must first obtain regulatory approval for our network marketing system in jurisdictions requiring such approval. To help ensure regulatory compliance, we rely on the advice of our outside legal counsel and regulatory consultants in each specific country.

As a network marketing company, we are also subject to regulatory oversight, including routine inquiries and enforcement actions, from various United States state attorneys general offices. Each state has specific acts referred to as Little FTC Acts. Each state act is similar to the federal laws. As a result, each state may perform its own inquiries about our organization and business practices, including allegations related to distributors or independent associates. To combat such industry-specific risk, we provide a copy of our published associate policies and procedures to each independent associate, publish these policies on our corporate website, and provide educational seminars and publications. In addition, we maintain a legal/compliance department to cooperate with all regulatory agencies and investigate allegations of improper conduct by our independent associates.

In Canada, our network marketing system is regulated by both national and provincial laws. Under Canada’s Federal Competition Act, we must make sure that any representations relating to compensation to our independent associates or made to prospective new independent associates constitute fair, reasonable, and timely disclosure and that such representations meet other legal requirements of the Federal Competition Act. All Canadian provinces and territories, other than Ontario, have legislation requiring that we register or become licensed as a direct seller within that province to maintain the standards of the direct selling industry and to protect consumers. Some other Canadian provinces require that both we and our independent associates be licensed as direct sellers.

In Australia, our network marketing system is subject to Australia’s federal and local regulations. Our global associate career and compensation plan is designed to comply with Australian law and the requirements of Australia’s Trade Practices Act. The Australian Trade Practices Administration and various other governmental entities regulate our business and trade practices, as well as those of our independent associates. Australia’s Therapeutic Goods Act, together with the Trade Practices Act, regulates any claims or representations relating to our products and our global associate career and compensation plan. An agreement to establish a joint scheme for the regulation of therapeutic products was signed by both the New Zealand and Australian governments in December 2003. The agency was initially expected to begin operating in July 2005, but on July 16, 2007, the New Zealand government announced that it will not proceed with legislation for the establishment of the joint agency because it does not have sufficient support of the New Zealand parliament. However, both the Australian and New Zealand governments remain committed to the vision of the joint agency and are expected to revisit it again in the future. The proposed harmonization of laws and regulatory bodies is anticipated to provide a more consistent approach to dietary supplement laws between the two countries.

In New Zealand, our network marketing system and our operations are subject to regulations of the Commerce Commission and the Ministry of Health, New Zealand Medical Devices Safety Authority, the Unsolicited Goods Act of 1975, the Privacy Act of 1993, and the Fair Trading Act of 1993. These regulations enforce specific kinds of business or trade practices and regulate the general conduct of network marketing companies. The Commerce Commission also enforces the Consumer Guarantees Act, which establishes specific rights and remedies with respect to transactions involving the provisions of goods and services to consumers. Finally, the New Zealand Commerce Commission and the Ministry of Health both enforce the Door-to-Door Sales Act of 1967 and the NZ Medicines Act, which govern the conduct of our independent associates.

In the United Kingdom, our network marketing system is subject to national regulations of the United Kingdom. Our global associate career and compensation plan is designed to comply with the United Kingdom’s national requirements, the requirements of the Fair Trading Act of 1973, the Data Protection Act of 1998, the Trading Schemes Regulations of 1997, and other similar regulations. The U.K. Code of Advertising and Sales Promotion regulates our business and trade practices and the activities of our independent associates, while the Trading Standards Office regulates any claims or representations relating to our operations. Our products are regulated by the Medicines and Healthcare Products Regulatory Agency.

In Japan, our network marketing system, overall business operations, trade practices, global associate career and compensation plan, and our independent associates are governed by Japan’s Door-to-Door Sales Law as enacted in 1976 by the Ministry of International Trade and Industry. Our global associate career and compensation plan is designed to meet Japan’s governmental requirements. Our product claims are subject to the Pharmaceutical Affairs Law, which prohibits the making and publication of “drug effectiveness” claims regarding products that have not received approval from Japan’s Ministry of Health, Welfare and Labor.
 
In the Republic of Korea, the primary body of law applicable to our operations is the Door-to-Door Sales Act, which governs the behavior of network marketing companies and affiliated distributors. The Door-to-Door Sales Act is
 
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enforced by the Fair Trade Commission. In the Republic of Korea, our products are categorized as health and functional foods and are regulated by the Health and Functional Food Act of 2004, with which the Company complies.

In Taiwan, our network marketing system, overall operations and trade practices are governed by the Fair Trade Law and the Consumer Protection Law. Such laws contain a wide range of provisions covering trade practices. Our products are governed by the Taiwan Department of Health and various legislation in Taiwan including the Health Food Control Act of 1999. This Act was enacted to enhance the management and supervision of matters relating to health, food, protecting the health of people and safeguarding the rights and interests of consumers.

In Denmark, the notion of door-to-door selling is prohibited. As a result, under Danish law, the trader is not allowed to contact the consumer at his home, place of work, or other non-public place in order to conclude a contract on certain subjects. However, the prohibition has an exemption when the consumer asks the trader for a contact in writing or upon written prior consent. In addition, the Danish Marketing Practices Act, the Guidelines from the Danish Consumerombudsman and the rules contained in the Danish Consumer Contracts Act govern our network marketing system. There is no requirement for pre-approval of our products in Denmark; however, our products are subject to a yearly inspection carried out by the Food authorities. Further, all our activities are subject to Self Inspection, the results of which are also controlled once a year by the Food authorities. The rules for marketing and sale of dietary supplements are covered by the Danish Executive Order on Food Supplements, as well as by the Danish Act on Foodstuffs and various EU-regulations. Denmark also subjects the marketing of a company’s food supplements to a notification procedure (with a pre-market approval process for certain substances), before a product may be lawfully marketed in Denmark. Full product compliance with all Danish provisions is reviewed by the Food authorities once a year.

In Germany, there is no specific legal regulation covering network marketing company practices. However, under certain circumstances network marketing systems may have to follow the German Unfair Competition Act. Our independent associates’ conduct is subject to the German statute that governs the conduct of a commercial agent. In addition, direct selling operations are governed by the Industrial Code, which requires direct sellers to hold itinerant trader’s cards. The German Regulation on food supplements and the German Law on food and feed govern vitamin and mineral substances and herbs and other substances, respectively.

In South Africa, there are no specific regulations for the network marketing industry. In general, the Consumer Affairs Act 1988, the Competition Act 1998, and the Advertising Standards Authority Code of Advertising Practice (a voluntary code enforced by the media) govern business practices. The products are classified as complementary medicines for which there are no specific regulations. The Foodstuffs, Cosmetics and Disinfectants Act 1972, and the Medicines and Related Substances Act 1965, currently apply.

In Singapore, the network marketing industry is governed by the Multi-Level Marketing and Pyramid Selling (Prohibition) (Amendment) Act and the accompanying Pyramid Selling (Excluded Schemes and Arrangements) Order 2000 and Order 2001. General business practices and advertising are regulated under the Consumer Protection (Fair Trading) Act 2003, as amended, and its accompanying regulations. The products are classified as food and supplements of a food nature, which are governed by the Sale of Food Act and the Singapore Food Regulations. Cosmetics and products which rise to the level of medicinal and other health-related products are regulated under various regulations such as the Medicines Act, the Poisons Act, the Sale of Drugs Act, the Medicines (Advertisement and Sale) Act and the Misuse of Drug Regulations.

In Austria, the Austrian Trade Law of 1994 (Novelle 2002) prohibits the offer of direct sale to an individual consumer of food supplement and cosmetic products. The provision, however, has generally not been enforced in recent years and sales made via the Internet or mail order or made to a non-consumer distributor do not fall under this prohibition. The Austrian Trade Law is predominantly administered through the National Ministry of Economy and Labor. Our business operations within Austria are conducted from beyond the borders of Austria which is the common practice in our industry. Our distributors qualify as “traders” for purposes of Austrian state and municipal laws. Traders are regulated by the local chambers of commerce and must obtain licenses from the respective chambers of commerce. Regulation of food supplements and cosmetics is generally harmonized throughout the EU and must conform to EU standards. Austrian-specific food regulations include the Food Safety and Consumer Protection Law (2006), supporting ordinances to this law, the Food Supplement Law, and the Austrian Food Codex, which is primarily administered by the National Ministry of Health, Office for Health and Food Security, and the Local Health Authority.

In Sweden various provisions of the Consumer Sales Act (1990), the Marketing Practices Act (2008), the Distance and Doorstep Sales Act (2005), the Product Liability Act (1992), the Product Safety Act (2004), and the Companies Act (2005) all serve to govern our multi-level marketing (“MLM”) and business activities. The Food Act (2006) provides regulations and guidelines for the sale of food and food supplements. We are subject to the authority of
 
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the Swedish Consumer Office, the Swedish Companies Registration Office, the Swedish Tax Office, Swedish Customs, Medical Products Agency, and the National Food Administration. As in all EU countries various EU regulations and guidelines apply.

In the Netherlands, the Food and Consumer Product and the Unfair Trade Practices Act are the most relevant legislations relating to our business practices. The first is enforced by the Food and Consumer Product Safety Authority and the latter is enforced by the Consumer Authority. Furthermore, various EU regulations apply as well as the Dutch Door to Door Selling Act, and all provisions of the Dutch Civil Code with particular emphasis to those regulations dealing with general terms and conditions, and those regarding misleading advertising.

Norway exercises a border control of products and their composition upon importation. Import products must be registered in an Import Reporting Registry, and the regulations are enforced by the customs authorities. Our products must be compliant with Norwegian regulations in order to be admitted for admission through customs into Norway. In Norway Door-to-Door Selling is allowed, provided the Guidelines from the Norwegian Consumer Agency are followed. Likewise, telephone-selling is allowed provided the agency’s guidelines are followed. Home selling in Norway is also allowed. All of our sales in Norway are subject to a 14-day right to cancel by the consumers.

In Mexico, as in many other markets, there are no specific regulations directly related to the direct selling or network marketing industry. However, all product sales and business offerings must comply with the Consumer Protection Law, which is enforced by the Consumer Protection Agency. Food supplements and medicines are subject to the Health Law and various Official Mexican Standards, which are enforced by the Health Ministry and The Federal Commission for Protection Against Sanitary Risk. Mexican Customs Law and its regulations govern the general importation of our products into Mexico. We are subject to the Mexican Corporate Law, which is enforced by the Mexican courts and to the Federal Labor Law enforced by the Labor Courts. As a company with presence, and transacting business, in Mexico, we are subject to the Foreign Investment Law and its regulations administered by the Ministry of Economy. We are required to register before the Mexican System for Business Information at the appropriate Business Chamber under the Organizations Law.

Other Regulations. Our operations are also subject to a variety of other regulations, including:

·  
social security taxes;
 
·  
value added taxes;
 
·  
goods and services taxes;
 
·  
sales taxes;
 
·  
consumption taxes;
 
·  
income taxes;
 
·  
customs duties;
 
·  
employee/independent contractor regulations;
 
·  
employment, service pay, retirement pay, and profit sharing requirements;
 
·  
import/export regulations;
 
·  
federal securities laws; and
 
·  
antitrust laws.

In many markets, we are limited by the types of rules we can impose on our independent associates, including rules in connection with cooling off periods and termination criteria. If we do not comply with these requirements, we may be required to pay social security, unemployment benefits, workers’ compensation, or other tax or tax-type assessments on behalf of our independent associates and may incur severance obligations if we terminate one of our independent associates.
 
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 In some countries, including the United States, we are also governed by regulations concerning the activities of our independent associates. Regulators may find that we are ultimately responsible for the conduct of our independent associates and may request or require that we take additional steps to ensure that our independent associates comply with these regulations. The types of conduct governed by these types of regulations may include:

·  
claims made about our products;
 
·  
promises or claims of income or other promises or claims by our independent associates; and
 
·  
sales of products in markets where the products have not been approved or licensed.

In some markets, including the United States, improper product claims by independent associates could result in our products being overly scrutinized by regulatory authorities. This review could result in our products being re-classified as drugs or classified into another product category that requires stricter regulations or labeling changes.

We continuously research and monitor the laws governing the conduct of our independent associates, our operations, our global associate career and compensation plan, and our products and sales aids within each of the countries in which we sell our products. We provide education for our independent associates regarding acceptable business conduct in each market through our policies and procedures for independent associates’, seminars, and other training materials and programs. However, we cannot guarantee that our independent associates will always abide by our policies and procedures and/or act in a professional and consistent manner.

Competition

Other Nutritional Supplement Companies. The nutritional supplement industry is steadily gaining momentum and is intensely competitive. Our current direct competitors selling similar nutritional products include:

·  
Herbalife Ltd.;
 
·  
Market America, Inc.;
 
·  
Nature’s Sunshine Products, Inc.;
 
·  
Nu Skin Enterprises, Inc.;
 
·  
Reliv, International Inc;
 
·  
Solgar Vitamin and Herb Company, Inc.;
 
·  
Usana Health Sciences, Inc.;
 
·  
Weider Nutrition; and
 
·  
Schiff Nutrition International, Inc.

Network marketing. Nutritional supplements are offered for sale in a variety of ways. Network marketing has a limited number of individuals interested in participating in the industry, and we must compete for those types of individuals. We believe network marketing is the best sales approach to sell our products for the following reasons:

·  
our products can be introduced into the global marketplace at a much lower up-front cost than through conventional methods;
 
·  
our key ingredients and differential components found in our proprietary products can be better explained through network marketing;
 
·  
the network marketing approach can quickly and easily adapt to changing market conditions;
 
·  
consumers appreciate the convenience of ordering from home, through a sales person, by telephone, or on the Internet; and
 
·  
network marketing enables independent associates to earn financial rewards.

 
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    We compete with other direct selling and network marketing companies for new independent associates and for retention of continuing independent associates. Some of our competitors have longer operating histories, are better known, or have greater financial resources. These companies include:

·  
Amway Corporation;
 
·  
Body Wise International, Inc.;
 
·  
Envion International;
 
·  
Forever Living Products, Inc.;
 
·  
Herbalife International, Inc.;
 
·  
Mary Kay, Inc.;
 
·  
Nature’s Sunshine Products, Inc.;
 
·  
New Vision International;
 
·  
Nu Skin Enterprises, Inc.;
 
·  
Reliv, International Inc.;
 
·  
Shaklee Worldwide; and
 
·  
Usana Health Sciences, Inc.
 
·  
Schiff Nutrition International Inc.

 
The availability of independent associates decreases when other network marketing companies successfully recruit and retain independent associates for their operations. We believe we can successfully compete for independent associates by emphasizing the following:

·  
our unique patented, proprietary blend of high-quality products;
 
·  
our 17-year track record in the business of selling nutritional products;
 
·  
our model which does not require our independent associates to carry inventory or accounts receivable;
 
·  
our unique and financially rewarding global associate career and compensation plan;
 
·  
our innovative marketing and educational tools; and
 
·  
our easy and convenient delivery system.

Employees

At December 31, 2010, we employed 490 people around the world, as set forth below:

 
2010
 
2009
United States
338
 
337
Australia
36
 
38
United Kingdom
30
 
34
Japan
28
 
33
Republic of Korea
27
 
34
Taiwan
18
 
17
Switzerland
6
 
7
Mexico
4
 
Canada
2
 
 
1
South Africa
1
 
1
Total
490
 
502

These numbers do not include our independent associates, who are independent contractors and are not considered employees.

 
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Item 1A. Risk Factors

In addition to the other risks described in this report, the following risk factors should be considered in evaluating our business and future prospects:

 
1.  If we are unable to attract and retain independent associates, our business may suffer.

Our future success depends largely upon our ability to attract and retain a large active base of independent associates and members who purchase our packs and products. We cannot give any assurances that the number of our independent associates will continue at their current levels or increase in the future. Several factors affect our ability to attract and retain independent associates and members, including:

·  
on-going motivation of our independent associates;
 
·  
general economic conditions;
 
·  
significant changes in the amount of commissions paid;
 
·  
public perception and acceptance of the wellness industry;
 
·  
public perception and acceptance of network marketing;
 
·  
public perception and acceptance of our business and our products, including any negative publicity;
 
·  
the limited number of people interested in pursuing network marketing as a business;
 
·  
our ability to provide proprietary quality-driven products that the market demands; and
 
·  
competition in recruiting and retaining independent associates.
 

 
2.  The loss of key high-level independent associate leaders could negatively impact our associate growth and our revenue.

As of December 31, 2010, we had approximately 403,000 independent associates and members who purchased our products within the last 12 months, of which 201 occupied the highest associate level under our global compensation plan. These independent associate leaders are important in maintaining and growing our revenue. As a result, the loss of a high-level independent associate or a group of leading associates in the independent associates’ networks of downlines, whether by their own choice or through disciplinary actions by us for violations of our policies and procedures, could negatively impact our associate growth and our revenue.

 
3.  If our international markets are not successful, our business could suffer.

We currently sell our products in the international markets of Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, Denmark, Germany, South Africa, Singapore, Austria, the Netherlands, Norway, Sweden and, beginning January 24, 2011, Mexico. Nonetheless, our international operations could experience changes in legal and regulatory requirements, as well as difficulties in adapting to new foreign cultures and business customs. If we do not adequately address such issues, our international markets may not meet growth expectations. Our international operations and future expansion plans are subject to political, economic, and social uncertainties, including:

·  
inflation;
 
·  
the renegotiation or modification of various agreements;
 
·  
increases in custom duties and tariffs;
 
·  
changes and limits in export controls;
 
·  
government regulations and laws;
 
·  
trademark availability and registration issues;
 
·  
changes in exchange rates;
 
·  
changes in taxation;
 
·  
wars and other hostilities; and
 
 
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·  
changes in the perception of network marketing.
 
Any negative changes related to these factors could adversely affect our business, profitability, and growth prospects. Furthermore, any negative changes in our distribution channels may force us to invest significant time and money related to our distribution and sales to maintain our position in certain international markets.

 4.  If we are unable to protect our proprietary rights of our products, our business could suffer.

Our success and competitive position largely depends on our ability to protect the following proprietary rights:

·  
Our Ambrotose® complex, a glyconutritional dietary supplement ingredient consisting of a blend of monosaccharides, or sugar molecules, used in the majority of our products;
 
·  
The MTech AO Blend®, our proprietary, patent-pending antioxidant used in the Ambrotose AO® complex; and
 
·  
A compound used in our reformulated Advanced Ambrotose® complex that allows for a more potent concentration of the full range of mannose-containing polysaccharides occurring naturally in aloe.

We have filed patent applications for the technology relating to Ambrotose®, Ambrotose AO®, Phytomatrix®, Gi-ProBalance ™ and FiberSlim® in the United States and certain foreign countries. As of December 31, 2010, we had received 48 patents for the technology relating to Ambrotose® complex, five of which were issued in the United States and the remainder in 29 foreign jurisdictions. In addition, we have entered into confidentiality agreements with our independent associates, suppliers, manufacturers, directors, officers, and consultants to help protect our proprietary rights. Nevertheless, we continue to face the risk that our patent applications for each of these products will be denied or that the patent protection we are granted is more limited than originally requested. As a precaution, we consult with outside legal counsel and consultants to help ensure that we protect our proprietary rights. However, our business, profitability, and growth prospects could be adversely affected if we fail to receive adequate protection of our proprietary rights.

 
5.  Adverse or negative publicity could cause our business to suffer.

Our business depends, in part, on the public’s perception of our integrity and the safety and quality of our products. Any adverse publicity could negatively affect the public’s perception about our industry, our products, or our reputation and could result in a significant decline in our operations and/or the number of our independent associates. Specifically, we are susceptible to adverse or negative publicity regarding:

·  
the nutritional supplements industry;
 
·  
skeptical consumers;
 
·  
competitors;
 
·  
the safety and quality of our products and/or our ingredients;
 
·  
regulatory investigations of our products or our competitors’ products;
 
·  
the actions of our independent associates;
 
·  
the direct selling/network marketing industry; and
 
·  
scandals within the industries in which we operate.
 

For instance, on July 5, 2007, the Texas Attorney General filed suit against us, MannaRelief Ministries, Samuel L.Caster, the Fisher Institute, and H. Reginald McDaniel alleging violations of the Texas Deceptive Trade Practices Act and the Texas Food, Drug and Cosmetic Act.  We subsequently reached an agreement with the Texas Attorney General’s office settling an enforcement action against us, our former Chief Executive Officer and Chairman of the Board, Samuel L. Caster, and others. Without admitting any wrongdoing, we agreed to refund up to $4 million to certain members and pay $2 million to cover fees and expenses of Texas regulators. The settlement did not include any fine or penalty against the Company. We have also taken a number of actions to address concerns raised by the Texas Attorney General’s action. Although the matter has been resolved, the lawsuit created a substantial amount of adverse publicity that may have had and may continue to have a negative impact on our business.

 
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6.  If we are exposed to product liability claims, we may be liable for damages and expenses, which could affect our overall financial condition.

We could face financial liability from product liability claims if the use of our products results in significant loss or injury. We can make no assurances that we will not be exposed to any substantial future product liability claims. Such claims may include claims that our products contain contaminants, that we provide our independent associates and consumers with inadequate instructions regarding product use, or that we provide inadequate warnings concerning side effects or interactions of our products with other substances. We believe that we, our suppliers, and our manufacturers maintain adequate product liability insurance coverage. However, a substantial future product liability claim could exceed the amount of insurance coverage or could be excluded under the terms of an existing insurance policy, which could adversely affect our overall future financial condition.

In recent years a discovery of Bovine Spongiform Encephalopathy, (“BSE”), which is commonly referred to as “Mad Cow Disease”, has caused concern among the general public. As a result, some countries have banned the importation or sale of products that contain bovine materials sourced from locations where BSE has been identified. We have changed the vast majority of our capsules to a vegetable base. However, if a vegetable base is not available or practical for use, certifications are required to ensure the capsule material is BSE-free. The higher costs could affect our financial condition, results of operations, and our cash flows.

 7.  If our outside suppliers and manufacturers fail to supply products in sufficient quantities and in a
timely fashion, our business could suffer.

Outside manufacturers make all of our products. Our profit margins and timely product delivery are dependent upon the ability of our outside suppliers and manufacturers to supply us with products in a timely and cost-efficient manner. Our ability to enter new markets and sustain satisfactory levels of sales in each market depends on the ability of our outside suppliers and manufacturers to provide required levels of ingredients and products and to comply with all applicable regulations. As a precaution, we have approved alternate suppliers and manufacturers for our products. However, the failure of our primary suppliers or manufacturers to supply ingredients or produce our products could adversely affect our business operations.

We believe we have dependable suppliers for all of our ingredients and we have identified alternative sources for all of our ingredients, except Arabinogalactan. Due to the unique nature of Arabinogalactan, an important component used in the formulation of our Ambrotose® complex, we are unable to identify an alternative supplier at this time. If our suppliers are unable to perform, any delay in replacing or substituting such ingredients could affect our business.

The supplier of one of our major product components announced in February 2009 that its processing facility was closed and manufacturing of the component would cease. Alternate sources of supply for this component have been identified and we are in the final stages of executing a contract, but failure to secure another source of supply will adversely affect our business operations.

 
8.  Our inability to develop and introduce new products that gain associate, member, and market acceptance could harm our business.

A critical component of our business is our ability to develop new products that create enthusiasm among our independent associates and members. If we are unable to introduce new products, our associate productivity could be harmed. In addition, if any new products fail to gain market acceptance, are restricted by regulatory requirements or have quality problems, this would harm our results of operations. Factors that could affect our ability to continue to introduce new products include, among others, government regulations, the inability to attract and retain qualified research and development staff, the termination of third-party research and collaborative arrangements, proprietary protections of competitors that may limit our ability to offer comparable products, and the difficulties in anticipating changes in consumer tastes and buying preferences.

 
9.  Our failure to appropriately respond to changing consumer preferences and demand for new products or product enhancements could significantly harm our relationship with independent associates and members, product sales, as well as our financial condition and operating results.

Our business is subject to changing consumer trends and preferences, including rapid and frequent changes in demand for products, new product introductions, and enhancements. Our failure to accurately predict these trends could
 
23

 
negatively impact consumer opinion of our products, which in turn could harm our independent associate and member relationships and cause the loss of sales. The success of our new product offerings and enhancements depends upon a number of factors, including our ability to:

·  
accurately anticipate consumer needs;
 
·  
innovate and develop new products or product enhancements that meet these needs;
 
·  
successfully commercialize new products or product enhancements in a timely manner;
 
·  
price our products competitively;
 
·  
manufacture and deliver our products in sufficient volumes and in a timely manner; and
 
·  
differentiate our product offerings from those of our competitors.
 
If we do not introduce new products or make enhancements to meet the changing needs of our members in a timely manner, some of our products could be rendered obsolete, which could negatively impact our revenues, financial condition, and operating results.

 
10.  The global nutrition industry is intensely competitive and the strengthening of any of our competitors could harm our business.

The global nutrition industry is intensely fragmented and competitive. We compete for independent associates with other network marketing companies outside the global nutrition industry. Many of our competitors have greater name recognition and financial resources, which may give them a competitive advantage. Our competitors may also be able to devote greater resources to marketing, promotional, and pricing campaigns that may influence our continuing and potential independent associates and members to buy products from competitors rather than from us. Such competition could adversely affect our business and current market share.

 
11.  A downturn in the economy has affected consumer purchases of discretionary items such as the health and wellness products that we offer, which could continue to have an adverse effect on our business, financial condition, profitability and cash flows.

We appeal to a wide demographic consumer profile and offer a broad selection of health and wellness products. A downturn in the economy has adversely impacted consumer purchases of discretionary items such as health and wellness products. During calendar years 2008 through 2010, the United States and global economies slowed dramatically as a result of a variety of problems, including turmoil in the credit and financial markets, concerns regarding the stability and viability of major financial institutions, the state of the housing markets and volatility in worldwide stock markets. Given the significance and widespread nature of these nearly unprecedented circumstances, the U.S. and global economies could remain significantly challenged in a recessionary state for an indeterminate period of time. These economic conditions could cause many of our existing and potential associates to delay or reduce purchases of our products for some time, which in turn could continue to harm our business by adversely affecting our revenues, results of operations, cash flows and financial condition. We cannot predict the duration of these economic conditions or the impact they will have on our consumers or business. For additional information regarding current economic conditions and their impact on our results of operations, refer to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 
12.  If we incur substantial liability from litigation, complaints, or enforcement actions or incur liabilities or penalties resulting from misconduct by our independent associates, our financial condition could suffer.

Routine enforcement actions and complaints are common in our industry. Although we believe we fully cooperate with regulatory agencies and use various means to address misconduct by our independent associates, including maintaining policies and procedures to govern the conduct of our independent associates and conducting training seminars, it is still difficult to detect and correct all instances of misconduct. Violations of our policies and procedures by our independent associates could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or foreign regulatory authorities against us and/or our independent associates in each country. Because we have expanded into foreign countries, our policies and procedures for our independent associates differ depending on the different legal requirements of each country in which an independent associate does business. Any future litigation, complaints, and enforcement actions involving us and/or our independent associates could consume
 
24

 
considerable amounts of financial and other corporate resources, which could have a negative impact on our business, profitability, and growth prospects.

 
13.  Challenges by private parties to the form of our network marketing system could harm our business.

We may be subject to challenges by private parties, including our independent associates and members, to the form of our network marketing system or elements of our business. In the United States, the network marketing industry and regulatory authorities have relied on the implementation of distributor rules and policies designed to promote retail sales to protect consumers, prevent inappropriate activities, and distinguish between legitimate network marketing distribution plans and unlawful pyramid schemes. We have adopted rules and policies based on case law, rulings of the FTC, discussions with regulatory authorities in several states, and domestic and global industry standards. Legal and regulatory requirements concerning network marketing systems, however, involve a high level of subjectivity, are inherently fact-based, and are subject to judicial interpretation. Because of this, we can provide no assurance that we would not be harmed by the application or interpretation of statutes or regulations governing network marketing, particularly in any civil challenge by a current or former independent associate or member.

 
14.  If our network marketing activities do not comply with government regulations, our business could suffer.

Many governmental agencies regulate our network marketing activities. A government agency’s determination that our business or our independent associates have significantly violated a law or regulation could adversely affect our business. The laws and regulations for network marketing intend to prevent fraudulent or deceptive schemes. Our business faces constant regulatory scrutiny due to the interpretive and enforcement discretion given to regulators, periodic misconduct by our independent associates, adoption of new laws or regulations, and changes in the interpretation of new or existing laws or regulations. For example, in July 2007, the Texas Attorney General filed suit against us, MannaRelief Ministries, Samuel L.Caster, the Fisher Institute, and H. Reginald McDaniel alleging violations of the Texas Deceptive Trade Practices Act and the Texas Food, Drug and Cosmetic Act. We subsequently reached an agreement with the Texas Attorney General’s office settling the enforcement action. Without admitting any wrongdoing, we agreed to refund up to $4 million to certain members and paid $2 million to cover fees and expenses of Texas regulators. We also made certain corporate governance changes required by the Texas Attorney General’s office and agreed not to violate certain provisions of the Texas Deceptive Trade Practices Act and Texas Food, Drug and Cosmetic Act. If we are unable to comply fully with the provisions of the settlement, Texas regulators could pursue further remedies that may impact our business.

In addition, in the past and because of the industry in which we operate, we have experienced inquiries regarding specific independent associates.

 
15.  If government regulations regarding network marketing change or are interpreted or enforced in a manner adverse to our business, we may be subject to new enforcement actions and material limitations regarding our overall business model.

Network marketing is always subject to extensive governmental regulations, including foreign, federal, and state regulations. Any change in legislation and regulations could affect our business. Furthermore, significant penalties could be imposed on us for failure to comply with various statutes or regulations. Violations may result from:

·  
misconduct by us or our independent associates;
 
·  
ambiguity in statutes;
 
·  
regulations and related court decisions;
 
·  
the discretion afforded to regulatory authorities and courts interpreting and enforcing laws; and
 
· 
new regulations or interpretations of regulations affecting our business.

 
16.  If we violate governmental regulations or fail to obtain necessary regulatory approvals, our operations could be adversely affected.

Our operation is subject to extensive laws, governmental regulations, administrative determinations, court
decisions, and similar constraints at the federal, state, and local levels in our domestic and foreign markets. These regulations primarily involve the following:
 
25

 
·  
the formulation, manufacturing, packaging, labeling, distribution, importation, sale, and storage of our products;
 
·  
the health and safety of dietary supplements, cosmetics and foods;
 
·  
trade practice laws and network marketing laws;
 
·  
our product claims and advertising by our independent associates;
 
·  
our network marketing system;
 
·  
pricing restrictions regarding transactions with our foreign subsidiaries or other related parties and similar regulations that affect our level of foreign taxable income;
 
·  
the assessment of customs duties;
 
·  
further taxation of our independent associates, which may obligate us to collect additional taxes and maintain additional records; and
 
·  
export and import restrictions.

Any unexpected new regulations or changes in existing regulations could significantly restrict our ability to continue operations, which could adversely affect our business. For example, changes regarding health and safety, and food and drug regulations for our nutritional products could require us to reformulate our products to comply with such regulations.

In some foreign countries, nutritional products are considered foods, while other countries consider them drugs. Future health and safety or food and drug regulations could delay or prevent our introduction of new products or suspend or prohibit the sale of existing products in a given country or marketplace. In addition, if we expand into other foreign markets, our operations or products could also be affected by the general stability of foreign governments and the regulatory environment relating to network marketing and our products. If our products are subject to high customs duties, our sales and competitive position could suffer as compared to locally produced goods. Furthermore, import restrictions in certain countries and jurisdictions could limit our ability to import products from the United States.

 
17.  Increased regulatory scrutiny of nutritional supplements as well as new regulations that are being adopted in some of our markets with respect to nutritional supplements could result in more restrictive regulations and harm our results if our supplements or advertising activities are found to violate existing or new regulations or if we are not able to effect necessary changes to our products in a timely and efficient manner to respond to new regulations.

There has been an increasing movement in the United States and other markets to increase the regulation of dietary supplements, which could impose additional restrictions or requirements on us and increase the cost of doing business. In several of our markets, new regulations have been adopted, or are likely to be adopted, in the near-term that will impose new requirements, make changes in some classifications of supplements under the regulations, or limit the claims we can make. In addition, there has been increased regulatory scrutiny of nutritional supplements and marketing claims under existing and new regulations. In Europe for example, we are unable to market supplements that contain ingredients that have not been previously marketed in Europe (“novel foods”) without going through an extensive registration and approval process. Europe is also expected to adopt additional regulations in the near future to set new limits on acceptable levels of nutrients. The FDA has implemented Good Manufacturing Practices for the U.S. nutritional supplement industry. Our operations could be harmed if new regulations require us to reformulate products or effect new registrations, if regulatory authorities make determinations that any of our products do not comply with applicable regulatory requirements, if the cost of complying with regulatory requirements increases materially, or if we are not able to effect necessary changes to our products in a timely and efficient manner to respond to new regulations. In addition, our operations could be harmed if governmental laws or regulations are enacted that restrict the ability of companies to market or distribute nutritional supplements, impose additional burdens, or requirements on nutritional supplement companies.

 18.  If our information technology system fails, our operations could suffer.

Like many companies, our business is heavily dependent upon our information technology infrastructure to effectively manage and operate many of our key business functions, including:
·  
order processing;
 
·  
supply chain management;
 
·  
customer service;
 
26

 
·  
product distribution;
 
·  
commission processing;
 
·  
cash receipts and payments; and
 
·  
financial reporting.

These systems and operations are vulnerable to damage and interruption from fires, earthquakes, telecommunications failures, and other events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Although we maintain an extensive security system and disaster recovery program that was developed under the guidelines published by the National Institute of Standards of Technology, a long-term failure or impairment of any of our information technology systems could adversely affect our ability to conduct day-to-day business.

 19.  Currency exchange rate fluctuations could reduce our overall profits.

In 2010 and 2009, we recognized 55.9% and 51.4%, respectively, of net sales in markets outside of the United States. In preparing our consolidated financial statements, certain financial information is required to be translated from foreign currencies to the United States dollar using either the spot rate or the weighted-average exchange rate. If the United States dollar changes relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate. We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations. To date, we have not entered into any hedging contracts or participated in any hedging or derivative activities.

 
20.  We may be held responsible for certain taxes or assessments relating to the activities of our independent associates, which could harm our financial condition and operating results.

Our independent associates are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes, and to maintain appropriate tax records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our distributors. In the event that local laws and regulations require us to treat our independent distributors as employees, or if our distributors are deemed by local regulatory authorities to be our employees, rather than independent contractors, we may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results.

 
21. Our Equity Line with Dutchess may not be available to us if we elect to make a draw down.
 
         On September 16, 2010, we entered into an Investment Agreement (the “Investment Agreement”) with Dutchess Opportunity Fund II, LP, a Delaware limited partnership (the “Investor”). Pursuant to the Investment Agreement, the Investor committed to purchase, subject to certain restrictions and conditions, up to $10,000,000 of our common stock, over a period of 36 months from the first trading day following the effectiveness of the registration statement registering the resale of shares purchased by the Investor pursuant to the Investment Agreement (the “Equity Line”). The aggregate number of shares of common stock issuable by us and purchasable by the Investor under Investment Agreement is 5,000,000. Dutchess will not be obligated to purchase shares under the Equity Line unless certain conditions are met, which include: effectiveness of the registration statement; the continued listing of our stock on the NASDAQ Global Market; our compliance with our obligations under the Investment Agreement and Registration Rights Agreement entered into with Dutchess; the absence of injunctions or other governmental actions prohibiting the issuance of common stock to Dutchess; the absence of violations of shareholder approval requirements with respect to such issuance of our common stock to Dutchess; the accuracy of representations and warranties made to Dutchess; and approval of the Equity Line transaction by our board of directors. If we are unable to access funds through the Equity Line, we may be unable to access capital on favorable terms or at all.
 
27

 
  22. Any draw downs under our Equity Line with Dutchess may result in dilution to our shareholders.
 
         If we sell shares to Dutchess under the Equity Line, it will have a dilutive effect on the holdings of our current shareholders, and may result in downward pressure on the price of our common stock. If we draw down amounts under the Equity Line, we will issue shares to Dutchess at a discount of up to 4% from the average price of our common stock. If we draw down amounts under the Equity Line when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if our share price were stable or increasing, and may further decrease our share price.

  23.  Our stock price is volatile and may fluctuate significantly.

The price of our common stock is subject to sudden and material increases and decreases. Decreases could adversely affect investments in our common stock. The price of our common stock and the price at which we could sell securities in the future could significantly fluctuate in response to:

·  
broad market fluctuations and general economic conditions;
 
·  
fluctuations in our financial results;
 
·  
future securities offerings;
 
·  
changes in the market’s perception of our products or our business, including false or negative publicity;
 
·  
governmental regulatory actions;
 
·  
the outcome of any lawsuits;
 
·  
financial and business announcements made by us or our competitors;
 
·  
the general condition of the industry; and
 
·  
the sale of large amounts of stock by insiders.

In addition, the stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies. The changes sometimes appear to occur without regard to specific operating performance. The price of our common stock in the open market could fluctuate based on factors that have little or nothing to do with us or that are outside of our control.

 
24.  Certain shareholders, directors, and officers own a significant amount of our stock, which could allow them to influence corporate transactions and other matters.

 As of December 31, 2010, our directors, executive officers, and a major shareholder, collectively with their families and affiliates, beneficially owned approximately 40.5% of our total outstanding common stock. As a result, if two or more of these shareholders choose to act together based on their current share ownership, they may be able to control a significant percentage of the total outstanding shares of our common stock, which could affect the outcome of a shareholder vote on the election of directors, the adoption of stock option plans, the adoption or amendment of provisions in our articles of incorporation and bylaws, or the approval of mergers and other significant corporate transactions.

 25.  We have implemented anti-takeover provisions that may help discourage a change of control.

Certain provisions in our articles of incorporation, bylaws, and the Texas Business Organization Code help discourage unsolicited proposals to acquire our company, even if the proposal may benefit our shareholders. Our articles of incorporation authorize the issuance of preferred stock without shareholder approval. Our Board of Directors has the power to determine the price and terms of any preferred stock. The ability of our Board of Directors to issue one or more series of preferred stock without shareholders’ approval could deter or delay unsolicited changes of control by discouraging open market purchases of our common stock or a non-negotiated tender or exchange offer for our common stock. Discouraging open market purchases may be disadvantageous to our shareholders who may otherwise desire to participate in a transaction in which they would receive a premium for their shares.

In addition, other provisions may also discourage a change of control by means of a tender offer, open market purchase, proxy contest or otherwise. Our charter documents provide for three classes of directors on our Board of Directors with members of each class serving staggered three year terms. In addition, the Texas Business Organization Code restricts, subject to exceptions, business combinations with any “affiliated shareholder.” Any or all of these provisions could delay, deter or help prevent a takeover of our Company and could limit the price investors are willing to pay for our common stock.
 
28

 
 
26.  We are not required to pay dividends, and our Board of Directors may decide not to declare dividends in the future.

The declaration of dividends on our common stock is solely within the discretion of our Board of Directors, subject to limitations under Texas law stipulating that dividends may not be paid if payment therefore would cause the corporation to be insolvent or if the amount of the dividend would exceed the surplus of the corporation. Our Board of Directors may decide not to declare dividends or we could be prevented from declaring a dividend because of legal or contractual restrictions. The failure to pay dividends could reduce our stock price. Our Board of Directors suspended dividends in August 2009. We may not resume payment of dividends in the future.

 27.  Concentration Risk

A significant portion of our revenue is derived from our core Ambrotose® complex products which include the Ambrotose® products and Advanced Ambrotose® products. A decline in sales value of such legacy products could have a material adverse effect on our earnings, cash flows, and financial position. Revenue from the core Ambrotose® products were as follows for the years ended December 31, 2010 and 2009 (in thousands, except percentages):

 
2010
   
2009
 
Sales by
product
 
% of total
net sales
   
Sales by
product
 
% of total
net sales
 
Advanced Ambrotose®
$
61,458
 
26.9
%
 
$
65,360
 
22.6
%
Ambrotose®
 
19,078
 
  8.4
%
   
25,413
 
  8.8
%
Total
$
80,536
 
35.3
%
 
$
90,773
 
31.4
%
 
       Our business is not currently exposed to customer concentration risk given that no independent associate has ever accounted for more than 10% of our consolidated net sales.
 
       Circumstances and conditions may change. Accordingly, additional risks and uncertainties not currently known, or that we currently deem not material, may also adversely affect our business operations.

 
29

 

Item 1B.  Unresolved Staff Comments

None.

Item 2.     Properties

We lease property at several locations for our headquarters and distribution facilities, including:

Location
Size
 
Original
term
 
Expiration
date
 
Coppell, Texas (corporate headquarters)
110,000
sq. feet
 
10
years
 
March 2017
 
Coppell, Texas (distribution center)
75,000
sq. feet
 
10
years
 
March 2017
 
St. Leonards, Australia (Australian headquarters)
 850
sq. meters(1)
 
5
years
 
August 2013
 
Didcot, Oxfordshire (combined U.K. headquarters and
distribution center)
16,631
sq. feet
 
5
years
 
July 2011
Minato-ku, Tokyo, Japan (Japanese headquarters)
 296
Tsubos(2)
 
2
years
 
November 2012
Ganganm-gu, Seoul, Korea (Republic of Korea headquarters)
717
Pyong (3)
 
3
years
 
June 2013
Taipei, Taiwan (Taiwan headquarters)
 254
pings (4)
 
3
years
 
June 2011
Zug, Switzerland (Switzerland headquarters)
 680
sq. meters(5)
 
5
years
 
October 2013
Markham, Ontario (Canada headquarters)
3,097
sq. feet
 
3
 years
 
September 2012
Bedfordview, South Africa
383
sq. meters(6)
 
5
 years
 
March 2015
Guadalajara, Mexico (customer service center)
1550
sq. meters(7)
 
5.25
 years
 
February 2016
Mexico City, Mexico (customer service center)
179
sq. meters(8)
 
5
 years
 
November 2015

______________________
 
(1) Approximately 9,149 square feet.
 
(2) Approximately 10,538 square feet.
 
(3) Approximately 25,526 square feet.
 
(4) Approximately 9,021 square feet.
 
(5) Approximately 7,324 square feet.
 
(6) Approximately 4,119 square feet.
 
(7) Approximately 16,684 square feet.
 
(8) Approximately 1,926 square feet.

Our main distribution facility is located in Coppell, Texas and consists of 75,000 square feet of leased space that houses an automated distribution system capable of processing up to 18,000 orders per day. In 2005, we opened a distribution facility in the United Kingdom, which is located in Didcot, Oxfordshire and is capable of processing up to 650 orders per day. Both distribution centers currently operate well below full capacity and are capable of supporting our planned sales volume growth in the foreseeable future.

To maximize our operating strategy and minimize costs, we continue to contract with third-party distribution and fulfillment facilities in Canada, Australia, Japan, the Republic of Korea, Taiwan,  South Africa, and Mexico. By entering into these third-party distribution facility agreements, our smaller offices maintain flexible operating capacity, minimize shipping costs, and are able to process an order within 24-hours after order placement and receipt of payment.

Item 3.    Legal Proceedings

See “Litigation” in Note 13 of the Notes to our Consolidated Financial Statement, which is incorporated herein by reference.

Item 4.    Removed and Reserved

 
30

 

PART II

Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market for Our Common Stock. On February 12, 1999, we completed our initial public offering and on February 16, 1999, our common stock began trading on the NASDAQ Global Market (formerly the NASDAQ National Market) under the symbol “MTEX.” The NASDAQ Global Select Market is a segment of the NASDAQ Global Market with the highest initial listing standards of any exchange in the world. Beginning July 3, 2006, NASDAQ moved our common stock to the NASDAQ Global Select Market. As of March 4, 2011, we had an aggregate of 26,490,466 shares of our common stock outstanding and the closing price on such date was $1.88. Below are the high and low closing prices of Mannatech’s common stock as reported on the NASDAQ for each quarter of the fiscal years ended December 31, 2010 and 2009:

2010:
Low
 
High
First Quarter
 
$
2.78
 
$
4.41
 
Second Quarter
 
$
1.89
 
$
4.23
 
Third Quarter
 
$
2.00
 
$
2.98
 
Fourth Quarter
 
$
1.62
 
$
2.19
 
2009:
             
First Quarter
 
$
2.50
 
$
3.90
 
Second Quarter
 
$
2.97
 
$
4.73
 
Third Quarter
 
$
3.13
 
$
4.80
 
Fourth Quarter
 
$
2.34
 
$
3.89
 

Holders. As of March 4, 2011, we had 3,200 shareholders of record who held approximately 26% of our common stock directly and 130 security brokers and dealers who held approximately 74% of our common stock on behalf of approximately 9,200 shareholders.

Dividends. Our quarterly cash dividends were $0.02 per share for the first and second quarters of 2009. In the third quarter of 2009, our 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. See “Risk FactorsWe are not required to pay dividends, and our Board of Directors may decide not to declare dividends in the future” in Item 1A of this Form 10-K for further discussion related to future payment of dividends.

Stock Options. The following table provides information as of March 4, 2011 about our common stock that may be issued upon the exercise of stock options under our existing stock option plan.

Plan Category
 
Number of securities to be issued upon exercise of outstanding options, warrants, and rights
(a)
 
Weighted-average
exercise price of
outstanding options, warrants, and rights
(b)
 
Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities reflected in column (a))
(c)
Equity compensation plan
 
1,384,401
 
$
2.89
 
356,998
Equity compensation plans not approved by Shareholders
 
   
 
Total
 
1,384,401
       
356,998


In February 2008, our Board of Directors approved our 2008 Stock Incentive Plan (the “2008 Plan”), which reserves up to 1,000,000 shares of common stock for issuance of stock options and restricted stock to our employees, board members, and consultants, plus any shares reserved under our then-existing, unexpired stock plans for which options had not been issued, and any shares underlying outstanding options under the then-existing stock option plans that terminate without having been exercised in full. The 2008 Plan was approved by our shareholders at our 2008 Annual Shareholders’ Meeting. Currently, the 2008 Plan is the one stock incentive plan under which we may grant options.
 
31

 
At the 2010 Annual Shareholders’ Meeting, shareholders approved an amendment to the 2008 Plan to permit a one-time stock option exchange program. On July 16, 2010, we commenced the option exchange program (the “Exchange Program”) whereby employees (including officers), directors, and consultants could elect to exchange their “out of the money” stock options for new options at a lower exercise price. The Exchange Program expired on August 13, 2010. On August 16, 2010, pursuant to the Exchange Program, an aggregate of 784,930 eligible options were tendered and accepted by the Company in exchange for the grant of an aggregate of 440,558 replacement options.

All of the replacement options granted pursuant to the Exchange Program have an exercise price of $2.46 and were granted under the 2008 Plan, as amended. Each replacement option vests annually in ⅓ installments starting one year from the grant date and has a term of 10 years. Incremental stock option expense resulting from the exchange was minimal because the fair value of the replacement options was approximately equal to the fair value of the surrendered options they replaced.


Sales of Unregistered Securities.

None.

Uses of Proceeds from Registered Securities.

None.

Issuer Purchases of Equity Securities.

None.

 
32

 

 
Performance Graph.

 
Our common stock began trading on the NASDAQ Global Market (formerly the NASDAQ National Market) on February 16, 1999. Set forth below is information comparing the cumulative total shareholder return and share price appreciation plus dividends on our common stock with the cumulative total return of the S&P Midcap Index and a market weighted index of publicly traded peers for the period from December 31, 2005 through December 31, 2010. The comparison assumes that $100 is invested in shares of our common stock, the S&P Midcap Index and an index of publicly traded peers on January 1, 2006, and that all dividends were reinvested. The publicly-traded companies in our peer group are Schiff Nutrition International Inc. (NYSE Symbol WNI), Herbalife Ltd. (NYSE Symbol HLF) Nature’s Sunshine Products, Inc. (NYSE Symbol NATR), USANA Health Sciences, Inc.(NADSAQ Symbol USNA), and Nu Skin Enterprises, Inc. (NYSE Symbol NUS).
 
The following graph also includes the S&P SmallCap Index that we will be using in the future instead of the S&P MidCap Index. We have selected this new index due to a decrease in our market capitalization in recent years. The S&P SmallCap Index includes companies whose equity securities are of comparable market capitalization. For the purposes of comparison, the stock performance graph below includes the new index and the previously reported index. The comparisons are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
 

 
 

 
Company/Market/Peer Group
12/31/2005
12/31/2006
12/31/2007
12/31/2008
12/31/2009
12/31/2010
Mannatech, Inc.
$100.00
$108.97
$48.44
$19.55
$25.18
$14.57
S&P SmallCap Index
$100.00
$115.12
$114.78
$79.11
$99.34
$125.48
S&P MidCap Index
$100.00
$110.32
$119.12
$75.96
$104.36
$132.16
Peer Group Index
$100.00
$117.37
$110.31
$71.85
$135.17
$196.26


 
33

 

Item 6.     Selected Financial Data

The Selected Financial Data set forth below for each of the five years ended December 31, have been derived from and should be read in conjunction with (A) Our Consolidated Financial Statements and related notes set forth in Item 15 of this report, and (B) Our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Item 7 of this report.

   
2010
 
2009
 
2008
 
2007
 
2006(1)
 
Consolidated Statements of Operations Data:
 
(in thousands, except per share amounts)
 
Net sales
 
$
228,088
 
$
289,705
 
$
332,703
 
$
412,678
 
$
410,069
 
Gross profit
 
$
98,015
 
$
96,477
 
$
134,544
 
$
163,846
 
$
169,393
 
Income (loss) from operations
 
$
(11,481
)
$
(25,594
)
$
(14,499
)
$
7,609
 
$
44,074
 
Net income (loss)
 
$
(10,616
)
$
(17,368
)
$
(12,628
)
$
6,594
 
$
32,390
 
Earnings (loss) Per Common Share:
                               
Basic
 
$
(0.40
)
$
(0.66
)
$
(0.48
)
$
0.25
 
$
1.22
 
Diluted
 
$
(0.40
)
$
(0.66
)
$
(0.48
)
$
0.25
 
$
1.19
 
Weighted-Average Common Shares Outstanding:
                               
Basic
   
26,488
   
26,467
   
26,461
   
26,443
   
26,598
 
Diluted
   
26,488
   
26,467
   
26,461
   
26,893
   
27,219
 
Other Financial Data:
                               
Capital expenditures
 
$
3,764
 
$
4,896
 
$
5,633
 
$
13,446
 
$
27,216
 
Dividends declared per common share
 
$
 
$
0.04
 
$
0.22
 
$
0.36
 
$
0.32
 
Consolidated Balance Sheet Data:
                               
Total assets
 
$
81,423
 
$
102,302
 
$
124,058
 
$
152,454
 
$
152,235
 
Long-term liabilities
 
$
8,103
 
$
8,339
 
$
9,813
 
$
9,431
 
$
11,402
 

______________________________________
 
(1) We capitalized $18.4 million of costs related to our internally-developed software projects, which were completed in April 2007. In addition, we recognized an income tax benefit of $3.3 million associated with income tax credits for our research and experimentation activities.


 
34

 

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in the understanding of our consolidated financial position and our results of operations for each of the three years ended December 31, 2010, 2009, and 2008. This discussion should be read in conjunction with “Item 15. – Consolidated Financial Statements and related Notes,” beginning on page F-1 of this report and with other financial information included elsewhere in this report. Unless stated otherwise, all financial information presented below, throughout this report, and in the consolidated financial statements and related notes includes Mannatech and all of our subsidiaries on a consolidated basis.

Company Overview

Since November 1993, we have continued to develop innovative, high-quality, proprietary nutritional supplements, topical and skin care products, and weight-management products that are sold through a global network marketing system. We operate 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, Sweden and, beginning January 24, 2011, Mexico. The Switzerland office was created to manage certain day-to-day business needs of non-North American markets.

We conduct our business as a single operating segment and primarily sell our products through a network of approximately 403,000 independent associates and members who had purchased our products and/or packs within the last 12 months, who we refer to as current independent associates and members. New recruits and pack sales are leading indicators for the long-term success of our business. New recruits include new independent associates and members purchasing 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 seventeen countries. We review and analyze net sales by geographical location and by packs and products on a consolidated basis. Each of our subsidiaries sells similar products and exhibits similar economic characteristics, such as selling prices and gross margins.
 
Because we sell our products through network marketing distribution channels, the opportunities and challenges that affect us most are: recruitment of new and retention of independent associates and members; entry into new markets and growth of existing markets; niche market development; new product introduction; and investment in our infrastructure.

Current Economic Conditions and Recent Developments

During 2010, we continued to feel the negative impact of the weak economic environment. In addition, we experienced increased competition in certain international markets where competitors launched operations, and in some cases made attempts to attract some of our independent associate field leaders. Reduction in the number of associate recruits and loss of active associates were major factors that negatively influenced our financial results throughout 2010.

In response to adverse market conditions, we implemented various initiatives to reduce expenses over the last few years. By establishing a culture of expense control and accountability, we achieved a significant decrease in operating expenses and maintained that level of expense control through 2010. At the same time, we remained committed to our strategic plan of developing new, innovative, and scientifically validated products, international expansion, and strengthening financial results.

We continue to expand internationally and, in January 2011, began selling products in Mexico. We have office locations in both Guadalajara and Mexico City, as well as a distribution center located in Monterrey. During 2010, our operating expenses associated with the Mexico launch totaled $1.1 million. Mexico is one of the most important international market openings we have ever undertaken as we believe it has a significant sales volume potential. According to the Direct Selling Association, Mexico is the sixth largest direct selling market in the world. Our expansion into Mexico complements our existing presence in North America while highlighting our continued focus on global expansion.

We continue to focus on new product development. In late September 2010, we launched our exclusive, age-defying product line, the Mannatech LIFTTM skin care system. The Mannatech LIFTTM skin care line is an innovative system formulated to reduce the signs of aging and improve the youthful radiance of skin in three easy steps. The line is paraben-free and features our Jeunesse 7™ proprietary blend – a combination of our signature glyconutrients and a French
 
35

 
green clay. These features collectively make the Mannatech LIFTTM line a natural, age-defying skin care system unique to the industry. In addition, we expanded several previously launched products in our domestic line to our international markets in 2010. Sales of Essential Source™ Omega-3 and PhytoBurst™ Nutritional Chews, two products introduced in 2009, also remained strong in 2010. Ambrotose®, a glyconutrient product originally launched in 1996, remains our best-selling product.

In addition to our innovative product development, we continue to invest in research for our existing products. In 2010, our collaborative research projects included various tests and studies performed on our family of Ambrotose® products, newly introduced LIFTTM skin care system, and EM·PACT® sports drink. Additional clinical and pre-clinical studies are scheduled to be conducted in 2011.

We strive to ensure that all of our products meet the strictest quality guidelines. In the third quarter of 2010, the International Sport Karate Association (ISKA) certified Mannatech as its official dietary supplement provider. Several of our products will feature the “ISKA Certified for Elite Athletes” seal on the label, which will be the only health supplements on the market to feature this seal on its packaging. The certification program was developed by ISKA to recognize high-quality dietary supplements. ISKA and Mannatech’s exclusive initial partnership will last until 2012, with an option to renew.

Even during difficult times, we maintain our focus to be a generous and socially responsible company. We continue our charitable donations to MannaRelief, a non-profit organization that provides charitable services for children in need. In 2010, MannaRelief and Mannatech partnered together to launch the Give for RealSM program. This “donation-through-consumption” initiative was designed to allow consumers and associates to help undernourished children around the world. For every purchase on an automatic order containing Ambrotose® complex powder, Advanced Ambrotose® powder, MannaBears™ gummies, PhytoMatrix® caplets, PhytoBurst® nutritional chews, or Optimal Support Packets, a donation of Mannatech’s nutritional supplements is provided through MannaRelief to children in need worldwide. In 2010, we provided an additional $166,000 in donations to MannaRelief as a result of the Give For RealSM program. MannaRelief and Mannatech’s goal is to connect one million sponsors to one million undernourished children.

We believe our aggressive cost reduction, new product introduction, international expansion, and financial discipline will help us effectively manage through the challenging economy. We believe that achieving desired levels of revenues and profitability in the future will depend largely upon our ability to attract and retain associates. In the short term, our focus is on restoring sales volume by recruiting associates and increasing consumer confidence, continued expense control, emphasizing the value and benefits of our flagship product, Ambrotose®, and maintaining charitable donations through the Give for RealSM initiative.
 
36

 

Results of Operations

Year Ended December 31, 2010 compared to Year Ended December 31, 2009

The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2010 and 2009 (in thousands, except percentages).

 
2010
 
2009
 
Change
 
Total
Dollars
 
% of
net sales
 
Total
dollars
 
% of
net sales
 
Dollar
 
Percentage
Net sales
$
228,088
 
100
%
 
$
289,705
 
100
%
$
(61,617
)
(21.3
)%
Cost of sales
 
32,754
 
14.4
%
   
46,813
 
16.2
%
 
(14,059
)
(30.0
)%
Commissions and incentives
 
97,319
 
42.7
%
   
146,415
 
50.5
%
 
(49,096
)
(33.5
)%
   
130,073
 
57.0
%
   
193,228
 
66.7
%
 
(63,155
)
(32.7
)%
Gross profit
 
98,015
 
43.0
%
   
96,477
 
33.3
%
 
1,538
 
1.6
%
                                   
Operating expenses:
                               
Selling and administrative expenses
 
62,657
 
27.5
%
   
69,997
 
24.2
%
 
(7,340
)
(10.5
)%
Depreciation and amortization
 
11,517
 
5.0
%
   
12,333
 
4.3
%
 
(816
)
(6.6
)%
Other operating costs
 
35,322
 
15.5
%
   
39,741
 
13.7
%
 
(4,419
)
(11.1
)%
Total operating expenses
 
109,496
 
48.0
%
   
122,071
 
42.1
%
 
(12,575
)
(10.3
)%
Loss from operations
 
(11,481
)
(5.0
)%
   
(25,594
)
(8.8
)%
 
14,113
 
55.1
%
Interest income
 
173
 
0.1
%
   
473
 
0.2
%
 
(300
)
(63.4
)%
Other income, net
 
268
 
0.1
 %
   
1,046
 
0.4
 %
 
(778
)
(74.4
)%
Loss before income taxes
 
(11,040
)
(4.8
)%
   
(24,075
)
(8.3
)%
 
13,035
 
54.1
%
Benefit for income taxes
 
424
 
0.2
%
   
6,707
 
2.3
%
 
(6,283
)
(93.7
)%
Net loss
$
(10,616
)
(4.7
)%
 
$
(17,368
)
(6.0
)%
$
6,752
 
38.9
%


 
37

 

For geographical purposes, consolidated net sales shipped to customers by location for the years ended December 31, 2010 and 2009 were as follows (in millions, except percentages):

Net Sales in Dollars and as a Percentage of Consolidated Net Sales

   
2010
 
2009
United States
 
$
100.8
 
44.1
%
 
$
140.7
 
48.6
%
Japan
   
34.2
 
15.0
%
   
42.0
 
14.5
%
Republic of Korea
   
22.0
 
9.6
%
   
26.4
 
9.1
%
Australia
   
20.0
 
8.8
%
   
22.9
 
7.9
%
Canada
   
18.5
 
8.1
%
   
23.0
 
7.9
%
South Africa
   
12.0
 
5.3
%
   
13.2
 
4.6
%
Taiwan
   
6.4
 
2.8
%
   
6.6
 
2.3
%
New Zealand
   
3.1
 
1.4
%
   
4.3
 
1.5
%
United Kingdom
   
2.4
 
1.1
%
     
3.3
 
1.0
%
Germany
   
2.3
 
1.0
%
   
3.2
 
1.1
%
Singapore
   
2.1
 
0.9
%
   
1.5
 
0.5
%
Norway(1)
   
1.6
 
0.7
%
   
0.3
 
0.1
%
Austria(1)
   
1.1
 
0.5
%
   
0.3
 
0.1
%
The Netherlands(1)
   
0.6
 
0.3
%
   
0.2
 
0.1
%
Sweden(1)
   
0.5
 
0.2
%
   
0.2
 
0.1
%
Denmark
   
0.5
 
0.2
%
   
1.6
 
0.6
%
Total
 
$
228.1
 
100
%
 
$
289.7
 
100
%

_________________________
(1) Austria, the Netherlands, Norway, and Sweden began operations in September 2009.

Net Sales

For the year ended December 31, 2010, our operations outside of the United States accounted for approximately 55.9% of our consolidated net sales, whereas in the same period in 2009, our operations outside of the United States accounted for approximately 51.4% of our consolidated net sales.

Consolidated net sales for the year ended December 31, 2010 decreased $61.6 million, or 21.3%, to $228.1 million, as compared to $289.7 million for the same period in 2009. Domestic sales decreased $39.9 million, while international sales decreased $21.7 million. Despite our decrease in net sales, we look for future growth as we continue to develop innovative products, actively recruit new associates, and expand internationally.

Fluctuation in foreign currency exchange rates had an overall favorable impact on our net sales of approximately $9.0 million for year ended December 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 year ended December 31, 2009.

 
38

 


Net sales by country in transactional currency for the year ended December 31, 2010 and 2009 were as follows (in millions, except percentages):
               
Change
 
Country
 
Transactional
Currency
 
2010
 
2009
 
Transactional
currency
 
Percentage
 
Australia and Singapore
 
AUD
 
23.9
 
31.1
 
(7.2
)
(23.2
)%
Austria(1), Germany, the Netherlands(1)
 
EUR
 
3.0
 
2.6
 
0.4
 
15.4
%
Denmark
 
DKK
 
3.0
 
8.6
 
(5.6
)
(65.1
)%
Japan
 
JPY
 
2,971.3
 
3,890.7
 
(919.4
)
(23.6
)%
Korea
 
KRW
 
25,358.9
 
33,366.8
 
(8,007.9
)
(24.0
)%
New Zealand
 
NZD
 
4.4
 
6.9
 
(2.5)
 
(36.2
)%
Norway(1)
 
NOK
 
8.6
 
2.0
 
6.6
 
330.0
%
South Africa
 
ZAR
 
87.6
 
109.8
 
(22.2
)
(20.2
)%
Sweden(1)
 
SEK
 
3.0
 
1.2
 
1.8
 
150.0
%
Taiwan
 
TWD
 
201.8
 
217.4
 
(15.6
)
(7.2
)%
United Kingdom
 
GBP
 
1.7
 
2.1
 
(0.4
)
(19.0
)%
_________________________
(1) Austria, the Netherlands, Norway, and Sweden began operations in September 2009.

Our total sales and sales mix can be influenced by any of the following:

•  
changes in our sales prices;
•  
changes in consumer demand;
•  
changes in 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;
•  
direct competition; and
•  
fluctuations in foreign currency exchange rates.

Our sales mix for the years ended December 31, was as follows (in millions, except percentages):
   
Change
   
2010
 
2009
 
Dollar
 
Percentage
Consolidated product sales
 
$
187.2
 
$
213.9
 
$
(26.7
)
(12.5
)%
Consolidated pack sales
   
31.3
   
62.1
   
(30.8
)
(49.6
)%
Consolidated other, including freight
   
9.6
   
13.7
   
(4.1
)
(29.9
)%
Total consolidated net sales
 
$
228.1
 
$
289.7
 
$
(61.6
)
(21.3
)%

Pack sales correlate to new independent associates who purchase starter packs and to continuing independent associates who purchase upgrade or renewal packs. However, there is no direct correlation between product sales and the number of new and continuing independent associates and members because independent associates and members utilize products at different volumes.

Product Sales

Substantially all of our product sales are made to independent associates at published wholesale prices. We also sell our products to independent members at discounted published retail prices.
 
39

 
For the year ended December 31, 2010, product sales decreased $26.7 million, or 12.5%, to $187.2 million, as compared to $213.9 million for the same period in 2009. The $26.7 million decrease in product sales was comprised of a decrease in existing product sales of $22.9 million and a decrease in new product sales of $3.8 million. We implemented a 2-5% price increase in most countries in late January 2010. We believe the decrease in product sales was due to the macro-economic factors negatively affecting our company and direct competition with other network marketing companies in recruiting and retaining independent associates.

The following new products were introduced during 2010:

 
·  
Mannatech LIFT™ Skin Care System in the United States and certain international markets;
 
·  
Essential Source Omega 3 in several international markets;
 
·  
Various promotional packages in the United States and several international markets;
 
·  
Health Solutions Starter packs in Singapore and New Zealand;
 
·  
GlycoSlim® drink mix (chocolate) in Japan;
 
·  
Simply Delicious Snack Bars(1) in the United States and Canada;
 
·  
PhytoBurst Nutritional Chews in Australia, Singapore, New Zealand, Japan, Korea, and Taiwan;
 
·  
GI Pro Balance Slimstick in Singapore, New Zealand, Australia and Japan; and
 
·  
BounceBackin Taiwan.
_________________________
(1) We plan to discontinue Simply Delicious Snack Bars in 2011.

Pack Sales

Packs may be purchased by our independent associates who wish to build a Mannatech business. These packs are offered to our independent associates at a discount from published retail prices. There are several pack options available to our associates. In certain markets, pack sales are concluded during the associate registration process and can provide new associates with valuable training and promotional materials, as well as products for resale to retail customers, demonstration purposes, and personal consumption. Business-building associates can also purchase an upgrade pack, which provides associates with additional promotional materials and eligibility for additional commissions and incentives. Many of our business-building independent associates also choose to purchase renewal packs to satisfy annual renewal requirements to continue to earn various commissions.

The dollar amount of pack sales associated with the number of independent associates are as follows, for the years ended December 31 (in millions, except percentages):
       
Change
 
   
2010
 
2009
 
Dollar
 
Percentage
 
New
 
$
21.4
 
$
39.6
 
$
(18.2
)
(46.0
)%
Continuing
   
9.9
   
22.5
   
(12.6
)
(56.0
)%
Total
 
$
31.3
 
$
62.1
 
$
(30.8
)
(49.6
)%

Total pack sales for the year ended December 31, 2010 decreased by $30.8 million, or 49.6%, to $31.3 million, as compared to $62.1 million for the same period in 2009.

The number of new and continuing independent associates and members who purchased our packs and/or products during the twelve months ended December 31, was as follows:
   
2010
 
2009
New
 
89,000
 
22
%
 
145,000
 
28
%
Continuing
 
314,000
 
78
%
 
368,000
 
72
%
Total
 
403,000
 
100
%
 
513,000
 
100
%

There was an overall decrease of 110,000, or 21.4%, for the year ended December 31, 2010 in the number of associates as compared to the same period in 2009, which was due both to a decline in the number of new independent associates and members, as well as fewer continuing independent associates and members.
 
40

 
During 2009 and 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;
 
 
focused on new product development;
 
 
explored new international markets;
 
 
launched an aggressive marketing and educational campaign;
 
 
continued to strengthen 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; and
 
 
introduced new products in many of our global markets.

Other Sales

Other sales consisted of (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.

For the year ended December 31, 2010, other sales decreased by $4.1 million, or 29.9%, to $9.6 million as compared to $13.7 million for the same period in 2009. The decrease in other sales was primarily due to a $2.8 million decrease in freight fees for product and pack shipments, a $1.0 million decrease associated with an expiration of a transactional tax holiday for sales in certain international markets, a $0.2 million decrease in Success Tracker™ and training fees, and a $0.1 million decrease in sales of promotional materials.

Gross Profit

For the year ended December 31, 2010, gross profit increased by $1.5 million, or 1.6%, to $98.0 million, as compared to $96.5 million for the same period in 2009. For the year ended December 31, 2010, gross profit as a percentage of net sales increased to 43.0% as compared to 33.3% for the year ended December 31, 2009.

Cost of sales decreased for the year ended December 31, 2010, by 30.0%, or $14.1 million to $32.7 million as compared to $46.8 million for the same period in 2009. Cost of sales as a percentage of net sales decreased to 14.4%, as compared to 16.2% for the same period in 2009. The improvement reflected the impact of changes made to our pack sales in late 2009 and early 2010, including a reduction in the cost of packs and modification of bonus and pack components.

Commission costs decreased for the year ended December 31, 2010, by 32.2%, or $44.5 million, to $93.8 million, as compared to $138.3 million for the same period in 2009. The decrease in commissions was due to the decrease in commissionable net sales. For the year ended December 31, 2010, commissions as a percentage of net sales decreased to 41.1% as compared to 47.7% for the same period of 2009. The rate improvement was a result of changing various aspects of the Power Bonus program, as well as modification of our pack bonus structure and commission rates.

Incentive costs decreased for the year ended December 31, 2010, by 56.8%, or $4.6 million, to $3.5 million, as compared to $8.1 million for the same period in 2009. The costs of incentives, as a percentage of net sales, decreased to 1.5% for the year ended December 31, 2010, as compared to 2.8% for the same period in 2009. The decrease in total costs of annual incentives was the result of the number of independent associates who qualified for annual incentives, which decreased in 2010 by 69% to 744 as compared to 2,403 in 2009.  The decrease in qualifiers for the annual incentive is primarily related to higher associate recruiting activity seen in 2009 due to the introduction of the $499 Premium/All-Star Pack.
 
41

 
Selling and Administrative Expenses

Selling and administrative expenses include a combination of both fixed and variable expenses. These expenses consist of compensation and benefits for employees, temporary and contract labor, outbound shipping and freight, and marketing-related expenses, such as monthly magazine development costs and costs related to hosting our corporate-sponsored events.

For the year ended December 31, 2010, overall selling and administrative expenses decreased $7.3 million, or 10.5%, to $62.7 million, as compared to $70.0 million for the same period in 2009. Selling and administrative expenses, as a percentage of net sales for the year ended December 31, 2010, increased to 27.5%, as compared to 24.2% for the same period in 2009. Compensation and compensation-related costs decreased $2.6 million primarily from a decrease in contract labor costs. Selling and marketing expenses decreased $2.4 million due to cost control in several areas of this category, such as advertising, public relations, promotions, and magazine publications. Freight costs decreased by $2.3 million due to a decrease in product shipments.

Other Operating Costs

Other operating costs include travel, accounting/legal/consulting fees, royalties, credit card processing fees, banking fees, off-site storage fees, utilities, and other miscellaneous operating expenses. Changes in other operating costs are associated with the changes in our net sales.

For the year ended December 31, 2010, other operating costs decreased by $4.4 million, or 11.1%, to $35.3 million as compared to $39.7 million for the same period in 2009. For the year ended December 31, 2010, other operating costs as a percentage of net sales increased to 15.5 % compared to 13.7 % for the same period in 2009. The decrease in other operating costs was primarily due to a reduction in credit card fees of $1.5 million, travel expenses of $0.9 million, and consulting fees of $0.8 million. Also contributing to the reduction in other operating costs was legal fees of $0.3 million, office expenses of $0.3 million, repairs and maintenance of $0.2 million, research and development of $0.3 million, and royalties of $0.1 million.

Depreciation and Amortization Expense

For the year ended December 31, 2010, depreciation and amortization expense was $11.5 million, as compared to $12.3 million for the same period in 2009.  As a percentage of net sales, depreciation and amortization expense increased slightly to 5.0% from 4.3% for the same period in 2009.

Provision for Income Taxes

Provision for income taxes include current and deferred income taxes for both our domestic and foreign operations. Our statutory income tax rates by jurisdiction are as follows, for the years ended December 31:

Country
2010
 
2009
Australia
30.0
%
 
30.0
%
Canada
30.0
%
 
33.0
%
Denmark
25.0
%
 
25.0
%
Japan
42.0
%
 
42.0
%
Mexico
30.0
%
 
 
Norway
28.0
%
 
28.0
%
Republic of Korea
24.2
%
 
24.2
%
Singapore
17.0
%
 
17.0
%
South Africa
28.0
%
 
28.0
%
Sweden
26.3
%
 
26.3
%
Switzerland
16.2
%
 
16.2
%
Taiwan
17.0
%
 
25.0
%
United Kingdom
28.0
%
 
28.0
%
United States
37.5
%
 
37.5
%


 
42

 
 
Income from our international operations is subject to taxation in the countries in which we operate. Although we may receive foreign income tax credits that would reduce the total amount of income taxes owed in the United States, we may not be able to utilize our foreign income tax credits in the United States.

We use the recognition and measurement provisions of FASB ASC Topic 740, Income Taxes, (“Topic 740”), to account for income taxes. The provisions of Topic 740 require a company to record a valuation allowance when the “more likely than not” criterion for realizing a deferred tax asset cannot be met. A company is to use judgment in reviewing both positive and negative evidence of realizing a deferred tax asset. Furthermore, the weight given to the potential effect of such evidence is commensurate with the extent the evidence can be objectively verified. As a result, we reviewed the operating results, as well as all of the positive and negative evidence related to realization of such deferred tax assets to evaluate the need for a valuation allowance in each tax jurisdiction.

As of December 31, 2010 and 2009, we maintained our valuation allowance for deferred tax assets in the following table (in millions), as we believe the “more likely than not” criterion for recognition and realization purposes, as defined in Topic 740, cannot be met.

Country
2010
 
2009
Mexico
$
0.8
 
$
Norway
 
0.2
   
0.0
Sweden
 
0.1
   
0.0
Switzerland
 
0.5
   
0.3
Taiwan
 
1.0
   
0.9
United States
 
1.5
   
1.1
Total
$
4.1
 
$
2.3


The dollar amount of the provisions for income taxes is directly related to our profitability and changes in taxable income among countries. For the year ended December 31, 2010, our effective income tax rate decreased to 3.8% from 27.9% for the same period in 2009. For 2010, our effective income tax rate was lower than what would be expected if the federal statutory income tax rate were applied to income before taxes primarily because of increases in the valuation allowance for deferred tax assets; increases in uncertain income tax positions and favorable differences from foreign operations. For 2009, our effective income tax rate was lower than expected if the federal statutory income tax rate were applied to income before taxes primarily because of increases in the valuation allowance for deferred tax assets and favorable differences from foreign operations.

 
43

 

Year Ended December 31, 2009 compared to Year Ended December 31, 2008

The tables below summarize our consolidated operating results in dollars and as a percentage of net sales for the years ended December 31, 2009 and 2008 (in thousands, except percentages).

 
2009
 
2008
 
Change
 
Total
Dollars
 
% of
net sales
 
Total
dollars
 
% of
net sales
 
Dollar
 
Percentage
Net sales
$
289,705
 
100
%
 
$
332,703
 
100
%
$
(42,998
)
(12.9
)%
Cost of sales
 
46,813
 
16.2
%
   
48,564
 
14.6
%
 
(1,751
)
(3.6
)%
Commissions and incentives
 
146,415
 
50.5
%
   
149,595
 
45.0
%
 
(3,180
)
(2.1
)%
   
193,228
 
66.7
%
   
198,159
 
59.6
%
 
(4,931
)
(2.5
)%
Gross profit
 
96,477
 
33.3
%
   
134,544
 
40.4
%
 
(38,067
)
(28.3
)%
                                   
Operating expenses:
                               
Selling and administrative expenses
 
69,997
 
24.2
%
   
81,077
 
24.4
%
 
(11,080
)
(13.7
)%
Depreciation and amortization
 
12,333
 
4.3
%
   
12,310
 
3.7
%
 
23
 
0.2
%
Other operating costs
 
39,741
 
13.7
%
   
55,656
 
16.7
%
 
(15,915
)
(28.6
)%
Total operating expenses
 
122,071
 
42.1
%
   
149,043
 
44.8
%
 
(26,972
)
(18.1
)%
Loss from operations
 
(25,594
)
(8.8
)%
   
(14,499
)
(4.4
)%
 
(11,095
)
(76.5
)%
Interest income
 
473
 
0.2
%
   
1,604
 
0.5
%
 
(1,131
)
(70.5
)%
Other income (expense), net
 
1,046
 
0.4
 %
   
(5,303
)
(1.6
)%
 
6,349
 
119.7
 %
Loss before income taxes
 
(24,075
)
(8.3
)%
   
(18,198
)
(5.5
)%
 
(5,877
)
(32.3
)%
Benefit for income taxes
 
6,707
 
2.3
%
   
5,570
 
1.7
%
 
1,137
 
20.4
 %
Net loss
$
(17,368
)
(6.0
)%
 
$
(12,628
)
(3.8
)%
$
(4,740
)
(37.5
)%


 
44

 

For geographical purposes, consolidated net sales primarily shipped to customers by location for the years ended December 31, 2009 and 2008 were as follows (in millions, except percentages):

Net Sales in Dollars and as a Percentage of Consolidated Net Sales

   
2009
 
2008
United States
 
$
140.7
 
48.6
%
 
$
176.9
 
53.1
%
Japan
   
42.0
 
14.5
%
   
44.8
 
13.5
%
Republic of Korea
   
26.4
 
9.1
%
   
35.7
 
10.7
%
Canada
   
23.0
 
7.9
%
   
23.6
 
7.1
%
Australia
   
22.9
 
7.9
%
   
26.1
 
7.8
%
South Africa(1)
   
13.2
 
4.6
%
   
5.5
 
1.7
%
Taiwan
   
6.6
 
2.3
%
   
5.2
 
1.6
%
New Zealand
   
4.3
 
1.5
%
   
5.2
 
1.6
%
United Kingdom
   
3.3
 
1.0
%
     
4.7
 
1.4
%
Germany
   
3.2
 
1.1
%
   
3.8
 
1.1
%
Denmark
   
1.6
 
0.6
%
   
1.2
 
0.4
%
Singapore(2)
   
1.5
 
0.5
%
   
 
%
Austria(3)
   
0.3
 
0.1
%
   
 
%
Norway(3)
   
0.3
 
0.1
%
   
 
%
The Netherlands(3)
   
0.2
 
0.1
%
   
 
%
Sweden(3)
   
0.2
 
0.1
%
   
 
%
Total
 
$
289.7
 
100
%
 
$
332.7
 
100
%

_________________________
(1) South Africa began operations in May 2008.
(2) Singapore began operations in November 2008.
(3) Austria, the Netherlands, Norway, and Sweden began operations in September 2009.

Net Sales

For the year ended December 31, 2009, our operations outside of the United States accounted for approximately 51.4% of our consolidated net sales, whereas in the same period in 2008, our operations outside of the United States accounted for approximately 46.9% of our consolidated net sales.

Consolidated net sales for the year ended December 31, 2009 decreased by $43 million, or 12.9%, to $289.7 million as compared to $332.7 million for the same period in 2008. Domestic sales decreased $36.2 million, while international sales decreased $6.8 million.

Fluctuation in foreign currency exchange rates had an overall unfavorable impact on our net sales of approximately $4.6 million for year ended December 31, 2009. 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 year ended December 31, 2008.

 
45

 
 
Net sales by country in transactional currency for the year ended December 31, 2009 and 2008 were as follows (in millions, except percentages):

               
Change
 
Country
 
Transactional
Currency
 
2009
 
2008
 
Transactional
currency
 
Percentage
 
Australia and Singapore(1)
 
AUD
 
31.1
 
31.0
 
0.1
 
0.3
%
Austria, Germany, the Netherlands(2)
 
EUR
 
2.6
 
2.6
 
 
 
Denmark
 
DKK
 
8.6
 
6.3
 
2.3
 
36.5
%
Japan
 
JPY
 
3,890.7
 
4,584.3
 
(693.6
)
(15.1
)%
Korea
 
KRW
 
33,366.8
 
38,733.4
 
(5,366.6
)
(13.9
)%
New Zealand
 
NZD
 
6.9
 
7.3
 
(0.4)
 
(5.5
)%
Norway(2)
 
NOK
 
2.0
 
 
2.0
 
 
South Africa(3)
 
ZAR
 
109.8
 
47.4
 
62.4
 
131.6
%
Sweden(2)
 
SEK
 
1.2
 
 
1.2
 
 
Taiwan
 
TWD
 
217.4
 
165.4
 
52.0
 
31.4
%
United Kingdom
 
GBP
 
2.1
 
2.6
 
(0.5
)
(19.2
)%

_________________________
(1) Singapore began operations in November 2008.
(2) Austria, the Netherlands, Norway, and Sweden began operations in September 2009.
(3) South Africa began operations in May 2008.

Our sales mix for the years ended December 31, was as follows (in millions, except percentages):
 
     
Change