Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 33-20323

Royal BodyCare, Inc.

(Exact name of registrant as specified in its charter)

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

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 Act of 1934 during the past 12 months and (2) has been subject to such filing requirements for the past 90 days.

x YES ¨ NO

Shares of common stock, par value $0.001, outstanding at May 1, 2003:

17,956,294

Table of Contents

TABLE OF CONTENTS

Table of Contents

Item 1. FINANCIAL STATEMENTS

ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

See notes to condensed consolidated financial statements.

-3-

Table of Contents

ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See notes to condensed consolidated financial statements.

-4-

Table of Contents

ROYAL BODYCARE, INC. and SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See notes to condensed consolidated financial statements.

-5-

Table of Contents

ROYAL BODYCARE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Unaudited Condensed Consolidated Financial Statements:

The accompanying unaudited condensed consolidated financial statements of Royal BodyCare, Inc. (“RBC” or the “Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. However, the Company believes that the disclosures made are adequate to make the information presented not misleading. Nevertheless, it is suggested that these financial statements be read in conjunction with the summary of significant accounting policies and notes to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the Company’s results for the interim periods have been included. The Condensed Consolidated Balance Sheet as of December 31, 2002 was derived from the Company’s audited financial statements included in the Company’s Form 10-K for the year ended December 31, 2002. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note B – Nature of Operations and Organization:

RBC is principally engaged in the marketing of nutritional supplements and personal care products in the United States, Canada and Japan. The Company’s products are marketed through a network marketing system in which distributors, who are independent contractors, purchase products for resale to retail customers or for personal use.

RBC has also entered into agreements to license the exclusive rights to sell its nutritional and personal care products in certain international markets through third party licensees in the respective countries. RBC has entered into two such arrangements pursuant to which its products are presently being marketed. Under these agreements, distributors in these countries are compensated by the third party licensees according to the same or a similar compensation plan as the one used by RBC for its independent distributors in the United States, Canada and Japan.

-6-

Table of Contents

Through its wholly-owned subsidiary, MPM Medical, Inc., a Texas corporation (“MPM Medical”), the Company also distributes wound care and oncology products throughout the United States. These products are marketed under the MPM Medical trade name and are distributed through medical/surgical supply dealers and pharmaceutical distributors.

Discontinued Operations

In December 2000, RBC created a new subsidiary named BizAdigm, Inc. (“BizAdigm”) to offer various internet products through a network of independent distributors similar in approach to the marketing of RBC’s nutritional and personal care products. Due to low sales volume, RBC discontinued the operations of BizAdigm during the second quarter of 2002.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment of Long-Lived Assets”, which requires a single accounting model to be used for long-lived assets to be sold and broadens the presentation of discontinued operations to include a “component of an entity” (rather than a segment of a business). A component of an entity comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity. A component of an entity that is classified as held for sale, or has been disposed of, is presented as a discontinued operation if the operations and cash flows of the component will be (or have been) eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component.

Consequently, the operating results of BizAdigm are classified as discontinued operations. Liabilities of BizAdigm are included in “Liabilities of Discontinued Operations” and “Long Term Liabilities of Discontinued Operations”, at March 31, 2003 and December 31, 2002. Liabilities of discontinued operations represent the current portion of long-term debt. The long-term debt of discontinued operations are capital lease and other long-term borrowing arrangements that mature at various dates through the first quarter of 2004.

The loss from discontinued operations in the quarter ended March 31, 2002 represents the operating results of BizAdigm. This loss represents the excess of selling, general and administrative expenses plus cost of goods sold and distributor commissions over recognized sales of $45,000.

Note C – Liquidity:

During 2002 and 2001, the Company incurred net losses and a decline in working capital. At December 31, 2002, the Company had cash and cash equivalents of $627,000 and a working capital deficiency of $1,400,000. To improve its working capital position, on March 27, 2003, the Company sold 4,000,000 shares of its common stock at an aggregate price of $400,000 to its licensee in the former Soviet Union. The president of this licensee, Coral Club International, Inc., is a member of the Company’s Board of Directors. Additionally, the Company’s founder and Chairman purchased 1,000,000 shares of our common stock for $100,000 in April 2003 and has committed to purchase up to an additional $100,000 of the Company’s common stock during the remainder of the second quarter of 2003. Management of the Company has also taken certain actions that it believes will help improve future operating results. During 2002, the Company began manufacturing the key raw materials used in products that account for more than 50% of consolidated sales. The Company’s cost to manufacture these raw materials is less than it paid the former supplier for these materials.

-7-

Table of Contents

In addition, the Company has undertaken other cost cutting measures that will reduce its administrative expenses in 2003, while implementing marketing strategies and programs it believes will improve retention of its distributor base and reverse the declining sales trend the Company has experienced during the past three years. However, there can be no assurances that these efforts will be successful to allow the Company to avoid a further decline in its sales.

Note D – Inventories:

Inventories at March 31, 2003 and December 31, 2002 consist of the following:

Note E – Property and Equipment:

Property and equipment at March 31, 2003 and December 31, 2002 consists of the following:

-8-

Table of Contents

Note F – Intangible Assets:

Intangible assets consist of the following:

Amortization expense related to intangible assets, excluding goodwill, totaled $10,600 for the quarters ended March 31, 2003 and 2002. The aggregate estimated amortization expense for intangible assets remaining as of March 31, 2003 is as follows:

Note G – Accrued Liabilities:

Accrued liabilities at March 31, 2003 and December 31, 2002 consist of the following:

-9-

Table of Contents

Note H – Stock-Based Compensation:

At March 31, 2003, the Company had a long-term incentive plan for the benefit of certain key employees, officers and directors. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net earnings (loss), as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Note I – Long Term Obligations:

At March 31, 2003 and December 31, 2002 long-term debt consists of the following:

-10-

Table of Contents

Certain purchases of equipment have been financed through capital leases. Such leases have terms ending in 2004 and have various interest rates approximating 15%.

Note J – Segments and Geographic Area:

The Company’s segments are based on the organization structure that is used by management for making operating and investment decisions and for assessing performance. Based on this management approach, the Company has two operating segments: Nutritional Products and Medical Products. The Nutritional Products segment manufactures and distributes 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 under the Royal BodyCare^® trade name and are distributed by a network of independent distributors operating primarily in North America and by licensees operating in certain other countries outside of North America. The Medical Products segment markets a line of approximately 25 wound care and oncology products under the MPM Medical trade name. The wound care products are distributed directly to hospitals, nursing homes and home health care agencies throughout the United States through a network of medical/surgical supply dealers. The oncology products are distributed to hospitals, cancer treatment clinics and pharmacies through a nationwide network of pharmaceutical distributors.

The Company evaluates the performance of its segments primarily based on operating profit. All intercompany transactions have been eliminated, and intersegment revenues are not significant. In calculating operating profit for these two segments, administrative expenses incurred that are common to the two segments are allocated on a usage basis.

-11-

Table of Contents

Segment information is as follows (in thousands):

Financial information summarized geographically for the quarters ended March 31, 2003 and 2002 is listed below (in thousands):

The Company recorded sales in the amount of $431,000 and $385,000 to its licensee in the former Soviet Union during the quarters ended March 31, 2003 and 2002, respectively. No customer of the Company accounted for more than ten percent of net sales during the quarters ended March 31, 2003 or 2002.

-12-

Table of Contents

Note K – Earnings (Loss) Per Share:

The assumed conversion of the convertible notes would have an anti-dilutive effect on diluted earnings per common share for the quarters ended March 31, 2003 and 2002, and accordingly have been excluded from the computation.

All stock options and warrants outstanding in the respective periods were excluded from the computation of diluted earnings per common share because their exercise price was greater than the average market price of the common stock and, therefore anti-dilutive.

Note L – Comprehensive Income (Loss):

Comprehensive income (loss) is net earnings (loss) plus other comprehensive income (loss), which, for the periods presented, consists of the change in the foreign currency translation adjustment. The following table provides information regarding comprehensive income (loss):

Note M – Legal Proceedings:

On May 29, 2002, the Company filed suit against a former supplier and member of its Board of Directors (G. Patrick Flanagan), and certain others (“Defendants”) requesting injunctive and monetary relief and alleging, among other causes of action, breach of contract, conspiracy, fraud, breach of fiduciary duty, disparagement, tortuous interference and unlawful restraint of trade. On July 26, 2002, the Court granted an Agreed Injunction that enjoined the Defendants and other parties acting in concert with them from, among other

-13-

Table of Contents

things, refusing to sell certain raw materials to the Company 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 the Company 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 the Company 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. The Company received payments totaling $19,000 during the first quarter of 2003 pursuant to this settlement arrangement. 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.

The Company is from time to time engaged in routine litigation. The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate by management for these litigation matters.

-14-

Table of Contents

FORWARD-LOOKING STATEMENTS

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

-15-

Table of Contents

RESULTS OF OPERATIONS

Quarter Ended March 31, 2003 Compared with the Quarter Ended March 31, 2002

Our sales for the quarter ended March 31, 2003 were $4,801,000 compared with sales for same quarter of the prior year of $7,263,000, a decrease of $2,462,000 or 34%. The decline in first quarter sales resulted mainly from sales declines in our traditional Nutritional Products segment in the U.S., Canadian and other international markets of $2,004,000, $285,000 and $247,000, respectively. Declines in these markets were partially offset by a net sales increase in our Medical Products segment of $74,000.

We believe that the principal factor 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.

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 $271,000 in the first quarter of 2002.

In response to Flanagan’s actions, on May 29, 2002, we filed suit against Flanagan and one former RBC distributor in the Dallas County, Texas District Court. As described elsewhere in this report, we settled this litigation in February 2003. In addition, since Flanagan’s announcement, we refined and completed the development of our proprietary version of

-16-

Table of Contents

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 declined significantly in the first quarter of 2003 mainly as a result of the sales decline described above. Cost of goods sold for the quarter ended March 31, 2003 was $1,192,000 compared with cost of goods sold in the same quarter of the prior year of $2,223,000, a decrease of $1,031,000 or 46%. As a percentage of sales, cost of goods sold was 25% in the first quarter of 2003 compared with 31% in the first quarter of 2002. This improvement is related to the fact that we now manufacture the key raw materials used in our top-selling products. Our costs to manufacture these raw materials are less than the price we paid to purchase them from the former third party supplier.

Our distributor commissions also declined significantly in the first quarter of 2003 as a result of the decline in our sales. Distributor commissions for the quarter ended March 31, 2003 were $1,597,000 compared with distributor commissions in the same quarter of 2002 of $2,548,000, a decrease of $951,000 or 37%. In the Nutritional Products segment, distributor commissions as a percentage of sales were unchanged at 36%. On a consolidated basis, distributor commissions as a percentage of sales declined to 33% in the first quarter of 2003 compared with 35% in the same period of 2002. This percentage decline was related to the increase in sales in the Medical Products segment since commissions on sales of these products average approximately 2%.

Our general and administrative expenses for the quarter ended March 31, 2003, were $1,802,000 compared with such expenses in the same quarter of 2002 of $2,204,000, a decrease of $402,000 or 18%. 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 38% in the first quarter of 2003 compared with 30% in the first quarter of 2002.

Interest expense for the quarter ended March 31, 2003, was $83,000 compared with such expense in the same quarter of 2002 of $106,000, a decrease of $23,000 or 22%. This decrease was related to the repayment of long-term debt during 2002.

Other income of $19,000 recognized in the first quarter of 2003 represents payments received during the quarter pursuant to the settlement of our lawsuit with Flanagan in February 2003. Under the terms of the settlement, Flanagan is obligated to make monthly payments calculated as a percentage of gross his gross revenues, as defined, up to an aggregate of $250,000.

-17-

Table of Contents

The loss from discontinued operations in the quarter ended March 31, 2002 represents the operating results of BizAdigm. BizAdigm’s operations were discontinued during the second quarter of 2002. This loss represents the excess of selling, general and administrative expenses plus cost of goods sold and distributor commissions over recognized sales of $45,000.

Our net loss for the quarter ended March 31, 2003 was $15,000, or $0.00 per share, compared with a net loss in the comparable quarter of the prior year of $19,000 or $0.00 per share, an improvement of $4,000. This improvement resulted from the factors described above.

Other than those described above, there have been no economic events or changes that have affected our sales or operating results and 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.

LIQUIDITY AND CAPITAL RESOURCES

During the first quarter of 2003, we had a net increase in cash of $64,000. This increase in cash resulted from net cash provided by financing activities of $202,000 that was partially offset by the net cash used by operating activities and net cash used to purchase property and equipment of $126,000 and $8,000, respectively. Net cash provided by financing activities represented the sale of 4,000,000 shares of our common stock for $400,000 that was partially offset by the repayment of long-term debt in the amount of $180,000. The common stock was sold to our licensee in the former Soviet Union. The president of this licensee, Coral Club International, is a member or our Board of Directors. Net cash used by operating activities was primarily attributable to the reduction of accounts payable during the quarter.

Our working capital increased $191,000 during the first quarter of 2003 mainly as a result of the sale of common stock. To further improve our working capital position, our founder and Chairman purchased 1,000,000 shares of our common stock for $100,000 in April 2003 and has committed to purchase up to an additional $100,000 of our common stock during the remainder of the second quarter of 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 operating results in the first quarter of 2003 reflect the improvement in gross margin, as our costs to manufacture these raw materials are 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 our sales or working capital.

-18-

Table of Contents

Consistent with industry practice, most of our sales are paid by our distributors at the time of order. Therefore, our primary working capital need is to maintain inventory at a level commensurate with sales activities. 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, beyond the recent financing arrangements we have undertaken as described above, we would be able to obtain any additional outside financing or 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 affect 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 of America 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 that the estimated or assumed amounts. These differences are usually minor and are included in our consolidated financial statements as soon as they are known. Our estimates, judgments and assumptions are continually evaluated based on available information and experience. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

We 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,

-19-

Table of Contents

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 the assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, we believe that our condensed 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 March 31, 2003:

-20-

Table of Contents

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 that 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 that accounted for 16% of net sales during the first quarter of 2003 and 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 $98,000 at March 31, 2003, a 10% adverse change in the currency rate would reduce earnings before tax by approximately $9,800.

Interest rates

Our credit arrangements expose us to fluctuations in interest rates. At March 31, 2003, we had $708,000 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 March 31, 2003, a 10% increase in interest rates would adversely affect our financial position, annual results of operations, or cash flows by approximately $4,700.

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.

-21-

Table of Contents

Item 1. Legal Proceedings.

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

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

On February 18, 2003, the parties entered into an agreement to settle all claims and causes of actions that existed between them, including those arising out of the transactions that formed the basis of the lawsuit. Under the terms of this settlement, G. Patrick Flanagan and/or Flantech Group, defendants in the original suit, agreed to pay to 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 also the Company’s Form 8-K dated March 6, 2003.)

Item 2. Changes in Securities.

None

Item 3. Defaults Upon Senior Securities.

None

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

None

-22-

Table of Contents

Item 5. Other Information.

None

Item 6. Exhibits and Reports on Form 8-K.

Exhibit 99.1 – Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 99.2 – Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

We filed a report on Form 8-K dated March 6, 2003 providing information and documentation relating to the settlement of all claims and causes of actions existing between us and the former sole source supplier of “silica hydride”, the principal ingredient of our top selling product, Microhydrin^®. We filed suit against this supplier on May 29, 2002 alleging, among other things, breach of contract, after the supplier announced on May 25, 2002 that he would no longer sell silica hydride to us in breach of an unlimited supply agreement between the supplier and us. On August 16, 2002, the defendants filed a counterclaim against us alleging, among other things, unfair competition, breach of contract and conspiracy. The parties entered in an agreement to settle this matter on February 18, 2003.

-23-

Table of Contents

SIGNATURES

Pursuant to the requirements 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.

-24-

Table of Contents

ROYAL BODYCARE, INC.

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Clinton H. Howard, certify that:

-25-

Table of Contents

Date: May 14, 2003

/s/ Clinton H. Howard                                                 

Clinton H. Howard

Chief Executive Officer

-26-

Table of Contents

ROYAL BODYCARE, INC.

CERTIFICATIONS PURSUANT TO

SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

I, Steven E. Brown, certify that:

-27-

Table of Contents

Date: May 14, 2003

/s/ Steven E. Brown                                                 

Steven E. Brown

Vice President-Finance

and Chief Financial Officer

-28-

Table of Contents

ROYAL BODYCARE, INC.

Exhibit Index

-29-