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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2004

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x.

        On March 18, 2005, the closing price of Registrant’s common stock sold was $0.17 per share. On such date, 6,491,406 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 $1,103,539 (6,491,406 shares times $0.17 per share).

As of March 18, 2005, 20,056,294 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.

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FORWARD LOOKING STATEMENTS

The statements, other than statements of historical or present 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, but not limited to, “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 statements. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Form 10-K. We do not undertake any obligation to publicly release any revisions to any forward looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. 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, 2004

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PART I

Item 1. Business

Overview

We are a Nevada corporation principally engaged in marketing products through an international network of independent distributors that we refer to as “Associates.” 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.

The Company’s Nutritional Products are distributed through a network marketing system in which Associates purchase products for personal use, purchase products for resale to retail customers and sponsor other individuals as Associates to do the same. Associates can derive compensation both from the direct sales of products and from sales generated by sponsored Associates. The marketing effort of our Associates involves person-to-person communication of information related to our products and the system by which they are marketed. We believe this feature makes network marketing a more effective means of marketing our products than in-store retail sales where there is little or no direct explanation of product benefits. Network marketing provides financial opportunity to a broad cross-section of people, including those seeking to simply supplement other income, as well as those who desire a full-time home-based business.

In addition to Nutritional 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 email at webmaster@royalbodycare.com. Our corporate web site address is www.royalbodycare.com.

History

Our Chairman and Chief Executive Officer, Mr. Clinton H. Howard, formed our United States subsidiary in 1991 to distribute a line of aloe vera based personal care products and an aloe drink in the United States through network marketing. In 1992, we expanded the product line to include nutritional supplements and formed a Canadian subsidiary to distribute our products through network marketing in Canada. Shortly after its formation, the Canadian subsidiary acquired Pure Life International Products Inc., which distributed its own brand of nutritional products through network marketing, principally in Canada. 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 subsidiaries in the United States and Canada as well as certain other corporations affiliated with Mr. Howard, which were subsequently discontinued. In 1996, we acquired the business of Light Force, Inc., which distributed a line of nutritional supplements featuring certain proprietary formulations, with spirulina as the main ingredient. The Light Force independent distributor network was merged into our independent 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. Through the merger, the shareholders of GlobeNet obtained 86% of the then outstanding common stock of Mighty Power USA, and Mighty Power USA changed its name to GlobeNet International I, Inc. In October 1999, we changed our name from GlobeNet International I, Inc. to Royal BodyCare, Inc., and redomesticated the Company to the State of Nevada.

In December 2000, we introduced a selection of Internet products. These products were marketed under the brand name BizAdigm^TM and distributed through network marketing. 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 marketer and distributor of wound care and oncology products. These assets were transferred to our wholly-owned subsidiary of the same name, MPM Medical, Inc.

Products

We market products in two industry segments. The Nutritional Products segment, which accounted for 87% and 92% of consolidated sales in 2004 and 2003, respectively, markets nutritional supplements and personal care products under the Royal BodyCare trade name. The Medical Products segment markets 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: (i) wellness products, (ii) weight loss products and (iii) sports and fitness products. The finished products are produced according to our specifications and/or formulas by manufacturers and suppliers that we do not control.

Our product line features certain raw materials manufactured by us 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, silica-mineral hydride, a complex that has antioxidant and other beneficial properties, and HydraCel concentrate, a liquid form of RBC NanoClusters. We also use this technology to make and enhance the flavor of CocoaClusters^TM and VanillaClusters^TM, which are ingredients used in protein drink mixes that we market under the name SlimShake^TM. 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, as well as through the facilities of our third party suppliers.

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 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 collectively accounted for approximately 26% and 33% of consolidated sales in 2004 and 2003, respectively. The principal ingredient in these products is silica-mineral hydride, which we now produce in our own manufacturing facility using a proprietary process developed by us. 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, which account for approximately 86% of Medical Products sales, 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 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.

Manufacturing and Product Sourcing

We contract with third party manufacturers and suppliers to produce all of our finished products, as more fully described above. This strategy provides operating flexibility with minimum investment and helps us to control operating costs. We believe that our manufacturers and suppliers are high-quality and are capable of meeting our current and projected demand over the next several years. We do not have long-term contracts with any of our manufacturers or suppliers. Many of our products can be obtained from a number of sources at competitive prices.

We manufacture certain proprietary raw materials used by our manufacturers and suppliers in the production of many Nutritional Supplement 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. Our manufacturing operations are conducted at our headquarters located in Irving, Texas.

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Sales by Geographic Area

For information related to sales by geographic region for the years ended December 31, 2004, 2003 and 2002, please see Note O to our consolidated financial statements included under Part IV of this report.

Independent Distributor Network

Overview. We market our Nutritional Products in the United States, Canada and Japan through a network of independent distributors that we refer to as “Associates.” As a result, we sell substantially all of our Nutritional Products in these markets through individuals who are not our employees. Our Associates generally purchase products from us for resale to consumers or for personal consumption. The concept of network marketing is based on the strength of personal recommendations that frequently come from friends, neighbors, relatives, and close associates. We believe that network marketing is an effective method of distribution because it allows person-to-person interaction about our products and business, which is not readily available through other distribution channels.

Our sales in these markets are dependent upon the number and productivity of our Associates. Growth in sales is dependent upon the sponsorship of new Associates and retention of existing Associates. We had approximately 17,150 active Associates at December 31, 2004, of whom approximately 14,000 were located in the United States, 3,000 were located in Canada and 150 were located in Japan. This compares to approximately 22,100 active Associates at December 31, 2003, of whom approximately 17,800 were located in the United States, 4,000 were located in Canada and 300 were located in Japan. We consider an Associate active if he/she has placed an order within the previous twelve months. The decline in active Associates is the result of low levels of sponsorship of new Associates by our present Associate base. In an effort to reverse this trend, we have developed and introduced new products, recreated our core marketing message, focused our product strategy, developed new marketing materials for use by our Associates and introduced changes to our Associate compensation plan designed to encourage sponsoring activities. While we believe these actions will ultimately increase the sponsorship of new Associates, we can give no assurance that the decline of active Associates will not continue.

We do not have any significant accounts receivable from our Associates because they are required to pay for purchases prior to shipment. Associates pay for products primarily by credit cards, although orders can also be paid with cash, direct account withdrawal, money orders, or checks. We are not dependent upon the sales of any individual Associate, the loss of whom would have a material adverse effect on our business.

Associates. A person who wishes to become an Associate must complete an application under the sponsorship of an existing Associate. The new Associate then becomes part of the sponsoring Associate’s organization. New Associates sign a written contract and agree to adhere to our policies and procedures that govern the activities of Associates. An Associate has the right to purchase products from us at wholesale, sponsor new Associates and earn compensation in accordance with our Associate compensation plan. While some Associates sell our products and recruit new Associates on a full-time basis, the majority engage in these activities on a part-time basis or only purchase our products for personal consumption.

Sponsoring. We rely on our Associates to recruit and sponsor new Associates. While we develop and sell sales materials for use by our Associates, Associates are primarily responsible for recruiting and educating new Associates with respect to our products, the Associate compensation plan and how to build a successful distributorship. Because new Associates are linked to their sponsor, sponsorship of new Associates creates multiple levels in the network marketing structure. Persons that an Associate sponsors are referred to as “downline” or sponsored Associates.

Sponsoring activities are not required of Associates and we do not pay any commissions for sponsoring new Associates. However, because of the financial incentives provided to those who succeed in building an Associate network that consumes and resells products, we believe that many of our Associates attempt, with varying degrees of effort and success, to sponsor new Associates.

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Compensation. Our Associate compensation plan provides several opportunities for Associates to earn compensation. We believe our compensation plan provides financial rewards comparable to those offered by other compensation plans in the industry. There are generally two ways in which our Associates earn compensation:

Commissions are based on the total monthly sales by the Associate and his or her downline organization. As an Associate’s business expands from successfully sponsoring new Associates into the business who in turn expand their own businesses, an Associate can receive higher commissions. Most commissions are paid to Associates monthly.

Support. Associates are encouraged to assume responsibility for training and motivating other Associates within their respective downline organizations and to conduct meetings for potential new Associates. Associates can purchase sales and training materials from us, and they assume the costs of advertising and marketing our products to their customers, as well as the direct cost of sponsoring and training new Associates.

In addition to the development of sales and training materials for use by our Associates, we also periodically sponsor and conduct regional, national and international Associate events and training seminars. Attendance at these sessions is voluntary.

We also use the Internet to support our Associates and enhance communication with them. Through our web site, Associates can obtain information about us and our products. They can also obtain other current information such as new product announcements and descriptions of product specials and other sales promotions. In addition, Associates have the ability to sponsor new Associates and to place orders through our web site. To help our Associates effectively manage their businesses, we allow them to obtain information related to their downline organization directly from our database, which can be accessed through the Internet.

Compliance. On occasion, Associates fail to adhere to our Associate policies and procedures. We systematically review reports of alleged Associate misbehavior. Infractions of the policies and procedures are reported to a compliance committee that determines what disciplinary action may be warranted in each case. If we determine that an Associate has violated any of our Associate policies and procedures, we may take a number of disciplinary actions. For example, we may terminate the Associate’s purchase and distribution rights completely or impose sanctions, such as warnings or probation. We may also withdraw or deny awards, suspend privileges, withhold commissions until specific conditions are satisfied, or take other appropriate actions at our discretion.

Returns. Our product return policy allows retail customers to return the unused portion of any product to the Associate who sold them the product for a full cash refund. We reimburse the Associate with product or credit on account upon receipt of proper documentation and the return of the remaining product.

Product returned by Associates that is unused and resalable is refunded up to one year from the date of purchase at 100% of the sales price less a 10% restocking fee and commissions paid. Returned product that was damaged during shipment to the customer is 100% refundable. Return of product that was not damaged at the time of receipt by the Associate may result in cancellation of the Associate’s distributorship according to the terms of the Associate agreement. For the years 2004 and 2003, returns were less than 1% of sales.

Overseas Distributors

We have entered into exclusive license arrangements for distribution of our Nutritional Products in certain overseas markets. Most of our sales under these arrangements are to Coral Club International, Inc. (“CCI”), which has exclusive distribution rights in the former Soviet Union and certain other countries, principally in Eastern Europe. Sales to CCI were 30% and 19% of consolidated sales in 2004 and 2003, respectively. Under arrangements with other licensees, our products are also distributed in Western Europe, New Zealand and Indonesia.

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

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Medical Products Distribution

At December 31, 2004. the MPM sales force consisted of four full time sales representatives and approximately six manufacturer representatives assigned to specific geographic territories within the United States. This compares to a sales force at December 31, 2003 that consisted of two full time sales representatives and approximately 12 manufacturer representatives. One new full time sales representative was assigned a geographic territory that was formerly serviced by a manufacturer representative. Also during 2004, we eliminated certain manufacturer representatives that did not actively promote our Medical Products.

Our sales force calls on customers that use our wound care or oncology products, as well as the dealers and distributors through whom our customers purchase these products. Wound care products are distributed to hospitals, nursing homes and home health care agencies throughout the United States primarily through a traditional, unaffiliated nationwide network of medical/surgical supply dealers. The oncology products are distributed to hospitals, cancer treatment clinics and pharmacies primarily through a traditional, unaffiliated nationwide network of pharmaceutical distributors. We do not have long term supply contracts with any of our customers, dealers or distributors.

During 2004, a medical/surgical dealer significantly expanded its business and, as a result, increased its purchases of wound care products from MPM. This dealer accounted for 37% and 8% of Medical Products sales in 2004 and 2003, respectively.

Trademarks, Patents or Other Intellectual Property

We have trademark registrations in the United States and certain foreign jurisdictions of the name Royal BodyCare, our crown logo and the name Microhydrin. In addition, we have trademark registrations in the United States of certain other key product and product ingredient names, and we have trademark applications pending in the United States and certain foreign jurisdictions. We rely on common law trademark rights to protect our unregistered trademarks. Common law trademark rights do not provide the same level of protection as afforded by a United States federal registration of a trademark. Also, common law trademark rights are limited to the geographic area in which the trademark is actually used.

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. Therefore, there can be no assurance that another company will not replicate one or more of our products.

Seasonality

Our business is not subject to significant seasonal fluctuations.

Inventory Requirements, Backlogs

Distributors of our Nutritional Products, except for overseas licensees, and distributors of 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 24 to 72 hours after we receive them so there is no significant backlog of orders related to these distribution channels.

We do not maintain inventory in anticipation of product orders from our overseas licensees. Under the terms of our license agreements, the licensee is required to make a cash deposit equal to 50% of the purchase order amount at the time the purchase order is placed, and allow two to three months for delivery. In addition, under our agreement with CCI, we 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 accepts ownership of and pays for the products as they are segregated in our warehouse for CCI’s account. However, we do not recognize sales until the products are shipped. Therefore, we define backlog as purchase orders received by us that are

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accompanied by the requisite deposit, plus the purchase price of CCI products that are stored in our warehouse pending shipment. Backlog fluctuates depending on licensee ordering patterns and the timing of CCI’s shipping requests. Backlog was approximately $2,305,000 and $1,162,000 at December 31, 2004 and 2003, respectively.

Industry/Competitors

We market our Nutritional Products 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.

In the distribution of Nutritional Products, we compete with retail outlets, such as health food stores, supermarkets and department stores, and other network marketing companies. We endeavor to compete successfully by offering a wide selection of products that incorporate proprietary technology 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.

We also compete against other network marketing companies for the time, attention and commitment of new and current Associates. The pool of individuals interested in the business opportunities presented by network marketing tends to be limited in each market and is reduced to the extent other network marketing companies successfully recruit these individuals into their businesses. Our ability to remain competitive depends, in significant part, on our success in sponsoring and retaining Associates. We endeavor to compete successfully by offering high quality products, a rewarding Associate compensation plan and attractive Associate support programs.

Our Medical Products also face heavy competition. In the wound care product market, we compete against a number of companies, most of which are significantly larger and have far greater financial resources. The oncology products market in which we compete is highly fragmented and largely undefined with the principal competition being a line of products marketed by Medline Industries. We endeavor to compete by offering effective products at competitive prices.

Research and Development

From time to time, we have contracted 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. Amounts expended to fund these studies have not been significant.

We enhance our product line through the development of new products and the improvement of existing products. New product ideas are derived from a number of sources, including in-house personnel with significant experience in nutritional product formulation and development, medical and nutrition professionals, trade publications, scientific and health journals, product suppliers, and other third parties. Prior to introducing new products, we investigate product formulations to ensure that they are backed by sound scientific research and are in compliance with applicable regulations.

Governmental Regulations

Products. One or more of the following agencies regulates the formulation, manufacture, packaging, labeling, advertising, distribution and sale of our products: the Food and Drug Administration (“FDA”), the Federal Trade Commission (“FTC”), the Consumer Product Safety Commission and various agencies of the states and foreign countries into which our products are shipped or sold.

In the United States, the FDA regulates products under the Food, Drug, and Cosmetic Act (“FD&C”) and regulations promulgated under that act. Our largest product group in terms of sales includes products that are regulated as dietary supplements under the FD&C. Dietary supplements are also regulated in the United States under the Dietary Supplement Health and Education Act of 1994 (“DSHEA”). We believe DSHEA provides a favorable regulatory climate to the dietary supplement industry.

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Advertising of products is subject to regulation by the FTC under the FTC Act. The FTC Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The FTC Act also provides that the dissemination of or causing to be disseminated any false advertisement pertaining to drugs or foods, which would include dietary supplements, is an unfair or deceptive act or practice. Under the FTC’s Substantiation Doctrine, an advertiser is required to have a “reasonable basis” for all objective product claims before the claims are made. Failure to adequately substantiate claims may be considered either deceptive or unfair practices. We believe that we have the necessary documentation to support our advertising and promotional practices.

We cannot predict the nature of any future laws, regulations, interpretations or applications, nor can we determine what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. They could include, however, requirements for the reformulation of certain products to meet new standards, the recall or discontinuation of certain products that cannot be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and additional scientific substantiation. Any or all of these requirements could have a material adverse effect on our business, financial condition and results of operations.

Network Marketing. Laws and regulations in each country in which we operate prevent the use of deceptive or fraudulent practices that have sometimes been inappropriately associated with legitimate direct selling and network marketing activities. These laws include anti-pyramiding, securities, lottery, referral selling, anti-fraud and business opportunity statutes, regulations, and court cases. Illegal schemes, typically referred to as “pyramid,” “chain distribution,” or “endless chain” schemes, compensate participants primarily or solely for the introduction or enrollment of additional participants into the scheme. Often these schemes are characterized by large up-front entry or sign-up fees, over-priced products of low value, little or no emphasis on the sale or use of products, high-pressure recruiting tactics and claims of huge and quick financial rewards requiring little or no effort. Generally these laws are directed at ensuring that product sales ultimately are made to consumers and that advancement within sales organizations is based on sales of the enterprise’s products, rather than investments in the organizations or other non-retail sales related criteria or activity. In addition to federal regulation by the FTC in the United States, each state has enacted its own “Little FTC Act” to regulate sales and advertising. We actively strive to comply with all applicable state and federal laws and regulations affecting our distribution channel. We believe that our network marketing system satisfies the standards and case law defining a legal marketing system.

We cannot predict the nature of any future law, regulation, interpretation, or application, nor can we predict what effect additional governmental legislation or regulations, judicial decisions or administrative orders, when and if promulgated, would have on our business in the future. It is possible that future developments may require that we revise our network marketing program. Any or all of these requirements could have a material adverse effect on our business, results of operations, and financial condition.

Employees

We currently have 69 employees, of whom 8 are executive officers or management employees, 7 are department heads, 17 are warehouse or manufacturing employees, 19 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 in our workforce in 2005. None of our employees are represented by labor unions, and we have not experienced work stoppages or other labor strife with our employees.

Additional Available Information

We make available free of charge through our web site, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”), 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. This information may also be obtained from the SEC’s on-line database located at www.sec.gov.

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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. 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. During 2004, we refinanced the note to seller and the original bank note through a new bank note. Amounts outstanding as of December 31, 2004 on the mortgage note and the new bank note were approximately $2,674,000 and $173,000, respectively.

We also lease distribution facilities in Burnaby, British Columbia to support our sales operations in Canada at an annual rental of approximately $98,000. 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

None.

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 18, 2005 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 Chairman and CEO. In March 2003, we sold 4,000,000 shares of our common stock at an aggregate price of $400,000 to Coral Club International, Inc. (“CCI”), a licensee of the Company. The president of CCI was a member of our Board of Directors from December 2002 through June 2004. 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 not to 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.

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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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this report.

Overview

We operate in two industry segments, Nutritional Products and Medical Products. In the United States, Canada and Japan, we distribute Nutritional Products directly through a network of independent Associates. In markets other than the United States, Canada and Japan, we distribute Nutritional Products through exclusive license arrangements with third parties, who distribute our products through network marketing in the licensed territory. We distribute Medical Products in the United States to hospitals, nursing homes, clinics and pharmacies through traditional medical/surgical supply dealers and pharmaceutical distributors.

We account for payments made to our Associates in accordance with Emerging Issues Task Force Issue (“EITF”) No. 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products). As a result, we have presented the portion of Associate sales incentive payments representing rebates as reductions to sales rather than as distributor commissions. We have reclassified the appropriate amounts for all periods presented by reducing sales and distributor commissions by equal amounts. These reclassifications had no effect on operating profit (loss), net earnings (loss), or earnings (loss) per share.

Sales. Consolidated net sales in dollars and as a percentage of consolidated net sales are as follows:

Associate network. We sell Nutritional Products to Associates who purchase products for personal consumption or for resale to retail customers; Associates also sponsor new Associates who also engage in these

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activities. Consequently, sales in this distribution channel are dependent upon the number and productivity of our Associates. Associates pay for product purchases prior to shipment, mainly through the use of credit cards, and we recognize sales when we ship products to the Associates. We compensate Associates for their sales activities through our Associate compensation plan. This plan allows Associates to earn higher commissions as their sales and the sales of their downline Associates increase.

The following table sets forth the Associate network sales by geographic region as a percentage of total sales for the periods indicated:

Sales through this channel have declined because of the low rate of sponsorship of new Associates by the current Associate network. This is discussed further below under the caption “Results of Operations – 2004 Compared with 2003 – Sales.” In general, we believe that it is more difficult to build a growing Associate network in North America than in other markets because of the large number of companies competing for time, attention and commitment of individuals interested in the opportunity presented by network marketing. For this reason, we are considering expansion into new international markets to increase sales through this distribution channel. There is no assurance that we will undertake this expansion and any decision to establish operations in a new market would be contingent on obtaining outside financing on terms acceptable to us.

Licensees. We sell Nutritional Products to third parties who purchase products from us in accordance with a license arrangement that gives the licensee exclusive rights to distribute our products in the licensed territory. The licensee is required to distribute our products in its territory through network marketing. We do not maintain inventory to fulfill licensee orders; licensees are required to pay us a 50% deposit with their orders and then pay the balance when products are ready to ship. We recognize sales when we ship products to the licensees. Licensees also pay us a monthly royalty based on sales in their territories. We record these royalties as sales. Our sales in this distribution channel are dependent upon the licensee’s success in building an Associate network in the licensed territory. Gross profit on sales to licensees is significantly less than on sales to our Associate network because we do not pay Associate commissions or incur other expenses related to the Associate network in the licensed territory.

Our principal licensee is Coral Club International (“CCI”). In July 2004, we entered into a ten-year exclusive license agreement, which replaced the expiring five-year license agreement, giving CCI distribution rights in 31 countries, including mainly countries of the former Soviet Union and Eastern Europe. CCI accounted for 97%, 97% and 75% of licensee sales in 2004, 2003 and 2002, respectively. The President of CCI is a former member of our Board of Directors and owns approximately 20% of our outstanding common stock.

Medical Products. We sell Medical Products primarily to wholesalers such as medical/surgical dealers and pharmaceutical distributors. These wholesalers supply various health care providers such as hospitals, nursing homes, clinics and pharmacies. Our sales force, which is comprised of employed sales representatives and independent manufacturer representatives, markets our products to both wholesalers and health care providers. In some cases, wholesalers maintain their own sales forces to market products that they supply, which include our products. We sell to wholesalers on terms that generally require payment within 30 to 45 days. We recognize sales when products are shipped. Manufacturer representatives receive a percentage of sales as compensation, which percentage varies by product.

During 2004, a medical/surgical dealer significantly expanded its business and, as a result, increased its purchases of our medical products. This dealer accounted for 37%, 8% and 1% of Medical Products sales in 2004, 2003 and 2002, respectively.

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Cost of Sales. Cost of sales primarily consists of costs related to (i) product ingredients we manufacture such as raw materials, labor and overhead directly associated with production activities, (ii) products and sales materials purchased from third party manufacturers and suppliers for resale, (iii) import duties, (iv) freight and (v) provisions for slow moving or obsolete inventory. Cost of sales and gross profit vary based on the sales mix of products sold within a distribution channel as well as the mix of product sales among distribution channels.

Distributor Commissions. Distributor commissions consist primarily of commissions paid to our Associates in accordance with our Associate compensation plan. These commissions are calculated based on the total monthly sales by the Associate and his or her downline organization. Associates can qualify to receive additional commissions as sales in their organizations expand. Most commissions are paid to Associates monthly. Total Associate commissions average approximately 35% of sales in this distribution channel. In accordance with EITF 01-9, sales incentives paid to Associates that represent rebates are recorded as a reduction of sales rather than distributor commission expense. Associates earn rebates based on their personal monthly sales and the level at which they qualify under the Associate compensation plan. We also classify commissions paid to manufacturer representatives who sell Medical Products as distributor commissions. Total commissions to manufacturer representatives average less than 2% of Medical Products sales.

General and Administrative. General and administrative expenses include wages and benefits, rents and utilities, travel, promotion and advertising including Associate events, and professional fees along with other marketing and administrative expenses. Wages and benefits represent the largest component of selling, general, and administrative expenses.

Critical Accounting Polices and Estimates

Our consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). Our significant accounting policies are described in Note B to the consolidated financial statements. The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Those estimates and assumptions are based on historical experiences and changes in the business environment. However, actual results may sometimes differ materially from estimates under different conditions. Critical accounting policies and estimates are defined as both those that are material to the portrayal of our financial condition and results of operations and that require management’s most subjective judgments. We believe our most critical accounting policies and estimates are as described in this section.

Revenue Recognition. In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (“SAB 104”), we recognize revenue at the point products are shipped, which is the point the risks and rewards of ownership pass to the customer. Under the terms of our license agreements, our licensees are required to make a cash deposit equal to 50% of the purchase order amount at the time the purchase order is placed, and allow two to three months for delivery. In addition, under our agreement with CCI, we segregate and 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 accepts ownership of and pays for the products as they are segregated in our warehouse for CCI’s account. However, in accordance with SAB 104, we do not recognize revenue until the products are shipped. Deposits and payments received for unshipped products are recorded as deferred revenue and are included in accrued liabilities. As required by EITF 01-9, sales are recorded net of the rebate portion of sales incentives paid to Associates.

Intangible Assets. 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.

Tax Valuation Allowance. 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

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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.

Results of Operations

The following table sets forth our operating results as a percentage of sales for the periods indicated:

2004 Compared with 2003

Sales. Our sales for the year ended December 31, 2004 were $18,266,000 compared with sales for the prior year of $18,140,000, an increase of $126,000 or 1%. This increase was due to a $757,000 increase in sales of our Medical Products that was partially offset by a $631,000 decrease in sales of our Nutritional Products. While sales of Nutritional Products to our licensees increased $2,103,000, sales of Nutritional Products to our Associate network declined $2,734,000.

The decline in sales to our Associate network relates to declines in the number of active Associates. We consider an Associate active if he or she has purchased during the previous 12 months. The decline in the number of active Associates results from low levels of sponsoring of new Associates by the current Associate network, which we largely attribute to the breach of a supply agreement by a former supplier, who was also a former member of our Board of Directors. In contravention of the supply agreement in force at the time, in May 2002, this former supplier refused to continue to supply his products to us and instead began to supply a competitor. Since this supplier supplied raw materials used in the production of our key products and was central to our brand, his departure dramatically reduced the confidence of our Associates as well as their motivation to introduce our products and our business to prospective new Associates.

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In an attempt to overcome the reduced sponsorship activity among our Associate network, we have taken a number of actions since mid-2002:

While we believe these actions will ultimately increase the sponsorship of new Associates, we can give no assurance that the decline of active Associates will not continue.

The growth in sales to our licensees relates to growth of CCI. Sales to CCI increased $2,027,000 in 2004. CCI’s sales growth is attributed to the continued expansion of the independent distributor network in CCI’s territory.

During 2004, a medical/surgical dealer significantly expanded its business and, as a result, increased its purchases of our Medical Products. This increase in sales to this dealer accounted for substantially all of the sales increase in the Medical Products segment.

Cost of sales. Cost of goods sold for the year ended December 31, 2004 was $6,562,000 compared with cost of goods sold in the prior year of $5,910,000, an increase of $652,000 or 11%. As a percentage of sales, cost of goods sold was 36% in 2004 and 33% in 2003. As a percentage of sales, gross margin declined 3% in 2004 mainly because of the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees. The gross margin for products sold to licensees is lower than the gross margin for products sold to the Associate network because we sell to licensees at lower prices. Sales prices to licensees are lower since we do not pay Associate commissions or incur other expenses related to the Associate network in the licensed territory.

Distributor commissions. Our distributor commissions for the year ended December 31, 2004 declined as a result of the decline in sales to our Associate network. Distributor commissions for the year ended December 31, 2004 were $3,604,000 compared with distributor commissions in 2003 of $4,550,000, a decrease of $946,000 or 21%. With regard to our Associate network, distributor commissions as a percentage of commissionable sales were unchanged at 35%. On a consolidated basis, distributor commissions as a percentage of sales declined to 20% in 2004 compared with 25% in 2003. The percentage decline in relation to consolidated sales was mainly related to the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees because we do not pay distributor commissions on sales to licenses.

General and administrative. General and administrative expenses for the year ended December 31, 2004, were $6,869,000 compared with 2003 expenses of $6,967,000, a decrease of $98,000 or 1%. This decrease was the net of a $295,000 decrease in expenses in the Nutritional Products segment that was partially offset by a $197,000 increase in expenses in the Medical Products segment. The decrease in expenses in the Nutritional Products segment was mainly related to management’s efforts to control and, where possible, reduce operating expenses. While we continued to improve operating efficiency in this segment in 2004, we realized reduced expenses mainly because of certain actions initiated in 2003. These actions included the reorganization and consolidation of several operating functions and a significant reduction in personnel and information technology expenses. General and administrative expenses in the Medical Products segment increased to support increased sales and marketing activities. As a percentage of sales, general and administrative expenses were 38% in 2004 and 2003.

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Other income. Other income represents payments received pursuant to the settlement in February 2003 of a lawsuit with a former supplier. Under the terms of the settlement, this supplier was obligated to make monthly payments calculated as a percentage of his gross revenues, as defined, up to an aggregate of $250,000. In accordance with this agreement, we received $148,000 in 2004 and $102,000 in 2003.

Net earnings (loss). Net earnings for the year ended December 31, 2004 were $537,000, or $.03 per share, compared with a net loss in the prior year of $105,000 or $.01 per share. This improvement resulted from the factors described above.

2003 Compared with 2002

Sales. Sales for the year ended December 31, 2003 were $18,140,000 compared with sales for the prior year of $24,250,000, a decrease of $6,110,000 or 25%. This decline was due to a decline in sales of our Nutritional Products of $6,477,000 that was partially offset by a $367,000 increase in sales of Medical Products. Sales of Nutritional Products to our licensees increased $574,000, while sales of Nutritional Products to our Associate network declined $7,051,000.

We believe that the principal factors affecting sales to our Associate network were the actions a former supplier and member of our Board of Directors. We entered into a written supply contract with this former supplier that gave us the right to purchase the principal ingredient in our top selling product, Microhydrin, and certain other proprietary raw materials. Sales of products containing these proprietary ingredients increased to a level that represented in excess of 50% of our consolidated sales volume. In contravention of our supply agreement, on May 24, 2002, this former supplier notified us that he had signed an agreement with a competitor 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 this notification, our former supplier and two former Associates launched an aggressive negative campaign to entice our Associates to leave us and join this competitor. Related to these efforts, in breach of its license agreement with us, our European licensee announced it was doing business directly with our former supplier and discontinued purchasing products from us in May 2002. On May 29, 2002, we filed suit against our former supplier and certain related parties. In February 2003, we settled this litigation pursuant to an agreement that provided, among other things, for aggregate payments by the former supplier to us in the amount of $250,000.

In connection with the failure of our former supplier to supply us key product ingredients, we refined and completed the development of our own proprietary versions of these raw materials. We began shipping Microhydrin made with our proprietary raw materials on July 31, 2002. During 2003, we developed and introduced new marketing programs and Associate compensation plan incentives, which included the introduction of a new weight loss system, that were designed to stimulate the sales and recruiting efforts of our Associate network.

Cost of sales. Our cost of goods sold for the year ended December 31, 2003 declined significantly as a result of the decline in our sales. 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 33% in 2003 and 35% in 2002. As a percentage of sales, gross margin improved 2% in 2003. This was primarily due to the fact that our cost for key raw materials that we began manufacturing in-house in mid-2002 is less than our cost to purchase these materials, resulting in a gross margin improvement in 2003. However, this improvement was largely offset as a result of the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees. The gross margin for products sold to licensees is lower than the gross margin for products sold to the Associate network because we sell to licensees at lower prices. We sell at lower prices because we do not pay Associate commissions or incur other expenses related to the Associate network in the licensed territory.

Distributor commissions. 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 $4,550,000 compared with distributor commissions in 2002 of $6,987,000, a decrease of $2,437,000 or 35%. With regard to our Associate network, distributor commissions as a percentage of

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commissionable sales were unchanged at 35%. On a consolidated basis, distributor commissions as a percentage of sales declined to 25% in 2003 compared with 29% in 2002. The percentage decline in relation to consolidated sales was mainly related to the change in sales mix of Nutritional Products between sales to the Associate network and sales to licensees because we do not pay distributor commissions on sales to licenses.

General and administrative. 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 38% in 2003 and 35% in 2002.

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

Discontinued operations. Earnings from discontinued operations of $75,000, net of income taxes of $39,000, for the year ended December 31, 2003 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.

Net loss. 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.

Liquidity and Capital Resources

Historically, our principal needs for funds have been for operating expenses, working capital and capital expenditures. We have funded these needs through equity financing, debt financing and cash flow from operations. We have also used operating leases to finance the use of certain buildings and equipment required for our operations. Working capital needs primarily relate to inventory purchases and, to a lesser extent, accounts receivable balances associated with sales of Medical Products.

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Cash and working capital. During the year ended December 31, 2004, we had a net increase in cash of $550,000 compared with a net decrease in cash of $125,000 in 2003. This improvement was mainly attributable to the improvement in net operating results in 2004.

At December 31, 2004, we had working capital of $123,000, a $937,000 improvement from the working capital deficit at December 31, 2003 of $814,000. This increase in working capital was mainly related to an increase in current assets of $991,000 that was partially offset by an increase in current liabilities of $54,000. Our Canadian subsidiary maintains a $125,000 line of credit, all of which was available at December 31, 2004.

Operating activities. In 2004, our operating activities provided cash flows of $953,000 compared with $300,000 in 2003. In 2004, net earnings adjusted for non-cash activities such as depreciation and amortization and loss on disposition of assets provided cash flows of $1,128,000 compared with $593,000 in 2003.

Operating activities include the management of working capital accounts such as accounts receivable, inventories, prepaid expenses, accounts payable, deferred revenues and accrued operating expenses. One of the most significant factors affecting our working capital accounts is the arrangement we maintain with our licensees, principally CCI. In accordance with our licensee agreements, product orders from licensees are accompanied by a cash deposit equal to 50% of the value of the order. These deposits are used in part to make deposits with our suppliers against orders we place to fulfill licensee product orders. In addition, in accordance with our license agreement with CCI, we segregate and store finished products for CCI in our warehouse and then ship them at a later date based on CCI’s business needs. CCI pays the remaining 50% due on its product orders when goods are segregated in our warehouse for CCI’s account. Cash received as deposits for product orders and as payment for stored products are recorded as deferred revenue, which we include as a component of accrued liabilities. Deposits we make with our suppliers are recorded as prepaid expenses. During 2004, cash provided by the increase in accrued liabilities of $289,000 and cash used for the increase in prepaid expenses of $286,000 were mainly related to transactions associated with our licensee agreements.

During 2004, we used cash from operations of $265,000 related to an increase in accounts receivable. This increase resulted from increased sales of our Medical Products. We sell Medical Products on terms that generally range from 30 to 45 days.

Investing activities. During 2004, we used cash of $93,000 related to investing activities. This cash was used to purchase property and equipment.

Financing activities. During 2004, we used cash of $307,000 in financing activities mainly related to the repayment of long-term debt. In June 2004, we borrowed $224,000 from a bank that is being repaid in monthly installments of $9,500 through May 2006. Proceeds of this borrowing were used to repay another bank note and a note payable to the previous owner of our headquarters facility.

General liquidity and cash flows. We believe that our working capital requirements can be met through available cash and cash generated from operating activities for the foreseeable future; however, an overall decrease in demand for our products could adversely affect our liquidity. In the event of a significant decrease in cash provided by our operating activities, we may seek outside sources of capital including bank borrowings, other types of debt or equity financings. We can give 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 significant capital expenditures during the next twelve months, other than the possible establishment of operations to distribute Nutritional Products through network marketing in a new international market. Any decision to establish operations in a new market would be contingent upon obtaining outside financing on terms acceptable to us. We would consider either debt or equity financing, although we can give no assurance that any such financing would be available.

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Contractual Cash Obligations

The table below summarizes our contractual obligations outstanding as of December 31, 2004:

Inflation

We do not believe that inflation has had a material impact on our operating results.

Recent Accounting Pronouncements

Share-Based Payments. The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (Revised 2004) (“SFAS 123R”), Share-Based Payment, in December 2004. SFAS 123R is a revision of FASB Statement 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Accordingly, we will adopt the standard in the third quarter of fiscal 2005. We have not determined the impact, if any, that this statement will have on our consolidated financial position or results of operations.

Inventory Pricing. In November 2004, the FASB issued SFAS No. 151 (“SFAS 151”), Inventory Costs, to amend the guidance in Chapter 4, Inventory Pricing, of FASB Accounting Research Bulletin No. 43, Restatement and Revision of Accounting Research Bulletins. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The Statement requires that those items be recognized as current-period charges. Additionally, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. We are currently evaluating the impact of the adoption of this statement which is required to be adopted in 2006.

Accounting for Nonmonetary Exchanges. As part of its short-term international convergence project with the IASB, on December 16, 2004, the FASB issued SFAS No. 153 (“SFAS153”) to address the accounting for nonmonetary exchanges of productive assets. SFAS 153 amends APB No. 29, Accounting for Nonmonetary Exchanges, which established a narrow exception for nonmonetary exchanges of similar productive assets from fair value measurement. This statement eliminates that exception and replaces it with an exception for exchanges that do not have commercial substance. Under SFAS 153 nonmonetary exchanges are required to be accounted for at fair value, recognizing any gains or losses, if their fair value is determinable within reasonable limits and the transaction has commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if future cash flows of the entity are expected to change significantly as a result of the exchange. An entity is to apply the provisions of SFAS 153 prospectively for nonmonetary asset exchange transactions in fiscal periods beginning after June 15, 2005. Accordingly, we will adopt this statement in 2006 and adoption is not expected to have a material impact on our financial position or results of operations.

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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 12% of 2004 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 $77,000 at December 31, 2004, a 10% adverse change in the currency rate would reduce earnings before tax by approximately $7,700.

Interest rates. Our credit arrangements expose us to fluctuations in interest rates. At December 31, 2004, we had approximately $466,000 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, 2004, a 10% increase in interest rates would adversely affect our financial position, annual results of operations, or cash flows by approximately $3,500.

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 as of December 31, 2004. 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, however, 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.

There has been no change in internal controls over financial reporting that occurred during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

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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 7, 2005, 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 of Certain Beneficial Owners and Management

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.

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PART IV

Item 15. Exhibits, Financial Statement Schedules

Title of Document

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2004 and 2003.

Consolidated Statements of Operations for the Years December 31, 2004, 2003 and 2002.

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002.

Notes to Consolidated Financial Statements

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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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INDEX TO FINANCIAL PAGES

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Report of Independent Registered Public Accounting Firm

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, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2004 and 2003, and the consolidated results of their operations and their consolidated cash flows for the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

GRANT THORNTON LLP

Dallas, Texas

March 18, 2005

F-2

Table of Contents

Index to Financial Statements

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

Index to Financial Statements

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

Index to Financial Statements

Royal BodyCare, Inc. and Subsidiaries

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY