MANNATECH INC - Annual Report: 2003 (Form 10-K)

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2003

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

or

For the transition period from                      to                     

Commission File No. 000-24657

MANNATECH, INCORPORATED

(Exact Name of Registrant as Specified in its Charter)

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 an accelerated filer (as defined in Rule 12b-2 of the Act) Yes x No ¨

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant as of June 30, 2003 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $33,127,700. The number of shares of the Registrant’s common stock outstanding as of March 8, 2004 was 26,323,052 shares.

Documents Incorporated by Reference

Mannatech incorporates information required by Part III (Items 10, 11, 12, 13, and 14) of this report by reference to its definitive proxy statement for the Registrant’s 2003 annual shareholders’ meeting to be filed pursuant to Regulation 14A on or before April 29, 2004.

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Since its initial public offering, Mannatech’s common stock has traded on the NASDAQ National Market under the symbol “MTEX.” Corporate filings can be viewed on the SEC’s website www.sec.gov or on Mannatech’s corporate website at www.mannatech.com. The filings can also be obtained by contacting Mannatech’s investor relations department at IR@mannatech.com or calling 972-471-6512.

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Special Note Regarding Forward-Looking Statements

Certain disclosure and analysis in this report, including information incorporated by reference, includes 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, or 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 the current views about the future events and financial performance of Mannatech, Incorporated, also referred to herein as Mannatech or the Company. These forward-looking statements are subject to certain events, risks, and uncertainties that may be outside Mannatech’s control. Some of these forward-looking statements include statements regarding:

Actual results and developments could materially differ from those expressed in or implied by such statements due to a number of factors, including:

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 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.

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

PART I

General

Mannatech began operations in 1993 and is a developer of innovative, high-quality, proprietary nutritional supplements, topical products, and weight-management products. Mannatech sells its products and packs through a global network-marketing system throughout the United States, Canada, Australia, the United Kingdom, Japan, and New Zealand. Mannatech plans to expand into South Korea in the second half of 2004 and Taiwan in the first quarter of 2005. Mannatech operates as a single segment and primarily sells its products and starter and renewal packs through a network of approximately 264,000 independent associates and members who have purchased Mannatech’s products within the last 12 months.

Mannatech’s product philosophy is based on the belief that specific carbohydrates and antioxidants are essential to maintain a healthy immune system and that food alone does not provide the amount of essential nutrients the body needs for optimal cell-to-cell communication or to combat the harmful free radicals found in today’s environment, including pollutants in the air, food, and water. Based on certain scientific advances in the emerging field of phytochemistry, Mannatech has formulated high-quality, primarily naturally-occurring, plant-derived, carbohydrate-based products that work through the body’s normal physiology rather than developing synthetic-based products that are easily duplicated and considered less effective. Phytochemistry is defined as certain naturally-occurring components of various plants, known as “phytochemicals,” that are believed to help support and maintain optimal health and wellness.

Throughout its ten-year history, Mannatech has developed proprietary, quality-driven ingredients. Mannatech’s proprietary product history began in November 1993 with the development of its first products that contained Manapol^®, an ingredient that helps cell-to-cell communication. Manapol^® is also included in Mannatech’s proprietary-blend of glyconutrients called Ambrotose^® Complex, which was introduced in 1996. Ambrotose^® Complex combines naturally-occurring monosaccharides and polysaccharides and contains specific sugars essential to help support optimal cell-to-cell communication. Ambrotose^® Complex is a key compound found in all but one of Mannatech’s 32 different products. In addition, in 2001 Mannatech broadened its proprietary ingredients by developing Ambroglycin^™, which is a balanced food-mineral matrix supplement that delivers certain vitamins, chelated minerals, trace minerals, antioxidant co-factors, and Ambrotose^® Complex to the body. Finally, in 2003, Mannatech introduced a proprietary, patent-pending, antioxidant blend called MTech AO Blend^™, which is found in Mannatech’s new antioxidant product called Ambrotose AO^™.

Mannatech believes network-marketing is an effective communication channel for its business and products. Network-marketing allows Mannatech to effectively educate consumers about the unique potential benefits of its proprietary products, as well as the unique science of its products. Additionally, Mannatech believes network-marketing allows it to introduce products into the marketplace more quickly and at a lower cost than other more conventional marketing methods. Further, Mannatech believes network-marketing allows its independent associates to supplement their income and develop financial freedom by building their own businesses.

Mannatech’s highlights for 2003 and early 2004 include the following:

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

Mannatech’s principal executive offices are located at 600 S. Royal Lane, Suite 200, Coppell, Texas 75019 and its telephone number is (972) 471-7400. Mannatech’s corporate filings can be viewed on its corporate website at www.mannatech.com or obtained by contacting its investor relations department at (972) 471-6512 or IR@mannatech.com.

Industry Overview

Nutrition Industry

According to the Nutrition Business Journal, the United States Nutrition Industry reported revenues of $58 billion in 2002, which consisted of 35% of the revenue related to functional foods, 32% related to nutritional supplements, 25% related to natural and organic foods, and 8% related to natural personal care. Of the $58 billion reported in revenues, 53% of the revenues were reported from retail and mass marketers, 32% from natural health food retailers, 9% from direct marketing channels, 3% from mail order and the Internet, and 3% from practitioners. For 2004 through 2008, the Nutrition Business Journal is predicting the nutrition industry to grow at an annual rate of between 5% and 7%, of which nutritional supplements are expected to grow between 3% and 5%. The continued reported growth rate of over 7% for the nutrition industry in 2002 attributed to the interest by the United States government in making nutritional information more available to the public and in reducing health care spending through disease prevention. In addition, the growth can be attributed to the combination of rising costs of health care, general aging of the population and the United States population becoming better educated on the health benefits of nutrition and its role in one’s optimal health and wellness.

In the last decade, the nutrition industry experienced explosive growth primarily resulting from the United States Congress passing the Dietary Supplement Health and Education Act of 1994, called the DSHEA Act of 1994. The DSHEA Act of 1994 encouraged manufacturers and retailers to provide full information about responsible use of its products and allowed companies to use this information in media campaigns. In addition, the DSHEA Act of 1994 allowed consumers to obtain education and information about the health benefits associated with specific ingredients found in dietary supplements and the effective health benefits and latest science-based information about certain products.

In addition to the United States Nutrition Industry, the Euromonitor is predicting various foreign dietary supplement markets to grow between 1% to 5% per year in 2004 through 2007. This growth in nutritional supplements in foreign markets is largely attributable to the following:

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Direct Selling Industry

Several years ago, supplement manufacturers avoided direct selling channels. However, in today’s marketplace, many manufacturers and consumers consider direct-selling as a legitimate channel for selling products. In addition, investment analysts have begun paying more attention to direct marketing companies. Recently there has been an influx of prominent investors investing in direct marketing companies, which helps provide direct marketing companies with more credibility in the marketplace. For example, in 2002 Warren Buffett acquired a network-marketing vendor of kitchen products. Other investment capital groups have also invested in direct selling companies and large corporations have diversified their marketing strategy by entering the direct marketing arena. Mannatech does not currently have any plans to liquidate all of its holdings to any investment group; however, Mannatech has no control over who acquires its stock in the open marketplace.

According to the Direct Selling Association, in 2002, United States direct sales totaled $28.7 billion, which was an increase of 4% from the prior year of $27.6 billion. Of the $28.7 billion, 15.5% of sales related to wellness products and 28.2% related to personal care products. In addition, the Direct Selling Association estimates that over 56% of the United States population, or more than 13 million people, have purchased goods or services through a direct selling channel. According to the Nutrition Business Journal, in 2002, the direct channel nutrition industry sales grew an estimated 6.1% and reported $8.5 billion in revenues. Specifically, the Nutrition Business Journal reported out of the $8.5 million, supplement sales grew 6.8% to $6.1 billion, of which 25% of the growth was reported through sales via the Internet. Mannatech believes that the combination of an e-commerce platform and network-marketing helps increase revenue growth for direct channel sellers as consumers continue to seek information, thereby providing opportunities for brand marketers to reach and influence consumers. In addition, according to the Nutrition Business Journal, in 2001, the Global Nutrition Industry reported $151 million in revenues of which 59.6% of the reported revenues were from foreign countries in which Mannatech has operations.

Mannatech net sales for 2003 grew over 35%, which surpassed the industry’s predicted average expected growth rate of 5%. In 2002, Mannatech was listed by the Nutrition Business Journal as the 15^th largest direct seller corporation in the United States and based on its 2002 reported sales levels, Mannatech expects to be named in the Nutrition Business Journal’s top ten direct sales companies for 2003. Mannatech believes the combination of its “high tech with high touch” marketing approach coupled with its product legitimacy and its distinct and unique ingredients allows it to differentiate itself from its competition.

Operating Strengths

Mannatech’s product development focuses on the discovery that the body needs eight monosaccharides to support cell-to-cell communication and to help maintain optimal health and wellness. Mannatech’s products are predominately formulated with naturally-occurring, plant-derived, carbohydrate-based products that are designed to use nutrients working through normal physiology to help achieve and maintain optimal health and wellness rather than attempting to develop synthetic, carbohydrate-based products, as many other companies are doing.

Mannatech believes its proprietary blend of Ambrotose^® Complex distinguishes it as a leader in the nutritional supplements industry and that no other combination of vitamins, minerals, amino acids, or herbals can replace the saccharides found in Ambrotose^® Complex. As a result, Mannatech has filed several patents in the United States and abroad for this compound and believes that the use of this compound in its products allows it to differentiate and distinguish its products from its competitors’ products.

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Mannatech’s existing products must also pass a comprehensive quality assurance program. Mannatech continually seeks to identify new clinical studies to further validate its products and scientific research. Mannatech offers a variety of resources detailing its product research and quality assurance program including its e-commerce platform. Mannatech’s e-commerce platform consists of its scientific Internet database, called www.GlycoScience.org, and its corporate website, at www.mannatech.com, which describes its product ingredients and provides various education-based product information about ingredients found in dietary supplements.

Mannatech’s team of research and developers has almost 80 years of combined experience in the research and development area. Mannatech believes that its research and development team of personnel, as well as its facilities and strategic alliances with its suppliers, consultants, and manufacturers allow it to effectively identify, develop, and market high-quality, innovative, proprietary products that will increase its competitive advantage in the marketplace. Mannatech incurred research and development expenses of $3.4 million, $3.4 million, and $4.0 million, in 2001, 2002, and 2003, respectively. Historically, Mannatech budgets between 2% and 3% of its annual net sales for various research and development efforts. In 2004, Mannatech projects it will spend between $3.5 million and $4.5 million for its on-going research and development efforts. These research and development efforts are led by a research team comprised of scientists with significant years of experience including experience in designing products based on carbohydrate-based technology. Mannatech’s research and development efforts are conducted in Mannatech’s laboratory and are performed using equipment such as a gas and liquid chromatography and mass spectrometers. Such equipment is used to:

Mannatech bases its comprehensive quality assurance program on nationally recognized standards such as the Good Manufacturing Practices. Mannatech’s team of experts helps ensure that its formulations are made with superior ingredients and follow Mannatech’s guidelines. Mannatech further requires that its formulations meet rigorous specifications for microbiological, chemical, and physical analysis.

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To ensure strict controls over its products through all phases of production, packaging, and distribution, Mannatech contracts with suppliers and manufacturers that have equally high-quality assurance standards, meet stringent FDA requirements, and are certified by official accredited bodies such as NSF International or the National Nutritional Foods Association. Mannatech routinely reviews its suppliers’ and manufacturers’ quality assurance programs to ensure that they are following Mannatech’s required specifications, sampling plans, and test procedures. To ensure consumer satisfaction, Mannatech’s quality assurance team samples and tests each batch of products produced by its suppliers and manufacturers. In addition, Mannatech packages its dietary supplements with inner and outer seals to minimize possible tampering and performs stability studies under controlled and accelerated temperature storage conditions to ensure the accuracy of the expiration dates of its products.

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Business Strategy

Mannatech’s goals for the future include the following:

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Products and Product Development

Scientists have discovered that healthy bodies consist of many sophisticated components working in harmony to achieve optimal health and wellness. To achieve harmony, the body needs to achieve and maintain accurate internal communication to function at an optimal level. In its most basic form, the body’s internal communication occurs at the cellular level and is referred to as cell-to-cell communication. Scientists have also learned that there are over 200 monosaccharides, also called sugar molecules, which form naturally within plants, eight of which are considered vital components for cellular communication in the human body. These eight monosaccharides are found on the surface of all cells. Furthermore, scientists have found that certain proteins have one or more monosaccharides attached to them, which forms a molecule called glycoprotein. In addition, Harper’s Biochemistry, a leading and nationally-recognized biochemistry reference source, recognizes that these eight different monosaccharides are commonly found in human glycoproteins and are believed to be key in helping healthy cell-to-cell communication in the human body. The eight monosaccharides include the following:

These eight monosaccharides have one or more sugar molecules attached to them and play an essential role in all cell-to-cell communication. Scientists have found that the body needs certain carbohydrates that contain up to 85% of the saccharides to support and maintain optimal health and wellness. Based on scientific knowledge and the study of glycoproteins, Mannatech developed its proprietary compound, Ambrotose^® Complex, to provide the body with certain of these eight monosaccharides. Mannatech has applied for patents around the globe to protect its formulation and use of Ambrotose^® Complex and have been issued 14 patents in various foreign jurisdictions.

Currently, Mannatech offers 24 different nutritional products, three topical products, and a weight-management system consisting of five different products. Mannatech also offers a full spectrum of sales aids for its associates. Sales aids include various enrollment and renewal packs, orientation and training programs, brochures, audio and videotapes, web-based data management tools, and personalized website development, all of which account for approximately 20% to 25% of total sales.

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Mannatech products focus on achieving and maintaining optimal health and wellness. Optimal health and wellness includes the following:

Mannatech continues to explore additional products that expand its focus on skin care and other nutritional products. In 2004, Mannatech plans to introduce Ambrotose AO^™ into its foreign markets, register its core products in South Korea and Taiwan, and reformulate its nutrition food bars. Mannatech’s product committee plans to continue its focus on identifying and analyzing potential new products and compounds that target overall health and wellness. When considering new products and compounds, Mannatech’s product committee uses the following criteria:

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To maintain a flexible operating strategy and an unlimited production capacity, Mannatech contracts with third-party contractors to produce all of its products. This strategy effectively allows Mannatech to quickly respond to significant fluctuations in demand with minimal investment and helps to control operating costs. Mannatech believes that its suppliers and manufacturers are high-quality and are capable of meeting Mannatech’s current and projected inventory requirements over the next several years. Mannatech has also identified alternative suppliers and manufacturers to ensure that it will be able to meet demand changes in a timely manner and minimize any risk of business interruption. Mannatech maintains a supply agreement with its supplier of Manapol^®, which requires Mannatech and its manufacturers to collectively buy a minimum monthly volume at an agreed-upon price through November 2004. Historically, Mannatech and its manufacturers purchase up to 40% of its supplier’s production of Manapol^®.

Mannatech’s main distribution facility in Coppell, Texas, 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. This system currently operates at 30% of its capacity. This system enhances productivity and is capable of supporting Mannatech’s planned sales volume growth. To maximize its operating strategy and minimize costs, Mannatech contracts with third-party contract distribution facilities in Canada, Australia, the United Kingdom, and Japan and plans to contract with third-party distribution contractors in South Korea and Taiwan. By entering into these distribution facility agreements, Mannatech minimizes its cost of shipping an order and generally is able to process an order within 24-hours after order placement and payment. For further information on these contract facilities, see “Item 2. Properties” of this report.

Competition

Other Nutritional Supplement Companies. The nutritional supplement industry is steadily gaining momentum and recognition and is intensely competitive. Mannatech competes directly with companies that sell similar nutritional products including:

Network-Marketing. Nutritional supplements are offered for sale in a variety of ways. Network-marketing has a limited number of individuals interested in participating and Mannatech must compete for these individuals. Mannatech believes that network-marketing is the best sales approach to sell its products because of the following:

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Mannatech competes with other direct selling and network-marketing companies for new associates and for retention of existing associates. Some of its competitors have longer operating histories, are better known, or have greater financial resources. These companies include:

The availability of associates decreases when other network-marketing companies successfully recruit and retain people into their operations. Mannatech competes for associates by focusing on the following:

Intellectual Property

Mannatech pursues registrations for trademarks associated with its key products and protects its legal rights concerning its trademarks. Mannatech has approximately 27 trademark registrations in the United States and approximately seven trademark applications pending with the United States Patent and Trademark Office. Mannatech also has approximately 222 trademark registrations and 125 trademark applications pending in 21 foreign jurisdictions. The protection available in foreign jurisdictions may not be as extensive as the protection available to Mannatech in the United States. Furthermore, Mannatech must rely on common law trademark rights to protect its unregistered trademarks, even though such rights do not provide Mannatech with the same level of protection as afforded by a United States federal registration of a trademark. Common law trademark rights are limited to the geographic area in which the trademark is actually used. Whereas the United States federal registration of a trademark enables Mannatech to discontinue the unauthorized use of the trademark by a third party anywhere in the United States provided that the unauthorized third party user has not perfected its common law rights of the trademark in the specific geographic area prior to the registration date.

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Mannatech has been issued 14 patents in various foreign jurisdictions in connection with its proprietary product Ambrotose^® Complex. These patents grant Mannatech the exclusive right to prevent others from making, using or selling the patented subject matter through 2017. The exclusionary rights of these patents are national in scope and Mannatech has five patent applications pending in the United States Patent and Trademark Office. Two of the patents pending are in connection with Ambrotose^® Complex and the others are in connection with Immunostart^®, Ambrotose AO^™ and its website GlycoScience.org. Mannatech has also submitted 13 patent applications in various foreign jurisdictions in connection with Ambrotose^® Complex and one patent application for GlycoScience.org. Until a patent is approved and issued, Mannatech cannot protect itself from another company replicating one or more of its products.

Associate Distribution System

Overview. Mannatech’s sales philosophy is to distribute its products through a network-marketing operation where consumers purchase products for personal consumption and/or resale. Mannatech’s members and retail customers purchase Mannatech’s products for personal consumption but do not participate in Mannatech’s global associate career and compensation plan. Mannatech’s associates participate in Mannatech’s global associate career and compensation plan. All of Mannatech’s associates are independent contractors who are contractually bound to follow certain policies and procedures. These policies and procedures help Mannatech ensure the legality of its associates’ activities by requiring associates to comply with regulatory guidelines and act in a consistent, professional manner.

Mannatech’s revenues are heavily dependent upon the retention and productivity of its associates. Mannatech believes that the enrollment of new associates and members and the retention of its existing associates and members are necessary to achieve long-term growth. Mannatech believes the introduction of new innovative incentives, such as travel incentives and its revamped global associate career and compensation plan, will help motivate its associates and help expand Mannatech’s global customer purchasing base. Mannatech remains actively committed to the development of its associates through recruitment, support, motivation, and compensation. Total associates and members purchasing Mannatech products within the 12 months ended December 31, 2002 and 2003 were approximately 200,000 and 264,000, respectively.

Mannatech does not have any significant accounts receivable from its associates because all customers are required to pay for purchases prior to shipment. Associates, members, and customers generally pay for products by credit cards, although orders can also be paid with cash, direct account withdrawal, money orders, or checks. To gain operating efficiencies, Mannatech offers a 10% discount to associates and members who enroll in its automatic monthly order program, a program where the associate signs up for a standing order to be shipped to them every four weeks. Mannatech’s automatic monthly orders have continued to increase to approximately 68.5% of total orders placed in 2003 compared to 65.0% in 2002.

Associate Development. Network-marketing consists of enrolling individuals who will build a network of associates, members, and retail customers that purchase products directly from Mannatech.

Mannatech supports its associates by providing a vast array of support services that can be tailored to each associates’ need, including:

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Mannatech and its existing associates train and educate new associates about Mannatech products and network-marketing. Mannatech offers a global orientation/training program, which integrates audio, video, and motion graphics that associates can customize into their own individual, unique marketing and training program. This training program helps provide systematic and uniform training related to Mannatech’s products and the related global regulatory requirements, global associate career and compensation plan and various methods of conducting business. Mannatech also offers a variety of brochures, monthly newsletter, two magazines, and other promotional materials to associates to assist in their sales efforts, training and continuing education. Mannatech continually updates its training and promotional materials to provide associates with the most current information.

Mannatech’s global associate career and compensation plan consists of ten different associate leadership achievement levels. The associate leadership levels from lowest to highest include:

The initial associate leadership level is based upon the initial pack purchased and thereafter, by the associates’ downline growth and volume of direct and indirect commissionable net sales. Global commissionable net sales are calculated based on product and pack sales, which are assigned a certain product point volume. Promotional materials and training aids are not assigned any point volume. Associates earn points, which in turn earn commissions for the associates’ direct and indirect global product sales, as well as the expansion of their networks, also referred to as their global seamless downline structure. A global seamless downline structure allows associates to build their global organization by expanding their existing downlines into all international markets rather than having to establish new downlines to qualify for higher levels of commissions within each new country. Mannatech’s global associate career and compensation plan is designed to comply with all applicable governmental regulations that govern the various aspects of associate compensation in each country.

Based upon knowledge of industry-related network-marketing compensation plans, Mannatech believes that its global associate career and compensation plan remains strong in the industry and is currently among the most financially rewarding plans offered in the industry. Mannatech’s commissions and incentives, as a percentage of net sales, range between 40% to 45% of consolidated net sales and are expected to continue to remain in the same percentage range in the future.

Mannatech’s global associate career and compensation plan was modified to combine two widely used aspects of direct selling and network-marketing compensation plan concepts. Mannatech’s compensation plan pays various types of commissions and incentives based upon a point system that calculates a percentage of the associate’s commissionable direct and indirect net sales and the attainment of certain associate leadership levels. Mannatech believes its global associate career and compensation plan fairly compensates its associates at every stage of building their business by quickly rewarding an associate for both the breadth and depth of establishing a global seamless downline structure.

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Mannatech’s global associate career and compensation plan identifies and pays fifteen different kinds of incentive commissions to its qualified associates. Some of the commissions and incentives are based on the following:

Management of Associates. Mannatech takes an active role in the oversight of its associates. Mannatech tries to ensure that its associates’ conduct complies with applicable laws and regulations governing the sale of its products and the promotion of its business opportunities by contractually binding associates to abide by Mannatech’s associate policies and procedures. Mannatech provides each associate with a copy of its policies and procedures upon signing up as an associate and distributes changes to its policies and procedures that must be followed in order to remain compliant with respect to Mannatech’s policies and procedures. In addition to publishing and distributing its policies and procedures, Mannatech also publishes the changes in its associate newsletter, posts the changes on its corporate website, and announces the changes at various educational meetings, seminars and webcasts. Furthermore, Mannatech’s legal/compliance department periodically monitors its associates’ websites for content. In an effort to decrease the number of independent websites owned by associates and to preserve and protect its trademarks, Mannatech offers Mannapages^™, a standardized, personal, Internet website program created to help associates with their sales efforts, provide consistent standardized information and education, and assist Mannatech in monitoring its associates’ websites.

Mannatech’s legal/compliance program also depends on associate self-regulation. When a complaint is filed against an associate, the legal/compliance department conducts an investigation of the allegations by obtaining a written response from associate and witness statements, if applicable. Depending on the nature of the violation, Mannatech may suspend and/or terminate the non-compliant associates’ rights and may impose various sanctions, including warnings, probation, termination of associate status, and withholding commissions until the complaint is rectified. Mannatech’s legal/compliance department, in cooperation with other departments and associates, periodically evaluates the conduct of its associates and the need for new and revised policies and procedures. Mannatech’s compliance program assists in maintaining associate ethics and helps associates in their sales efforts. Mannatech also sponsors continuing education to ensure that its associates understand and abide by Mannatech’s associate policies and procedures.

Product Return Policy. Mannatech stands behind its product and believes it offers a reasonable and industry standard product return policy. Mannatech has two return policies – one policy for retail customers and the other policy for associates. Mannatech’s retail sale return policy allows a retail customer to return any unused portion of any Mannatech product to the original associate who sold them the product and receive a full cash refund from that associate. Mannatech subsequently reimburses the original associate who provides such refund with replacement product after the associate provides Mannatech with the proper documentation and returns the remainder of the product or empty bottle to Mannatech.

Mannatech’s associate product return policy states that any associate requesting a refund for a purchase will receive a 90% refund of the paid wholesale cost for any returned, unopened, restockable products, and any up-to-date corporate literature that is in good, reusable condition. Mannatech will refund 100% of the paid wholesale cost if the error or problem was caused by Mannatech. Mannatech believes that its return policy complies with the Direct Selling Association’s Code of Conduct and is consistent with return policies from other direct selling and network-marketing companies. Mannatech’s product returns have remained relatively consistent as a percentage of gross sales and were 0.6%, 0.7%, and 0.8% in 2001, 2002, and 2003, respectively.

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Information Technology Systems

Mannatech’s technologically advanced e-commerce systems include a transaction processing database, financial systems, and comprehensive management tools that are designed to:

To complement its transaction database, Mannatech developed a comprehensive management tool called Success Tracker^™ that is used by its associates to manage and optimize their business organizations. With this tool, associates have constant access to reports on the status of their individual organization, which helps associates optimize their earnings.

Mannatech also maintains a comprehensive service continuity plan to minimize the risk of loss due to any disruption in business. The plan encompasses all critical aspects of business and identifies contacts, resources and an action plan to have Mannatech running within 72 hours after a disaster. Additionally, Mannatech performs daily backup procedures, monitors various software and hardware systems, and performs routine maintenance procedures and periodically upgrades its software and hardware to further ensure that its systems work efficiently and effectively and to minimize the risk of business interruption.

Mannatech continues to enhance its e-commerce platforms to remain competitive and efficient. During 2004, Mannatech plans to spend between $6.5 million and $7.0 million on its information technology systems. In addition, Mannatech plans to spend between $3.5 million and $4.5 million for targeted capital projects. These capital projects include the following:

Mannatech’s comprehensive financial system includes five sub-modules that directly interface with the general ledger module and report-writing system. This financial system is Windows-based and capable of operating on several platforms and enables Mannatech to track, report and analyze financial information. Mannatech’s current financial system is adequate for its reporting needs over the next 12 months. Nonetheless, Mannatech intends to research new financial systems that would automate integration and enhance its existing system to provide greater operating efficiencies in 2004 and have its new financial system operational in 2005.

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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 and network-marketing activities. Such regulations address, among other things:

The following governmental agencies regulate various aspects of Mannatech’s business and its products in the United States:

The FDA regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution, and sale of foods, dietary supplements, over-the-counter drugs, and pharmaceuticals. 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,” which includes regulations requiring companies, including Mannatech and its suppliers and manufacturers, to meet Good Manufacturing Practices in the preparation, packaging, storage, and shipment of its products. The FDA has also published a Notice of Advanced Rule Making for Good Manufacturing Practices that requires manufacturers of dietary supplements to follow Good Manufacturing Practices. In 2003, the FDA proposed additional regulations that would require additional information about a company’s product ingredients to be included on the company’s product labels. Mannatech believes it meets the necessary regulations of the FDA and that its suppliers and manufacturers are in compliance with applicable laws and regulations. In 2004, Mannatech will also focus on validating its compliance with newly introduced Good Manufacturing Practice regulations in Canada and the Therapeutic Goods Advertising Code in Australia, while preparing for additional regulations to be introduced in the United States.

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The Dietary Supplement Health and Education Act of 1994, referred to as the DSHEA Act, 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 current diets. A majority of Mannatech’s products are considered dietary supplements as outlined in the Federal Food, Drug and Cosmetic Act. This act requires a company to maintain evidence that a dietary supplement is reasonably safe. Each manufacturer of dietary supplements may make a statement of nutritional support in connection with its products but must also include a disclaimer statement that neither the product nor any claim has been reviewed or approved by the FDA. The statement of nutritional support describes certain types of product performance characteristics and evidence that a statement is truthful and not misleading. A company is required to notify the FDA of this statement no later than thirty-days after the statement is first made.

The FDA oversees product safety, manufacturing and product information, such as claims in a product’s labeling, package inserts and accompanying literature. The FDA has promulgated regulations governing the labeling and marketing of dietary and nutritional supplement products. The regulations include:

Mannatech utilizes a substantiation program that involves the compilation and review of scientific literature pertinent to the ingredients contained in each of its products. Mannatech continuously updates its substantiation program to expand its evidence for each of its product claims and notifies the FDA of certain types of performance claims made in connection with its products.

In certain markets, including the United States, specific claims made by Mannatech with respect to its products 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 regulations as unapproved and thus an illegal drug. To maintain the product’s status as a dietary supplement, the labeling and marketing must comply with the provisions in the DSHEA Act and the FDA’s extensive regulations. As a result, Mannatech has procedures in place to help ensure its associates and employees comply with the requirements of the DSHEA Act, the Food, Drug and Cosmetic Act, and various other regulations. Because of the diverse scope of regulators enforcing these regulations, guidelines for conformance is often open to interpretation and debate. Mannatech can make no assurances that regulators will not question its actions in the future, even though it believes it complies with the 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.

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Regulators, such as the FTC, 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 misleading marketing practices and misleading advertising of certain products. These enforcement actions have resulted in consent decrees and significant monetary judgments against the companies involved. Regulators require a company to convey product claims clearly and accurately and further require marketers to maintain adequate substantiation for their claims. The FTC requires such substantiation to be competent and reliable scientific evidence. Specifically, the FTC 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 to ensure that consumers have access to information about the emerging areas of science and also requires reasonable evidence proving product claims at the time such claims are first made. The failure to have this evidence violates the Federal Trade Commission Act. Although the FTC has never threatened any enforcement action against Mannatech for the advertising of its products, Mannatech can give no assurance that the FTC will not question its advertising or claims in the future, but believes it is in compliance with certain laws and regulations.

International Regulations. Mannatech is also subject to extensive regulations in each international country in which it operates. Currently Mannatech operates in Canada, Australia, the United Kingdom, Japan, and New Zealand and plans to begin operations in South Korea in late 2004 and in Taiwan in early 2005. Some of the country-specific regulations include the following:

Regulations regarding Network-Marketing System. Mannatech’s network-marketing system, which includes its global associate career and compensation plan, is 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, achievement within a network-marketing company must be based on the sale of products rather than compensation for the recruitment of associates, investments in the organization, or other non-retail sales-related criteria. For instance, various states or provinces limit the amount associates may earn from commissions on sales by other associates that are not directly sponsored by the associate. Prior to Mannatech expanding its operations into any new foreign jurisdictions, Mannatech must first obtain regulatory approval for its network-marketing system in jurisdictions requiring such approval. To help ensure regulatory compliance Mannatech also relies on its outside counsel in each specific country for advice.

Mannatech is also subject to inquiries and enforcement actions from various state attorneys general offices. Each state has its own state acts referred to as Little FTC Acts. Each state act is similar to the requirements of the federal laws. As a result, each state may perform its own inquiries about Mannatech’s organization and business practices, including allegations related to its associates. To combat such risk, Mannatech publishes and distributes its associate policies and procedures to its associates, provides various educational seminars and publications, and maintains a compliance department that investigates allegations of improper associate conduct.

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In Canada, Mannatech’s network-marketing system is regulated by both national and provincial laws. Under Canada’s Federal Competition Act, Mannatech must make sure that any representations relating to associate compensation made to prospective associates constitute fair, reasonable, and timely disclosure and that such representations meet other legal requirements of the Federal Competition Act. Mannatech’s global associate career and compensation plan has been reviewed by the appropriate Canadian authorities and Mannatech has not received any objections to the provisions of its plan. Any future changes to the plan will require additional review by the appropriate Canadian authorities. All Canadian provinces and territories, other than Ontario, have legislation requiring that Mannatech 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 provinces require that both Mannatech and its associates be licensed as direct sellers. Mannatech believes that it holds the required provincial or territorial direct sellers’ licenses to legally conduct business in Canada.

In Australia, Mannatech’s network-marketing system is subject to Australian’s federal and state regulations. Mannatech’s 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 offices regulate Mannatech’s business and trade practices, as well as those of its associates. Australia’s Therapeutic Goods Act, together with the Trade Practices Act, regulates any claims or representations relating to Mannatech’s products and its global associate career and compensation plan.

In the United Kingdom, Mannatech’s network-marketing system is subject to national regulations of the United Kingdom. Mannatech’s 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, and the Trading Schemes Regulations of 1997. The U.K. Code of Advertising and Sales Promotion regulates Mannatech’s business and trade practice and the practices of its associates and the Trading Standards Office regulates any claims or representations relating to Mannatech’s operations.

In Japan, Mannatech’s network-marketing system, overall business operations, trade practices, global associate career and compensation plan, and its associates are governed by Japan’s Door-to-Door Sales Law as enacted in 1976 by the Ministry of International Trade and Industry. Mannatech’s global associate career and compensation plan is designed to meet Japan’s governmental requirements. Mannatech’s 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 New Zealand, Mannatech’s network-marketing system and its operations are subject to certain regulations of the Commerce Commission and the Ministry of Health, 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 governs the conduct of Mannatech’s associates.

In South Korea, the primary body of law applicable to Mannatech’s operations will be the Door-to-Door Sales Act, which governs the behavior of multi-level marketing companies and distributors who are affiliated with such companies. The Door-to-Door Sales Act is enforced by the Fair Trade Commission. In South Korea, Mannatech believes its products will be categorized as health and functional foods and will be regulated by the newly enacted Health and Functional Food Act of 2003. The Korea Food and Drug Administration is currently finalizing the standard and criteria for health and functional foods including defining the requirements for functional foods and acceptable ingredients.

In Taiwan, Mannatech’s network marketing system, overall operations and trade practices will be governed by the Fair Trade Law and the Consumer Protection Law. Such laws contain a wide range of provisions covering trade practices. Mannatech believes its products will be governed by the Taiwan Department of Health and the 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 of the republic and safeguarding the rights and interests of consumers.

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

In many markets, Mannatech is limited in the types of rules it can impose on its associates, including rules in connection with cooling off periods and termination criteria. If Mannatech does not comply with these restrictions, it may be required to pay social security, unemployment, workers’ compensation, or other tax or tax-type assessments on behalf of its associates and may incur severance obligations if it terminates an associate.

In some countries, including the United States, Mannatech is also governed by regulations concerning the activities of its associates. Regulators may find that Mannatech is ultimately responsible for its associates’ conduct and may request or require that Mannatech take steps to ensure that its associates comply with these regulations. The types of conduct governed by these types of regulations may include:

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

Mannatech continually researches and monitors the laws governing its associate conduct, its operations, its global associate career and compensation plan, and its products and sales aids as required by regulations in each market. Mannatech tries to educate its associates about acceptable business conduct in each market through its associates’ policies and procedures, seminars, and other training materials and programs. However, Mannatech cannot guarantee that its associates will always act in a professional and consistent manner.

Employees

As of December 31, 2003, Mannatech employed 263 people in the United States, nine of whom hold executive positions. Mannatech also employs 30 people in Australia, 14 people in the United Kingdom, and 17 people in Japan. These numbers do not include Mannatech’s associates, who are independent contractors and not considered employees of Mannatech. Mannatech employees are not unionized and Mannatech believes it maintains a good relationship with its employees.

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Risk Factors

In addition to the other risk factors described in this report, the following additional risk factors should be considered in evaluating Mannatech’s business and future prospects:

Mannatech’s future success depends largely upon its ability to attract and retain a large base of associates and members who purchase and sell its products. Mannatech cannot give any assurances that the productivity of its associates and members will continue at their current levels or increase in the future. Several factors affect Mannatech’s ability to attract and retain a significant number of associates and members, including:

Although Mannatech uses various means to address associate misconduct including maintaining policies and procedures to govern the conduct of associates and conducting training seminars, it is still difficult to detect and correct all instances of associate misconduct. Violations of Mannatech’s policies and procedures by its associates could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or foreign regulatory authorities against Mannatech and its associates. Because Mannatech has expanded into foreign countries, Mannatech’s associate policies and procedures differ due to the legal requirements of each foreign country in which it does business. Litigation, complaints, and enforcement actions involving Mannatech and its associates could consume considerable amounts of financial and other corporate resources, which could have a negative impact on Mannatech’s business, profitability and growth prospects. Periodically, regulatory agencies have inquired about certain complaints regarding associates and Mannatech has always cooperated with such inquiries and investigations.

Mannatech’s success and competitive position largely depends on its ability to protect the following proprietary rights:

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Mannatech has filed various patent applications for Ambrotose^® Complex in the United States and certain countries abroad and has received five patents for Ambrotose^® Complex, in various foreign countries. In addition, Mannatech has entered into confidentiality agreements with its associates, suppliers, manufacturers, directors, officers and consultants to help protect its proprietary rights. Nevertheless, Mannatech continues to face the risk of its patent protection for Ambrotose^® Complex being ultimately denied or receiving limited patent protection that is more limited than originally requested. As a precaution, Mannatech consults with outside legal counsel and consultants to help ensure that it continues to properly protect its proprietary rights. However, Mannatech’s business, profitability, and growth prospects could be adversely affected if it fails to properly protect its proprietary rights.

Mannatech’s business depends, in part, upon the public’s perception of its integrity and the safety and quality of its products. Any adverse publicity could negatively affect the public’s perception of Mannatech and could result in a significant decline in its operations and the number of its associates. Mannatech and its products could be subject to adverse publicity regarding:

Mannatech could face financial liability due to product liability claims if the use of its products results in significant loss or injury. To date, Mannatech has not been the subject of any product liability claims. However, Mannatech can make no assurances that it will not be exposed to future product liability claims. Such claims may include that Mannatech’s products contain contaminants, that it provides its associates and consumers with inadequate instructions regarding product use, or that it provides inadequate warnings concerning side effects or interactions of its products with other substances. Mannatech believes that Mannatech and its suppliers and manufacturers maintain adequate product liability insurance coverage. However, a product liability claim could exceed the amount of insurance coverage or a product claim could be excluded under the terms of an existing insurance policy, which could adversely affect Mannatech’s future financial condition.

In 2002, Mannatech voluntarily discontinued the sale of its products containing ephedra, which included two of its products, GlycoLEAN BODY SYSTEM^® ACCELERATOR^™ and MVP. Mannatech has never had any claims related to the use of ephedra in these products. None of Mannatech’s other products contain ephedra. Products containing ephedra have been the subject of adverse publicity in the United States and other countries due to alleged harmful effects, including death. The FDA is currently in the process of banning the use of ephedra. In 2002, Mannatech voluntarily reformulated its GlycoLEAN BODY SYSTEM^® ACCELERATOR^™ to include a non-ephedra ingredient and renamed it GlycoLEAN BODY SYSTEM^® ACCELERATOR2^™. Mannatech is currently exploring an ephedra free ingredient for its MVP product but has discontinued selling MVP. Aggregate sales for Mannatech’s discontinued products related to ephedra, were $1.2 million in 2002, which was 0.9% of Mannatech’s consolidated net sales.

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Outside manufacturers make all of Mannatech’s products. Together, Mannatech and its manufacturers purchase up to 40% of one of its suppliers’ production. Mannatech also purchases up to 25% of one of its manufacturers production. Mannatech’s profit margins and timely product delivery are dependent upon the ability of its outside suppliers and manufacturers to supply its products in a timely and cost-efficient manner. Mannatech’s ability to enter new markets and sustain satisfactory levels of sales in each market depends upon the ability of its outside suppliers and manufacturers to produce its ingredients and products and to comply with all applicable regulations. As a precaution, Mannatech has identified alternate suppliers and manufacturers for its products. However, the failure of Mannatech’s primary suppliers or manufacturers to supply ingredients or produce its products could adversely affect Mannatech’s business operations.

Mannatech believes it has dependable suppliers for all of its ingredients and that it has identified alternative sources for all of its ingredients except Manapol^® and Arabinogalactan, which are components of Mannatech’s proprietary compounds. Although Mannatech maintains good relationships with its suppliers and could produce or replace any of its ingredients if its suppliers are unable to perform, any delay in replacing or substituting such ingredients could affect Mannatech’s business.

The global nutrition industry is intensely competitive. Mannatech also competes for associates with other network-marketing companies outside the global nutrition industry. Many competitors have greater name recognition and financial resources than Mannatech, which may give them a competitive advantage. Mannatech’s competitors may also be able to devote greater resources to marketing, promotional, and pricing campaigns that may influence Mannatech’s existing and potential associates and members to buy products from competitors rather than from Mannatech. Such competition could adversely affect Mannatech’s business and current market share.

Various governmental agencies regulate Mannatech’s network-marketing activities. A government agency’s determination that Mannatech and its associates have significantly violated a law or regulation could adversely affect Mannatech’s business. The laws and regulations regulating network-marketing generally intend to prevent fraudulent or deceptive schemes. Mannatech believes it complies with the current laws and regulations for which it is subject. However, Mannatech’s business faces constant regulatory scrutiny due to the interpretive and enforcement discretion given to regulators, periodic misconduct by its associates, adoption of new laws or regulations, and changes in the interpretation of new or existing laws or regulations. In the past, Mannatech has experienced inquiries regarding specific associates and has complied and cooperated with all regulatory agencies in connection with such inquiries.

Mannatech’s 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 Mannatech’s business. Furthermore, significant penalties could be imposed upon Mannatech for failure to comply with various statutes or regulations. Violations may result from:

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

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

In March 2002, the European Parliament approved a Directive on Food Supplements, which was intended to harmonize supplemental regulations across the European Union. This directive deals with vitamins and minerals and creates a number of labeling rules, ingredient form stipulations, and upper and lower content levels. If Mannatech’s products do not comply with these rules or regulations, it may need to discontinue selling its products while it reformulates its products. Any changes required by this directive could impair Mannatech’s ability to sell its products and operate its business in the United Kingdom.

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 Mannatech’s introduction of new products or suspend or prohibit the sale of existing products in a given country or marketplace. In addition, if Mannatech expands into other foreign markets, its operations or products could also be affected by the general stability of foreign governments and the regulatory environment relating to network-marketing and its products. If Mannatech’s products are subject to high customs duties, its sales and competitive position could suffer as compared to locally produced goods. Furthermore, import restrictions in certain countries and jurisdictions could limit Mannatech’s ability to import products from the United States.

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Mannatech currently operates in the international markets of Canada, Australia, the United Kingdom, Japan, and New Zealand. Further, Mannatech plans to enter South Korea in the second half of 2004 and Taiwan in 2005. Nonetheless, Mannatech’s international operations could experience changes in legal and regulatory requirements, as well as difficulties in adapting to new foreign cultures and business customs. If Mannatech does not adequately address such issues, its international markets may not meet growth expectations. Mannatech’s international operations and future expansion plans are subject to political, economic, and social uncertainties, including:

Any negative changes related to these factors could adversely affect Mannatech’s business, profitability, and growth prospects. Furthermore, changes in its distribution channels may force Mannatech to invest significant time and money related to its distribution and sales to maintain its position in certain international markets.

Mannatech’s business is heavily dependent upon its information technology infrastructure to effectively manage and operate many of its key business functions, including:

Although Mannatech maintains an extensive disaster recovery program, a long-term failure or impairment of any of its information technology systems could adversely affect its ability to conduct day-to-day business.

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

In addition, the stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the quoted prices of the securities of many companies. The changes often appear to occur without regard to specific operating performance. The price of Mannatech’s common stock could fluctuate based upon factors that have little or nothing to do with Mannatech or that are outside of Mannatech’s control. These fluctuations could materially cause Mannatech’s stock price to decline.

In March 2003, certain shareholders of Mannatech, including Samuel L. Caster, J. Stanley Fredrick, Marlin Ray Robbins, Jr., Jett, H. Reginald McDaniel, and Donald W. Herndon, together beneficially owned approximately 52.8% of Mannatech’s outstanding common stock as reflected in a Schedule 13D filed with the Securities and Exchange Commission. These shareholders include some of Mannatech’s directors and officers, as well as a Mannatech associate, and a former employee of Mannatech. This group formally disbanded as reported in an amendment to the Schedule 13-D filed in August 2003. However, Mannatech’s directors and executive officers, collectively with their families and affiliates, beneficially own approximately 44.3% of Mannatech’s total outstanding common stock. Therefore, if any of these shareholders choose to act together based on their current share ownership they may be able to control a majority of the shares of stock of Mannatech and could control the outcome of an election of directors, the adoption or amendment of provisions in Mannatech’s articles of incorporation and bylaws, or the approval of mergers and other significant corporate transactions. As a result, Mannatech shareholders may not have the opportunity to sell their shares for more than the then-prevailing market price of Mannatech’s common stock or the market price of its common stock could decline as the result of the approval or disapproval of a transaction.

Certain provisions in Mannatech’s articles of incorporation, bylaws and the Texas Business Corporation Act help discourage unsolicited proposals to acquire Mannatech, even if the proposal may benefit its shareholders. Mannatech’s articles of incorporation authorize the issuance of preferred stock without shareholder approval. The board of directors has the power to determine the price and terms of any preferred stock. The ability of Mannatech’s 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 Mannatech’s common stock or a non-negotiated tender or exchange offer for its common stock. Discouraging open market purchases may be disadvantageous to Mannatech’s 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. Mannatech’s charter documents provide for three classes of directors on its board of directors with members of each class serving staggered three year terms. Also, the Texas Business Corporation Act restricts, subject to exceptions, business combinations with any “affiliated shareholder.” Any or all of these provisions could delay, deter or help prevent a takeover of Mannatech and could limit the price investors are willing to pay for Mannatech’s common stock.

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Mannatech leases property at several locations for its headquarters and distribution facilities, including:

For its international operations, Mannatech contracts with several third party contractors for distribution and fulfillment operations. Mannatech believes its leased facilities are adequate for its projected operations. Mannatech’s third party contract distribution operations include the following:

In October 1997, Mannatech filed a Notice of Objection to the issuance of a registered trademark issued to IntraCell Nutrition, Inc., which had filed a trademark application for the name “Manna.” On May 19, 2000, Mannatech’s Notice of Opposition was rejected. To date, no infringement action has been filed against Mannatech by IntraCell. If IntraCell brings any infringement action against Mannatech, a negative determination could adversely affect Mannatech’s business, results of operations, financial condition, and liquidity.

In February 2003, the Australian Therapeutic Goods Administration, referred to as the TGA, notified Mannatech that it was the subject of an investigation. In March 2003, Mannatech was further notified that the allegations by the TGA related to four separate incidents over the period from November 2002 through March 2003. The notification by the TGA alleged that Mannatech and/or its independent associates made certain claims or representations in Australia relating to Mannatech’s products that either breached the Therapeutic Goods Advertising Code or resulted in violations of the Therapeutic Goods Act of 1989. As a result, Mannatech took certain corrective actions, including initiating compliance complaint procedures against certain independent associates alleged to have breached Mannatech’s associates’ policies and procedures. In June 2003, Mannatech received a letter from the TGA stating that subject to additional information about the specific outcomes of the complaint procedures, the TGA does not intend to take any further action against Mannatech and as a result, Mannatech considers this matter to be closed.

On November 21, 2003, Mannatech was again contacted by the TGA with regard to several associate promotional materials that were submitted to the TGA. Mannatech continues to work with the TGA in resolving these complaints and has asked for additional information from the TGA, so it can initiate any appropriate action in accordance with its associate polices and procedures. As of March 1, 2004, Mannatech had not received any further response from the TGA and therefore, Mannatech is unable to determine the scope of the TGA inquiry or the facts giving rise to a potential violation.

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None.

PART II

Market for its Common Stock. On February 12, 1999, Mannatech completed its initial public offering and on February 16, 1999, its common stock began trading on the Nasdaq National Market under the symbol “MTEX.” As of March 8, 2004, the total number of outstanding shares of its common stock was 26,232,052 and the closing price on such date was $11.28. Below are the high and low sales prices of Mannatech’s common stock as reported on the Nasdaq National Market for each quarter of the fiscal years ended December 31, 2002 and 2003:

Holders. As of March 10, 2004, there were approximately 4,600 shareholders of record who held Mannatech’s common stock directly and approximately 143 security brokers and dealers who held approximately 52.5% of Mannatech’s common stock on behalf of approximately 8,800 shareholders.

Dividends. Mannatech did not pay any dividends in 2002 or 2003. On January 21, 2004, Mannatech’s Board of Directors declared a $0.10 per common share dividend, payable on March 12, 2004 for shareholders owning shares on the close of business on February 20, 2004. Thereafter, Mannatech’s Board of Directors will periodically reevaluate its dividend policy based on its consolidated results of operations, financial condition, cash requirements, and other relevant factors. Any payments of dividends are subject to certain limitations under the Texas Business Corporation Act.

Sales of Unregistered Securities.

None.

Uses of Proceeds from Registered Securities.

None.

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The Selected Financial Data set forth below for each of the five years ended December 31, 2003 have been derived from and should be read in conjunction with (A) Mannatech’s Consolidated Financial Statements and related notes set forth in Item 15 of this report, beginning on page F-1, and (B) “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Item 7 of this report.

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The following discussion is intended to assist in the understanding of Mannatech’s consolidated financial position and its results of operations for each of the three years ended December 31, 2001, 2002, and 2003. This discussion should be read in conjunction with “Item 15. – the 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 its subsidiaries on a consolidated basis.

Company Overview

For over a decade, Mannatech has developed innovative, high-quality, proprietary nutritional supplements, topical products, and weight-management products that are sold through a global network-marketing system throughout the United States, Canada, Australia, the United Kingdom, Japan, and New Zealand. New Zealand began operations on June 10, 2002 and is serviced by Mannatech’s Australian subsidiary. Mannatech plans to open operations in South Korea in the second half of 2004 and in Taiwan in the first quarter of 2005.

Mannatech operates as a single segment and primarily sells its products through a network of approximately 264,000 associates and members who have purchased Mannatech’s packs and products within the last 12 months. Mannatech aggregates its operating segments because it believes it operates as a single reportable segment selling its nutritional supplements in similar distribution channels in each of its operations. Mannatech’s management reviews its financial information in each country by pack sales and by product sales. Each of Mannatech’s operations sells primarily the same products and possesses similar economic characteristics, such as similar gross margins. For the year ended December 31, 2003, Mannatech’s foreign operations accounted for approximately one-third of its consolidated net sales, whereas in the same period in 2002, its foreign operations accounted for approximately one-fourth of its consolidated net sales. Consolidated net sales by country in dollars and as a percentage of consolidated net sales for the years ended December 31, 2003, 2002, and 2001 are as follows:

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

Mannatech derives its revenues from sales of its products, sales of its starter and renewal packs, and from shipping fees and defers the recognition of its revenues until its customers receive their shipment. Substantially all of its product sales are sold to independent associates at published wholesale prices, sold to members at discounted published retail prices, or sold to customers at published retail prices. Mannatech believes the vast majority of its product sales are for personal consumption; however, Mannatech cannot distinguish its personal consumption sales from its other sales because it has no involvement in its products after delivery other than usual and customary product returns.

Mannatech periodically changes its starter and renewal packs to meet current market demands. Each of Mannatech’s starter and renewal packs includes some combination of its products and promotional materials and entitles associates and members to published discounts related to Mannatech’s retail prices. Mannatech tries to offer comparable packs in each country in which it does business; however, because each country has different regulatory guidelines, not all of Mannatech’s packs can be offered in all countries.

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Mannatech attributes the improvement in its sales and operations to the following:

Mannatech believes that its revamped global associate career and compensation plan and its annual travel incentive program contributed to an increase in the number of independent associates, as reflected by the 33.6% increase in its pack sales for the year ended December 31, 2003. Mannatech believes its annual travel incentive program helps increase the number of independent associates purchasing its products and is also a motivational vehicle for attracting and retaining independent associates. Mannatech’s annual travel incentive usually has a qualification period of between four- to seven months, during which independent associates qualify for the annual travel incentive by earning points primarily on the sales of high dollar packs and product purchases. Under its annual travel incentive program, Mannatech requires its associates to maintain their associate position and prohibits the subsequent return of any qualifying packs or products, except in exchange for like-kind products and packs.

Mannatech believes its future success on increasing its net sales is dependent on the following factors:

In 2004, Mannatech will primarily focus on registering its Ambrotose AO^™ product in its existing foreign markets and begin registering its most popular products in South Korea and Taiwan. Mannatech also plans to improve its nutritional food bars to include a more complete array of essential nutrients, and to continue its ongoing research of new products and product strategies for 2005.

Cost of sales consists of products purchased from third-party manufacturers, costs of promotional materials sold to Mannatech’s independent associates, freight, and provisions for slow moving or obsolete inventories. Mannatech’s inventory turnover ratio improved from 3.5 in 2002 to 4.6 in 2003. Mannatech’s sales mix of products and packs affects its cost of sales and gross profit differently because its products sold have a higher gross margin than its gross margins on its packs sold. Mannatech’s sales mix can be influenced by the following: