Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2003

OR

Commission File No.: 33-20323

Royal BodyCare, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: 972-893-4000

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

(Title of class)

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  ¨.

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.    x

On March 8, 2004, the closing price of Registrant’s common stock sold was $0.40 per share. On such date, 6,492,706 shares of Registrant’s Common Stock were held by non-affiliates. Based upon the price on such date, the aggregate market value of Registrant’s voting stock held by non-affiliates on that date was $2,597,082 (6,492,706 shares times $0.40 per share).

As of March 8, 2004, 19,956,294 shares of the registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Items 10, 11, 12, 13, and 14 of Part III hereof is incorporated by reference to the Registrant’s definitive proxy statement to be filed no later than 120 days after the close of Registrant’s year end.

Table of Contents

FORWARD LOOKING STATEMENTS

The statements, other than statements of historical facts included in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical or present facts, that address activities, events, outcomes and other matters that we plan, expect, intend, assume, believe, budget, predict, forecast, project, estimate or anticipate (and other similar expressions) will, should or may occur in the future are forward looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate” or “believe”. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and time of future events. We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur. Our actual future performance could differ materially from such statement. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. Factors that could cause or contribute to such differences include, but are not limited to:

Table of Contents

ROYAL BODYCARE, INC.

FORM 10-K

YEAR ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

1

Table of Contents

PART I

Item 1. Business

General/History

We are a Nevada corporation principally engaged in marketing products through an international network of independent distributors. Our core product line is marketed under the Royal BodyCare^® brand name in three broad categories: (i) wellness products, (ii) weight loss products, and (iii) sports and fitness products (collectively “Nutritional Products”). Our core product line includes herbal formulas, vitamins, minerals, antioxidants and personal care products. We market these products in countries outside of the United States, Canada and Japan through exclusive licensing arrangements.

In addition to the Royal BodyCare products, we also market a line of wound care and oncology products (“Medical Products”) in the United States under the MPM Medical trade name. These products are distributed by us to hospitals, nursing homes, clinics and pharmacies through medical/surgical supply dealers and pharmaceutical distributors.

Our principal offices are located at 2301 Crown Court, Irving, Texas 75038. We can be reached by phone at 972-893-4000, by fax at 972-893-4111 and by e-mail at webmaster@royalbodycare.com. Our web site address is www.royalbodycare.com. We make available on our website, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports. Our Chief Executive Officer is Clinton H. Howard and our Chief Financial Officer is Steven E. Brown. Both of them can be reached at our principal offices.

Mr. Howard formed our United States subsidiary in 1991 to market a line of aloe vera based personal care products and an aloe drink in the United States through a multi-level network of independent distributors. In 1992 we expanded our product line to include nutritional supplements. Mr. Howard formed our Canadian subsidiary in 1992 to market our products through a network of independent distributors in Canada. Shortly after its formation, our Canadian subsidiary acquired Pure Life International Products Inc., then a 12-year old company which distributed its Pure Life brand of nutritional products principally in Canada. After this acquisition, we introduced the Pure Life line of products to the United States market. In 2003, Pure Life was merged into our Canadian subsidiary.

In June 1995, GlobeNet Inc. was incorporated to serve as a holding company for our United States and Canadian subsidiaries as well as certain other corporations affiliated with Mr. Howard, which were subsequently discontinued. In 1996, we acquired the business of Light Force, Inc. Light Force distributed a line of nutritional supplements featuring certain proprietary formulations, with spirulina as the main ingredient. The Light Force distributor network was merged into our distributor network.

On April 1, 1997, Mighty Power USA, Inc., a corporation whose stock at that time was publicly traded on the NASDAQ Bulletin Board, merged with GlobeNet. In connection with the merger, Mighty Power USA effected a one-for-seven reverse stock split. Mighty Power USA then issued 7,886,415 new shares to the shareholders of GlobeNet in exchange for 100% of the outstanding stock of GlobeNet. In addition, under the terms of the merger agreement, certain shareholders of Mighty Power USA transferred an additional 2,541,427 shares of common stock to the GlobeNet shareholders. As a result, the shareholders of GlobeNet obtained 86% of the then outstanding common stock of Mighty Power USA. In connection with these transactions, Mighty Power USA changed its name to GlobeNet International I, Inc. The merger was accounted for as a purchase and as a reverse merger, with GlobeNet being the acquirer. Therefore, GlobeNet’s historical financial statements are now our historical financial statements. In October 1999, we changed our name from GlobeNet International I, Inc. to Royal BodyCare, Inc. In conjunction with the name change, we also redomesticated to the State of Nevada.

In December 2000, we introduced a selection of Internet products that we marketed under the brand name BizAdigm^TM. The BizAdigm^TM products were marketed through a network of independent distributors similar in approach to how our nutritional and personal care products are marketed. Due to low sales volume, we discontinued BizAdigm^TM operations in the second quarter of 2002.

2

Table of Contents

In August 2001, we purchased substantially all of the assets of MPM Medical, Inc., a distributor of wound care and oncology products. These assets were transferred to our wholly-owned subsidiary of the same name, MPM Medical, Inc.

Restatement of Financial Statements

In connection with the preparation of the our financial statements for 2003, our audit committee, which was established in September 2003, requested that management and our independent accountants review the revenue recognition policy with regard to our licensee in the former Soviet Union, Coral Club International, Inc. (“CCI”) (See Note R to the consolidated financial statements). Until September 2002, sales were recorded when products were shipped to CCI. In September 2002, CCI and we reached an agreement that provided that we would store products for CCI in our warehouse and then ship them at a later date to locations designated by CCI in accordance with its business needs. As part of this agreement, CCI agreed to accept ownership of and pay for the products as they were segregated in our warehouse for CCI’s account. Upon entering into this agreement, we began to recognize sales to CCI at the time products were billed and segregated in our warehouse for CCI’s account.

After reviewing this accounting practice in light of authoritative accounting literature, management, in consultation with our independent accountants, concluded that sales should have been recognized at the time products were shipped rather than when such products were segregated in our warehouse for CCI’s account. As a result, we have restated our previously reported audited financial statements for the year ended December 31, 2002, and the unaudited results for the quarters ended September 30, 2003, June 30, 2003, March 31, 2003, December 31, 2002, and September 30, 2002. The restated financial statements for 2002 are contained in this report, and the components of the restatement along with the related effect on previously issued financial statements are set forth in Note C to the consolidated financial statements.

Plant and Equipment

We purchase Royal BodyCare and MPM products from manufacturers and suppliers that we do not control. Many of these products can be obtained from a number of sources at competitive prices. However, we manufacture certain essential product ingredients, most notably RBC NanoClusters^™, silica hydride powder, and HydraCel^™ concentrate, that are used in many Royal BodyCare products. We began manufacturing these raw materials in June 2002 to replace raw materials that were formerly purchased under a license agreement with a third party supplier. These raw materials are manufactured according to proprietary formulations and processes developed by us for our exclusive use. We outsource the production of our finished products, many of which incorporate our proprietary raw materials. Our manufacturing operations are conducted at our headquarters located in Irving, Texas. We own the machinery and equipment necessary to produce our proprietary raw materials. Other than normal office furniture and computer equipment, the only other property or equipment that we own or use is laboratory equipment owned and maintained for internal quality control testing of our products and equipment used for the distribution of our products to our customers.

In 2001, we purchased our headquarters facility in Irving, Texas. The total cost of this facility was approximately $3.7 million. Financing for this purchase was provided by a $3 million mortgage note, a $300,000 note from the seller and a $350,000 note from a bank. Amounts outstanding as of December 31, 2003 on the mortgage, seller and bank notes were approximately $2,773,000, $110,000 and $149,000, respectively.

Employees

We currently have 67 employees, of whom 8 are executive officers or management employees, 7 are department heads, 17 are warehouse or manufacturing employees, 16 are in customer service or order entry, 2 are in financial or accounting and the remaining employees are clerical or administrative. We do not foresee any significant increase being necessary for our workforce in 2004. None of our employees are represented by labor unions, and we have not experienced work stoppages or other labor strife with our employees.

Independent Distributor Network

In the United States, Canada and Japan, we attempt to recruit people who can effectively explain our line of nutritional products, demonstrate their uses and applications and effectively utilize our direct marketing techniques to sell our products and sponsor other distributors. This type of direct marketing strategy is commonly referred to as multi-level or network marketing.

3

Table of Contents

We had approximately 22,100 active independent distributors at December 31, 2003, of whom approximately 17,800 are located in the United States, 4,000 are located in Canada and 300 are located in Japan. This compares to approximately 40,000 active distributors at December 31, 2002, of whom approximately 30,000 were located in the United States, 9,500 were located in Canada and 500 were located in Japan. We consider an independent distributor active if he/she has placed an order within the previous twelve months. We compensate distributors who market the Royal BodyCare product line through a “Stair Step” compensation plan, consistent with other industry recognized compensation programs. Under this plan commissions are earned based on the amount of sales by the distributor and his/her sales group. Distributor compensation is paid monthly.

Except for sales meetings and certain promotional activities that we sponsor, our distributors are responsible for all expenses incurred by them in their sales programs.

We use the Internet to support our marketing efforts and enhance communication with our distributors. Through our web sites, distributors can obtain information about us and our products, and other current information such as new product announcements and descriptions of product specials and other sales promotions. Through our Royal BodyCare web site, we provide our distributors the ability to enroll new Royal BodyCare distributors and to place orders. To help our distributors better manage their business, we allow them to obtain information related to their sales groups directly from our database, which can be accessed through the Internet.

Overseas Distributors

We have entered into exclusive license arrangements with overseas licensees for marketing the Royal BodyCare line of products. Under these arrangements our products are distributed principally in the former Soviet Union, New Zealand, Singapore and Indonesia.

Pursuant to these arrangements, these overseas licensees, who are unaffiliated third parties, are granted exclusive rights to sell our products in their respective territories through office/warehouse facilities. The independent distributors in the licensed territories are compensated through the same or a similar compensation plan as that used by us for our distributors in the United States, Canada and Japan.

Products

We market products in two industry segments. In the Nutritional Products segment, we market nutritional supplements and personal care products under the Royal BodyCare trade name. In the Medical Products segment, we market wound care and oncology products under the MPM Medical trade name.

Nutritional Products. We currently market a line of over 75 nutritional supplements and personal care products, including herbs, vitamins and minerals, as well as natural skin, hair and body care products. These products are marketed in three broad categories, wellness products, weight loss products and sports and fitness products. We procure the finished products from manufacturers and suppliers that we do not control and have them made or processed according to our specifications or formulas.

Our product line features certain raw materials manufactured according to proprietary formulations and processes in the emerging field of nanotechnology. Nanotechnology involves the manufacture and manipulation of molecules 1 to 100 nanometers in size. A nanometer is one-billionth of a meter. We developed these proprietary formulations and processes for our exclusive use. Raw materials manufactured using this technology include RBC NanoClusters, a mineral catalyst that increases absorption, silica hydride, a silica-mineral hydride complex that has antioxidant and other beneficial properties, and HydraCel concentrate, a liquid form of NanoClusters. Our product line also features spirulina as a main ingredient in nutritional supplements and aloe vera as a main ingredient in our skin and personal care products. We maintain quality control of our products through our in-house laboratory facilities and operations.

We established our manufacturing facility in June 2002 to produce nanotechnology-based raw materials using our own proprietary process. We established this facility when our former raw material supplier, contrary to

4

Table of Contents

the terms of the license agreement in place at that time, announced that he would no longer supply raw materials to us. Prior to his announcement, these raw materials were supplied exclusively to us. We began shipping products made with our proprietary raw materials on July 31, 2002.

Our primary products are Microhydrin^® and Microhydrin Plus^™, which accounted for approximately 33% of our sales in 2003. The principal ingredient in these products is silica hydride powder, which we now produce in our own manufacturing facility. No other product accounted for more than 10% of our sales.

Medical Products. We currently market a line of approximately 25 wound care and oncology products. The wound care products are for the treatment and healing of wounds such as pressure ulcers, leg ulcers, cuts, burns and abrasions. These products include wound and skin cleansers, wound dressings, a moisture barrier cream and a unique hydrogel wound dressing with Lidocaine. The wound care products are distributed directly to hospitals, nursing homes and home health care agencies throughout the United States through a traditional, unaffiliated nationwide network of medical/surgical supply dealers. The oncology products are designed to reduce destruction to skin and tissue caused by radiation, and to reduce pain caused by radiation reactions in the skin and the internal mucosa. The oncology products are distributed to hospitals, cancer treatment clinics and pharmacies through a traditional, unaffiliated nationwide network of pharmaceutical distributors. Our MPM sales force consists of two full time sales representatives and approximately 12 manufacturer representatives assigned to specific geographic territories within the United States.

Industry/Competitors

We are in a highly competitive industry both domestically and internationally. We compete against companies that sell heavily advertised products through retail stores as well as other network marketing companies. Many of our competitors are significantly larger than we are and have far greater financial resources. Our competition includes network marketing companies close to our size such as Reliv International and Nutrition for Life, and much larger companies such as Amway, Nu Skin and Herbalife. At a consumer level, we compete with large health food chains such as GNC, small independently-owned health food stores, as well as drug stores, department stores and supermarkets that sell nutritional supplements and personal care products.

We offer a wide selection of products with a reputation for high quality. We believe that our products possess features and provide benefits that are desired by consumers looking for natural health products. We place a high degree of emphasis on new product development to ensure our product line remains current with developing trends in our industry and new scientific evidence. We generally do not attempt to compete based on price, although price is a consideration. Prices are justified through product quality and benefits and, to the extent possible, the proprietary ingredients and unique formulations.

Our MPM products also face heavy competition. In the wound care product market, we compete against companies that are significantly larger and have far greater financial resources such as 3M, Convatec (a subsidiary of Squibb) and Johnson & Johnson. We also compete against smaller companies such as Gentell and Dermasciences. The oncology products market in which we compete is highly fragmented and largely undefined with the principle competition being a line of products marketed by Medline Industries.

Capital Stock

We have authorized 50 million shares of common stock. As of March 8, 2004, we had issued and outstanding 19,956,294 shares of common stock.

Inventory Requirements, Backlogs

The distributors of our nutritional products and our medical products generally do not maintain large inventories of our products. They depend on us to maintain our inventory at a level that will allow us to fill their orders or the orders of their customers, as the case may be, as they are placed. We generally ship orders within 48 hours after we receive them so there is no significant backlog of orders.

We do not maintain inventory in anticipation of product orders from our international licensees. Under the terms of our license agreements, the licensee is required to make a cash deposit equal to 50% of the purchase order

5

Table of Contents

value at the time the purchase order is placed, and allow two to three months for delivery. We define backlog as purchased orders received by us that are accompanied by the requisite deposit. Backlog fluctuates depending on the ordering patterns of our licensees. Backlog was approximately $1,162,000 and $360,000 at December 31, 2003 or 2002, respectively.

Research and Development

From time to time, we contract with scientists at universities, medical colleges, and private research organizations to conduct small studies to evaluate the safety and functions of our products. Most of these studies have been conducted to evaluate the safety and functions of Microhydrin. In October 2000, one study was published in the Journal of Medicinal Food.

Trademarks, Patents or Other Intellectual Property

We own trademarks on the name Royal BodyCare and the names of certain key products such as Microhydrin.

During 2002, we developed proprietary formulations and manufacturing processes to produce certain raw materials, which are principal ingredients in our leading products. We have not filed for patent protection related to our proprietary formulations or manufacturing processes.

Governmental Regulations

One or more of the following agencies regulates the formulation, labeling and advertising of our products: the Food and Drug Administration, the Federal Trade Commission, the Consumer Product Safety Commission and various agencies of the states and foreign countries into which our products are shipped or sold. In addition, our distribution and sales program is, like that of other companies operating in interstate commerce, subject to the jurisdiction of the Federal Trade Commission and a number of other federal agencies. Various state agencies regulate our multi-level distribution activities.

Item 2. Properties

In March 2001, we purchased the approximately 119,000 square foot facility that houses our executive offices, manufacturing and warehouse space for approximately $3.7 million. This facility is located in Irving, Texas. Prior to its purchase, we leased this facility. We also lease distribution facilities in Burnaby, British Columbia to support our sales operations in Canada at an annual rental of approximately $92,000. Prior to October 2003, we maintained a second Canadian distribution facility in Toronto, Ontario. In October 2003, this facility was vacated and its operations moved to the Burnaby office.

Item 3. Legal Proceedings

ROYAL BODYCARE, INC. v. G. PATRICK FLANAGAN, Individually and as authorized agent on behalf of FLANAGAN TECHNOLOGIES, INC., FLANAGAN TECHNOLOGIES, INC. a/k/a and d/b/a FLANTECH and/or FLANTECH GROUP and JOHN LLOYD, Cause Number DV02-04797, Dallas County, Texas, District Court.

On May 29, 2002, we filed suit against a former supplier and member of our Board of Directors (G. Patrick Flanagan), and certain others (“Defendants”) requesting injunctive and monetary relief and alleging, among other causes of action, breach of contract, conspiracy, fraud, breach of fiduciary duty, disparagement, tortuous interference and unlawful restraint of trade. On July 26, 2002, the Court granted an Agreed Injunction that enjoined the Defendants and other parties acting in concert with them from, among other things, refusing to sell certain raw materials to us and disparaging Royal BodyCare, Inc. and its officers, directors, employees or its products. In connection with this suit, on August 16, 2002, the Defendants filed a counter claim against us alleging, among other causes of action, unfair competition, breach of contract and conspiracy.

On February 18, 2003, the parties entered into an agreement to settle all claims and causes of actions that existed between them, including those arising out of the transactions that formed the basis of the lawsuit. Under the terms of this settlement, G. Patrick Flanagan and/or Flantech Group, defendants in the original suit, agreed to pay to

6

Table of Contents

us an aggregate of $250,000, payable in monthly installments beginning in February 2003, calculated as a percentage of gross revenues, as defined, generated by G. Patrick Flanagan or certain entities to which he is related. Through December 31, 2003, we received $102,000 of the amount owed pursuant to this settlement. In addition, the parties agreed not to disparage the other, its products, its directors, officers or employees, and not to send unsolicited communications to any known customer of the other.

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

None.

7

Table of Contents

PART II

Item 5. Market for the Company’s Common Equity and Related Stockholder Matters

Our Common Stock is traded on the Nasdaq over-the-counter Bulletin Board published by the National Quotation Bureau, Inc. The following reflects the range of high and low bid quotes for each calendar quarter during each of the past two years:

As of March 8, 2004 there were approximately 566 holders of our common stock. Since our inception, we have paid no dividends on our stock. We do not anticipate that we will pay dividends in the foreseeable future.

Sales of Unregistered Securities

In April 2003 and June 2003, we sold an aggregate of 2,000,000 shares of our common stock at a total price of $200,000 to our founder and CEO. In March 2003, we sold 4,000,000 shares of our common stock at an aggregate price of $400,000 to our licensee in the former Soviet Union. The president of Coral Club International, Inc., our licensee, is a member of our Board of Directors. In March 2001, in connection with the acquisition of our current headquarters, we issued 40,000 shares of our common stock to an individual investor. These issuances were not registered with the Securities and Exchange Commission under the Securities Act of 1933, or any state securities commissioner. Exemption from registration of each of the issuances is claimed by us under Section 4(2) of the Federal Securities Act of 1933 as a transaction by an issuer which does not involve a public offering and comparable limited offering exemptions under the state securities laws.

Our convertible notes, and the shares of our common stock issued upon conversion of these notes, are subject to certain restrictions upon the sale or transfer thereof which are denoted prominently upon the certificates of these securities as required by the applicable federal and state securities laws. We have further instructed our transfer agent to not transfer these securities in the absence of registration or satisfactory evidence that the transfer would be in compliance with the applicable securities laws pertaining thereto. Exemption from registration of the sale of these securities under the applicable federal and state securities laws is claimed by us under Section 4(2) of the Federal Securities Act of 1933 as a transaction by an issuer which does not involve a public offering and comparable limited offering exemptions under the state securities laws.

8

Table of Contents

Item 6. Selected Financial Data

The financial data included in the table shown below has been selected by us and has been derived from the financial statements for the periods indicated.

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

In connection with the preparation of the our financial statements for 2003, our audit committee, which was established in September 2003, requested that management and our independent accountants review the revenue recognition policy with regard to our licensee in the former Soviet Union, Coral Club International, Inc. (“CCI”) (See Note R to the consolidated financial statements). Until September 2002, sales were recorded when products were shipped to CCI. In September 2002, CCI and we reached an agreement that provided that we would store products for CCI in our warehouse and then ship them at a later date to locations designated by CCI in accordance with its business needs. As part of this agreement, CCI agreed to accept ownership of and pay for the products as they were segregated in our warehouse for CCI’s account. Upon entering into this agreement, we began to recognize sales to CCI at the time products were billed and segregated in our warehouse for CCI’s account.

After reviewing this accounting practice in light of authoritative accounting literature, management, in consultation with our independent accountants, concluded that sales should have been recognized at the time products were shipped rather than when such products were segregated in our warehouse for CCI’s account. As a result, we have restated our previously reported audited financial statements for the year ended December 31, 2002. The restated financial statements for 2002 are contained in this report, and the components of the restatement along with the related effect on previously issued financial statements are set forth in Note C to the consolidated financial statements. Management’s discussion and analysis of financial condition and results of operations incorporates the restated amounts.

Overview

We operate in two industry segments, Nutritional Products and Medical Products. The Nutritional Products segment represents our core product line, accounting for 92% of our sales. We have experienced declining sales in the Nutritional Products segment in North America, which, even with the decline, is still our primary market. At the same time, we have experienced sales growth outside of North America, mainly through a licensee that distributes our Nutritional Products in the former Soviet Union. We have also experienced growth in the Medical Products segment, which distributes its products in the United States.

As described more fully below, we attribute the decline in sales of our core product line to the dispute with a former supplier and member of our Board of Directors, Patrick Flanagan. Since this dispute arose, we have developed replacement products for the products formerly supplied by Flanagan, developed and introduced new products, recreated our core marketing message, eliminating our association with Flanagan, and introduced changes to our distributor compensation plan intended to stimulate sales and increase recruiting of new independent distributors. The most recent of these changes became effective in January 2004. While we believe these actions will ultimately reverse the declining sales trend, we can give no assurance of future sales growth.

9

Table of Contents

While addressing the issues created by our dispute with Flanagan, we also engaged in a concerted effort to reduce operating expenses during this period of declining North American sales. In this regard, we reduced personnel, and reorganized and consolidated operating activities to increase efficiency and reduce operating expenses. This included reorganizing our international marketing department, which reduced expenses while improving efficiency, closing one of two Canadian distribution centers and moving a significant portion of the Canadian operations to our office in the U.S. As described more fully below, we also obtained a favorable settlement of the litigation with Flanagan, pursuant to which he paid us $102,000 during 2003.

These efforts produced an improvement in operating results in 2003. Our net loss in 2003 was $105,000 compared with a net loss of $556,000 in 2002. As more fully described below, to improve liquidity and reduce our working capital deficit, during the first six months of 2003, we sold 6,000,000 shares of common stock for an aggregate purchase price of $600,000. These were primary factors in the reduction of our working capital deficit to $814,000 at December 31, 2003 compared with $1,522,000 at December 31, 2002.

Liquidity and Capital Resources; Material Changes in Financial Condition

During the year ended December 31, 2003, we had a net decrease in cash of $125,000. This decrease occurred mainly because net cash used in financing and investing activities of $368,000 and $37,000, respectively, exceeded net cash provided by operating activities of $300,000. With regard to our operating activities, we had a loss from continuing operations of $180,000, which included non-cash expense items such as depreciation and amortization of $607,000 and a loss on disposition of assets of $213,000. In addition, our accrued liabilities increased $297,000 which was primarily attributable to an increase in cash deposits made by our licensee in the former Soviet Union related to purchase orders placed but not shipped. Net cash provided from these operating activities was partially offset by cash used to reduce accounts payable by $307,000. With regard to financing activities, during 2003 we made aggregate debt repayments in the amount of $968,000, including payments against lines of credit and payments of long-term debt related to both continuing and discontinued operations. To improve our liquidity, during 2003 we sold 6,000,000 shares of our common stock for an aggregate purchase price of $600,000. We sold 4,000,000 of theses shares to our licensee in the former Soviet Union, Coral Club International, Inc., the president of which is a member of our Board of Directors. The remaining 2,000,000 shares were sold to our founder and Chairman. As a result of all these activities, during 2003 we reduced our working capital deficit to $814,000, a $708,000 improvement from the working capital deficit of $1,522,000 reported at December 31, 2002.

Consistent with industry practice, most of our sales are paid by our distributors at the time of order. Because our sales are generated through independent distributors who do not maintain a significant inventory, it is necessary for us to have products on hand when the distributors place their orders. During periods of sales growth we must purchase inventory in anticipation of sales, thereby creating the need for additional working capital.

We believe that we will be able to fund moderate sales increases through our operations. Should sales growth increase beyond our ability to finance our growth internally, or should we require additional working capital before returning to profitability, we may again seek outside sources of capital including bank borrowings, other types of debt or equity financings. There is no assurance, however, that we would be able to obtain any additional outside financing or obtain financing on terms we would find acceptable. We have no plans or requirements for any other significant capital expenditures during the next twelve months.

Other than those factors already described, we are not aware of any trends or uncertainties that would significantly effect our liquidity or capital resources in the future.

Critical Estimates, Uncertainties or Assessments in Our Financial Statements

The preparation of our financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In applying our accounting principles, we must often make individual estimates and assumptions regarding expected outcomes or uncertainties. As you might expect, the

10

Table of Contents

actual results or outcomes are generally different than the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

We review the carrying value of our goodwill and other intangible assets at the end of each year and at other times if events and circumstances warrant such a review. One of the methods used for this review is performed using estimates of future cash flows. If the carrying value of our goodwill or other intangible assets is considered impaired, an impairment charge is recorded for the amount by which the carrying value of the goodwill or intangible assets exceeds its fair value. We believe that the estimates of future cash flows and fair value are reasonable. Changes in estimates of such cash flows and fair value, however, could affect the evaluation.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Based on an assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our consolidated financial statements provide a meaningful and fair perspective of our company.

Contractual Cash Obligations

The table below summarizes our contractual obligations outstanding as of December 31, 2003:

Results of Operations - 2003 Compared with 2002

Our sales for the year ended December 31, 2003 were $19,278,000 compared with sales for the prior year of $25,925,000, a decrease of $6,647,000 or 26%. This decline was due primarily to declines in sales of our Nutritional Products in the U.S. and Canadian markets of $6,388,000 and $886,000, respectively. Declines in these markets were partially offset by a net sales increase in our international licensee markets, principally the former Soviet Union, of $260,000 and sales of Medical Products of $367,000.

We believe that the principal factor affecting our U.S. and Canadian Nutritional Products sales was the dispute with G. Patrick Flanagan, formerly a member of our Board of Directors, and the related entities through which his proprietary products are marketed (collectively “Flanagan”). We entered into a supply contract with Flanagan in 1998 that gave us the unfettered right to purchase silica hydride powder, the principal ingredient in our top selling product, Microhydrin, and certain other proprietary raw materials. Sales of products containing Flanagan’s proprietary ingredients increased to a level that represented in excess of 50% of our sales volume. We were effectively the exclusive distributor of products containing his proprietary ingredients until December 2001 when Flanagan began marketing a product competitive with Microhydrin on his web site and, on a limited basis, through certain health food stores. Flanagan’s actions had an extremely negative impact on the sales and recruiting efforts of our network of independent distributors. As an initial step to improve our competitive position, we developed a proprietary, broad-based blend of antioxidants, including Microhydrin. This product, Microhydrin Plus, was introduced in late April 2002.

11

Table of Contents

In contravention of our written unlimited supply agreement, on May 24, 2002, Flanagan informed us that he had signed an agreement with an Arizona-based company granting it exclusive rights for the distribution of his products through network marketing, and that he would no longer supply us his products. Concurrent with his announcement on May 24, Flanagan and two former RBC distributors launched an aggressive negative campaign to entice our distributors to leave us and join the Arizona-based company. In addition, in breach of its license agreement with us, our European licensee announced it was doing business with Flanagan and discontinued purchasing products from us in May 2002.

In response to Flanagan’s actions, on May 29, 2002, we filed suit against Flanagan and one former RBC distributor in the Dallas County, Texas District Court. As described elsewhere in this report, we settled this litigation in February 2003. In addition, as a result of Flanagan’s actions, we refined and completed the development of our proprietary version of silica hydride powder and other raw materials formerly supplied by Flanagan. We began shipping Microhydrin made with our silica hydride powder on July 31, 2002, and other products made with our proprietary raw materials as existing supplies of products made with Flanagan’s raw materials were exhausted.

During 2003, we developed and introduced new marketing programs and distributor compensation plan incentives, which included the introduction of a new weight loss system, that were designed to stimulate sales and recruiting efforts among our independent distributor network. We will be able to evaluate the effectiveness of these efforts during 2004. We believe that the actions we have taken along with our other marketing strategies and programs, will help us, for the most part, to improve retention of our present distributor base, stabilize our present sales volume and provide a base from which we can begin to grow our business. However, there can be no assurances that these efforts will be successful or that the introduction of products that directly compete with our Microhydrin will not cause a further decline in sales.

Our cost of goods sold for the year ended December 31, 2003 declined significantly as a result of the decline in our sales. Our cost of goods sold for the year ended December 31, 2003 was $5,910,000 compared with cost of goods sold in the prior year of $8,355,000, a decrease of $2,445,000 or 29%. As a percentage of sales, cost of goods sold was 31% in 2003 and 32% in 2002. As a percentage of sales, gross margin improved 1% in 2003 mainly because of two factors. Our cost for key raw materials that we began manufacturing in-house in mid-2002 is less than our cost to purchase these materials. This resulted in a gross margin improvement in 2003. However, this improvement was largely offset as a result of the overall increase in sales to our international licensees. The gross margin for products sold to international licensees is lower than the gross margin for products sold in other markets because we sell internationally at lower prices, as we do not pay distributor commissions on sales of products to international licensees.

Our distributor commissions for the year ended December 31, 2003 declined significantly as a result of the decline in our sales. Our distributor commissions for the year ended December 31, 2003 were $5,689,000 compared with distributor commissions in 2002 of $8,661,000, a decrease of $2,972,000 or 34%. In the Nutritional Products segment, U.S. and Canadian market distributor commissions as a percentage of sales were unchanged at 40%. On a consolidated basis, distributor commissions as a percentage of sales declined to 30% in 2003 compared with 33% in 2002. This percentage decline was related to the overall increase in sales to our international licensees because we do not pay distributor commissions on sales of these products.

Our general and administrative expenses for the year ended December 31, 2003, were $6,967,000 compared with such expenses in 2002 of $8,441,000, a decrease of 1,474,000 or 17%. This decrease was mainly related to management’s efforts to reduce operating expenses in light of the decline in sales. We improved operating efficiency through a reorganization and consolidation of several operating functions, and significantly reduced personnel and information technology expenses. As a percentage of sales, general and administrative expenses were 36% in 2003 and 33% in 2002.

Our interest expense for the year ended December 31, 2003 was $304,000 compared with interest expense in 2002 of $388,000, a decrease of $85,000 or 22%. This decrease was related to the repayment of long-term debt.

12

Table of Contents

We recorded a loss on disposition of assets in 2003 of $173,000. This loss was mainly related to the cancellation of a split dollar life insurance arrangement originally established in 1995 between Clinton Howard, Chairman and CEO, and us. In connection with the cancellation of this arrangement in November 2003, a $1,000,000 life insurance policy on the life of Mr. Howard having a cash surrender value of approximately $122,000 was transferred to us, and we cancelled a collateral assignment agreement from the policy owner, Mr. Howard’s spouse, that provided for repayment to the Company of the policy premiums we paid. As a result, the Company charged $145,000 to expense in 2003, which represented the difference between the cash surrender value transferred to the Company and policy premiums of $267,000 paid by the Company, which were no longer secured by the collateral assignment agreement.

Other income of $102,000 recognized in 2003 represents payments received pursuant to the settlement of our lawsuit with Flanagan in February 2003. Under the terms of the settlement, Flanagan is obligated to make monthly payments calculated as a percentage of his gross revenues, as defined, up to an aggregate of $250,000.

Earnings from discontinued operations for the year ended December 31, 2003, net of income taxes of $39,000, resulted from the settlement of a $241,000 obligation of BizAdigm prior to its maturity date for less than the contractual amount. This obligation was settled in April 2003 for a cash payment of $125,000 and the issuance of a five-year option valued at $2,500 to purchase 25,000 shares of the Company’s common stock at an exercise price of $0.10 per share, which was the market price of the stock.

Earnings from discontinued operations of $25,000 for year ended December 31, 2002 represent the net result of activities associated with BizAdigm and activities associated with Great Xpectations Marketing, Inc. (GXI), our wholly-owned subsidiary that discontinued its operations in 1999. BizAdigm’s operations were discontinued during the second quarter of 2002. BizAdigm had recognized sales of $45,000 during 2002, and recognized a loss of approximately $75,000. This loss represented the excess of selling, general and administrative expenses plus cost of cost of goods sold and distributor commissions over recognized sales. Also during 2002, we recorded earnings from discontinued operations of $100,000 due to the reversal of an accrual related to certain contingent liabilities of GXI that we have now determined will not have to be paid.

Our net loss for the year ended December 31, 2003 was $105,000, or $.01 per share, compared with a net loss in the prior year of $556,000 or $.04 per share. This improvement resulted from the factors described above.

Other than those previously described, we are not aware of any economic trends or uncertainties that would have a material impact on our future sales or operating results. We believe that we have purchased our products at the best price available and that any price increases in the foreseeable future will be small. Any such price increases would be passed through to our distributors. In addition, we do not believe at this time that inflation will have a material impact on our operating results.

Results of Operations - 2002 Compared with 2001

Our sales for the year ended December 31, 2002 were $25,925,000 compared with sales for the prior year of $33,819,000, a decrease of $7,894,000 or 23%. This decline in sales resulted mainly from sales declines of our traditional nutritional and personal care products in the U.S. and Canadian markets of $7,236,000 and $2,028,000, respectively. Declines in these markets were partially offset by a net sales increase in our other international markets of $603,000 and in our MPM Medical products market of $767,000.

We believe one of the principal factors affecting our sales has been the dispute with G. Patrick Flanagan, formerly a member of our Board of Directors, and the related entities through which his proprietary products are marketed (collectively “Flanagan”). We entered into a supply contract with Flanagan in 1998 that gave us the unfettered right to purchase silica hydride powder, the principal ingredient in our top selling product, Microhydrin^®, and certain other proprietary raw materials. Sales of products containing Flanagan’s proprietary ingredients increased to a level that represented in excess of 50% of our sales volume. We were effectively the exclusive distributor of products containing his proprietary ingredients until December 2001 when Flanagan began marketing a product competitive with Microhydrin on his web site and, on a limited basis, through certain health food stores. Flanagan’s actions had a negative impact on the marketing efforts of our network of independent distributors. To improve our competitive position, we developed a proprietary, broad-based blend of antioxidants, including Microhydrin. This new product, Microhydrin Plus, was introduced in late April 2002 and the acceptance of this product has been positive.

13

Table of Contents

In contravention of our written unlimited supply agreement, on May 24, 2002, Flanagan informed us that he had signed an agreement with an Arizona-based company granting it exclusive rights for the distribution of his products through network marketing, and that he would no longer supply us his products. Concurrent with his announcement on May 24, Flanagan and two former RBC distributors launched an aggressive negative campaign to entice our distributors to leave us and join the Arizona-based company. In addition, in breach of its license agreement with us, our European licensee announced it was doing business with Flanagan and discontinued purchasing products from us in May 2002. Sales to the European licensee were $291,000 in 2002 compared with $1,100,000 in 2001.

In response to Flanagan’s actions, on May 29, 2002, we filed suit against Flanagan and one former RBC distributor in the Dallas County, Texas District Court. As described elsewhere in this report, we settled this litigation in February 2003. In addition, since Flanagan’s announcement, we refined and completed the development of our proprietary version of silica hydride powder and other raw materials formerly supplied by Flanagan. We began shipping Microhydrin made with our silica hydride powder on July 31, 2002, and other products made with our proprietary raw materials as existing supplies of products made with Flanagan’s raw materials were exhausted.

We believe that the actions we have taken along with our present marketing strategies and programs, will allow us, for the most part, to improve retention of our present distributor base, stabilize our present sales volume and provide a base from which we can begin to grow our business. However, there can be no assurances that these efforts will be successful or that the introduction of products that directly compete with our Microhydrin will not cause a further decline in sales.

Our cost of goods sold for the year ended December 31, 2002 was $8,355,000 compared with cost of goods sold in the prior year of $10,318,000, a decrease of $1,963,000 or 19%. As a percentage of sales, cost of goods sold was 32% in 2002 compared with 31% in 2001. This percentage increase was mainly related to the increase in sales to our international licensees. Cost of goods sold as a percentage of sales is higher for products sold to international licensees because we do not pay distributor commissions on sales of these products.

Our distributor commissions for the year ended December 31, 2002 were $8,661,000 compared with distributor commissions in 2001 of $12,157,000, a decrease of $3,496,000 or 29%. As a percentage of sales, distributor commissions in 2002 were 33% compared with 36% in 2001. This percentage decline was mainly related to the increase in sales to our international licensees and sales of MPM Medical products because we do not pay distributor commissions on sales to our international licensees and commissions paid on sales of MPM Medical products are approximately 2%.

Our general and administrative expenses for the year ended December 31, 2002, were $8,441,000 compared with such expenses in 2001 of $9,706,000, a decrease of $1,265,000 or 13%. This decrease was mainly related to management’s efforts to reduce operating expenses in light of the decline in sales. As a percentage of sales, general and administrative expenses were 33% in 2002 compared with 29% in 2001.

Our depreciation and amortization expenses for the year ended December 31, 2002, were $625,000 compared with such expenses in 2001 of $883,000, a decrease of $258,000 or 29%. In 2001, we recorded goodwill amortization expense of $156,000. As described in Note G to the consolidated financial statements, we recorded no goodwill amortization expense in 2002. Also contributing to the decrease in depreciation and amortization expense in 2002 was the disposition of property and equipment in 2001, which is more fully described below.

We recorded a loss on disposition of assets in 2001 of $703,000. The principal components of this loss are described below:

Web Site Software – In December 2000, we entered into a contract with a software development company to design, program, maintain and host a new web site for us. We wrote off our investment of $253,000 when the software development company became insolvent.

14

Table of Contents

Japan assets – In June 2001, we entered into an agreement to reacquire the license we had previously granted to a third party to market our products in Japan. As part of this agreement, we acquired assets, mainly computer software, used in the Japan operations. In connection with a restructuring of operations in Japan in December 2001, we determined that we no longer had use for certain of these assets resulting in a write off of $160,000.

Other Assets – In December 2001, we identified certain ineffective marketing programs that we decided to eliminate or change. In connection with this effort, we wrote off inventories and other assets associated with these programs in the amount of $277,000.

Earnings from discontinued operations of $25,000 for year ended December 31, 2002 represent the net result of activities associated with BizAdigm and activities associated with Great Xpectations Marketing, Inc. (GXI), our wholly-owned subsidiary that discontinued its operations in 1999. BizAdigm’s operations were discontinued during the second quarter of 2002. BizAdigm had recognized sales of $45,000 during 2002, and recognized a loss of approximately $75,000. This loss represented the excess of selling, general and administrative expenses plus cost of cost of goods sold and distributor commissions over recognized sales. Also during 2002, we recorded earnings from discontinued operations of $100,000 due to the reversal of an accrual related to certain contingent liabilities of GXI that we have now determined will not have to be paid. The loss from discontinued operations in 2001 relates solely to the operations of BizAdigm. The loss represents the excess of selling, general and administrative expenses plus cost of goods sold and distributor commissions over recognized sales of $799,000, net of income tax benefits. BizAdigm’s loss in 2001 includes the write-off of our investment in BizAdigm’s assets of $490,000.

Our net loss for the year ended December 31, 2002 was $556,000, or $0.04 per share, compared with a net loss in the prior year of $1,115,000 or $0.08 per share, an improvement of $711,000. Our losses in 2002 and 2001 resulted from the factors described above.

Recent Accounting Pronouncements

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51, Consolidated Financial Statements, for certain entities that do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties or in which equity investors do not have the characteristics of a controlling financial interest (“variable interest entities”). Variable interest entities within the scope of FIN 46 will be required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. It is not expected that the adoption of the provisions of FIN 46 will have any impact upon our financial condition or results of operations.

Accounting for Certain Financial Instruments

In May 2003, the Financial Accounting Standards Board issued SFAS No.150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No.150 revised the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new statement requires that those instruments be classified as liabilities in statements of financial condition. SFAS No.150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is generally effective at the beginning of the first interim period beginning after June 15, 2003. It is not expected that the adoption of the provisions of SFAS No. 150 will have any impact upon our financial condition or results of operations.

15

Table of Contents

Item 7A. Quantitative and Qualitative Disclosure about Market Risk

The following discussion about our market risk includes “forward-looking statements” that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. We do not use derivative financial instruments for speculative or trading purposes. We are exposed to market risk from changes in foreign currency exchange rates and interest rates which could affect our future results of operations and financial condition. We manage our exposure to these risks through our regular operating and financing activities.

Foreign exchange

We have foreign-based operations in Canada which accounted for 14% of 2003 net sales. We make advances to our foreign subsidiary denominated in U.S. dollars, exposing the foreign subsidiary to the effect of changes in spot exchange rates of the Canadian dollar relative to the U.S. dollar. We do not regularly use forward-exchange contracts to hedge these exposures. Based on our foreign currency exchange rate exposure for intercompany advances of approximately $270,000 at December 31, 2003, a 10% adverse change in the currency rate would reduce earnings before tax by approximately $27,000.

Interest rates

Our credit arrangements expose us to fluctuations in interest rates. At December 31, 2003, we had approximately $486,000 outstanding in indebtedness, which provided for interest to be paid monthly based on a variable rate. Thus, interest rate changes would result in a change in the amount of interest to be paid each month. Based upon the interest rates and borrowings at December 31, 2003, a 10% increase in interest rates would adversely affect our financial position, annual results of operations, or cash flows by approximately $3,300.

Item 8. Financial Statements and Supplemental Data

The financial statements and supplementary data are listed in the Index to Financial Statements appearing on Page F-1 of this Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures within 90 days before the filing of this report. Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities and Exchange Act of 1934, as amended, is recorded, processed, summarized and reported with the time periods specified in the SEC’s rules and forms.

We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected. In preparing our financial statements for the year ended December 31, 2003, we determined that certain revenue recognition accounting practices being used by us were not consistent with authoritative accounting literature. As a result, we have implemented additional procedures to prevent this from recurring. There have been no other significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

16

Table of Contents

PART III

Certain information required by Part III is omitted from this Report as we will file a definitive proxy statement for the Annual Meeting of Shareholders to be held on June 2, 2004, pursuant to Regulation 14A (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the Proxy Statement is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference.

Item 10. Directors and Executive Officers of the Company

Information with respect to our directors may be found in the Proxy Statement in the section titled “Election of Directors” and is incorporated herein by reference. Information with respect to executive officers may be found in the Proxy Statement in the section titled “Executive Compensation and Other Information” and is incorporated herein by reference. Information with respect to compliance with Section 16(a) of the Exchange Act by the persons subject thereto may be found in the Proxy Statement in the section titled “Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

Item 11. Executive Compensation

Information with respect to executive compensation may be found in the Proxy Statement in the section titled “Executive Compensation and Other Information” and under the caption “Director Compensation” in the section titled “Election of Directors.” Such information is incorporated herein by reference.

Item 12. Security Ownership and Certain Beneficial Owners and Management and Related Stockholder Matters

The information in the Proxy Statement set forth in the section “Security Ownership of Certain Beneficial Owners and Management” and under the caption “Equity Compensation Plan Information” in the section titled “Executive Compensation and Other Information” is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information set forth under the caption “Certain Relationships and Related Transactions” in the section titled “Executive Compensation and Other Information” in the Proxy Statement is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

Information regarding principal accounting fees and services is set forth under the caption “Audit Fees and Non-Audit Fees” in the section titled “Ratify Appointment of Independent Auditors” in the Proxy Statement and is incorporated herein by reference.

17

Table of Contents

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Title of Document

Report of Grant Thornton LLP, Independent Certified Public Accountants

18

Table of Contents

December 3, 2003 – We filed a report on Form 8-K in connection with the execution of an employment agreement effective through December 31, 2008 with our Chief Executive Officer, Clinton H. Howard.

November 11, 2003 – We filed a report on Form 8-K in connection with the issuance of a press release announcing our third quarter results.

19

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Pursuant to the requirements to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

20

Table of Contents

INDEX TO FINANCIAL PAGES

F-1

Table of Contents

Report of Independent Certified Public Accountants

Board of Directors and Stockholders

Royal BodyCare, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Royal BodyCare, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Royal BodyCare, Inc. and Subsidiaries as of December 31, 2003 and 2002, and the consolidated results of their operations and their consolidated cash flows for the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note C to the consolidated financial statements, the consolidated balance sheet as of December 31, 2002 and the related consolidated statements of operations and cash flows for the year ended December 31, 2002 have been restated.

As discussed in Note G to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) on January 1, 2002.

GRANT THORNTON LLP

Dallas, Texas

March 12, 2004

(except for Note C,

as to which the date is April 9, 2004)

F-2

Table of Contents

Royal BodyCare, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31,

The accompanying notes are an integral part of these financial statements.

F-3

Table of Contents

Royal BodyCare, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31,

The accompanying notes are an integral part of these financial statements.

F-4

Table of Contents

Royal BodyCare, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

The accompanying notes are an integral part of these financial statements.

F-5

Table of Contents

Royal BodyCare, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31,