MANNATECH INC, 10-Q, 1999-11-12

MANNATECH INC
10-Q, 1999-11-12
MEDICINAL CHEMICALS & BOTANICAL PRODUCTS

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

FORM 10-Q

(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _________________

Commission File No. 000-24657

MANNATECH, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)

Texas 75-2508900
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

600 S. Royal Lane, Suite 200
Coppell, Texas
75019
(Address of Principal Executive Offices, including Zip Code)

(972) 471-7400
(Registrant's Telephone Number, including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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
----- -----

As of November 9, 1999, the number of shares outstanding of the registrant's
sole class of common stock, par value $0.0001 per share, was 24,695,293.
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TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
Part I - FINANCIAL INFORMATION

<S> <C>
Item 1. Financial Statements......................................................................... 1
Consolidated Balance Sheets....................................................................... 1
Consolidated Statements of Income................................................................. 2
Consolidated Statement of Changes in Shareholders' Equity......................................... 3
Consolidated Statements of Cash Flows............................................................. 4
Notes to Consolidated Financial Statements........................................................ 5

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 7
Overview.......................................................................................... 7
Results of Operations............................................................................. 9
Three months ended September 30, 1999 compared with the three months ended
September 30, 1998.............................................................................. 9
Nine months ended September 30, 1999 compared with the nine months ended September 30, 1998....... 10
Liquidity and Capital Resources................................................................... 12
Year 2000......................................................................................... 13
Forward-Looking Statements........................................................................ 14
Recent Financial Accounting Standards Board Statements............................................ 15

Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 15

Part II - OTHER INFORMATION

Item 1. Legal Proceedings............................................................................ 15
Item 2. Changes in Securities and Use of Proceeds.................................................... 15
Item 3. Defaults Upon Senior Securities.............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 16
Item 5. Other Information............................................................................ 16
Item 6. Exhibits and Reports on Form 8-K............................................................. 16

</TABLE>

i
<PAGE>

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MANNATECH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share information)
<TABLE>
<CAPTION>
September 30,
December 31, 1999
1998 (Unaudited)
------------ -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents..................................... $ 763 $ 18,203
Short-term investments........................................ -- 1,688
Accounts receivable, less allowance for doubtful
accounts of $58 in both 1998 and 1999....................... 63 219
Receivable from related parties............................... 125 125
Current portion of notes receivable-shareholders.............. 307 158
Inventories................................................... 6,875 8,403
Prepaid expenses and other current assets..................... 447 1,026
Deferred tax assets........................................... 398 398
------------ -------------
Total current assets........................................ 8,978 30,220
Property and equipment, net................................... 14,103 13,324
Notes receivable-shareholders, excluding current portion...... 701 533
Other assets.................................................. 948 827
Deferred offering costs....................................... 2,144 --
------------ -------------
Total assets................................................ $ 26,874 $ 44,904
============ =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of capital leases and notes payable........... $ 854 $ 812
Accounts payable.............................................. 5,480 670
Accrued expenses.............................................. 15,063 16,986
Payable to related party...................................... -- 230
------------ -------------
Total current liabilities................................... 21,397 18,698
Capital leases and notes payable, excluding current portion... 1,056 514
Deferred tax liabilities...................................... 1,438 1,438
------------ -------------
Total liabilities........................................... 23,891 20,650
------------ -------------
Commitments and contingencies.................................
Redeemable warrants........................................... 300 --
------------ -------------
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding................ -- --
Common stock, $.0001 par value, 99,000,000 shares authorized
22,101,738 shares issued and outstanding in 1998 and
24,626,401 shares issued and 24,610,093 shares
outstanding in 1999......................................... 2 3
Additional paid-in capital.................................... 2,632 16,826
Notes receivable from shareholders............................ (636) --
Retained earnings............................................. 685 7,629
------------ -------------
2,683 24,458
Less treasury stock, at cost, 16,308 shares in 1999........... -- (204)
------------ -------------
Total shareholders' equity.................................. 2,683 24,254
------------ -------------
Total liabilities, redeemable warrants and shareholders'
equity..................................................... $ 26,874 $ 44,904
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.

1
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MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(in thousands, except per share and share information)

<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- --------------------------
1998 1999 1998 1999
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net Sales......................................................... $ 39,128 $ 45,814 $ 122,853 $ 133,465
----------- ----------- ----------- -----------
Cost of Sales..................................................... 7,037 7,657 20,581 21,717
Commissions....................................................... 15,103 18,353 48,975 54,334
----------- ----------- ----------- -----------
22,140 26,010 69,556 76,051
----------- ----------- ----------- -----------
Gross profit.................................................... 16,988 19,804 53,297 57,414
----------- ----------- ----------- -----------
Operating Expenses:
Selling and administrative expenses............................. 7,682 8,839 22,623 26,200
Write-off of deferred offering costs............................ 941 0 941 0
Other operating costs........................................... 5,640 6,231 15,678 18,339
----------- ----------- ----------- -----------
Total operating expenses..................................... 14,263 15,070 39,242 44,539
----------- ----------- ----------- -----------
Income from operations............................................ 2,725 4,734 14,055 12,875
Other (income) expense, net....................................... 18 (286) (4) (150)
----------- ----------- ----------- -----------
Income before income taxes........................................ 2,707 5,020 14,059 13,025
Income tax expense................................................ 1,042 1,832 5,413 4,754
----------- ----------- ----------- -----------
Net income........................................................ $ 1,665 $ 3,188 $ 8,646 $ 8,271
=========== =========== =========== ===========

Earnings per common share:
Basic........................................................... $ 0.08 $ 0.13 $ 0.39 $ 0.35
=========== =========== =========== ===========
Diluted......................................................... $ 0.07 $ 0.12 $ 0.37 $ 0.33
=========== =========== =========== ===========
Weighted-average common and common equivalent shares outstanding
Basic........................................................... 22,101,738 24,531,782 22,101,738 23,940,787
=========== =========== =========== ===========
Diluted......................................................... 23,613,258 25,678,448 23,674,310 25,319,931
=========== =========== =========== ===========
Dividends declared per common share............................... $ 0.06 $ 0.00 $ 0.36 $ 0.06
=========== =========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

2
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MANNATECH, INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(in thousands)

Notes
Common Stock Additional receivable Treasury Stock Total
-------------------- paid-in from Retained --------------- shareholders'
Shares Par value capital shareholders earnings Shares Amounts equity
--------- --------- ---------- ------------ -------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998... 22,102 $ 2 $ 2,632 $ (636) $ 685 -- $ -- $ 2,683
Dividends declared ($.06
per share)............. -- -- -- -- (1,327) -- -- (1,327)
Repayment of notes
receivable -
shareholders........... -- -- -- 636 -- -- -- 636
Net proceeds from
offering................ 1,500 0 9,241 -- -- -- -- 9,241
Exercise of warrants..... 475 0 941 -- -- -- -- 941
Tax benefit from
exercise of
warrants and stock
options............... -- -- 3,270 -- -- -- -- 3,270
Tender of common stock
for
exercise of stock
options............... 149 0 204 -- -- 16 (204) 0
Proceeds from stock
option
exercises.............. 400 1 538 -- -- -- -- 539
Net income............... -- -- -- -- 8,271 -- -- 8,271
--------- --------- ---------- ------------ -------- ------ ------- ------------

Balance at September 30, 1999.. 24,626 $ 3 $ 16,826 $ -- $ 7,629 16 $ (204) $ 24,254
========= ========= ========== ============ ======== ====== ======= ============

</TABLE>

See accompanying notes to consolidated financial statements.

3
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MANNATECH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(in thousands)

<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 8,646 $ 8,271
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................................... 1,585 2,210
Loss on disposal of assets......................................... 69 44
Deferred income tax expense........................................ 486 --
Tax benefit from exercise of warrants and stock options............ -- 3,270
Changes in operating assets and liabilities:
Accounts and notes receivable.................................... 215 (176)
Inventories...................................................... (1,307) (1,528)
Prepaid expenses and other current assets........................ (581) (580)
Other assets..................................................... 40 120
Accounts payable................................................. 156 (4,810)
Accrued expenses................................................. 5,501 1,923
Payable to related party......................................... -- 230
-------- -------
Net cash provided by operating activities....................... 14,810 8,974
-------- -------

Cash flows from investing activities:
Acquisition of property and equipment and construction
in progress......................................................... (3,406) (1,475)
Restricted cash...................................................... 199 --
Short-term investments............................................... -- (1,688)
(Advance) Repayment of shareholders/related party receivables........ (59) 974
-------- -------
Net cash (used in) investing activities......................... (3,266) (2,189)
-------- -------

Cash flows from financing activities:
Payment of dividends................................................. (9,274) (1,327)
Repayment of capital lease obligations............................... (264) (439)
Proceeds from the initial public offering............................ -- 12,000
Proceeds from warrants............................................... -- 641
Proceeds from stock option exercises................................. -- 539
Proceeds from note payable........................................... 436 --
Repayment of notes payable........................................... (29) (144)
Deferred offering costs.............................................. (1,101) (615)
-------- -------
Net cash provided by (used in) financing activities............. (10,232) 10,655
-------- -------

Net increase in cash and cash equivalents............................. 1,312 17,440
Cash and cash equivalents:
Beginning of period.................................................. 61 763
-------- -------
End of period........................................................ $ 1,373 $18,203
======== =======
Supplemental disclosure of cash flow information:
Income taxes paid.................................................... $ 3,258 $ 4,671
======== =======
Interest paid........................................................ $ 20 $ 99
======== =======
A summary of non-cash investing and financing activities follows:
Assets acquired through notes payable and capital lease obligations.. $ 1,908 $ -
======== =======

</TABLE>

See accompanying notes to consolidated financial statements.

4
<PAGE>

MANNATECH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Mannatech, Incorporated (the "Company") was incorporated in the State of
Texas on November 4, 1993, as Emprise International, Inc. Effective October 25,
1995, the Company changed its name to Mannatech, Incorporated. The Company,
located in Coppell, Texas, develops and sells proprietary nutritional
supplements and topical products through a network marketing system. The Company
currently sells its products in the United States, Canada and Australia.
Independent associates ("Associates") purchase products, at wholesale, for the
primary purpose of selling to retail consumers or for personal consumption. In
addition, Associates earn commissions under the Company's compensation plan.

On April 22, 1998, the Company formed a wholly-owned subsidiary, Mannatech
Australia Pty Limited, for the purpose of conducting business in Australia. The
Australian subsidiary, located in St. Leonards, began operations on October 1,
1998.

On December 1, 1998, the Company formed a wholly-owned subsidiary,
Mannatech Limited, for the purpose of conducting business in the Republic of
Ireland. This subsidiary is dormant pending the start-up of operations in the
Republic of Ireland.

In April 1999, the Company formed a wholly-owned subsidiary, Mannatech
Ltd., for the purpose of conducting business in the United Kingdom as a limited
service provider. The United Kingdom subsidiary is located in Basingstoke,
Hampshire and is scheduled to begin operations on November 15, 1999.

On May 1, 1999, the Company formed a wholly-owned subsidiary, Mannatech
Foreign Sales Corporation, under the laws of Barbados to act as a "foreign sales
corporation" as defined in the United States Internal Revenue Code.

On May 7, 1999, the Company formed a wholly-owned subsidiary, Internet
Health Group, Inc., a Texas corporation, for marketing its proprietary products,
specially-developed nutritional supplements and sports nutrition products over
the Internet. Internet Health Group, Inc. is located in Dallas, Texas, and is
currently developing its website, www.clickwell.com, which is anticipated to be
-----------------
operational in late 1999.

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair statement of the
Company's financial information as of September 30, 1998 and 1999. In preparing
consolidated financial statements in conformity with generally accepted
accounting principles, management is required to make certain estimates and
assumptions that may affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting periods. Actual results may differ
from such estimates. The consolidated results of operations of any interim
period are not necessarily indicative of the consolidated results of operations
to be expected for the fiscal year. For further information, refer to the
consolidated financial statements and accompanying footnotes included in the
Company's annual report on Form 10-K for the year ended December 31, 1998.

Principles of consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

Earnings Per Share

The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). FAS
128 requires dual presentation of basic and diluted earnings per share on the
face of the consolidated statement of income for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and

5
<PAGE>

denominator of the diluted earnings per share computation. Basic earnings per
share calculations are based on the weighted-average number of common shares
outstanding during the period, while diluted earnings per share calculations are
based on the weighted-average common shares and dilutive common share
equivalents outstanding during each period.

The following data shows the unaudited amounts used in computing earnings
per share and the effect on the weighted-average number of shares of dilutive
common stock for the nine months ended September 30, 1998 and 1999.

<TABLE>
<CAPTION>
1998 1999
-------------------------------------- ---------------------------------------
Income Shares Per share Income Shares Per share
(numerator) (denominator) amount (numerator) (denominator) amount
----------- ----------- ------ ----------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income available to
to common shareholders $ 8,646,208 22,101,738 $ 0.39 $ 8,270,769 23,940,787 $ 0.35
Effect of dilutive securities:
Stock options -- 1,315,915 -- 1,332,753
Stock warrants -- 256,657 -- 46,391
---------- ---------- ------------ ----------
Diluted EPS:
Net income available to
common shareholders plus
assumed conversions $ 8,646,208 23,674,310 $ 0.37 $ 8,270,769 25,319,931 $ 0.33
=========== ========== ====== ============ ========== ======

</TABLE>

NOTE 2 INVENTORIES

On the following dates, inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ ------------
(in thousands)
<S> <C> <C>
Raw materials............................. $ 3,054 $ 4,515
Work-in-progress.......................... -- --
Finished goods............................ 3,821 3,888
------------ ------------
$ 6,875 $ 8,403
============ ============
</TABLE>

NOTE 3 SHAREHOLDERS' EQUITY

In February 1999, the Company received approximately $9.2 million in net
proceeds from the sale of common stock in the Company's initial public offering
(the "IPO"). In the IPO, the Company sold 1,500,000 shares of its common stock
and existing shareholders sold 1,556,016 shares of their common stock at $8.00
per share. The Company is using approximately $6.3 million of the proceeds of
the IPO for international expansion, primarily for product registration, initial
inventory requirements and similar items. The remaining $2.9 million was used
to fund working capital and for general corporate purposes. In February 1999,
the Company also received $641,271 from the exercise of 475,015 outstanding
warrants at $1.35 per share.

On May 13, 1999, the Company filed a Registration Statement on Form S-1
registering 1,519,542 shares of the Company's common stock offered by certain
shareholders. On April 28, 1999, the Company filed a Registration Statement on
Form S-8 registering 642,000 shares of common stock. In May 1999, the Company
received $378,000 from the exercise of 280,000 stock options at $1.35 per share.
In September and October 1999, the Company received $161,425 from the exercise
of 119,574 stock options at $1.35 per share. In September 1999, three of the
Company's existing shareholders tendered 16,308 shares of their common stock
held, at the market price, to exercise 150,074 stock options at $1.35 per share.
The Company recorded the shares received as treasury stock, at cost.

NOTE 4 TRANSACTIONS WITH RELATED PARTIES

On June 2, 1999, the Company agreed to pay Mr. Ray Robbins, an associate
and a shareholder of the Company, $750,000 to cancel his remaining incentive
compensation agreement. The Company paid $500,000 upon the execution of the
agreement and will pay the remaining $250,000 in monthly installments of $10,000
with the final payment due in July 2001. The $750,000 was recorded in other
operating expenses in the consolidated statement of income.

6
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion and analysis is intended to assist you in
understanding our financial condition and results of operations for the three-
and nine-month periods ended September 30, 1999 as compared to the same periods
in 1998. The consolidated financial statements and related notes beginning on
page 1 should be referred to in conjunction with this discussion. Unless we
state otherwise, all financial information presented below and in the
consolidated financial statements and related notes includes Mannatech and all
of our subsidiaries on a consolidated basis.

Overview

Mannatech develops and sells proprietary nutritional supplements and
topical products through a network marketing system. We sell our products in the
United States, Canada and Australia, through a network of approximately 253,000
active associates as of September 30, 1999, compared to approximately 226,000
active associates as of September 30, 1998. We plan to begin operations in the
United Kingdom on November 15, 1999. We plan to expand into Japan in the early
summer of 2000. We will also continue to assess the potential of other foreign
markets. One of our subsidiaries, Internet Health Group, Inc., a Texas
corporation, will begin operations in late 1999 and will market our proprietary
products, specially-developed supplements and sports nutrition products over the
Internet.

Since beginning operations in November 1993, we have achieved year-to-year
growth in net sales. Our growth is mainly attributable to increases in new
product sales, growth in the number of associates and expansion into new
geographic markets in the United States, Canada and, beginning in October 1998,
Australia. In 1999, the growth rate of net sales generated in the United States
and Canada was lower than prior periods. Earnings per share in the third
quarter of 1999 were greater than earnings per share for the comparable period
in 1998 because of higher domestic sales, international expansion and a
reduction in other operating expenses.

We receive revenues primarily from sales of our products and our associate
starter and renewal packs, which include some combination of products,
promotional materials and free admission to our national events. Some of the
packs offer our associates a choice of different combinations of products and
promotional materials to be included in the purchased pack. To become an
associate, a person may enroll as a preferred customer and later execute an
associate application, sponsor new associates or purchase an associate starter
pack. Each pack also allows the associate to purchase products at wholesale
prices. We will offer a comparable associate starter pack in each country in
which we do business, subject to applicable law. All pack prices herein are
stated in United States currency.

In May 1998, we introduced a new starter and renewal pack for associates in
the United States and Canada, priced at $29.00. Historically, the starter packs
for associates in the United States and Canada could be purchased at $49.00,
$229.00, $339.00, $568.00 and $1,000.00 levels. Beginning in June 1998, starter
packs for associates in the United States and Canada could be purchased at
$29.00, $49.00, $289.00, $664.00 and $1,000.00 levels. The average wholesale
value of the starter packs for associates in the United States and Canada are
approximately $16.12, $44.62, $322.81, $817.32 and $1,138.83, respectively.
Beginning in April 1999, the average wholesale value of the starter packs in the
United States and Canada were approximately $15.05, $43.25, $319.50, $814.95 and
$1,153.95. In Australia, only one associate starter pack is available, is
priced at approximately $31.00, and has an approximate wholesale value of
$19.06.

We require associates to renew their status each year by: (1) renewing as
a preferred customer and continuing to sponsor new associates; or (2) purchasing
a renewal pack; or (3) earning enough personal points volume from product sales
to automatically renew their associate status for one year. Prior to June 1998,
associates in the United States and Canada could renew their associate status
for $49.00, $229.00 or $568.00. Since the introduction of the $29.00 preferred
customer pack in May 1998, associates in the United States and Canada have been
able to renew their associate status for $29.00, $200.00 or $350.00. Beginning
in October 1999, associates in Australia can renew their associate status for
$49.00, $200.00 or $350.00. Associates who do not renew their associate status
may continue to purchase our products at the wholesale price and resell the
products; however, they cannot earn commissions under our compensation plan.

7
<PAGE>

Associates are also eligible to purchase upgrade packs. Historically,
associates in the United States and Canada could purchase upgrade packs at
approximately $229.00, $339.00, $568.00 and $1,000.00 levels. Beginning in June
1998, upgrade packs for associates in the United States and Canada could be
purchased at $289.00, $375.00, $664.00 and $1,000.00 levels. Historically,
Australian associates could purchase upgrade packs at $262.00, $358.00 and
$620.00 levels. Beginning in April 1999, Australian associates can purchase
upgrade packs at $289.00, $375.00 and $664.00 levels. Upgrade packs are
accounted for as renewal packs, as they renew an associate's membership for one
year from the time of upgrade.

We generally recognize revenues when products or promotional materials are
shipped. Our revenues are based primarily on the wholesale prices of the
products sold. We defer revenue received from the sale of promotional packs to
the extent that it is greater than the wholesale value of the individual items
included in such packs. Revenues from promotional packs are allocated between
products and admission to events based on the proportionate fair value of these
items. Allocated event revenues are also deferred. All deferred revenue is
amortized over a 12-month period. Total deferred revenue was approximately
$641,000, $662,000 and $823,000 at September 30, 1998, December 31, 1998 and
September 30, 1999, respectively.

Associates are compensated by commissions, which are directly related to
their placement and position within our compensation plan, volume of direct
sales and number of new enrolled associates. In October 1998, we revised
portions of our compensation plan to perfect the global seamless downline
compensation concept and ensure compliance with common international standards
of paying commissions. The commission pool, as a whole, remains unchanged under
our existing and revised compensation plan and commissions should not exceed 42%
of commissionable net sales.

Our United States federal statutory tax rate is 35%. We pay taxes in
Australia at a statutory tax rate of 36%. We pay taxes in various state
jurisdictions at an approximate average statutory tax rate of 3%. As our
international expansion continues, a portion of our income will be subject to
taxation in the countries in which we operate. We may receive foreign tax
credits that would reduce the amount of United States taxes we owe, based upon
the amount of foreign taxes paid. We may not be able to use all of such foreign
tax credits in the United States. The use of the foreign tax credits is based
upon the proportionate amount of net sales in each country. Because many of
the countries that we may expand to during 1999 and beyond have maximum
statutory tax rates higher than the United States tax rate, we could end up
paying a higher overall effective tax rate on our consolidated operations.

8
<PAGE>

Results of Operations

The following table summarizes our operating results as a percentage of net
sales for each of the periods indicated:

<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1998 1999 1998 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales....................................... 18.0 16.7 16.8 16.3
Commissions......................................... 38.6 40.1 39.8 40.7
------ ------ ------- -------
Gross profit...................................... 43.4 43.2 43.4 43.0
Operating expenses:
Selling and administrative expenses............... 19.6 19.2 18.4 19.6
Write-off of deferred offering costs.............. 2.4 0.0 0.8 0.0
Other operating costs............................. 14.4 13.6 12.8 13.7
------ ------ ------- -------

Income from operations.............................. 7.0 10.4 11.4 9.7
Other (income) expense, net......................... 0.0 (0.6) (0.0) (0.1)
------ ------ ------- -------
Income before income taxes.......................... 7.0 11.0 11.4 9.8
Income tax expense.................................. 2.7 4.0 4.4 3.6
------ ------ ------- -------
Net income.......................................... 4.3% 7.0% 7.0% 6.2%
====== ====== ======= =======

Number of starter packs sold........................ 17,183 31,299 76,620 97,103
Number of renewal packs sold........................ 21,629 20,689 44,157 48,482
------ ------ ------- -------
Total number of packs sold.......................... 38,812 51,988 120,777 145,585
====== ====== ======= =======
Total associates cancelling associate status........ 1,683 1,336 6,264 2,784
====== ====== ======= =======
</TABLE>

Three months ended September 30, 1999 compared with the three months ended
September 30, 1998

Net Sales. Net sales increased 17.1% to $45.8 million for the three months
ended September 30, 1999 from $39.1 million for the comparable period in 1998.
This increase was primarily composed of the following:

. A $3.6 million increase from the sale of several new products introduced
after September 30, 1998, including our new GlycoLEAN(TM) weight
management product line;

. An increase of $2.5 million in existing product sales, which primarily
resulted from increases in the volume of existing products sold; and

. An increase of $600,000 due to an increase in the number and changes in
the mix of associate packs sold. Of this $600,000 increase,
approximately $500,000 resulted from an increase in the number of
associate packs sold to new associates and $100,000 resulted from
changes in the mix of associate renewal packs sold.

Cost of Sales. Cost of sales increased 10.0% to $7.7 million for the three
months ended September 30, 1999 from $7.0 million for the comparable period in
1998. As a percentage of net sales, cost of sales decreased to 16.7% for the
three months ended September 30, 1999 from 18.0% for the comparable period in
1998. The decrease as a percentage of net sales was primarily due to the change
in product mix and volume of finished goods sold. The dollar amount of the
increase in cost of sales was due to a net increase of $400,000 related to the
increased volume and the product mix of finished goods sold. The remaining
$200,000 net increase was due to the normal costs of spoilage and shrinkage of
inventory.

Commissions. Commissions increased 21.9% to $18.4 million for the three
months ended September 30, 1999 from $15.1 million for the comparable period in
1998. As a percentage of net sales, commissions increased to 40.1% for the three
months ended September 30, 1999 from 38.6% for the comparable period in 1998.
The increase as a

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<PAGE>

percentage of net sales was the direct result of an increase in commissionable
sales as a percentage of total sales. This increase was due to an increase in
sales from associate packs sold and the commencement of operations in Australia
in October 1998.

Gross Profit. As a result of the above factors, gross profit increased
16.5% to $19.8 million for the three months ended September 30, 1999 from $17.0
million for the comparable period in 1998. As a percentage of net sales, gross
profit decreased to 43.2% for the three months ended September 30, 1999 from
43.4% for the comparable period in 1998.

Selling and Administrative Expenses. Selling and administrative expenses
consist of human resource expenses, including wages, bonuses and marketing
expenses, and are a mixture of both fixed and variable expenses. Selling and
administrative expenses increased 14.3% to $8.8 million for the three months
ended September 30, 1999 from $7.7 million for the comparable period in 1998. As
a percentage of net sales, selling and administrative expenses decreased to
19.2% for the three months ended September 30, 1999 from 19.6% for the
comparable period in 1998. The dollar amount of the increase was due primarily
to a $900,000 increase in wages and the hiring of personnel for the Australian
operations. The remaining net increase was due to incurring $200,000 in
expenses related to a new bonus program for associates.

Write-off of Deferred Offering Costs. During August 1998, the Company
withdrew its original institutional/retail offering. Approximately $941,000 of
costs related to the withdrawn offering, such as underwriting expenses, printing
costs and roadshow costs, were expensed in the third quarter of 1998.

Other Operating Costs. Other operating costs include utilities,
depreciation, travel, office supplies and printing expenses. Other operating
costs increased 10.7% to $6.2 million for the three months ended September 30,
1999 from $5.6 million for the comparable period in 1998. As a percentage of net
sales, other operating costs decreased to 13.6% for the three months ended
September 30, 1999 from 14.4% for the comparable period in 1998. The dollar
amount increase was primarily due to an increase of $400,000 related to
Australian operations, which began in October 1998, and $200,000 for software
development for our internet subsidiary.

Other (Income) Expense, Net. Other (income) expense, net, primarily
consists of interest income, interest expense and royalties from vendors. Other
(income) expense, net, decreased to ($286,000) for the three months ended
September 30, 1999 from $18,000 for the comparable period in 1998. As a
percentage of net sales, other (income) expense, net, decreased to (0.6%) for
the three months ended September 30, 1999 from 0.0% for the comparable period in
1998. For the three months ended September 30, 1999, other (income) expense,
net, consisted of ($233,000) of interest income and $21,000 of interest expense
compared to ($18,000) of interest income and $17,000 of interest expense for the
three months ended September 30, 1998. The primary reason for the increase was
the increase in interest income and the recording of net foreign currency
exchange gains of $70,000.

Income Tax Expense. Income tax expense increased 80.0% to $1.8 million for
the three months ended September 30, 1999 from $1.0 million for the comparable
period in 1998. Our effective tax rate decreased to 36.5% for the three months
ended September 30, 1999 from 38.5% for the comparable period in 1998. Our
effective tax rate decreased because of an increase in our international sales,
which are not subject to various state income taxes averaging 3%.

Net Income. Net income increased 88.2% to $3.2 million for the three months
ended September 30, 1999 from $1.7 million for the comparable period in 1998. As
a percentage of net sales, net income increased to 7.0% for the three months
ended September 30, 1999 from 4.3% for the comparable period in 1998. This
increase was due to the factors described above.

Nine months ended September 30, 1999 compared with the nine months ended
September 30, 1998

Net Sales. Net sales increased 8.6% to $133.5 million for the nine months
ended September 30, 1999 from $122.9 million for the comparable period in 1998.
This increase was primarily composed of the following:

. A $6.8 million increase from the sale of several new products introduced
after September 30, 1998, and from existing products;

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<PAGE>

. A decrease of ($1.1 million) in existing product sales, which primarily
resulted from decreases in the volume of existing products sold as
associates are buying new products and products which historically were
not available in Canada and Australia; and

. An increase of $4.9 million from associate pack sales. Of this $4.9
million increase, approximately $4.0 million resulted from an increase
in the number and changes in the mix of associate packs sold to new
associates and $900,000 resulted from an increase in the number and
changes in the mix of associate renewal packs sold. We changed the
contents of some of our associate packs during this period and are
continuing to explore new strategies to increase associate pack sales
and renewal pack sales.

Cost of Sales. Cost of sales increased 5.3% to $21.7 million for the nine
months ended September 30, 1999 from $20.6 million for the comparable period in
1998. As a percentage of net sales, cost of sales decreased to 16.3% for the
nine months ended September 30, 1999 from 16.8% for the comparable period in
1998. The decrease as a percentage of net sales was primarily due to the change
in product mix and volume of finished goods sold. The dollar amount of the
increase in cost of sales was primarily due to:

. A net increase of $300,000 related to the increased volume and the
product mix of finished goods sold;

. A net increase in rework of inventory of $300,000;

. The recording of $160,000 for recovery of inventory in the first nine
months of 1998, which had been written off in December 1997; and

. A write-off of approximately $200,000 for other product changes.

Commissions. Commissions increased 10.8% to $54.3 million for the nine
months ended September 30, 1999 from $49.0 million for the comparable period in
1998. As a percentage of net sales, commissions increased to 40.7% for the nine
months ended September 30, 1999 from 39.8% for the comparable period in 1998.
The slight increase as a percentage of net sales was the direct result of an
increase in revenue from associate packs sold and the commencement of operations
in Australia in October 1998.

Gross Profit. As a result of the above factors, gross profit increased 7.7%
to $57.4 million for the nine months ended September 30, 1999 from $53.3 million
for the comparable period in 1998. As a percentage of net sales, gross profit
decreased to 43.0% for the nine months ended September 30, 1999 from 43.4% for
the comparable period in 1998.

Selling and Administrative Expenses. Selling and administrative expenses
consist of human resource expenses, including wages, bonuses and marketing
expenses, and are a mixture of both fixed and variable expenses. Selling and
administrative expenses increased 15.9% to $26.2 million for the nine months
ended September 30, 1999 from $22.6 million for the comparable period in 1998.
As a percentage of net sales, selling and administrative expenses increased to
19.6% for the nine months ended September 30, 1999 from 18.4% for the comparable
period in 1998. The dollar amount of the increase was due primarily to a $3.3
million increase in wages resulting from pay raises for corporate officers and
the hiring of personnel for the Australian operations. The remaining net
increase of $300,000 related to the new bonus program for associates.

Other Operating Costs. Other operating costs include utilities,
depreciation, travel, office supplies and printing expenses. Other operating
costs increased 16.6% to $18.3 million for the nine months ended September 30,
1999 from $15.7 million for the comparable period in 1998. As a percentage of
net sales, other operating costs increased to 13.7% for the nine months ended
September 30, 1999 from 12.8% for the comparable period in 1998. The dollar
amount increase was due to:

. A $750,000 charge for the agreement to cancel the remaining incentive
compensation contract as described in Note 4 of the notes to the
consolidated financial statements;

11
<PAGE>

. $900,000 paid for consulting and professional services related to our
international expansion and the registration and offering of additional
shares of our common stock on behalf of certain shareholders;

. A $500,000 increase in depreciation for additional asset purchases
related to the international expansion;

. $200,000 for software development for our internet subsidiary; and

. The payment of $200,000 for the settlement of a lawsuit.

Other (Income) Expense, Net. Other (income) expense, net, primarily
consists of interest income, interest expense and royalties from vendors. Other
(income) expense, net, increased to ($150,000) for the nine months ended
September 30, 1999 from ($4,000) for the comparable period in 1998. As a
percentage of net sales, other (income) expense, net, increased to (0.1%) for
the nine months ended September 30, 1999 from (0.0%) for the comparable period
in 1998. For the nine months ended September 30, 1999, other (income) expense,
net, consisted primarily of ($406,000) of interest income and $99,000 of
interest expense compared to ($68,000) of interest income and $21,000 of
interest expense for the nine months ended September 30, 1998. The increase in
other (income) expense related primarily to an increase in interest income and
net foreign currency exchange gains offset by an increase in income tax
penalties of $70,000.

Income Tax Expense. Income tax expense decreased (11.1%) to $4.8 million
for the nine months ended September 30, 1999 from $5.4 million for the
comparable period in 1998. Our effective tax rate decreased to 36.5% for the
nine months ended September 30, 1999 from 38.5% for the comparable period in
1998. Our effective tax rate decreased because of an increase in our
international sales, which are not subject to various state income taxes
averaging 3%.

Net Income. Net income decreased (3.5%) to $8.3 million for the nine months
ended September 30, 1999 from $8.6 million for the comparable period in 1998. As
a percentage of net sales, net income decreased to 6.2% for the nine months
ended September 30, 1999 from 7.0% for the comparable period in 1998. This
decrease occurred due to the amounts we spent on our international expansion and
cancellation of the remaining incentive compensation contract and the other
factors described above.

Liquidity and Capital Resources

In February 1999, we received approximately $9.2 million in net proceeds
from the sale of our common stock in our initial public offering. In the initial
public offering, we sold 1,500,000 shares of our common stock and existing
shareholders sold 1,556,016 shares of their common stock at $8.00 per share. We
are using approximately $6.3 million of the proceeds of the initial public
offering for international expansion, primarily for product registration,
initial inventory requirements and similar items. The remaining $2.9 million was
used to fund working capital and for general corporate purposes. In February
1999, we received $641,271 from the exercise of 475,015 outstanding warrants at
$1.35 per share. In May 1999, we received $378,000 from the exercise of 280,000
stock options at $1.35 per share. In September and October 1999, we received
$161,425 from the exercise of 119,574 stock options at $1.35 per share.

Our primary capital requirement is to fund working capital to support our
growth. In the past, we financed our operations mostly through cash flows from
operating activities and capital leases. As a result of our expenditures on the
facilities, equipment and personnel necessary to support our growth and
international expansion, we had a working capital deficiency of ($12.4 million)
as of December 31, 1998 compared to working capital of $11.5 million at
September 30, 1999. We invested approximately $4.9 million and $1.5 million
during the first nine months of 1998 and 1999, respectively, in our furniture,
equipment and leased properties. These projects were funded primarily through
operating cash flow and capital leases for the nine months ended September 30,
1998 and primarily from operating cash flow in the comparable period in 1999.

We paid approximately $9.3 million and $1.3 million in dividends to our
shareholders for the nine months ended September 30, 1998 and 1999,
respectively. For the nine months ended September 30, 1999, current liabilities
decreased due to the reduction in accounts payable and accrued expenses and an
income tax benefit related to the exercise of the warrants and stock options.
These decreases are primarily related to the receipt of proceeds from the
initial public offering and increases in sales volume. We believe our current
facilities are sufficient to support our near-term growth.

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<PAGE>

In March and August 1998, we entered into two capital leases with principal
amounts of $631,000 and $841,000, respectively. These capital leases bear
interest at 9.3%, are collateralized by the leased assets and are payable in
thirty-nine monthly installments. In July 1998, we entered into a thirty-month,
unsecured note payable with a finance company to finance our three-year product
liability insurance premium. The initial principal amount of this note was
$435,670, the interest rate is 8.0% and monthly installments are due through
December 2000.

Net cash provided by operating activities was $14.8 million and $9.0
million for the nine months ended September 30, 1998 and 1999, respectively.
Throughout these periods, we increased net sales, which were partially offset by
increases in inventories, expenses from international expansion and a decrease
in income tax payable of approximately $3.0 million from the compensation
expense related to the exercise of the warrants and options. In 1999, we expect
to spend up to $4.5 million for start-up costs and $2.6 million for initial
inventory for our planned expansion into the United Kingdom on November 15, 1999
and Japan in early summer of 2000.

Net cash (used in) investing activities was ($3.3 million) and ($2.2
million) for the nine months ended September 30, 1998 and 1999, respectively. In
1998, these activities consisted primarily of the relocation of our Texas
distribution center, the build-out of our research and development facility and
the development and implementation of our proprietary software program. The new
facilities and software program should be sufficient for our immediate needs.
However, we have spent approximately $1.8 million and intend to spend an
additional $2.0 million for additional modifications to the software program for
international expansion, Internet access and additional purchases of equipment
and build-out of leased facilities for our planned international expansion into
the United Kingdom in the fourth quarter of 1999 and Japan in early summer of
2000. In February 1999, certain shareholders repaid notes receivable due to us
of approximately $974,000.

Net cash provided by (used in) financing activities totaled ($10.2 million)
and $10.7 million for the nine months ended September 30, 1998 and 1999,
respectively. We paid dividends on a monthly basis to our shareholders in the
amount of $0.02-$0.06 per share each month until the completion of the initial
public offering on February 12, 1999. Our board of directors intends, from time-
to-time, to reevaluate this policy after considering relevant factors, including
the level of our net income and alternative uses of retained earnings. In
February 1999, the gross initial public offering proceeds of approximately $12.0
million were received.

Our existing capital resources, including cash provided by operating
activities, bank borrowings, together with the proceeds from the initial public
offering and suspension of dividend payments to shareholders, should be adequate
to fund our operations for at least the next 12 months. We have no present
commitments or agreements with respect to any acquisitions or purchases of
manufacturing facilities or new technologies. Changes could occur that would
consume available capital resources faster than anticipated. Our capital
requirements depend on numerous factors, including:

. the timing and pace of our entry into international markets;

. growth in the number of associates; and

. our research and development efforts.

If our existing capital resources, together with the net proceeds of the
initial public offering, are insufficient to meet our capital requirements, we
will be required to raise additional funds. We cannot assure you that additional
funding, if necessary, will be available on favorable terms, if at all.

Year 2000

We recognize the need to ensure that our operations and relationships with
vendors, associates and other third parties will not be adversely impacted by
software processing errors arising from calculations using the Year 2000 and
beyond. Many existing computer programs and databases use only two digits to
identify a year in the date field (i.e., 01 would represent 1901, not 2001). If
not corrected, many computer systems could fail or create erroneous results
before, during and after the Year 2000. We believe all of our internal
information systems currently in use will be Year 2000 ready, largely due to our
short operating history. The majority of our critical business applications
have been developed internally, in the past two years, with Year 2000 ready
tools. We have formalized, structured activities in

13
<PAGE>

progress to test for and ensure compliance of all hardware and software used.
With respect to non-information technology systems issues, we are near the
completion of identifying, assessing and remediating, if necessary, our building
and utility systems for any Year 2000 issues relating to the functionality of
our facilities. We are also near the completion of evaluating the Year 2000
readiness of our vendors and third parties whose system failures could have an
impact on our operations. However, we cannot predict or evaluate domestic or
foreign governments' and utility companies' preparation for the Year 2000 or the
readiness of other third parties that do not have a direct relationship with us.
The potential materiality of any such impact is not known at this time and we
cannot determine the extent to which such failures would impact us.

We have spent approximately $85,000 and expect the total cost associated
with Year 2000 identification, remediation and testing to be between $100,000
and $200,000. We believe that we have allocated adequate resources for this
purpose and expect our Year 2000 date compliance program to be completed before
December 1999. Based on current estimates, costs of addressing these issues,
which are expensed as they occur, are not expected to have a material impact on
our results of operations, financial condition or cash flows. This expectation
is subject to uncertainties that could cause actual results to differ
materially. Should any of the applications fail to perform properly on January
1, 2000, we have a contingency plan in place in which we will resort to
temporary manual processing, which is not expected to have a material adverse
impact on our short-term operations.

All remaining remediation and testing of non-information technology systems
is expected to be performed and completed by December 1999. Failure to achieve
Year 2000 readiness by any of our vendors, while expected to cause some
disruption to operations in the short-term is not expected to have a material
impact on our operations.

Forward-Looking Statements

Some of the statements in this report, under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Quantitative and
Qualitative Disclosures About Market Risk," "Consolidated Financial Statements
and the Notes to Consolidated Financial Statements" and "Part II-Other
Information," are "forward-looking statements," within the meaning of Section
21E of the Securities Exchange Act of 1934, that are subject to certain events,
risk and uncertainties that may be outside our control. These forward-looking
statements include statements of:

. management's plans, objectives, expectations, intentions and beliefs for
our future operations and future economic performance;
. our capital budget and future capital requirements;
. meeting our future capital needs;
. realization of our deferred tax assets;
. the level of future expenditures; and
. the outcome of regulatory and litigation matters, and the assumptions
described in this report underlying such forward-looking statements.

Actual results and developments could differ materially from those
expressed in or implied by such statements due to a number of factors,
including, without limitation:

. those described in the context of such forward-looking statements;
. future product development and manufacturing costs;
. timely development and acceptance of new products;
. our entry into new countries and markets;
. the impact of competitive products and pricing;
. the political and economic climate in which we conduct operations; and
. the risk factors described from time to time in our other documents and
reports filed with the Securities and Exchange Commission.

In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue" or
the negative of such terms and other comparable terminology.

14
<PAGE>

Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor anyone else
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this report.

Recent Financial Accounting Standards Board Statements

In June 1999, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 137 ("FAS 137"), "Accounting for Derivatives Instruments
and Hedging Activities - Deferral of the Effective date of FAS No. 133." FAS 133
establishes accounting and reporting standards for derivative financial
instruments, including certain derivative financial instruments imbedded in
other contracts and for hedging activities. FAS 137 deferred the effective
date of FAS 133 to fiscal years beginning after June 15, 2000. Currently, we do
not have any derivative financial instruments and this pronouncement would not
have an impact on us.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We do not engage in trading market risk sensitive instruments and do
not purchase as investments, as hedges, or for purposes "other than trading,"
instruments that are likely to expose us to certain types of market risk,
including interest rate, commodity price or equity price risk. We do have short-
term investments but there has been no material change in our exposure to
interest rate risk on our short-term investments. We have not issued any debt
instruments, entered into any forward or futures contracts, purchased any
options or entered into any swaps.

We also are exposed to certain other market risks, including changes in
currency exchange rates as measured against the United States dollar. The value
of the United States dollar affects our financial results. Changes in currency
exchange rates may positively or negatively affect our sales (as expressed in
United States dollars), gross margins, operating expenses and retained earnings.
When the United States dollar sustains a strengthening position against
currencies in which we sell our products or a weakening currency exchange rate
against currencies in which we incur costs, our net sales or costs may be
adversely affected. We have established policies, procedures and internal
processes governing the management of market risk and the use of any financial
instruments to manage our exposure to such risks. The sensitivity of earnings
and cash flows to changes in the currency exchange rate is assessed by applying
an appropriate range of potential currency rate fluctuations of our assets,
obligations and projected transactions denominated in foreign currency. Based
upon our overall currency exchange rate exposure at September 30, 1999, we do
not believe that our exposure to currency exchange rate fluctuations will have a
material impact on our consolidated financial position or consolidated results
of operations nor have there been any material changes to the market risks. All
statements other than historical information incorporated in this Item 3 are
forward-looking statements. The actual impact of future market changes could
differ materially due to, among other things, factors discussed in this report.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There have not been any material changes in, or additions to, the legal
proceedings previously reported in our 1998 Annual Report on Form 10-K as filed
with the Commission on March 31, 1999 and our 1999 second quarter report on Form
10-Q as filed with the Commission on August 5, 1999.

Item 2. Changes in Securities and Use of Proceeds

(a) Not applicable.

(b) Not applicable.

15
<PAGE>

(d) Uses of Proceeds from Registered Securities. On January 5, 1999,
our Registration Statement on Form S-1 (File No. 333-63133) became
effective. The subscription period terminated on February 11, 1999
and, on February 12, 1999, the closing took place. The total
number of shares of our common stock subscribed for and sold in
the initial public offering was 3,056,016, of which 1,500,000
shares were sold by us and 1,556,016 shares were sold by existing
shareholders. The aggregate price of the shares sold by us was
$12,000,000 and the net proceeds to us were $9,240,958. Net
proceeds included the aggregate proceeds less payments for:

. the placement agent engaged by us to manage the receipt of
subscription funds of a fee of $389,226, net of a reimbursement
of $90,774 in expenses by the placement agent;
. actual expenses of the initial public offering of $406,385; and
. $1,963,431 of deferred offering costs.

The aggregate price of the shares sold for the account of the
selling shareholders was $12,448,128. After payment of $497,925 to
the placement agent, net proceeds to the selling shareholders were
$11,950,203. None of such payments were direct or indirect
payments to directors, officers, affiliates or 10% beneficial
owners of Mannatech. No underwriter was involved in the initial
public offering.

The net proceeds of the initial public offering were intended to
be used by us to begin our international expansion and fund
current working capital needs. Of the $6.3 million in net proceeds
to be used for our international expansion, approximately $1.4
million has been used to pay for our expansion into Australia, the
United Kingdom and Japan and $4.9 million of such net proceeds for
our current working capital needs. The $4.9 million includes $2.0
million for the deferred offering costs incurred by us in
consummating the initial public offering. None of such payments
were direct or indirect payments to directors, officers,
affiliates or 10% beneficial owners of Mannatech.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits required by Item 601 of Regulation S-K

3.1 Amended and Restated Articles of Incorporation of the
Company, incorporated herein by reference to Exhibit 3.1 to
the Company's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.

3.2 Second Amended and Restated Bylaws of the Company,
incorporated herein by reference to Exhibit 4.3 to the
Company's Form S-8 (File No. 333-77227) filed with the
Commission on April 28, 1999.

3.3 Amendments to the Bylaws of the Company, contained in a
Majority Written Consent of the Shareholders of the Company
dated October 20, 1999, incorporated herein by reference to
Exhibit 99.1 to the Company's Form 8-K (File No. 000-24657)
filed with the Commission on November 2, 1999.

16
<PAGE>

4.1 Specimen Certificate representing the common stock, par
value $0.0001 per share, of the Company, incorporated
herein by reference to Exhibit 4.1 to the Company's
Amendment No. 1 to Form S-1 (File No. 333-63133) filed with
the Commission on October 28, 1998.

4.2 Settlement Agreement dated July 2, 1999, entered into by
and between Robert B. Hydeman, Ray Robbins and Robbins
Enterprises, Inc., and the Company, incorporated by
reference to Exhibit 4.2 to the Company's Amendment No. 2
to Form S-1 9File No. 333-78359) filed with the Commission
on August 10, 1999.

10.1 1997 Stock Option Plan dated May 20, 1997, incorporated
herein by reference to Exhibit 10.1 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.

10.2 1998 Incentive Stock Option Plan dated April 8, 1998,
incorporated herein by reference to Exhibit 10.2 to the
Company's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.

10.3 Form of Indemnification Agreement with a schedule of
director signatures, incorporated herein by reference to
Exhibit 10.8 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.

10.4 Letter of Understanding Regarding Development of
Proprietary Information for the Company effective as of
August 1, 1997, as amended, by and between Bill H.
McAnalley, Ph.D. and the Company, incorporated herein by
reference to Exhibit 10.12 to the Company's Form S-1 (File
No. 333-63133) filed with the Commission on September 10,
1998.

10.5 Commercial Lease Agreement dated November 7, 1996 between
MEPC Quorum Properties II Inc. and the Company, as amended
by the First Amendment thereto dated May 29, 1997 and the
Second Amendment thereto dated November 13, 1997,
incorporated herein by reference to Exhibit 10.13 to the
Company's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.

10.6 Commercial Lease Agreement dated May 29, 1997 between MEPC
Quorum Properties II Inc. and the Company, as amended by
the First Amendment thereto dated November 6, 1997,
incorporated herein by reference to Exhibit 10.14 to the
Company's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.

10.7 Assignment of Patent Rights dated October 30, 1997 by and
among Bill H. McAnalley, Ph.D., H. Reginald McDaniel, D.
Eric Moore, Eileen P. Vennum and William C. Fioretti and
the Company, incorporated herein by reference to Exhibit
10.15 to the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.

10.8 Supply Agreement effective as of August 14, 1997 by and
between the Company and Caraloe, Inc., incorporated herein
by reference to Exhibit 10.17 to the Company's Form S-1
(File No. 333-63133) filed with the Commission on September
10, 1998.

10.9 Trademark License Agreement effective as of August 14, 1997
by and between the Company and Caraloe, Inc., incorporated
herein by reference to Exhibit 10.19 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.

10.10 Letter of Agreement from the Company to Michael L. Finney
of LAREX, Incorporated dated December 23, 1997,
incorporated herein by reference to Exhibit 10.20 to the
Company's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.

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<PAGE>

10.11 Product Development and Distribution Agreement effective as
of September 15, 1997 between New Era Nutrition Inc. and
the Company, incorporated herein by reference to Exhibit
10.21 to the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.

10.12 Summary of Management Bonus Plan, incorporated herein by
reference to Exhibit 10.23 to the Company's Form S-1 (File
No. 333-63133) filed with the Commission on September 10,
1998.

10.13 Individual Guaranty of Samuel L. Caster dated January 5,
1998, incorporated herein by reference to Exhibit 10.27 to
the Company's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.

10.14 Individual Guaranty of Charles E. Fioretti dated January 5,
1998, incorporated herein by reference to Exhibit 10.28 to
the Company's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.

10.15 Lease dated September 1, 1998 between Mannatech Australia
Pty Limited and Legal & General Properties No. 1 Pty
Limited, incorporated herein by reference to Exhibit 10.29
to the Company's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.

10.16 Form of Employment Agreement entered into between the
Company and each of Charles E. Fioretti, Patrick D. Cobb,
Anthony E. Canale, Bill H. McAnalley and Deanne Varner,
incorporated herein by reference to Exhibit 10.30 to the
Company's Amendment No. 1 to Form S-1 (File No. 333-63133)
filed with the Commission on October 28, 1998.

10.17 Renewal and Extension Promissory Note dated February 17,
1999 in the amount of $33,316.02 made by Patrick D. Cobb,
incorporated herein by reference to Exhibit 10.25 to the
Company's 1998 Form 10-K (File No. 000-24657) filed with
the Commission on March 31, 1999.

10.18 Renewal and Extension Promissory Note dated February 17,
1999 in the amount of $199,896.10 made by Samuel L. Caster,
incorporated herein by reference to Exhibit 10.26 to the
Company's 1998 Form 10-K (File No. 000-24657) filed with
the Commission on March 31, 1999.

10.19 Renewal and Extension Promissory Note dated February 17,
1999 in the amount of $199,896.09 made by Charles E.
Fioretti, incorporated herein by reference to Exhibit 10.27
to the Company's 1998 Form 10-K (File No. 000-24657) filed
with the Commission on March 31, 1999.

10.20 Lease dated April 27, 1999 between the Company and Regus
(UK) Ltd. incorporated herein by reference to Exhibit 10.20
to the Company's Amendment No. 2 to Form S-1 (File No. 333-
78359) filed with the Commission on August 10, 1999.

27* Financial Data Schedule.
________________
* Filed herewith.

(b) Reports on Form 8-K.

18
<PAGE>

(i) Form 8-K filed with the Commission on November 2, 1999 (File
No. 000-24657) reporting action taken by majority written
consent of the shareholders of the Company in order to modify
the Bylaws.

19
<PAGE>

SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

MANNATECH, INCORPORATED

November 12, 1999 /S/ CHARLES E. FIORETTI
--------------------------------
Charles E. Fioretti
Chairman of the Board and Chief
Executive Officer

November 12, 1999 /S/ STEPHEN D. FENSTERMACHER
--------------------------------
Stephen D. Fenstermacher
Vice President of Accounting and
Chief Financial Officer
(principal accounting officer)

S-1
<PAGE>

INDEX TO EXHIBITS

3.1 Amended and Restated Articles of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.1 to the Company's Form S-1
(File No. 333-63133) filed with the Commission on September 10, 1998.

3.2 Second Amended and Restated Bylaws of the Company, incorporated herein by
reference to Exhibit 4.3 to the Company's Form S-8 (File No. 333-77227)
filed with the Commission on April 28, 1999.

3.3 Amendments to the Bylaws of the Company, contained in a Majority Written
Consent of the Shareholders of the Company dated October 20, 1999,
incorporated herein by reference to Exhibit 99.1 to the Company's Form
8-K (File No. 000-24657) filed with the Commission on November 2, 1999.

4.1 Specimen Certificate representing the common stock, par value $0.0001 per
share, of the Company, incorporated herein by reference to Exhibit 4.1 to
the Company's Amendment No. 1 to Form S-1 (File No. 333-63133) filed with
the Commission on October 28, 1998.

4.2 Settlement Agreement dated July 2, 1999, entered into by and between
Robert B. Hydeman, Ray Robbins and Robbins Enterprises, Inc., and the
Company incorporated herein by reference to Exhibit 4.2 to the Company's
Amendment No. 2 to Form S-1 (File No. 333-78359) filed with the
Commission on August 10, 1999.

10.1 1997 Stock Option Plan dated May 20, 1997, incorporated herein by
reference to Exhibit 10.1 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.

10.2 1998 Incentive Stock Option Plan dated April 8, 1998, incorporated herein
by reference to Exhibit 10.2 to the Company's Form S-1 (File No. 333-
63133) filed with the Commission on September 10, 1998.

10.3 Form of Indemnification Agreement with a schedule of director signatures,
incorporated herein by reference to Exhibit 10.8 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on September 10, 1998.

10.4 Letter of Understanding Regarding Development of Proprietary Information
for the Company effective as of August 1, 1997, as amended, by and
between Bill H. McAnalley, Ph.D. and the Company, incorporated herein by
reference to Exhibit 10.12 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.

10.5 Commercial Lease Agreement dated November 7, 1996 between MEPC Quorum
Properties II Inc. and the Company, as amended by the First Amendment
thereto dated May 29, 1997 and the Second Amendment thereto dated
November 13, 1997, incorporated herein by reference to Exhibit 10.13 to
the Company's Form S-1 (File No. 333-63133) filed with the Commission on
September 10, 1998.

10.6 Commercial Lease Agreement dated May 29, 1997 between MEPC Quorum
Properties II Inc. and the Company, as amended by the First Amendment
thereto dated November 6, 1997, incorporated herein by reference to
Exhibit 10.14 to the Company's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.

10.7 Assignment of Patent Rights dated October 30, 1997 by and among Bill H.
McAnalley, Ph.D., H. Reginald McDaniel, D. Eric Moore, Eileen P. Vennum
and William C. Fioretti and the Company, incorporated herein by reference
to Exhibit 10.15 to the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.

10.8 Supply Agreement effective as of August 14, 1997 by and between the
Company and Caraloe, Inc., incorporated herein by reference to Exhibit
10.17 to the Company's Form S-1 (File No. 333-63133) filed with the
Commission on September 10, 1998.
<PAGE>

10.9 Trademark License Agreement effective as of August 14, 1997 by and
between the Company and Caraloe, Inc., incorporated herein by reference
to Exhibit 10.19 to the Company's Form S-1 (File No. 333-63133) filed
with the Commission on September 10, 1998.

10.10 Letter of Agreement from the Company to Michael L. Finney of LAREX,
Incorporated dated December 23, 1997, incorporated herein by reference to
Exhibit 10.20 to the Company's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.

10.11 Product Development and Distribution Agreement effective as of September
15, 1997 between New Era Nutrition Inc. and the Company, incorporated
herein by reference to Exhibit 10.21 to the Company's Form S-1 (File No.
333-63133) filed with the Commission on September 10, 1998.

10.12 Summary of Management Bonus Plan, incorporated herein by reference to
Exhibit 10.23 to the Company's Form S-1 (File No. 333-63133) filed with
the Commission on September 10, 1998.

10.13 Individual Guaranty of Samuel L. Caster dated January 5, 1998,
incorporated herein by reference to Exhibit 10.27 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on September 10, 1998.

10.14 Individual Guaranty of Charles E. Fioretti dated January 5, 1998,
incorporated herein by reference to Exhibit 10.28 to the Company's Form
S-1 (File No. 333-63133) filed with the Commission on September 10, 1998.

10.15 Lease dated September 1, 1998 between Mannatech Australia Pty Limited and
Legal & General Properties No. 1 Pty Limited, incorporated herein by
reference to Exhibit 10.29 to the Company's Form S-1 (File No. 333-63133)
filed with the Commission on September 10, 1998.

10.16 Form of Employment Agreement entered into between the Company and each of
Charles E. Fioretti, Patrick D. Cobb, Anthony E. Canale, Bill H.
McAnalley and Deanne Varner, incorporated herein by reference to Exhibit
10.30 to the Company's Amendment No. 1 to Form S-1 (File No. 333-63133)
filed with the Commission on October 28, 1998.

10.17 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $33,316.02 made by Patrick D. Cobb, incorporated herein by
reference to Exhibit 10.25 to the Company's 1998 Form 10-K (File No. 000-
24657) filed with the Commission on March 31, 1999.

10.18 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.10 made by Samuel L. Caster, incorporated herein by
reference to Exhibit 10.26 to the Company's 1998 Form 10-K (File No. 000-
24657) filed with the Commission on March 31, 1999.

10.19 Renewal and Extension Promissory Note dated February 17, 1999 in the
amount of $199,896.09 made by Charles E. Fioretti, incorporated herein by
reference to Exhibit 10.27 to the Company's 1998 Form 10-K (File No. 000-
24657) filed with the Commission on March 31, 1999.

10.20 Lease dated April 7, 1999 between the Company and Regus (UK) Ltd.
incorporated herein by reference to Exhibit 10.20 to the Company's
Amendment No. 2 to Form S-1 (File No. 333-78359) filed with the
Commission on August 10, 1999.

27* Financial Data Schedule.
________________
* Filed herewith.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERNCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>

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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
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0
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<COMMON> 3
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