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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended December 31, 2002

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: None

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  þ    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.    þ

On March 27, 2003, the closing price of Registrant’s common stock sold was $0.08 per share. On such date, 6,498,106 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 $519,848 (6,478,106 shares times $0.08 per share).

As of March 27, 2003, 17,956,294 shares of the registrant’s Common Stock were outstanding.

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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:

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ROYAL BODYCARE, INC.

FORM 10-K

YEAR ENDED DECEMBER 31, 2002

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PART I

Item 1.    Business

General/History

We are a Nevada corporation 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. Our products include the following:

We market these products in countries outside of the United States, Canada and Japan through exclusive licensing agreements.

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.org. Our web site address is www.royalbodycare.com. The Company makes available on its website, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission, its annual report on 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 in Canada. After this acquisition, we introduced the Pure Life line of products to the United States market. 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 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. All share figures in this report have been adjusted to reflect this reverse 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.

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In August 2001, we purchased substantially all of the assets of MPM Medical, Inc., a distributor of wound care and oncology products. Unlike our core Royal BodyCare^® products, MPM Medical’s products are distributed directly by us and not through an independent distributor network.

Restatement of Financial Statements

As a result of a review of our accounting records in the normal course of business during 2002, we have restated our previously reported audited financial statements for the years ended December 31, 2001 and 2000, and recorded a prior period adjustment to our beginning accumulated deficit as of January 1, 2000. The restated financial statements for 2001 and 2000 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 D 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 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 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.

Employees

We currently have 80 employees, of whom 7 are executive officers or management employees, 10 are department heads, 15 are warehouse or manufacturing employees, 21 are in customer service or order entry, 3 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 2003. 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

We attempt to recruit people who can effectively explain our line of 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.

We had approximately 40,000 active independent distributors at December 31, 2002, of whom approximately 30,000 are located in the United States, 9,500 are located in Canada and 500 are 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 compensation program we pay sales commissions to our distributors. These commissions are based on the amount of purchases 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.

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We use the Internet to support our marketing efforts and enhance communication with our distributors. Through our websites, 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 website, 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 agreements with overseas licensee groups for marketing the Royal BodyCare^® line of products. Three of these licensees provide for the shipping of Royal BodyCare^® products into the following nations:

Pursuant to these agreements, 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 these 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

With the purchase of MPM Medical in August 2001, we now market our products through two divisions. Royal BodyCare markets nutritional supplements and personal care products. MPM markets wound care and oncology products.

Royal BodyCare.    We currently market a line of over 100 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, under our Royal BodyCare^® trade name. 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.

During fiscal year 2001, our purchases of raw materials did not reach certain minimum requirements outlined in our license agreement with Flanagan Technologies, Inc., (“Flanagan Technologies”). These raw materials were main ingredients in our principal products, including Microhydrin, our largest selling product. Under our agreement with Flanagan Technologies, it had the right to terminate our exclusivity and supply us products on a nonexclusive basis if such minimum purchases were not met. In May 2002, contrary to the terms of our license agreement, Flanagan announced that he had entered into an exclusive network marketing contract with an Arizona company, and that he would no longer supply to us the raw materials, including silica hydride powder, the principle ingredient in Microhydrin. Because we could no longer purchase these raw materials from Flanagan Technologies, who was the sole supplier of these materials, we established a manufacturing facility in June 2002 to produce raw materials using our own proprietary process. We began shipping Microhydrin made with our proprietary silica hydride powder on July 31, 2002.

Our product line now features certain ingredients manufactured according to proprietary formulations and processes developed by us for our exclusive use. These raw materials include nanoclusters, a mineral catalyst that increases absorption, silica hydride, a nutritional form of hydrogen with 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.

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Our primary products are Microhydrin and Microhydrin Plus^™, which accounted for 38% of our sales in 2002. 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.

MPM Medical.    Through MPM Medical, we 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 one full time sales representative 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.

In December 2001, Flanagan Technologies, the sole supplier of certain raw materials that were the main ingredients in our principal products, including Microhydrin, which is our largest selling product, began offering on its own and through third parties, a product that directly competes with Microhydrin^®. In May 2002, contrary to the terms of our license agreement, G. Patrick Flanagan, the individual who controls Flanagan Technologies and a former director, announced that he had entered into an exclusive network marketing contract with an Arizona company. (See Item 3. Legal Proceedings, below). Shortly thereafter, the Arizona company began marketing products supplied by Flanagan that were directly competitive to certain of our products, including Microhydrin. Initially, we developed Microhydrin Plus to compete against products offered by Flanagan Technologies. We then developed our own proprietary raw material formulations to replace raw materials formerly supplied under our license agreement with Flanagan Technologies.

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 insure 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 27, 2003, we had issued and outstanding 17,956,294 shares of common stock.

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Reports to Security Holders

We are subject to the continuous disclosure requirements of the Securities and Exchange Commission because we have had previous offerings registered pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended. Because we are a Section 15(d) company, we are not required to distribute an annual report to our shareholders. However, all of our filings with the Securities and Exchange Commission are available on-line for all shareholders to access at www.sec.gov. In addition, we distribute quarterly news releases to our shareholders as well as a year-end news release that includes operating results from our audited financial statements.

Inventory Requirements, Backlogs

Our independent distributors 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 and the orders of their customers as they are placed. We generally ship orders within 48 hours after we receive them so there is no significant backlog of orders.

Research and Development

We have contracted with scientists at universities, medical colleges, and private research organizations to conduct a series of studies over the past few years to evaluate the safety and functions of our dietary supplements, primarily 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 raw materials that we formerly purchased under a license agreement with a supplier that was the sole source of these materials. Through our proprietary processes, we now manufacture nanoclusters, silica hydride, and HydraCel concentrate. Silica hydride is the principal ingredient in our leading product, Microhydrin^®. 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. Prior to then, we leased that facility. We also lease distribution facilities in Vancouver, British Columbia and Toronto, Ontario for our sales operations in Canada at an aggregate annual rental of $125,000.

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

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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 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. 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. (For additional details, see the Company’s Form 10-Q for the quarter ended June 30, 2002, and Form 8-K’s dated August 30, 2002 and March 6, 2003.)

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

None.

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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 7, 2003 there were approximately 492 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

On March 27, 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 our licensee, Coral Club International, Inc., 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.

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.

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

As a result of a review of our accounting records in the normal course of business during 2002, we have restated our previously reported audited financial statements for the years ended December 31, 2001 and 2000, and recorded a prior period adjustment to our beginning accumulated deficit as of January 1, 2000. The restated financial statements for fiscal years 2001 and 2000 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 D to the consolidated financial statements. Management’s discussion and analysis of financial condition and results of operations incorporates the restated amounts for 2001 and 2000.

Liquidity and Capital Resources; Material Changes in Financial Condition

During the year ended December 31, 2002, we had a net increase in cash of $26,000. This increase resulted primarily from net cash provided by operating activities of $1,240,000, which, for the most part, was offset by cash used to repay borrowings and purchase property and equipment totaling $807,000 and $288,000, respectively. We generated $1,240,000 of cash from operating activities in spite of our net loss of $404,000. This was mainly attributable to depreciation and amortization expenses of $625,000, as well as cash provided from the reduction of our investment in accounts receivable and inventory during the year of $529,000 and $541,000, respectively.

During 2002 and 2001, we incurred net losses and a decline in working capital. At December 31, 2002, we had cash and cash equivalents of $627,000 and a working capital deficiency of $1,400,000. To improve our working capital position, on March 27, 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 this licensee, Coral Club International, Inc., is a member of our Board of Directors. Additionally, our founder and Chairman has committed to purchase up to $200,000 of our common stock during the month of April 2003. We have also taken certain actions that we believe will help improve future operating results. During 2002, we began manufacturing the key raw materials used in products that account for more than 50% of our sales. Our cost to manufacture these raw materials is less than we paid to our former supplier for these materials. In addition, we have undertaken other cost cutting measures that will reduce our administrative expenses in 2003, while implementing marketing strategies and programs we believe will improve retention of our distributor base and reverse the declining sales trend we have experienced during the past three years. However, there can be no assurances that these efforts will be successful to allow us to avoid a further decline in its sales.

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 actual results or outcomes are generally different than the estimated or assumed amounts. These differences are

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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 periodically review the carrying value of our goodwill and other intangible assets when 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 Commitments

The table below summarizes minimum cash obligations outstanding as of December 31, 2002:

Results of Continuing Operations—2002 Compared with 2001

Our sales for the year ended December 31, 2002 were $26,285,000 compared with sales for the prior year of $33,819,000, a decrease of $7,534,000 or 22%. 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 $963,000 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.

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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 $8,430,000 compared with cost of goods sold in the prior year of $10,318,000, a decrease of $1,888,000 or 18%. 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 32% 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 2002 of $158,000. This was mainly the result of an inventory write-off of $110,000 related to the disposal of packaging components and promotional material associated with products formerly supplied by Flanagan. This inventory became obsolete when Flanagan ceased to supply his products to us.

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

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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.

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 $404,000, or $0.03 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.

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 Continuing Operations—2001 Compared with 2000

Our sales for the year ended December 31, 2001 were $33,819,000 compared with sales for the prior year of $39,984,000, a decrease of $6,165,000 or 15%. This decline was due primarily to declines in sales of our traditional nutritional and personal care products in the U.S. and Canadian markets of $5,668,000 and $1,603,000, respectively. Declines in these markets were partially offset by a sales increase in our international licensee markets, principally Europe and Russia, of $703,000 and sales of MPM Medical products of $403,000.

While sales outside of North America have continued to grow, North American sales have not. Sales in the first six months of 2000 benefited from certain promotional programs and changes that were made to the plan by which our independent distributors are compensated. Sales declined in 2001 because we were unable to sustain this momentum. We introduced enhancements to our marketing program in the second quarter of 2001 that we believed would stimulate increased sales and recruiting activities among our North American independent distributors. However, during the third quarter, there were events that offset the effectiveness of these new programs. On July 1, 2001, our U.S. headquarters facility was damaged when a portion of the warehouse roof collapsed during a heavy rainstorm. We set up remote offices within 24 hours of the collapse, which allowed to us to continue to accept distributor orders with only a slight service disruption. However, because we were unable to resume shipping activities until July 10 and clear the backlog of shipments until July 17, July sales were significantly affected. Our sales and recruiting activity improved in August 2001, but declined again in September. We attribute this decline to the terrorist attacks on September 11.

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Another factor affecting our sales was Flanagan Technologies’ decision during the latter half of 2001 to begin supplying its products to us on a non-exclusive basis. In December 2001, Flanagan Technologies began marketing a product competitive with our leading product, Microhydrin^®, on its website and, on a limited basis, through certain health food stores. To improve our competitive position, we developed a new product that is a proprietary, broad-based blend of antioxidants, including Microhydrin^®. This new product, Microhydrin Plus^TM, will be introduced in the second quarter of 2002. Although no assurance can be given, we believe that the introduction of this new product, along with our present marketing strategies and programs, will allow us to retain our distributor base and reverse the declining sales trend experienced during 2001.

Our cost of goods sold for the year ended December 31, 2001 was $10,318,000 compared with cost of goods sold in the prior year of $11,540,000, a decrease of $1,222,000 or 11%. As a percentage of sales, cost of goods sold was 31% in 2001 compared with 29% in 2000. This increase was mainly attributable to the increase in sales to our international licensees. The cost of products sold to our international licensees as a percentage of sales is higher than for products sold to our independent distributors because the licensee is responsible for payment of the distributor commissions earned on sales in their respective territories as well as other operating expenses. This increase in the cost of goods sold percentage is offset by a reduction in distributor commissions.

Our distributor commissions for the year ended December 31, 2001 were $12,157,000 compared with distributor commissions in 2000 of $15,262,000, a decrease of $3,105,000 or 20%. As a percentage of sales, distributor commissions in 2001 were 36% compared with 38% in 2000. As described above, this percentage decline was mainly related to the increase in sales to our international licensees. A portion of this percentage decrease was also attributable to a restructuring of our distributor compensation plan that became fully effective June 1, 2000. We expect this percentage to increase over time as distributors qualify for the highest commission levels in the plan.

Our general and administrative expenses for the year ended December 31, 2001, were $9,706,000 compared with such expenses in 2000 of $11,415,000, a decrease of 1,709,000 or 15%. This decrease was mainly related to decreased operating expenses associated with the decline in sales. This expense decrease was partially offset by expenses incurred in connection with the enhancement and support of our information technology systems and increased expenses incurred in support of our international licensees. As a percentage of sales, general and administrative expenses were 29% in both 2001 and 2000.

Depreciation and amortization for the year ended December 31, 2001 was $883,000 compared to $692,000 in 2000, an increase of $191,000 or 28%. This increase was mainly due to depreciation associated with the capital investments that we made during 2001 and 2000, the most significant of which was the purchase of our headquarters facility in March 2001.

Our interest expense for the year ended December 31, 2001 was $396,000 compared with interest expense in 2000 of $177,000, an increase of $219,000 or 124%. This increase was due to additional borrowings made during 2001. The additional borrowings were mainly associated with the purchase of our headquarters facility in Irving, Texas in March 2001 and, to a lesser extent, the debt assumed in connection with the acquisition of MPM Medical in August 2001.

During the fourth quarter of 2001, we recorded a loss on disposition of assets 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.

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.

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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.

Our loss from discontinued operations in 2001 was $874,000, compared with earnings from discontinued operations of $46,000 in 2000. The loss in 2001 relates to the operations of BizAdigm. BizAdigm’s loss in 2001 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 since we were uncertain that the asset value would be realized through future operations. Earnings from discontinued operations in 2000 resulted from the reversal of certain liabilities recorded on the books of Great Xpectations that were settled for less than the original contractual amount, net of income taxes. Great Xpectations was a subsidiary of ours which conducted operations that were discontinued in 1999.

Our net loss for the year ended December 31, 2001 was $1,115,000, or $.08 per share, compared with net earnings in the prior year of $531,000 or $.04 per share. This decline resulted from the factors described above, primarily the decline in North American sales, the adjustments we recorded in the fourth quarter and the loss associated with BizAdigm operations.

Recent Accounting Pronouncements

Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the FASB issued Statement 146, Accountingfor Costs Associated with Exit or Disposal Activities. This statement requires entities to recognize costs associated with exit or disposal activities when liabilities are incurred rather than when the entity commits to an exit or disposal plan, as currently required. Examples of costs covered by this guidance include one-time employee termination benefits, costs to terminate contracts other than capital leases, costs to consolidate facilities or relocate employees, and certain other exit or disposal activities. This statement is effective for fiscal years beginning after December 31, 2002, and will impact any exit or disposal activities we initiate after that date.

Stock-Based Employee Compensation

In December 2002, the FASB issued Statement 148, Accounting for Stock-Based Compensation—Transition and Disclosure: an amendment of FASB Statement 123 (SFAS 123), to provide alternative transition methods for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in annual financial statements about the method of accounting for stock-based employee compensation and the pro forma effect on reported results of applying the fair value based method for entities that use the intrinsic value method of accounting. The pro forma effect disclosures are also required to be prominently disclosed in interim period financial statements. This statement is effective for financial statements for fiscal years ending after December 15, 2002 and is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002, with earlier application permitted. We do not plan to change to the fair value based method of accounting for stock-based employee compensation at this time and have included the disclosure requirements of SFAS 148 in the accompanying financial statements.

Accounting for Guarantees

In November 2002, FASB Interpretation 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), was issued. FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 applies prospectively to guarantees we issue or modify subsequent to December 31, 2002, but has certain disclosure requirements effective for interim and annual periods ending after December 15, 2002. We have not historically issued guarantees and do not anticipate FIN 45 will have a material effect on our 2003 financial statements.

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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. We are in the process of determining what impact, if any, the adoption of the provisions of FIN 46 will have upon our financial condition or results of operations.

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 2002 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 $41,000 at December 31, 2002, a 10% adverse change in the currency rate would reduce earnings before tax by approximately $4,100.

Interest rates

Our credit arrangements expose it to fluctuations in interest rates. At December 31, 2002, we had approximately $755,000 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, 2002, a 10% increase in interest rates would adversely affect our financial position, annual results of operations, or cash flows by approximately $5,400.

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 and the Financial Schedule appearing on Page S-2 of this Form 10-K.

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

None.

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PART II

Item 10.    Directors and Executive Officers

The following table sets forth, as of March 14, 2003, the name, age, and position of each of our Executive Officers and Directors and the month in which such Director or Officer began his term of office.

Term of Office

Each of our directors serves for a term of one year, and thereafter until his or her successor is elected at our annual shareholder’s meeting, and is qualified, subject to removal by our shareholders. Each officer serves, subject to the discretion of our Board of Directors, for a term of one year.

Family Relationships

Katherine M. Howard, our Secretary, is the wife of Clinton H. Howard, our Chairman and Chief Executive Officer.

Biographical Information

Set forth below is certain biographical information regarding each of our Directors and Executive Officers.

Clinton H. Howard.  Mr. Clinton Howard is our Chairman of the Board and Chief Executive Officer. He also served as President until the appointment of Wayne R. Holbrook to that position in February 2003. He graduated from Rice University with a BA degree and from Southwestern Medical School with an MA degree, after which he studied graduate business courses at S.M.U. and the University of Dallas and medical arts courses at Johns Hopkins Medical School. Mr. Howard founded American Biomedical Corporation in 1958, and built it into a chain of 40 medical testing laboratories. He took American Biomedical public in 1969. In 1974, American Biomedical was merged with National Health Laboratories, then one of the nation’s largest medical laboratory chains. In 1974, Mr. Howard founded Carrington Laboratories, Inc., originally named Avacare, Inc., a personal care products, direct sales marketing firm. In 1981, he established a research division which isolated an active medicinal compound in aloe vera, acemannan. He then sold the skin care business and converted Carrington to a pharmaceutical company. Mr. Howard retired from Carrington in 1990. The following year he founded Royal BodyCare.

Wayne R. Holbrook.  Mr. Holbrook joined us as Vice President – Marketing in November 2001 and was appointed President in February 2003. Prior to joining us, Mr. Holbrook served as President of One World Online, Inc., a publicly-traded company based in Utah from December 1998 until joining us. Prior to joining One World, Mr. Holbrook served as Executive Vice President of Global Connections, Inc. from January 1996 to December 1998.

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Steven E. Brown.  Mr. Steven Brown is a Director and Vice President-Chief Financial Officer and has held the same positions since joining us in May 1994. Prior to joining us, Mr. Brown was the Vice President, Finance and Chief Financial Officer of Carrington Laboratories, Inc. from 1980 through April 1994. Mr. Brown was treasurer of Carrington from 1982 through 1994 and served as a director from 1981 until August 1987. Mr. Brown is a Certified Public Accountant and was previously associated with the international accounting firm of Arthur Andersen & Co. from 1977 to 1980.

Kenneth Sabot.  Mr. Kenneth Sabot became the Senior Vice President of Operations in February 1998. Prior to joining us, Mr. Sabot was the Vice-President-Operations of To Life! L.L.C., a start up network marketing company, from August 1996 until February 1998. Prior to joining To Life, he was employed by Light Force, Inc. from 1981 through January 1996. Mr. Sabot joined Light Force as the Controller in 1981 and served as Chief Operating Officer from 1986 until leaving Light Force in January 1996. Mr. Sabot became a Certified Public Accountant in 1969.

Joseph S. Schuchert.  Mr. Joseph S. Schuchert was elected to the Board of Directors in June 2000. Mr. Schuchert is the Chairman of Kelso & Company, a merchant banking firm. Mr. Schuchert co-founded Kelso & Company in 1971 and has been employed with it since that time.

Leonid Lapp.  Mr. Leonid Lapp was elected to the Board of Directors in December 2002. Mr. Lapp is currently President and Chief Executive Officer of Coral Club International, Inc. and has held these positions for more than five years. Coral Club International, Inc. holds the license for distribution of our products in the former Soviet Union.

Item 11.    Executive Compensation

SUMMARY COMPENSATION TABLE

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Stock Options.    We did not issue any stock options to our executive officers during the fiscal year ending on December 31, 2002.

Stock Option Exercises.    The following table presents certain information concerning options exercised during the fiscal year ending December 31, 2002 by each of our executive officers. The table also includes the value of unexercised options held by our named executive officers at December 31, 2002.

AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR

AND FISCAL YEAR-END OPTION VALUES (1)

Employment Contracts and Termination of Employment

And Changes in Control Arrangements

There are no compensatory plans or arrangements, including payments to be received from us, with respect to any person named above which would in any way result in payments to any such person because of his resignation, retirement, or other termination of such person’s employment by us or our subsidiaries, or any change in control of us, or a change in the person’s responsibilities following a changing in control of us.

In connection with the appointment of Wayne R. Holbrook as President, we entered into an employment agreement with him effective February 1, 2003. This employment agreement is for a two-year period and is annually renewable thereafter. It provides that Mr. Holbrook will receive a monthly salary of $20,800 with bonuses and salary increases based on attaining specified performance objectives set forth in the agreement. Mr. Holbrook is also entitled to receive a nine-year option to acquire 500,000 shares of our common stock, at $0.086 per share. This option, which has not yet been granted, is to become exercisable during the first four years of the nine-year option period. Under the terms of this agreement, if we terminate the agreement other than for cause, Mr. Holbrook will be entitled to receive severance pay equal to three months of his then current salary. Exhibit 11.1 is a copy of Mr. Holbrook’s employment agreement with the Company.

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We entered into an employment letter agreement with Richard Howard on December 1, 1999. In October, 2001, Mr. Howard resigned his position as director and Vice President – Sales and Marketing, and terminated his employment agreement. Exhibit 11.2 is a copy of Mr. Richard Howard’s employment agreement with the Company.

Item 12.    Security Ownership and Certain Beneficial Owners and Management

The following tables set forth as of December 31, 2002, the address, and the number of shares of our common stock held of record or beneficially by each person who held of record, or was known by us to own beneficially, more than 5% of the then 13,956,294 issued and outstanding shares of our Common Stock, and the name and share holdings of each director and of all officers and directors as a group. As a result of us not being registered under Section 12(g) of the Securities Exchange Act of 1934, beneficial owners of more than 5% are not required to file Schedule 13Ds or 13Gs with the Securities and Exchange Commission. Therefore, there may be additional persons who have beneficially acquired more than 5% of our common stock.

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Item 13.    Certain Relationships and Related Transactions

Transactions with and Indebtedness of Management and Others

Mr. Clinton Howard has guaranteed our obligations with respect to the loan relating to our acquisition of our corporate headquarters and the debt assumed in connection with our purchase of MPM Medical. We have undertaken certain obligations to indemnify him and secure our obligations to him in the event we default on our loan.

Flanagan Technologies, Inc., a company controlled by G. Patrick Flanagan, one of our former directors, formerly granted us a license with respect to the rights to sell certain proprietary raw materials including silica hydride powder, the principal ingredient in our most successful product, Microhydrin^®. This license agreement was entered into in December 1998. Contrary to the terms of the agreement, Flanagan ceased to supply his raw materials to us under this agreement in May 2002. As a result we developed our own proprietary processes to manufacture the materials we formerly purchased under this agreement. Flanagan joined our board of directors in June 2000 and resigned effective March 14, 2002. We paid Flanagan Technologies, Inc. approximately $913,000 in 2002.

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PART III

Item 14.    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 quarterly 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 effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

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

Title of Document

Report of Grant Thornton LLP, Independent Certified Public Accountants

Consolidated Balance Sheets as of December 31, 2002 and 2001.

Consolidated Statements of Operations for the Years December 31, 2002, 2001 and 2000.

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2002, 2001 and 2000.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000.

Notes to Consolidated Financial Statements

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We filed no reports on Form 8-K during the quarter ending December 31, 2002.

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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.

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ROYAL BODYCARE, INC.

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Clinton H. Howard, certify that:

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Date:  March 31, 2003

/s/  Clinton H. Howard

Clinton H. Howard

Chairman of the Board

and Chief Executive Officer

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ROYAL BODYCARE, INC.

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Steven E. Brown, certify that:

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Date:  March 31, 2003

/s/  Steven E. Brown

Steven E. Brown

Vice President – Finance and

Chief Financial Officer

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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, 2002 and 2001, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the consolidated results of their operations and their consolidated cash flows for the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note D to the consolidated financial statements, the consolidated balance sheet as of December 31, 2001 and the related consolidated statements of operations and cash flows for the years ended December 31, 2001 and 2000 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 21, 2003 (except for Note C,

    as to which the date is March 27, 2003)

F-2

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Royal BodyCare, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

December 31,

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

F-3

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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

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Royal BodyCare, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY