| MANNATECH INC 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 and sell our products |
| We cannot give any assurances that the productivity of our independent associates and members will continue at their current levels or increase in the future |
| Several factors affect our ability to attract and retain a significant number of 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; 22 ______________________________________________________________________ [93]Table of Contents [94]Index to Financial Statements • public perception and acceptance of us and our products; • 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 active independent associates |
| If we incur substantial liability from litigation, complaints, or enforcement actions resulting from misconduct by our independent associates, our financial condition could suffer |
| Although we 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 |
| Because we have expanded into foreign countries, our policies and procedures for our independent associates differ due to the different legal requirements of each country in which we do business |
| Litigation, complaints, and enforcement actions involving us and our independent associates could consume considerable amounts of financial and other corporate resources, which could have a negative impact on our business, profitability and growth prospects |
| Periodically, regulatory agencies have inquired about certain complaints regarding our independent associates, and we have always cooperated with such inquiries and investigations |
| 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: • Ambrotose ™ complex, a glyconutritional dietary supplement ingredient consisting of a blend of plant polysaccharides and used in the majority of our products; • Ambroglycin^®, a balanced food-mineral matrix ingredient developed to use the latest food science technology to provide various dietary supplements to the body and used in Glycentials^® and Catalyst™; and • MTech AO Blend™, our proprietary, patent-pending antioxidant used in Ambrotose AO^® |
| We have filed patent applications for Ambrotose ™ complex in the United States and certain other countries, and as of March 1, 2006, we have received 20 patents for Ambrotose ™ complex issued in the United States and 19 various foreign countries |
| In addition, we have entered into confidentiality agreements with our independent associates, suppliers, manufacturers, directors, officers and consultants to help protect our proprietary rights |
| Nevertheless, we continue to face the risk that our patent protection for Ambrotose ™ complex will be denied or that the patent protection we are granted is more limited than originally requested |
| As a precaution, we consult with outside legal counsel and consultants to help ensure that we diligently protect our proprietary rights to minimize this risk |
| However, our business, profitability, and growth prospects could be adversely affected if we fail to receive adequate protection of our proprietary rights |
| If our business or our products are the subject of adverse publicity, our business could suffer |
| Our business depends, in part, upon 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 and could result in a significant decline in our operations and the number of our independent associates |
| Specifically, we are susceptible to adverse publicity regarding: • the nutritional supplements industry; • competitors; • the safety and quality of our products and ingredients; 23 ______________________________________________________________________ [95]Table of Contents [96]Index to Financial Statements • regulatory investigations of our products or competitors’ products; • the actions of our independent associates and the management of our independent associates; and • the direct selling and network-marketing industry |
| If we are exposed to product liability claims, we may be liable for damages and expenses, which could affect our financial condition |
| We could face financial liability due to product liability claims if the use of our products results in significant loss or injury |
| We make no assurances that we will not be exposed to any substantial future product liability claims |
| Such claims may include claims that our products contain contaminants, that we provide our independent associates and consumers with inadequate instructions regarding product use, or that we provide inadequate warnings concerning side effects or interactions of our products with other substances |
| We believe that our suppliers and manufacturers maintain adequate product liability insurance coverage |
| However, a 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 future financial condition |
| However, in 2002, we voluntarily discontinued the sale of our products containing ephedra, which included two of our products, GlycoLEAN^® Body System Accelerator™ and MVP In 2002, we voluntarily reformulated our GlycoLEAN^® Body System Accelerator™ to include a non-ephedra ingredient and introduced GlycoLEAN^® Body System Accelerator 2™ and discontinued selling MVP None of our other products have ever contained ephedra |
| During 2002, aggregate sales for our discontinued products related to ephedra, were dlra1dtta2 million, which accounted for 0dtta9prca of our consolidated net sales for the year ended December 31, 2002 |
| In recent years a discovery of Bovine Spongiform Encephalopathy (“BSE”), commonly referred to as “Mad Cow Disease” has caused concern among the general public |
| As a result, some countries have banned the importation or sale of products that contain bovine materials sourced from locations where BSE has been identified |
| We have certain products that use a beef-based gelatin capsule |
| All of our gelatin capsules are currently produced in the United States or in Australia, which are considered BSE-free countries, although a few cases have been identified in the United States |
| Nonetheless, we voluntarily began to switch certain of our production to utilize non-bovine gelatin capsules that are vegetable-based rather than beef-based in certain of our capsule products and are considering using vegetable-based capsules in all such products |
| However, future government action could require companies to use vegetable-based capsules, and if required, the costs of vegetable-based capsules could increase our costs as compared to the costs of bovine-based capsules |
| The higher costs could affect our financial condition, results of operations, and our cash flows |
| 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 |
| During 2004 and 2005, our manufacturers and we collectively purchased approximately, 47prca and 33prca, respectively, of a supplier’s supply of Manapol^® and purchased 100prca for both years of a supplier’s Australia Plum Powder, which is used in our Ambrotose AO^® product |
| We also purchased approximately 30prca and 39prca, respectively of a manufacturer’s production of finished products for the years ended December 31, 2004 and 2005, respectively |
| 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 upon the ability of our outside suppliers and manufacturers to produce the ingredients and products and to comply with all applicable regulations |
| As a precaution, we have approved alternate suppliers and manufacturers for our products |
| However, the failure of our primary suppliers or manufacturers to supply ingredients or produce our products could adversely affect our business operations |
| 24 ______________________________________________________________________ [97]Table of Contents [98]Index to Financial Statements We believe we have dependable suppliers for all of our ingredients and that we have identified alternative sources for all of our ingredients except Arabinogalactan, which is a component of our proprietary compound |
| Although we maintain good relationships with our suppliers and could produce or replace certain of our ingredients if our suppliers are unable to perform, any delay in replacing or substituting such ingredients could affect our business |
| 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 competitive |
| We also compete for independent associates with other network-marketing companies outside the global nutrition industry |
| Many competitors have greater name recognition and financial resources, which may give them a competitive advantage |
| Our competitors may also be able to devote greater resources to marketing, promotional, and pricing campaigns that may influence our continuing and potential independent associates and members to buy products from competitors rather than from us |
| Such competition could adversely affect our business and current market share |
| If our network-marketing activities do not comply with government regulations, our business could suffer |
| A government agency’s determination that our business and/or our independent associates have significantly violated a law or regulation could adversely affect our business |
| The laws and regulations regulating network-marketing generally intend to prevent fraudulent or deceptive schemes |
| Our business faces constant regulatory scrutiny due to the interpretive and enforcement discretion given to regulators, periodic misconduct by our independent associates, adoption of new laws or regulations, and changes in the interpretation of new or existing laws or regulations |
| In the past, we have experienced inquiries regarding specific independent associates and have complied and cooperated with all regulatory agencies in connection with such inquiries |
| If government regulations regarding network-marketing systems change or if interpreted or enforced in a manner adverse to our business, we may be subject to new enforcement actions and material limitations regarding our business operations |
| Our network-marketing system is always subject to extensive governmental regulations, including foreign, federal, and state regulations regarding network-marketing companies |
| Any detrimental change in legislation and regulations could affect our business |
| Furthermore, significant penalties could be imposed upon us for failure to comply with various statutes or regulations |
| Violations may result from: • misconduct by our independent associates; • ambiguity in statutes; • regulations and related court decisions; • the discretion afforded to regulatory authorities and courts interpreting and enforcing laws; and • regulations affecting our business |
| If we violate various governmental regulations or fail to obtain necessary regulatory approvals, our operations could be adversely affected |
| Our operation is subject to extensive laws, governmental regulations, administrative determinations, court decisions, and similar constraints at the federal, state, and local levels in our domestic and foreign markets |
| These regulations primarily involve the following: • the formulation, manufacturing, packaging, labeling, distribution, importation, sale, and storage of our products; • the health and safety of food and dietary supplements; 25 ______________________________________________________________________ [99]Table of Contents [100]Index to Financial Statements • 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 |
| If our international markets are not successful, our business could suffer |
| We currently operate in the international markets of Canada, Australia, the United Kingdom, Japan, New Zealand, the Republic of Korea, Taiwan, and Denmark |
| We are also registering our products in Germany |
| 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 • changes in the perception of network-marketing |
| Any negative changes related to these factors could adversely affect our business, profitability, and growth prospects |
| Furthermore, 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 |
| 26 ______________________________________________________________________ [101]Table of Contents [102]Index to Financial Statements 12 |
| If our information technology system fails, our operations could suffer |
| Our business is heavily dependent upon our information technology infrastructure to effectively manage and operate many of our key business functions, including: • order processing; • customer service; • product distribution; • commission processing; • cash receipts and payments; and • financial reporting |
| Although we maintain an extensive disaster recovery program, a long-term failure or impairment of any of our information technology systems could adversely affect our ability to conduct day-to-day business |
| Currency exchange rate fluctuations could lower our revenue and net income |
| In 2004 and 2005, we recognized 34dtta6prca and 33dtta4prca, respectively, of our net sales in markets outside of the United States |
| In preparing our consolidated financial statements, various 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 strengthens relative to applicable local currencies, there is a risk our reported sales, operating expenses, and net income could significantly fluctuate |
| We are not able to predict the degree of exchange rate fluctuations, nor can we estimate the effect any future fluctuations may have upon our future operations |
| However, to help mitigate this risk, our management monitors applicable exchange rates |
| To date we have not entered into any hedging contracts or participated in any hedging or derivative activities |
| Our stock price could 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; • governmental regulatory actions; • the outcome of any lawsuits; • financial and business announcements made by us or our competitors; and • the general condition of the economy and industry |
| 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 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 |
| 27 ______________________________________________________________________ [103]Table of Contents [104]Index to Financial Statements 15 |
| 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, 2005, our directors and executive officers, collectively with their families and affiliates, beneficially owned approximately 40dtta5prca of our total outstanding common stock |
| As a result, if any of these shareholders choose to act together based on their current share ownership, they may be able to control a significant amount of shares of our 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 |
| We have implemented anti-takeover provisions that may help discourage a change of control |
| Certain provisions in our articles of incorporation, bylaws, and the Texas Business Corporation Act help discourage unsolicited proposals to acquire our company, even if the proposal may benefit our shareholders |
| Our articles of incorporation authorize the issuance of preferred stock without shareholder approval |
| Our Board of Directors has the power to determine the price and terms of any preferred stock |
| The ability of our Board of Directors to issue one or more series of preferred stock without shareholders’ approval could deter or delay unsolicited changes of control by discouraging open market purchases of our common stock or a non-negotiated tender or exchange offer for our common stock |
| Discouraging open market purchases may be disadvantageous to our shareholders who may otherwise desire to participate in a transaction in which they would receive a premium for their shares |
| In addition, other provisions may also discourage a change of control by means of a tender offer, open market purchase, proxy contest or otherwise |
| Our charter documents provide for three classes of directors on our Board of Directors with members of each class serving staggered three year terms |
| Also, the Texas Business Corporation Act restricts, subject to exceptions, business combinations with any “affiliated shareholder |