MANNATECH INC - Annual Report: 2004 (Form 10-K)

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2004

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

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 common stock held by non-affiliates of the Registrant was $143,120,765 based on the reported last sales price of common stock on June 30, 2004, which was (the last business day of the Registrant’s most recently completed second fiscal quarter. The number of shares of the Registrant’s common stock outstanding as of March 23, 2005 was 27,112,627 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 2004 annual shareholders’ meeting to be filed pursuant to Regulation 14A on or before April 30, 2005.

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Since its initial public offering, Mannatech’s common stock has traded on the NASDAQ National Market under the symbol “MTEX.” Mannatech’s corporate filings can be viewed on the SEC’s website www.sec.gov or on its 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 as a wellness solutions provider in November 1993 and currently operates in the United States, Canada, Australia, the United Kingdom, Japan, New Zealand, and the Republic of Korea, herein referred to as South Korea. Operating in the field of glyconutrients, Mannatech has developed innovative, high-quality, proprietary nutritional supplements, topical and weight-management products sold through a global network-marketing system of independent associates and members. Mannatech operates as a single segment and primarily sells its products and starter and renewal packs through a network of approximately 369,000 independent associates and members, also called current 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, antioxidants, and other nutrients are essential to maintain optimal health and that typical modern diets do not provide adequate amounts of these nutrients to support optimal health and wellness. Mannatech’s products are designed to support cell-to-cell communication, the immune system, the endocrine system, healthy skin, and optimal health, as well as nutritional support during beneficial weight loss. Proprietary antioxidant products are believed to protect against harmful free radicals caused by illness, stress, and environmental pollutants. Mannatech has formulated high quality, predominantly naturally-occurring, plant-derived, carbohydrate-based products that are based on certain scientific advances in the emerging fields of phytochemistry and glycobiology, which support the body’s normal physiology rather than developing synthetic chemical-based nutritional supplements that are easily duplicated. Phytochemistry is the science of understanding the potential health benefits of naturally-occurring, plant-derived components known as phytochemicals. Glycobiology is the science of understanding how carbohydrates affect biological structures, functions, and processes. Scientists believe that specific phytochemicals and carbohydrates help support and maintain optimal health and wellness.

Mannatech’s proprietary product history began with the development of its first products containing Manapol^®, a product that supports cell-to-cell communication. In 1996, Mannatech introduced Ambrotose^® Complex, a proprietary blend of Manapol^® and additional glyconutrients provided by naturally-occurring monosaccharides and polysaccharides that provides specific sugars to the body that help support cellular communication and the immune system. Ambrotose^® Complex is a key component in all but one of Mannatech’s line of 30 products. In 2001, Mannatech broadened its line of proprietary ingredients by developing Ambroglycin^®, a balanced food-mineral matrix that helps deliver certain nutrients to the body. Furthermore, in 2004, Mannatech developed a proprietary blend of antioxidant nutrients, called MTech AO Blend^™, which is used in its proprietary antioxidant product Ambrotose AO^®.

Mannatech sells its products through network-marketing, which it believes is a unique and effective communication channel for its business and products as it allows it to effectively educate consumers about the distinguishing potential benefits of its proprietary products and the unique science of its products. Additionally, Mannatech believes network-marketing allows it to accelerate the introduction process of new products into the marketplace at a lower cost than other more conventional marketing methods. Further, network-marketing allows Mannatech’s business-building independent associates to supplement their income and develop financial freedom by building their own businesses centered around Mannatech’s philosophies and products.

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Mannatech’s recent events and accomplishments during 2004 and into early 2005 were as follows:

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 five most recent fiscal years, with respect to its net sales, results of operations, and identifiable assets is set forth in” Item 6. – Selected Financial Data” of this report.

Mannatech’s principle 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.

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Industry Overview

Nutrition Industry

According to the June 2004 Nutrition Business Journal, the United States Nutrition Industry reported that the nutrition industry’s annual revenues increased to $63 billion in 2003 from $58 billion in 2002. For 2002 and 2003, the percentages of annual revenues from the different sectors within the United States nutrition industry were composed of the following:

Of the total reported annual revenues from the United States nutrition industry, the percentage of total annual revenues by sales outlet type for 2002 and 2003 was as follows:

The Nutrition Business Journal hosted a seminar in March 2005, called the Global Market web seminar. At this seminar, the Nutrition Business Journal reported that globally the nutrition industry’s annual revenues increased in 2003 by 8.4% to $182 billion from $168 billion in 2002. The Nutrition Business Journal predicted that global annual revenues for the nutrition industry will grow at an annual rate of between 5% and 7%, of which the nutritional supplements sector is expected to grow between 3% and 5%. The continued reported growth rate for the nutrition industry is largely attributed to the following:

Direct Selling Industry

In today’s marketplace, many manufacturers and consumers use direct-selling as an effective channel for selling products. Recently there have been influxes of prominent investors who have invested in direct selling companies that have provided direct selling companies with additional credibility in the marketplace. For example, in 2002, Berkshire Hathaway, Inc. acquired a network-marketing vendor of kitchen products. Other capital investment groups have also invested in direct selling companies and large corporations have diversified their marketing strategy by entering the direct marketing arena.

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According to the Direct Selling Association, United States direct sales totaled $29.6 billion, in 2003, which was an increase of 3.0% from 2002 reported direct sales of $28.7 billion. The composition of the total direct sales for 2002 and 2003 included the following:

The Direct Selling Association estimates that over 55% of the United States population has purchased goods or services through a direct selling channel. In addition, according to the June 2004 Nutrition Business Journal, in 2003, the United States direct channel nutrition industry reported its best year since 1999 by posting a 3.6% increase in annual revenues. Both the Direct Selling Association and Mannatech believe that the combination of an effective e-commerce platform coupled with utilizing efficient network-marketing channels helps increase revenue growth as consumers continue to seek information, thereby providing opportunities for brand marketers to reach and influence a vast consumer base. Mannatech’s net sales for 2004 grew over 54%, which surpassed the industry’s predicted average expected growth rate of 5%. Mannatech’s net sales for 2004 were 0.5% of the total reported net sales for the United States nutrition industry. Mannatech believes the combination of its “high tech with high touch” marketing approach coupled with its product efficacy and its distinct and unique ingredients allows it to differentiate itself from its competition and will continue to allow Mannatech to experience global growth in the future.

Operating Strengths

In February 2003, Technology Review, MIT’s Magazine of Innovation, published a report called “The 10 Emerging Technologies that will Change the World.” In this article, Glycomics, which is the study of sugars, was noted as one of the ten emerging fields. In this article, glycomics was considered to play an important function in the body, as well as a critical role in stabilizing and determining the function of proteins through a process called glycosylation. Glycosylation is a process where sugar molecules attach to other molecules including newly made proteins. According to this article, scientists were stated to believe that by manipulating glycosylation, or sugars themselves, researchers hope to curtail certain disease processes. Throughout its history, Mannatech’s product development is based on this scientific discovery that the body needs at least specific eight sugars to support efficient and effective cell-to-cell communication 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 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. Mannatech believes that the use of this unique compound in its products allows it to differentiate and distinguish its products from those of its competitors. As a result, Mannatech has filed for patents in the United States and abroad for this and other of its compounds.

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

Mannatech’s research and development team has more than 160 years of combined experience. Mannatech believes that its research and development team and its facilities and strategic alliances with its suppliers, consultants, and manufacturers allows it to effectively identify, develop, and market high-quality, innovative, proprietary products that will increase its competitive advantage in the marketplace. Mannatech invested $3.4 million, $4.0 million, and $7.0 million, in 2002, 2003, and 2004, respectively, in its research and development efforts. Historically, Mannatech budgets between 2% and 3% of its annual net sales for targeted research and development efforts. In 2005, Mannatech projects it will spend between $7.0 million and $8.0 million for its on-going research and development efforts. A lot of Mannatech’s research and development efforts are conducted in its laboratory and are performed using scientifically-advanced equipment such as gas and liquid chromatography and mass spectrometers. Such equipment is used to:

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

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 evaluates its suppliers’ and manufacturers’ quality assurance programs to ensure that they follow Mannatech’s 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/or manufacturers. In addition, Mannatech packages its dietary supplements with inner and outer seals to minimize possible tampering. Further, Mannatech 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 its future include the following:

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Products and Product Development

Scientists have discovered that a healthy body consists of many sophisticated components working in harmony to achieve optimal health and wellness. To achieve this harmony, the body needs to achieve and maintain accurate cellular 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 sugar molecules 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 sugar molecules are commonly found in human glycoproteins and are believed to be key in helping healthy to provide cell-to-cell communication in the human body. The eight sugar molecules include the following:

These eight sugar molecules 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 sugars. Mannatech has applied for patents around the globe to protect its formulation and use of Ambrotose^® Complex and has been issued 17 patents in various foreign jurisdictions as of December 31, 2004.

Currently, Mannatech offers 22 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 independent associates including various enrollment and renewal packs, orientation and training programs, brochures, audio and videotapes, DVD’s, web-based data management tools, and personalized website development.

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Mannatech focuses its full spectrum of products on achieving and maintaining optimal health and wellness. Mannatech’s line of optimal health and wellness products includes the following:

Mannatech continues to explore additional products that expand its focus on skin care and other nutritional products. In March 2005, Mannatech introduced Advanced Ambrotose^® into the market, which is a more concentrated formula of its proprietary product Ambrotose^®, and will continue to register its core products in new foreign locations. Mannatech’s product committee continues to 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 ability to increase production capacity, Mannatech contracts with third-party contractors to produce all of its products. This strategy effectively allows Mannatech to quickly respond to fluctuations in demand with minimal investment and helps 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. However, as a safety measure, Mannatech has also identified and approved 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 2005. Mannatech also maintains supply agreements for various other raw materials that are used in its research and development process and in its products.

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 35% of its capacity. This system is capable of supporting Mannatech’s planned sales volume growth. To maximize its operating strategy and minimize the cost, Mannatech contracts with third-party contract distribution facilities in Canada, Australia, the United Kingdom, Japan, and the Republic of Korea, and plans to contract with a third-party distribution contractor in Taiwan. By entering into these distribution facility agreements, Mannatech maintains a flexible operating capacity, 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 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 in the industry, and Mannatech must compete for these individuals, as 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 independent associates and for retention of existing independent associates. Some of its competitors have longer operating histories, are better known, or have greater financial resources. These companies include:

The availability of independent associates decreases when other network-marketing companies successfully recruit and retain people for their operations. Mannatech believes it can successfully compete for independent associates by emphasizing the following:

Intellectual Property

Mannatech aggressively pursues registrations for all trademarks associated with its key products and protects its legal rights concerning its trademarks. As of December 31, 2004, Mannatech had approximately 34 trademark registrations in the United States and approximately four trademark applications pending with the United States Patent and Trademark Office. At December 31, 2004, Mannatech also had approximately 310 trademark registrations and 67 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. However, 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. A United States federal trademark registration 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 date Mannatech registered its trademark.

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As of December 31, 2004, Mannatech had been issued 17 patents in the following foreign jurisdictions in connection with its proprietary product Ambrotose^® Complex: Australia, France, Germany, Hong Kong, Ireland, Italy, Liechtenstein, Malaysia, Mexico, New Zealand, Singapore, South Africa, Republic of Korea, Spain, Switzerland, Taiwan, and the United Kingdom. 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. Mannatech also has one patent and seven patent applications pending in the United States Patent and Trademark Office. Five 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. At December 31, 2004, Mannatech also had submitted 13 patent applications in various foreign jurisdictions in connection with Ambrotose^® Complex. Until a patent is approved and issued, Mannatech cannot exclude others from making, using, selling, offering to sell, or importing a product that falls within the scope of the claims in the application. Mannatech also owns its domain name mannatech.com.

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 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 independent 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 independent 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 independent associates to achieve long-term growth. Mannatech believes the introduction of new innovative incentives, such as travel incentives will continue to motivate its independent associates and help expand Mannatech’s global customer purchasing base. Mannatech remains actively committed to the expansion of the number of independent associates through recruitment, support, motivation, and compensation. Total independent associates and members purchasing Mannatech products within the 12 months ended December 31, 2003 and 2004 were approximately 264,000 and 369,000, respectively.

Mannatech does not have any significant accounts receivable from its customers, as its customers are required to pay for purchases prior to shipment. Independent associates, members, and customers generally pay for products by credit card, although orders can also be paid with cash, wire transfers, direct account withdrawal, money orders, and/or checks. To gain operating efficiencies, Mannatech offers a 10% discount to independent associates and a 5% discount for independent members who enroll in its automatic monthly order program, a program where the independent associates and members register for a standing order to be shipped to them every four weeks. Mannatech’s automatic monthly orders have continued to increase to approximately 75.4% of total orders placed for the year ended December 31, 2004 as compared to 68.5% for the year ended December 31, 2003 and 65.0% of the total orders placed for the year ended December 31, 2002.

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

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Mannatech and its existing independent associates train and educate new independent associates about Mannatech products and network-marketing. Mannatech offers a global orientation/training program that integrates audio, video, and graphics so 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 newsletters, 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 and tools.

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

The initial leadership level is based upon the initial pack purchased by the independent associate. Thereafter, leadership levels are determined by the growth and volume of direct and indirect commissionable net sales credited to the associates’ global organization. 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. Independent associates earn points, which in turn earn commissions from the independent 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 independent 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 payments to independent associates 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 its industry. Together, Mannatech’s commissions and incentives, as a percentage of net sales, range from 41% to 46% of consolidated net sales and are expected to continue to remain in the same percentage range in the future.

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Mannatech’s global associate career and compensation plan pays various types of commissions and incentives based upon a point system that calculates a percentage of the independent associate’s commissionable direct and indirect net sales and the attainment of certain associate leadership levels. Mannatech believes its global associate career and compensation plan fairly compensates its independent associates at every stage of building their business by quickly rewarding an independent associate for both the breadth and depth of their global seamless downline structure.

Mannatech’s global associate career and compensation plan identifies and pays 15 different types of incentive commissions to its qualified independent associates, which are based on the following:

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

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

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Product Return Policy. Mannatech stands behind its products and believes it offers a reasonable and industry-standard product return policy to all of its customers. Refunds are not processed until proper approval is obtained. All refunds must be processed and returned in the same form of payment that was originally used in the sale. Mannatech allows its independent associates and members to exchange products as long as the products are unopened and restockable. Mannatech has three product return policies. The policies are for its retail customers, its members, and its independent associates.

Retail Customer Product Return Policy. Mannatech’s retail customer product return policy allows a retail customer to return any used or unused portion of any of its products to the original independent associate who sold them the product and such associate will provide the retail customer with a full cash refund. The independent associate is required to then forward proof of the retail customer’s refund to Mannatech to receive a replacement product.

Member Product Return Policy. Mannatech’s member product return policy allows members to return an order within 30 days of the purchase date without being terminated or being charged a 10% restocking fee. After 30 days from the purchase date, the members are still allowed to request a refund, but are charged a 10% restocking fee and may be terminated as an active member.

Independent Associate Product Return Policy. Mannatech’s independent associate product return policy allows its independent associates to return an order within one year of the purchase date upon terminating their account with Mannatech. Mannatech may allow the independent associate to receive a full refund less a 10% restocking fee. Mannatech will only issue a refund to the independent associate if the product is returned, unopened and restockable, and is in good, reusable condition. After a refund is granted, Mannatech will terminate the associates’ account, unless Mannatech caused the error or problem. Independent associates are allowed to exchange products without having their accounts terminated.

Information Technology Systems

Mannatech’s information technology and 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 both internally and by its independent associates to manage and optimize their business organizations. With this tool, independent associates have constant access to graphs, maps, alerts, and reports on the status of their individual organizations, which helps to optimize their earnings.

Mannatech also maintains a 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 and monitors various software and hardware systems. Mannatech also performs routine maintenance procedures and periodically upgrades its software and hardware to help ensure that its systems work efficiently and effectively and to minimize the risk of business interruption.

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Mannatech continues to enhance its information technology, websites, and e-commerce platforms to remain competitive and efficient. During 2004, Mannatech spent approximately $14.0 million on information technology, of which approximately $4.7 million was capitalized related to computer hardware, computer software and internally developed software projects. In 2005, Mannatech plans to spend between $12.0 million and $16.0 million for targeted capital projects, which are predominately information technology projects to enhance functionality. These capital projects include the following:

In 2004, Mannatech’s financial system included five sub-modules that directly interface with the general ledger module and report-writing system. This financial system is Windows-based and operates on several platforms to enable Mannatech to track, report and analyze financial information. During 2004, Mannatech purchased a multi-faceted financial system called PeopleSoft^® Enterprise One. After purchasing this system, Mannatech configured its financial modules and put the system into operation in January 2005. In 2006, Mannatech plans to fully integrate its new financial system with its new transaction-processing database, which will also utilize a customized PeopleSoft^® Enterprise One system. Mannatech believes its new PeopleSoft^® Enterprise One system will be sufficient to support its operations for the foreseeable future.

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:

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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 current 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 the prescribed current Good Manufacturing Practices. In 2004, 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 2005, Mannatech will continue to focus on validating its compliance with newly introduced current Good Manufacturing Practice regulations and Canadian Health Product Regulations in Canada and the Therapeutic Goods Advertising Code in Australia, while preparing for additional regulations to be introduced in the United States.

The Dietary Supplement Health and Education Act of 1994, referred to as DSHEA, revised the provisions of the Federal Food, Drug and Cosmetic Act concerning the composition and labeling of dietary supplements, and statutorily created a new class entitled “dietary supplements.” Dietary supplements include vitamins, minerals, herbs, amino acids, and other dietary substances used to supplement diets. A majority of 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 30 days after the statement is first made.

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

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 regulatory bodies as an 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 DSHEA and the FDA’s extensive regulations. As a result, Mannatech has procedures in place to help ensure that its independent associates and employees comply with the requirements of DSHEA, 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 all applicable regulations.

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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.

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/or misleading marketing practices, as well as misleading advertising of certain products. These enforcement actions have resulted in consent decrees and significant monetary judgments against the companies and/or individuals involved. Regulators require a company to convey product claims clearly and accurately and further require marketers to maintain adequate substantiation for their claims. 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 ensures that consumers are protected from false and/or misleading claims by requiring scientific substantiation of product claims at the time such claims are first made. The failure to have this substantiation violates the Federal Trade Commission Act. 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. Mannatech believes it is in compliance with applicable laws and regulations.

International Regulations. Mannatech is also subject to extensive regulations in each country in which it operates. Currently Mannatech operates in Canada, Australia, the United Kingdom, Japan, New Zealand, and the Republic of Korea. Mannatech plans to begin registering its products in Germany and Denmark in mid 2005, as well as begin operations in Taiwan in mid 2005. Some of the country-specific regulations include the following:

Regulations regarding Network-Marketing System and Mannatech’s Products. 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 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 legal counsel and regulatory consultants in each specific country for advice.

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Mannatech is also subject to inquiries and enforcement actions from various U.S. state attorneys general offices. Each state has specific 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 independent associates. To combat such risk, Mannatech provides associate policies and procedures to its independent associates, provides various educational seminars and publications, and maintains a legal/compliance department that investigates allegations of improper conduct by its independent associates.

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 compensation to its independent associates or made to prospective new independent associates constitute fair, reasonable, and timely disclosure and that such representations meet other legal requirements of the Federal Competition Act. 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 independent associates be licensed as direct sellers. Mannatech believes that it holds the required provincial and territorial direct sellers’ licenses to legally conduct business in Canada.

In Australia, Mannatech’s network-marketing system is subject to Australia’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 governmental entities regulate Mannatech’s business and trade practices, as well as those of its independent 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 2006, the governments of Australia and New Zealand plan to implement the Joint Therapeutic Agency, which will regulate all medicines, including dietary supplements, using a risk-based approach, which is similar to the current Australian Therapeutic Goods regime. This harmonization of laws and regulatory bodies is anticipated to provide a more consistent approach to dietary supplement laws between the two countries.

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 practices and the activities of its independent associates, while the Trading Standards Office regulates any claims or representations relating to Mannatech’s operations. Mannatech’s products are regulated by the Medicines and Healthcare Products Regulatory Agency.

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

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In the Republic of Korea, the primary body of law applicable to Mannatech’s operations is 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 the Republic of Korea, Mannatech believes its products are categorized as health and functional foods and are regulated by the newly enacted Health and Functional Food Act of 2004. 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.

In Denmark, the notion of door-to-door selling is generally prohibited. As a result, under Danish law, the trader is not allowed to contact the consumer at his home, place of work, or other non-public place in order to conclude a contract on certain subjects. However, the general prohibition has an exemption when the consumer asks the trader for a contract in writing or upon prior consent, which must also be in writing. In addition, the Danish Marketing Practices Act and the rules contained in the Danish Consumer Contracts Act that will govern Mannatech’s network-marketing system that it intends to operate in Denmark. In addition, there is no specific ban on products in Denmark, however, certain medical products, such as vitamins, slimming preparations and the like must have approval by the Danish Health Board before they can be sold. Further, the rules for marketing and sales of dietary supplements are covered by the Danish Executive Order on Dietary Supplements, as well as by the Danish Act on Foodstuffs. Finally, Denmark subjects the marketing of a company’s food supplements to a notification procedure or a pre-market approval process before a product may be lawfully marketed or sold in Denmark.

In Germany, there is no specific legal regulation covering multi-level marketing company practices in legal terms. However, under certain circumstances multi-level marketing systems may have to follow the German Unfair Competition Act. Mannatech’s independent associates’ conduct will be subject to the German statute that governs the conduct of a commercial agent. In addition, direct selling operations are governed by the Industrial Code, which requires direct sellers to hold itinerant trader’s cards. In Germany, there is only one regulation to distinguish self-employed persons from employees.

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

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

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In some countries, including the United States, Mannatech is also governed by regulations concerning the activities of its independent associates. Regulators may find that Mannatech is ultimately responsible for the conduct of its independent associates and may request or require that Mannatech take steps to ensure that its independent 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 independent associates could result in Mannatech’s products being overly 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 continuously researches and monitors the laws governing the conduct of its independent associates, its operations, its global associate career and compensation plan, and its products and sales aids in each of its countries’ operations. Mannatech tries to educate its independent associates about acceptable business conduct in each market through its policies and procedures for its independent associates’, seminars, and other training materials and programs. However, Mannatech cannot guarantee that its independent associates will always abide by its policies and procedures and/or act in a professional and consistent manner.

Employees

Mannatech employed a total of 388 people around the world at December 31, 2004 as set forth below:

These numbers do not include Mannatech’s independent 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 active base of independent associates and members who purchase and sell its products. Mannatech cannot give any assurances that the productivity of its independent 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 independent associates and members, including:

Although Mannatech uses various means to address misconduct by its independent associates including maintaining policies and procedures to govern the conduct of its independent associates and conducting training seminars, it is still difficult to detect and correct all instances of misconduct. Violations of Mannatech’s policies and procedures by its independent associates could lead to litigation, formal or informal complaints, enforcement actions, and inquiries by various federal, state, or foreign regulatory authorities against Mannatech and/or its independent associates. Because Mannatech has expanded into foreign countries, Mannatech’s policies and procedures for its independent associates differ due to the different legal requirements of each country in which it does business. Litigation, complaints, and enforcement actions involving Mannatech and its independent 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 its independent 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 as of December 31, 2004, received 17 patents for Ambrotose^® Complex, in various foreign countries. In addition, Mannatech has entered into confidentiality agreements with its independent 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 to minimize this risk. 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 independent 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. Mannatech can make no assurances that it will not be exposed to any substantial future product liability claims. Such claims may include that Mannatech’s products contain contaminants, that it provides its independent 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 future product liability claim could exceed the amount of insurance coverage or a future product claim could be excluded under the terms of an existing insurance policy, which could adversely affect Mannatech’s future financial condition.

In 2003, the FDA banned the use of ephedra and as a result, products containing ephedra are the subject of adverse publicity in the United States and other countries due to alleged harmful effects, including death. In 2002, Mannatech voluntarily discontinued the sale of its products containing ephedra, which included two of its products, GlycoLEAN^® Body System Accelerator^™ and MVP. In 2002, Mannatech voluntarily reformulated its GlycoLEAN^® Body System Accelerator^™ to include a non-ephedra ingredient and renamed it GlycoLEAN^® Body System, Accelerator 2^™. Mannatech continues to explore an ephedra free ingredient for its MVP product, but has discontinued selling MVP. None of Mannatech’s other products have ever contained ephedra. During 2002, aggregate sales for Mannatech’s discontinued products related to ephedra, was $1.2 million, which was 0.9% of Mannatech’s consolidated net sales for the year ended December 31, 2002.

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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, including Japan, have banned the importation or sale of products that contain bovine materials sourced from locations where BSE has been identified. Mannatech has certain products that use a beef-based gelatin capsule. All of its gelatin capsules are currently produced in the United States or in Australia, which are considered BSE-free countries. However, in December 2003, a single cow imported from Canada into the United States was found to have BSE, which prompted some countries to temporarily suspend imports of beef and bovine related products from the United States. As a result, Mannatech has begun to voluntarily switch its production to utilize non-bovine gelatin capsules that are vegetable-based rather than beef-based in certain of its capsule products and is also considering using vegetable-based capsules in all such products. However, future government action could require companies to use vegetable-based capsules, and if required, vegetable-based capsules cost could increase as compared to cost of bovine-based capsules, which could result in higher costs for Mannatech and affect its financial condition, results of operations, and its cash flows.

Outside manufacturers make all of Mannatech’s products. During 2004, Mannatech and its manufacturers collectively purchased approximately 47% from its supplier’s production of Manapol^® and 100% of its supplier’s production of Australia Plum Powder. Mannatech also purchased approximately 30% from another of its manufacturer’s production of finished products for the year ended December 31, 2004. Mannatech’s profit margins and timely product delivery are dependent upon the ability of its outside suppliers and manufacturers to supply Mannatech with 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 approved 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 certain 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 independent 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 independent associates and members to buy products from competitors rather than from Mannatech. Such competition could adversely affect Mannatech’s business and current market share.

A vast array of governmental agencies regulate network-marketing activities. A government agency’s determination that Mannatech and/or its independent 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. However, Mannatech’s business faces constant regulatory scrutiny due to the interpretive and enforcement discretion given to regulators, periodic misconduct by its independent 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 independent associates and has complied and cooperated with all regulatory agencies in connection with such inquiries.

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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:

Mannatech’s operation 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 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, New Zealand, and the Republic of Korea. Mannatech plans to begin registering its products in Germany and Denmark in mid 2005, and begin operations in Taiwan by mid 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.

In 2003 and 2004, Mannatech recognized 33.0% and 34.6%, respectively, of its net sales in markets outside of the United States. In preparing Mannatech’s 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. There is a risk if the United States dollar strengthens relative to applicable local currencies, Mannatech’s reported sales, operating expenses, and net income could significantly fluctuate. Mannatech is not able to predict the degree of exchange rate fluctuations, nor can it estimate the effect any future fluctuations may have upon its future operations. However, to help mitigate this risk, Mannatech’s management monitors applicable exchange rates. To date, Mannatech has not entered into any hedging contracts or participated in any hedging or derivative activities.

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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 Mannatech’s 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.

As of December 31, 2004, Mannatech’s directors and executive officers, collectively with their families and affiliates, beneficially owned approximately 40.1% of Mannatech’s 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 Mannatech’s stock, which could effect the outcome of a shareholder vote on the 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.

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. Mannatech’s 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 March, 2004, the New Zealand Medical Devices Safety Authority (referred to as MEDSAFE), contacted Mannatech regarding several Mannatech independent associates who were allegedly advertising Mannatech’s products for therapeutic purposes, which claims were in violation of the New Zealand Medicines Act 1981. Mannatech addressed the complaints through its independent associate disciplinary procedure and notified MEDSAFE of its actions. MEDSAFE notified Mannatech on June 3, 2004 that it was satisfied with Mannatech’s response to the complaints and that no further action would be taken.

On June 11, 2004, the Australian Therapeutic Goods Administration notified Mannatech regarding a complaint that an Australian independent associate had made certain therapeutic claims to promote Mannatech’s products. In response to this complaint, Mannatech conducted an investigation and terminated this associate’s account. In November 2004, the Australian Therapeutic Goods Administration indicated its agreement to the action proposed by Mannatech, including Mannatech’s plans for ongoing education and compliance training for its independent associates over the next three years. However, the Australian Therapeutic Goods Administration will continue to monitor Mannatech’s activities.

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On January 1, 2004, the Canadian Natural Health Product Regulations came into force, which apply to all Natural Health Products sold in Canada. The Natural Health Product Regulations require companies selling Natural Health Products in Canada to obtain a product license prior to the sale of such products. Regulatory compliance action in connection with products on the market prior to January 1, 2004 is subject to the priority classification of the product ingredients. As a result, companies selling products containing priority one ingredients were required to submit an application for a product license by June 30, 2004 and companies selling products containing priority two ingredients were required to submit an application for a product license by December 31, 2004. Mannatech did not file a license application for its products containing priority one ingredients by June 30, 2004. Accordingly Mannatech had to await receipt of its product license before its products containing priority one and priority two ingredients could be sold in Canada. In the meantime, Mannatech products remain available for personal consumption by Canadian consumers in accordance with Health Canada’s Importation of Human Use Drugs for Personal Use Enforcement Directive. Mannatech also reformulated certain of its products in order to prospectively comply with these new regulations in Canada. In March 2005, Mannatech was orally advised that it could begin reintroduction into Canada of its products containing priority one ingredients that have been assigned a submission number by the Natural Products Directorate.

On November 15, 2004, Ms. Chie Sasaski filed suit against Mannatech, Samuel Caster, its CEO, Victoria Arcadi, an independent associate, and Kathryn Dykman, a former employee of Mannatech, in the Superior Court of California, County of Los Angeles, case no. LC 069762. The suit alleged intentional and negligent infliction of emotional distress, intentional and negligent misrepresentation, invasion of privacy, and unfair competition. The lawsuit arises from the publication of a journal article written by an independent associate describing the treatment of the plaintiff’s child in 1997. Mannatech’s insurance carriers have accepted the duty of defense for this case under a reservations of rights. On January 18, 2005, Ms. Dykman was dismissed as a defendant. Currently, this matter is in the initial stages of discovery and Mannatech intends to vigorously defend itself against this suit. Ms. Sasaski is seeking unspecified damages.

On February 25, 2005, as part of Mannatech’s worldwide enforcement efforts of its intellectual property rights, Mannatech filed a patent infringement lawsuit in the in the High Court, Chancery Division, Patents Court, London, seeking a permanent injunction and certain damages against BION, Inc. and its principal Mr. Veilis Boye, claim no. HC05C00436. Mannatech has alleged infringement of certain claims of Mannatech’s European Patent (UK) No. 0 923 383.

None.

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Index to Financial Statements

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 23, 2005, the total number of outstanding shares of its common stock was 27,112,627 and the closing price on such date was $19.60. 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, 2003 and 2004:

Holders. As of March 23, 2005, there were approximately 4,200 shareholders of record who held Mannatech’s common stock directly and approximately 113 security brokers and dealers who held approximately 60.0% of Mannatech’s common stock on behalf of approximately 10,000 shareholders.

Dividends. Mannatech did not pay any dividends in 2003. In 2004 and early 2005, Mannatech declared and paid the following dividends for its common stock:

On March 9, 2005, Mannatech’s Board of Directors declared a quarterly cash dividend of $0.07 per common share payable on April 15, 2005, to all of its shareholders of record at the close of business on Friday, April 1, 2005.

In 2005, Mannatech’s Board of Directors expects to continue to pay a dividend, while continuing to periodically reevaluate its dividend policy based on its ongoing consolidated results of operations, financial condition, cash requirements, and other relevant factors. Any payment of dividends is also subject to certain limitations under the Texas Business Corporation Act.

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Index to Financial Statements

Stock Options

The following table provides information as of December 31, 2004 about Mannatech’s common stock that may be issued upon the exercise of stock options under all of our existing stock option plans.

Sales of Unregistered Securities.

None.

Uses of Proceeds from Registered Securities.

None.

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Index to Financial Statements

The Selected Financial Data set forth below for each of the five years ended December 31, have been derived from and should be read in conjunction with (A) 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.