UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
--------------------- ----------------------
September 30, 1997 0-22024
BAYWOOD INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 77-0125664
(state or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
14950 North 83rd Place, Suite 1
Scottsdale, Arizona 85260
(Address of principal office) (Zip code)
Registrant's telephone number, including area code: (602) 951-3956
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
$.001 par value common stock
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
As of September 30, 1997, there were 17,498,115 shares of Baywood International,
Inc. common stock, $.001 par value outstanding.
<PAGE>
BAYWOOD INTERNATIONAL, INC.
INDEX
-----
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheet as of September 30, 1997 3
Statements of Operations for the three and nine months ended
September 30, 1997 and 1996 4
Statements of Cash Flows for the three and nine months ended
September 30, 1997 and 1996 5
Statement of Information Furnished 6
Item 2 - Management's Discussion and Analysis or Plan of Operation 7-10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities 12
Item 3 - Defaults Upon Senior Securities 12
Item 4 - Submission of Matters to a Vote
of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 13
SIGNATURES 15
-2-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
BALANCE SHEET
-------------
September 30, 1997
<TABLE>
<S> <C>
ASSETS
------
CURRENT ASSETS
Cash and equivalents $ 624,764
Accounts receivable 61,743
Inventories 4,711
Interest receivable 7,648
Deferred income taxes 150,000
Prepaid expenses and other current assets 30,889
-----------
Total current assets 879,755
-----------
PROPERTY & EQUIPMENT
Furniture, fixtures, computers and equipment
(net of accumulated depreciation of $98,831) 23,448
-----------
OTHER ASSETS
Note receivable - related party
(net of allowance of $110,466) 36,425
Contracts & marketing rights
(net of accumulated amortization of $68,934) 85,966
Formulas & product lines
(net of accumulated amortization of $68,934) 85,966
-----------
Total other assets 208,357
-----------
Total assets $ 1,111,560
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 98,383
Sales commissions payable 35,359
Accrued liabilities 6,564
-----------
Total current liabilities 140,306
-----------
REDEEMABLE PREFERRED STOCK - $1 par and redemption value 800,000
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value,
10,000,000 shares authorized 35,000
Common stock, $.001 par value, 50,000,000
shares authorized, 17,498,115 shares
issued and outstanding 17,498
Additional paid-in capital 5,414,139
Accumulated deficit (5,295,383)
-----------
Total stockholders' equity 171,254
-----------
Total liabilities and stockholders' equity $ 1,111,560
===========
</TABLE>
-3-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 873,439 $ 431,893 $ 2,170,927 $ 2,445,763
COST OF SALES 602,998 233,569 1,393,844 1,452,113
------------ ------------ ------------ ------------
Gross profit 270,441 198,324 777,083 993,650
------------ ------------ ------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing expenses 117,884 125,106 267,464 403,920
General and administrative expenses 198,073 175,135 540,115 431,915
Depreciation and amortization 12,685 12,657 37,365 38,476
------------ ------------ ------------ ------------
Total selling, general and administrative expenses 328,642 312,898 844,944 874,311
------------ ------------ ------------ ------------
Operating profit (loss) (58,201) (114,574) (67,861) 119,339
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 4,600 7,300 11,853 17,150
Miscellaneous expense (44,173) -- (36,983) (1,086)
Miscellaneous income -- 9,116 6,769 97,238
Interest expense -- (148) (222) (28,586)
------------ ------------ ------------ ------------
Total other income (expense) (39,573) 16,268 (18,583) 84,716
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES (97,774) (98,306) (86,444) 204,055
INCOME TAX BENEFIT 14,000 -- 14,000 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (83,774) $ (98,306) $ (72,444) $ 204,055
============ ============ ============ ============
NET (LOSS) INCOME PER
COMMON AND EQUIVALENT SHARE: $ (0.01) $ (0.01) $ -- $ 0.01
============ ============ ============ ============
WEIGHTED AVERAGE OF COMMON SHARES
AND EQUIVALENTS OUTSTANDING 18,333,115 17,433,794 18,333,115 16,134,453
============ ============ ============ ============
</TABLE>
-4-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (83,774) $ (98,306) $ (72,444) $ 204,055
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization 12,684 12,658 38,056 38,476
Issuance of common stock as payment for services performed -- 26,000 -- 26,000
Loss on sale of computers and equipment -- -- -- 1,062
Inventory write-down for samples, shrinkage and spoilage 91,626 16,732 103,626 36,443
Note receivable write-down 37,000 -- 37,000 --
Interest receivable write-down 11,017 -- 11,017 --
Common stock accrued for interest on notes payable -- -- -- 8,603
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 213,002 136,852 442,083 (130,088)
(Increase) in interest receivable (3,672) (5,545) (11,017) (13,802)
(Increase) decrease in inventory 3,448 2,971 (28,820) 35,930
Decrease in prepaid expenses (4,365) (12,719) (21,739) (21,554)
(Decrease) in interest payable -- -- -- (23,496)
(Decrease) in customer deposits -- -- -- (16,140)
(Decrease) in accounts payable and accrued liabilities (100,528) (251,809) (641,950) (327,640)
--------- --------- --------- ---------
Net cash (used) by operating activities 176,438 (173,166) (144,188) (182,151)
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Sale of computers and equipment -- -- -- 1,280
Purchase of furniture, computers and equipment -- (560) -- (1,571)
Decrease in note receivable -- 5,000 -- 5,000
--------- --------- --------- ---------
Net cash (used) by investing activities -- 4,440 -- 4,709
--------- --------- --------- ---------
FINANCING ACTIVITIES:
Issuance of common and preferred stock for cash -- -- -- 800,000
Fees paid in connection with offering of common and preferred stock -- -- -- (82,629)
Proceeds from notes payable -- -- -- 50,000
Principal payments on notes payable -- -- -- (482,000)
--------- --------- --------- ---------
Net cash provided by financing activities -- -- -- 285,371
--------- --------- --------- ---------
CASH AND EQUIVALENTS (USED) DURING PERIOD 176,438 (168,726) (144,188) 107,929
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 448,326 384,364 768,952 107,709
--------- --------- --------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 624,764 $ 215,638 $ 624,764 $ 215,638
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ -- $ -- $ 38,126
Income taxes $ 8,874 $ -- $ 8,874 $ --
</TABLE>
-5-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
Statement of Information Furnished
The accompanying financial statements have been prepared in accordance
with Form 10-QSB instructions and in the opinion of management contain all
adjustments (consisting of only normal and recurring accruals) necessary to
present fairly the financial position as of September 30, 1997 and the results
of operations for the three and nine months ended September 30, 1997 and 1996
and the cash flows for the three and nine months ended September 30, 1997 and
1996. These results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with those used in the
preparation of the Company's 1996 Annual Report on Form 10-KSB.
Certain information and footnote disclosures normally included in
financial statements presented in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that the accompanying
financial statements be read in conjunction with the financial statements and
notes thereto incorporated by reference in the Company's 1996 Annual Report on
Form 10-KSB.
-6-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
Item 2 - Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
General
Baywood International, Inc. develops and markets consumer health
products in nutrition, dietary and skin care. The Company markets products under
its own brand labels and also private labels products for its customers by
designating products with individual store or entity names. The Company creates
distinct formulas with unique packaging and either produces a product to the
customer's specifications or actually researches and develops a product for the
customer. The Company also has available existing formulas, packaging designs,
finished products and brand names for the customer to choose from to market,
license or customize further, with emphasis on pure and natural ingredients.
Nutrition and dietary products that are not necessarily new to the market such
as aloe based products, bee pollen, royal jelly and propolis are the types that
have generated particular interest mostly in the Pacific Rim. Skin care products
such as cleansers, toners, lift powder, activator and creams have also generated
much interest in the Pacific Rim countries.
Since its inception, the Company has directed most of its sales efforts
toward international markets and has established either distribution or
registration of its products into companies in the Pacific Rim Countries (China,
Malaysia, Hong Kong, Taiwan, Indonesia and Korea) as well as Europe (Italy,
Germany, Austria, England and Switzerland). Most of the Company's sales are
generated from the Pacific Rim. Establishing distribution into health food
stores, chain drug stores, grocery chains, network marketing companies in the
United States is also part of the Company's marketing strategy.
The Company operates in one industry segment which is consumer products
in the health and beauty industry. Due to the nature of the products, production
processes, markets and marketing methods, the Company considers its business to
operate in one industry segment.
Results of Operations
Net sales for the three and nine months ended September 30, 1997 were
$873,439 and $2,170,927, respectively, compared to net sales of $431,893 and
$2,445,763 for the same period last year, an increase of $441,546 or 102.2% and
a decrease of $274,836 or 11.2%, respectively. The increase in net sales for the
three months ended September 30, 1997 is due to higher volumes of nutritional
product sold to the Far East, particularly to one major customer. Although the
volume of sales of this product increased in the three month period, there was
an overall decrease in net sales for the nine months ended September 30, 1997
compared to the same period in 1996 which was a result of decreased volumes of
skin care product sold to one major customer in the Far East. The decrease in
sales of skin care products to this major customer is due to restrictions
imposed on the import of finished skin care products into China. The new Chinese
Government regulations prohibit any further import of both finished cosmetic and
skin care products. Both cosmetic and skin care products must now be
manufactured in China and must carry a Chinese manufacturing labor content of
over fifty percent. The Company in conjunction with its Chinese distributors is
currently in the process of pursuing the establishment of a manufacturing
operation for the Company's skin care products in China. This major customer
accounted for $754,790 or 86.4% and $2,012,774 or 92.7% of net sales,
respectively, for the three and nine months ended September 30, 1997.
International sales for the three and nine months ended September 30,
1997 represented 95.9%
-7-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
and 98.7%, respectively, of the Company's net sales compared to 97.4% and 97.6%
for the same period last year. Distribution of the nutrition and dietary line
remains as the main source of revenue for the first nine months of 1997,
accounting for 99.8% of gross sales. There was no distribution of products
within the skin care line for the nine months ended September 30, 1997. The
Company is continually focused on building a broader customer base so that its
reliance on its major customer is lessened and so that the volatility of sales
from quarter to quarter is decreased. This focus on broadening the customer base
is accomplished through the introduction of other new products into current
distribution channels, the continued support through advertising and promotion
of existing products and the acquisition of other companies in the industry that
have established lines of complementary products and new areas of distribution.
Due to high demand in the industry for nutrition and dietary products both
domestically and internationally for health and well being, the Company
anticipates this line to be the primary foundation for revenue growth and
profitability in the future.
The Company's gross profit margin for the three and nine months ended
September 30, 1997 was 31% and 35.8%, respectively, compared to 45.9% and 40.6%
for the same period last year, an overall decrease of 5% for the nine months.
Gross margins on products within the nutrition and dietary line are lower than
those in the skin care line. In addition to the decrease in sales of the skin
care line as a factor in the lower gross margins for the nine months ended
September 30, 1997 compared to the same period last year, the Company accrued an
allowance for the write down of inventory for approximately $92,000 for the
three months ended September 30, 1997 due to inventory obsolescence and
spoilage.
Selling, general and administrative expenses for the three and nine
months ended September 30, 1997 were $328,642 or 37.6% of net sales and $844,944
or 38.9% of net sales compared to $312,898 or 72.5% of net sales and $874,311 or
35.8% of net sales for the same period last year. This represents an overall
increase of 3% on net sales. Overall corporate expenditures have decreased
compared to the same nine month period last year with exception to legal fees.
Legal Fees of $165,485 were the largest portion of selling, general and
administrative expenses for the nine months ended September 30, 1997,
representing 7.6% of net sales. The Company is aware that its legal expenses
have been significant in the first nine months of 1997 and expects these costs
to decline toward the beginning of 1998 as its current proceedings settle or are
concluded. Sales commissions as a percentage of net sales decreased slightly due
to lower commission rates negotiated by the Company compared to the first nine
months of 1996.
Net loss for the three and nine months ended September 30, 1997 was
$(83,774) or $(.01) per share and $(72,444) or less than $(.01) per share,
respectively, compared to a net loss of $(98,306) or $(.01) per share and net
income of $204,055 or $.01 per share for the same period last year.
A current income tax benefit of $14,000 was recognized in the third
quarter of 1997. The Company expects to generate profits for the year ended
December 31, 1997 and therefore has recognized a current benefit which will
offset taxable income in the remainder of 1997. There were no significant
deferred income taxes in the third quarter of 1997.
Other Information
Interest expense for the three and nine months ended September 30, 1997
was zero and $222, respectively, compared to $148 and $28,586 for the same
period last year. The decrease is due to the payoff of notes payable in the
second quarter of 1996.
-8-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
Total miscellaneous income for the nine months ended September 30, 1997
as compared to the same period last year decreased from $97,238 to $6,769. The
decrease of $90,469 is mainly due to benefits recognized in the first nine
months of 1996 from settlements of amounts payable from 1995.
The Company's interest revenue was generated from interest earned on
the Company's invested cash balance. The Company accrued a reserve against the
entire portion of interest earned in 1997 on its note receivable due from Royal
Products, Inc. In addition, the Company accrued a reserve for 50% of the balance
of principal on the note for possible uncollectability.
Capital Expenditures
During the three and nine months ended September 30, 1997, the Company
had not incurred material expenditures for property and equipment.
Liquidity and Capital Resources
As of September 30, 1997, the Company had $879,755 in current assets of
which $624,764 or 71% was cash and equivalents. Total current liabilities for
the same period totalled $140,306. This represents a ratio of current assets to
current liabilities of 6.3 for the nine months ended September 30, 1997.
Accounts receivable at December 31, 1996 decreased from $503,826 to $61,743. Due
to the nature of the Company's sales transactions being primarily large dollar
values and relatively few transactions, accounts receivable can fluctuate
significantly based on the timing of these transactions. Management does not
believe that these fluctuations currently have an adverse effect on the
Company's liquidity. Trade accounts payable remained in good standing due to
good relations, credit terms and payment histories with major suppliers and
vendors. The Company has agreed with its major suppliers on discounts of 1% to
2% of cost of goods with early payment within 10 to 15 days. The Company
recognized $20,508 of discounts under these agreements in the nine months ended
September 30, 1997. The Company believes that as it increases its sales volume,
liquidity will improve greatly. Sales terms generally include a 50% deposit at
the time of the order and the balance prior to shipment. Due to good relations
with some overseas customers, the Company has shipped on credit.
The Company neither anticipates any significant capital expenditures
nor are material capital expenditures required to meet expected growth for the
remainder of 1997.
Management is aware of the current currency problems that certain Far
Eastern (Malaysia, Taiwan and Indonesia) countries are dealing with. Despite the
Company's reliance on its product exports and their pricing into the Far East,
the Company does not consider its financial condition at this point to be at any
significant risk since its main distribution is into China where the currency
(Remninbi) has maintained its relative strength compared to the U.S. Dollar.
Also, the Company's reliance on its Malaysian, Taiwanese and Indonesian
customers constitutes less than 10% of distribution and has not seen any
significant negative impact from the currency problems of those countries.
-9-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
"CAUTION REGARDING FORWARD-LOOKING STATEMENTS"
CERTAIN STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT RELATED TO
HISTORICAL RESULTS, INCLUDING, WITHOUT LIMITATIONS, STATEMENTS REGARDING THE
COMPANY'S BUSINESS STRATEGY AND OBJECTIVES AND FUTURE FINANCIAL POSITION, ARE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT AND SECTION 21E OF THE EXCHANGE ACT AND INVOLVE RISKS AND UNCERTAINTIES.
ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS ON WHICH THESE
FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE, THERE CAN BE NO ASSURANCE
THAT SUCH ASSUMPTIONS WILL PROVE TO BE ACCURATE AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO,
THOSE SET FORTH IN THE FOLLOWING SECTION, AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS REPORT. ALL FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT ARE
QUALIFIED IN THEIR ENTIRETY BY THIS CAUTIONARY STATEMENT.
Factors That May Affect Future Results
The Company believes that results of operations in any quarterly period
may be impacted by factors such as delays in the shipment of new or existing
products, difficulty in the manufacturer acquiring critical product components
of acceptable quality and in required quantity, timing of product introductions,
increased competitions, the effect of announcements and marketing efforts of new
competitive products, a slower growth rate in the Company's target markets, lack
of market acceptance of new products and adverse changes in economic conditions
in any of the countries in which the company does business. Specifically, the
timing of registration of, and import restrictions on, new or existing products
in different countries in which the Company is doing business or may do business
could delay orders. Also, the significant portion of sales and net income
contributed by international operations, specifically by one customer, and any
disruption in supply from either of the Company's main suppliers, could
materially affect the Company's results of operations and financial condition in
a particular quarter. Due to the factors noted above, the Company's future
earnings and stock price may be subject to significant volatility. Any shortfall
in revenues or earnings from levels expected by the investing public or
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's common stock.
-10-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
-----------------
The Company previously disclosed under Item 3 of its Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996, that on
October 10, 1995, St. Anthony's Parish of Somerville, MA and the Pious Society
of Missionaries of St. Charles Boromeo, Inc. filed suit against Krystal Kleer,
Inc. in the Supreme Court of the State of New York and included the Company as a
defendant. The sum of all compensatory damages the plaintiffs seek against all
defendants amounts to $900,000, but the claims against the Company relate to the
repayment of three loans to Krystal Kleer for $100,000 each. The Company was
named in the lawsuit as a result of a disclosure in its prior financial
statements that it had issued certain common stock in exchange for all of the
equipment, fixtures and furnishings of Krystal Kleer. The Company has moved for
summary judgment and its dismissal as a defendant from the action.
The Company previously disclosed under Item 3 of its Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996, that the
Company is a defendant in a Nevada state court action filed in September 1996 by
Pershing Products, Inc. The Company also disclosed that it had filed a related
proceeding against Pershing and Dr. Jackie See in Federal District Court in
Arizona. The parties have agreed to dismiss both actions with prejudice, with no
payments between the parties and with each party bearing its own costs and
attorneys fees in the matter.
The Company previously disclosed under Item 3 of its Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1996, that former
director and officer Georgia Aadland filed a demand for arbitration against the
Company with the American Arbitration Association on March 3, 1997. The Company
also previously disclosed under Item 1 of its Quarterly Report on Form 10-QSB
for the for the quarter ended March 31, 1997, that John Shannon filed a demand
for arbitration against the Company with the American Arbitration Association on
April 15, 1997. The Company's motions seeking stays of arbitration were denied.
As previously disclosed in the March 31, 1997 quarterly report, Shannon seeks a
determination that 1,000,000 options allegedly granted to him on January 1, 1993
are valid. On April 28, 1997, the Company answered Mr. Shannon's demand and
stated that the options are invalid because the contract upon which they are
based was invalidly executed in violation of the Company's articles and bylaws,
the options and the underlying agreement do not satisfy Nevada statutory
requirements, entry into the agreement was a violation of Shannon's fiduciary
duties and Shannon waived any alleged options, among other defenses. The Shannon
matter is set for arbitration on November 13 and 14, 1997 and the arbitrator
intends to communicate his ruling before the first week of December 1997. The
Aadland arbitration date has been postponed until an unspecified hearing date in
the first or second quarter of 1998.
Under the terms of a January 8, 1993 agreement between the
Company and Royal Products, Inc. ("Royal"), Royal is obligated to make annual
principal and interest payments to the Company on July 1 of each year. John
Shannon is a director, officer and seventy percent (70%) shareholder of Royal.
As previously disclosed under Item 1 of the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1997, the Company filed a lawsuit against
Royal in Arizona Superior Court, seeking payment of the installment that was due
on July 1, 1997 of $32,500 plus attorneys' fees. Royal has answered the
Company's complaint and the Company has moved for summary judgment on its
claims.
-11-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
The Company previously disclosed under Item 3 of its Quarterly
Report on Form 10- QSB for the quarter ended June 30, 1997 that on June 2, 1997,
the Company filed a lawsuit in Federal District Court in Arizona against John
and Darlene Shannon for recovery of "short swing" profits pursuant to Section
16(b) of the Securities Exchange Act of 1934, as amended. The action alleges
sales and purchases of Company securities by the Shannons (or their affiliates)
within six (6) month periods while Mr. Shannon was a director or officer of the
Company or a greater than ten percent (10.0%) beneficial owner of the Company's
shares. The action seeks disgorgement of short-swing profits, interest from the
time the profits were realized, post-judgment interest and the Company's costs
and attorneys' fees. The Company has moved for summary judgment on its claims.
After the end of the Company's third quarter, on November 5,
1997, an individual claiming to be a shareholder filed suit in Maricopa County,
Arizona Superior Court against each of the Company's directors and against a
freight forwarding company that the Company uses for shipping its products to
the Far East. The lawsuit does not name the Company. The complaint alleges,
among other things, that the Company's Board and its Chairman made or acquiesced
in misrepresentations about the Chairman's background, the packaging of the
Company's products, and the status of financings alleging fraud, self-dealing
and breaches of fiduciary duty. The complaint seeks an undisclosed amount of
damages, an injunction and other relief. It is anticipated that the Company's
directors may seek indemnification from the Company for the defense of this
action.
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
Item 5 - Other Information
-----------------
Dependence on One Customer. Sales to one principal customer in
China accounted for 89.8% and 73.0% of net sales in fiscal years ended December
31, 1996 and 1995, respectively, and have accounted for 97.6%, 93.3% and 86.4%
of net sales in the quarters ended March 31, June 30 and September 30, 1997,
respectively. The Company is attempting to expand its customer base both
domestically and internationally, but expects that sales to its Chinese customer
will continue to account for a substantial percentage of sales. The Company's
Chinese customer could discontinue ordering at any time. Any potential problems
with this Chinese customer could have a substantial adverse impact on the
Company's business and could result in diminished revenues for several quarters
or more as the Company attempts to replace that business.
-12-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
Dependence on Two Suppliers. The Company does not manufacture
any of its products and depends entirely on third party manufacturers and
suppliers. Typically, the Company does not have supply agreements, but submits
purchase orders for its products. The Company currently purchases from two
suppliers.
The Company's largest supplier, The Chemins Company, Inc.,
located in Colorado accounted for approximately 67% and 70% of product purchases
in the fiscal years ended December 31, 1996 and 1995, respectively, and has
accounted for 100% of purchases in the quarters ended March 31, June 30 and
September 30, 1997, respectively. The Company's other supplier, Natural
Technology, Inc., located in Texas accounted for approximately 33% and 30% of
product purchases in the fiscal years ended December 31, 1996 and 1995,
respectively, and has accounted for no product purchases in the quarters ended
March 31, June 30 and September 30, 1997, respectively.
Although the Company believes that a number of alternative
sources of supply are available if required and that it could quickly replace
its main suppliers with alternative sources at comparable prices and terms, a
disruption in product supply from either The Chemins Company, Inc. or Natural
Technology, Inc. could have a significant adverse impact on the Company's
operations.
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Exhibit Name Method of Filing
- -------------- ------------ ----------------
<S> <C> <C>
3.1 Articles of Incorporation, as amended *
3.2 By-Laws **
4.1 Specimen Common Stock Certificate ***
4.2 Description of Common Stock ****
4.3 Certificates of Designation for Preferred Shares *****
4.4 Accredited Investor Subscription Agreement with Linda
Lee dated October 30, 1997 Exhibit filed herewith
27.1 Financial Data Schedule Exhibit filed herewith
</TABLE>
* Incorporated by reference to Exhibit 3.1 of annual report on
Form 10-KSB (file no. 0-22024) filed on April 18, 1996.
** Incorporated by reference to Exhibit 3 of Registration
Statement on Form S-1 (file no. 33-10236) filed on January 27, 1987, and
declared effective on February 14, 1988.
*** Incorporated by reference to Exhibit 1 of Registration
Statement on Form 8-A (File no. 022024) filed on July 2, 1993, and declared
effective on July 9, 1993.
-13-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
**** Incorporated by reference to page 31 of Registration Statement
on Form S-1 (file no. 33-10236) filed on January 27, 1987, and declared
effective on February 14, 1988.
***** Incorporated by reference to Exhibit 4.3 of quarterly report
on Form 10-QSB (file no. 0-22024) filed on August 11, 1997.
(b) Reports on Form 8-K
None
-14-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BAYWOOD INTERNATIONAL, INC.
(Registrant)
By: /s/ Harvey Turner Date: November 12, 1997
-------------------------------------
Harvey Turner
Chairman of the Board,
President & C.E.O.
By: /s/ Neil Reithinger Date: November 12, 1997
-------------------------------------
Neil Reithinger
Vice-President, Chief Financial Officer,
Secretary & Treasurer
-15-
ACCREDITED INVESTOR
SUBSCRIPTION AGREEMENT
----------------------
Board of Directors
BAYWOOD INTERNATIONAL, INC.
14950 North 83rd Place
Suite 1
Scottsdale, Arizona 85260
Gentlemen:
The undersigned hereby subscribes for 120,000 pre-split shares (the
"Shares") of Class "C" Preferred Stock, $1.00 par value, of Baywood
International, Inc. (the "Company") such Shares to be fully paid, nonassessable,
and issuable upon acceptance of this subscription by the Company's Board of
Directors, upon the Company's filing of a certificate setting forth the voting
powers, designations, preferences, limitations, restrictions and relative rights
of the Shares and upon the effectiveness of the conversion of the 800,000
pre-split preferred shares previously issued to me on May 8, 1996 into validly
issued and outstanding pre-split Class "C" Preferred Shares. I understand that
you will rely upon the following information to determine whether the Shares are
exempt from registration under the Securities Act of 1933, as amended (the
"Act") and comparable provisions of state securities laws.
ALL INFORMATION CONTAINED IN THIS SUBSCRIPTION AGREEMENT WILL BE TREATED
CONFIDENTIALLY. However, it is agreed that you may present this and any
supporting documents to such parties as you deem appropriate if called upon to
establish that the proposed offer and sale of the Shares is exempt from
registration under the Act or meets the requirements of applicable state
securities laws.
I. AGREEMENT TO DEFER AND ALTER PRIOR PREFERRED SHARE RIGHTS
WHEREAS, on May 8, 1996 the Company issued 800,000 pre-split preferred
shares to me in a private placement with the right to convert such shares to
Common stock or redeem the shares for cash on May 8, 1997 provided that certain
conditions were met regarding the average share price of the Company's Common
shares;
WHEREAS, on May 5, 1997, Management and my authorized representative
reached a verbal agreement to terminate any redemption right and to defer any
conversion right on such previously-issued pre-split preferred shares until May
8, 1998 and to provide me with a stock dividend of 120,000 additional pre-split
Shares with special conversion rights based upon the price of the Company's
Common Stock on May 8, 1998 (the "Deferment Transaction");
<PAGE>
WHEREAS, Management has confirmed the Deferment Transaction in a letter to
me dated May 5, 1997;
THEREFORE, the Company, upon acceptance of this subscription by its Board
of Directors, and I agree as follows:
A. Merger of Rights for all 920,000 Pre-Split Preferred Shares. Upon the
Company's acceptance of this Subscription Agreement, the voting powers,
designations, preferences, limitations, restrictions and relative rights of the
800,000 pre-split preferred shares which were issued to me on May 8, 1996 and
represented by preferred certificate number 8 will be terminated, and will
automatically be converted into and assume the identical voting powers,
designations, preferences, limitations, restrictions and relative rights of the
120,000 pre-split Shares issued pursuant to this Subscription Agreement. Such
800,000 pre-split shares and 120,000 pre-split Shares shall be designated Class
"C" Preferred Shares and shall equally share all the characteristics and
privileges of such Class "C" Preferred Shares.
B. Description of Class "C" Pre-Split Preferred Shares. The 120,000
pre-split preferred share dividend to be issued pursuant to this Subscription
Agreement and the 800,000 pre-split preferred shares previously issued to me on
May 8, 1996, upon the merger of rights described in Section A above, shall have
the following powers, designations, preferences, limitations, restrictions and
relative rights:
1. Conversion Privileges. On May 8, 1998, at Shareholder's option,
the Class "C" pre-split Preferred Shares are convertible into
pre-split or post-split Common stock of Baywood as follows:
a. Average Price; Reverse Split. "Average Price," as used
herein, shall mean the average share price of Baywood's
Common Shares for the three months prior to May 8, 1998.
"Reverse Split" shall mean the reverse 1 for 2 1/2split of
the Company's common stock approved by the Company's
shareholders on April 10, 1997, but which shall not become
effective until the Company files Articles of Domestication
in the Office of the Arizona Corporation Commission.
b. Average Price Less than $1.00. If the Average Price is less
than $1.00, the Class "C" Preferred Shares shall be
convertible into:
(i) (Pre-Split) that number of pre-split Common Shares which
is equal to the number which results from $920,000 divided
by the Average Price if the Reverse Split is not yet
effective; or
- 2 -
<PAGE>
(ii) (Post-Split) that number of post-split Common Shares
which is equal to the number which results from $368,000
divided by the Average Price if the Reverse Split has
already become effective.
c. Average Price of $1.00 or Greater. If the Average Price is
$1.00 or more, the 920,000 pre-split Class "C" Preferred
Shares shall be convertible:
(i) (Pre-Split) on a one-for-one (1:1) basis into pre-split
Common Shares, such that Shareholder shall receive a total
of 920,000 Common Shares if the Reverse Split is not yet
effective; or
(ii) (Post-Split) on a one-for-two and one half (1:2 1/2)
basis into post-split Common Shares, such that Shareholder
shall receive a total of 368,000 post-split Common Shares if
the Reverse Split has already become effective.
2. Redemption. Shareholder shall have no right to redeem the Class
"C" Preferred Shares.
3. Par Value. The Class "C" Preferred Shares shall have a par value
of $1.00 per share.
4. Distribution of Capital. In the event of dissolution, bankruptcy,
or termination of this corporation, the par value of all the
Class "C" Preferred Shares shall be paid in full before the
Common Stock or any part thereof or any dividend thereon is paid.
5. Voting Rights. The Shareholder of the Class "C" Preferred Shares
shall have no voting power.
6. Dividends. The Class "C" Preferred Shares shall be preferred both
as to dividends and assets and shall be entitled to receive out
of the surplus or net profits of the Company, in each fiscal
year, dividends at such rate or rates, as shall be determined by
the Board of Directors in connection with the issue of the
respective series of said stock and expressed in the stock
certificate therefor, before any dividends shall be paid upon the
Common Stock, but such dividends shall be noncumulative. No
dividends shall be paid, declared, or set apart for the payment
on the Common Stock of the Company, in any fiscal year, unless
the full dividends on the Class "C" Preferred Shares for such
year shall have been paid or provided for.
- 3 -
<PAGE>
II. REPRESENTATIONS AND WARRANTIES REGARDING SUBSCRIPTION
I understand that you will rely on the following information to confirm
that I am an "accredited investor" as defined in Regulation D promulgated under
the Act, that the Shares are exempt from registration under the Act and
comparable provisions of state securities laws and that I am qualified to be a
Purchaser.
1. Accredited Investor. I am an Accredited Investor because I fall within
one of the following categories:
(PLEASE CHECK ___ $1,000,000 Net Worth.
APPROPRIATE A natural person whose individual net worth, or joint
CATEGORY) net worth with that person's spouse, at the time of
his purchase exceeds $1,000,000.
___ $200,000/$300,000 Income.
A natural person who had an individual income in
excess of $200,000 (including contributions to
qualified employee benefit plans) or joint income
with such person's spouse in excess of $300,000 in
each of the two most recent years and who reasonably
expects to attain the same individual or joint levels
of income (including such contributions) in the
current year.
___ Director or Officer of Issuer
Any director or executive officer of the Company.
___ All Equity Owners In Entity Are Accredited.
An entity (i.e. corporation, partnership, trust, IRA,
etc.) in which all of the equity owners are
Accredited Investors as defined herein.
___ Corporation
A corporation not formed for the specific purpose of
acquiring the Interests offered, with total assets in
excess of $5,000,000.
___ Other Accredited Investor
Any natural person or entity which qualifies as an
accredited investor pursuant to Rule 501(a) of
Regulation D promulgated under the Act; specify basis
for qualification:
-----------------------------------------------------
-----------------------------------------------------
----------------------------------------------------.
- 4 -
<PAGE>
2. Representations and Warranties. I represent and warrant to the Company
that:
(a) I (i) have adequate means of providing for my current needs and
possible contingencies, and I have no need for liquidity of my investment in the
Company, (ii) can bear the economic risk of losing the entire amount of my
investment in the Company, and (iii) have such knowledge and experience that I
am capable of evaluating the relative risks and merits of this investment. I
further affirmatively represent and warrant to the Company that my current net
worth exceeds $1,000,000 U.S. and that my annual income for the last two years
and the current year exceeds $300,000 U.S.
(b) I affirmatively represent and warrant to the Company that I am not
a resident or citizen of the United States of America. My true and correct
address residency and citizenship is set forth under my signature at the end of
this letter. I have the legal power and authority to enter into this
Subscription Agreement and make the representations and warranties herein
understanding fully that the Company is placing material reliance on my candor
and veracity.
(c) The Shares for which I subscribe are being acquired solely for my
own account, for investment and are not being purchased with a view to or for
their resale or distribution. In order to induce the Company to sell Shares to
me, the Company will have no obligation to recognize the ownership, beneficial
or otherwise, of the Shares by anyone but me.
(d) I have received and read, and am familiar with the Articles of
Incorporation, Bylaws and general corporate records of the Company. I have
reviewed the Company's annual, quarterly and current reports on file with the
Securities and Exchange Commission on Forms 10-KSB, 10-QSB and 8-K and
amendments thereto. I confirm that all documents, records and books pertaining
to this investment as I have or could have requested, have been made available
for inspection by my attorney, accountant, and me. Specifically, Section B of
this Subscription Agreement sets forth the description of the powers,
designations, preferences, limitations, restrictions and relative rights of the
Shares I am acquiring, which shall govern the existing preferred shares which
were previously issued to me and which conditions I have read and approved.
(e) I and my advisor(s) have had a reasonable opportunity to ask
questions of and receive answers from the principals and management of the
Company concerning the Company's affairs generally and the terms and conditions
of my proposed investment in the Shares and all such questions have been
answered to my full satisfaction. No oral representations have been made or oral
information furnished to me or my advisor(s) in connection with the Shares which
were in any way inconsistent with the publicly available filings of the Company.
I am also aware that no state or Federal agency has reviewed or endorsed the
Shares and that the Company has a limited prior financial or operating history.
- 5 -
<PAGE>
(f) My interest in the Company is based primarily on what I understand
of the concept of its business (which understanding may be mistaken or flawed),
and not on its assets, liabilities or results to date.
(g) No person or entity has made any representation or warranty
whatsoever with respect to any matter or thing concerning the Company and this
offering, and I am purchasing the Shares based solely upon my own investigation
and evaluation.
(h) I understand that no Shares have been registered under the Act,
nor have they been registered pursuant to the provisions of the securities or
other laws of applicable jurisdictions.
(i) I am aware of the following:
(i) The Shares are a speculative investment which involve a high
degree of risk; and
(ii) My interest in the Shares is not readily transferable; it
may not be possible for me to liquidate my investment in the Shares.
(j) I understand the nature of this investment, and am aware and
familiar with the proposed business operations of the Company, and further
understand that the Shares are restricted securities within the meaning of the
Act, and that any future sale of such Shares will be regulated by this Act.
The foregoing representations and warranties are true and accurate as of
the date hereof, shall be true and accurate as of each date of delivery of funds
to the Company and shall survive such delivery. If, in any respect, such
representations and warranties are not true and accurate prior to delivery of
any funds, I will give written notice of that fact to the Company, specifying
which representations and warranties are not true and accurate and the reasons
therefor.
3. Transferability. I understand that I may sell or otherwise transfer my
Shares only if registered under the Act or with the favorable opinion of counsel
to the Company to the effect that such sale or other transfer may be made in the
absence of registration under the Act and that such transfer will not result in
a violation of any applicable federal or state law, rule or regulation. I have
no right to cause the Company to register the Shares. The certificates
representing my Shares will be legended to reflect this restriction, and stop
transfer instructions will apply.
4. Indemnification. I understand the meaning and legal consequences of the
representations and warranties contained in Paragraph 2 hereof, and I will
indemnify and hold harmless the Company, its officers and directors involved in
the offer or sale of the Shares to me, as well as each of the officers,
directors, employees and agents and other controlling persons of each of them,
from and against any and all loss, damage or liability due to or arising
- 6 -
<PAGE>
out of my failure to fulfill any of the terms or conditions of this Subscription
Agreement, or a breach of any representation or warranty of mine contained in
this Subscription Agreement.
5. Miscellaneous.
(a) This Subscription Agreement shall be governed by and construed in
all respects in accordance with the substantive law of the State of Arizona.
(b) This Subscription Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by all parties.
(c) I agree not to transfer or assign this Subscription Agreement, or
any of my interest herein, and further agree that the transfer or assignment of
the Shares acquired pursuant hereto shall be made only in accordance with this
Subscription Agreement and all applicable laws.
(d) I agree that I may not cancel, terminate or revoke this
Subscription Agreement or any agreement made hereunder and that this
Subscription Agreement shall survive my death or disability and shall be binding
upon my heirs, executors, administrators, successors and assigns.
(e) Upon receipt of a written request from the Company, I agree to
provide such information and to execute and deliver such documents as reasonably
may be necessary to comply with any and all laws, regulations, rules and
ordinances to which the Company is subject.
DATED THIS October 30, 1997 ADDRESS:
23/F Block E, Phase 2,
Superluck Industrial Centre
/s/ Linda Lee 57 Sha Tsui Road, Tusen Wan, Hong Kong
- --------------------------- --------------------------------------
Linda Lee
- 7 -
<PAGE>
REVIEWED AND ACCEPTED THIS 12TH DAY OF NOVEMBER, 1997 AS AUTHORIZED BY THE BOARD
OF DIRECTORS BY:
BAYWOOD INTERNATIONAL, INC.
BY: /s/ Harvey Turner
-------------------------------------
Harvey Turner, President and Chairman
- 8 -
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 806175
<NAME> Baywood International, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 624,764
<SECURITIES> 0
<RECEIVABLES> 61,743
<ALLOWANCES> 0
<INVENTORY> 4,711
<CURRENT-ASSETS> 879,755
<PP&E> 23,448
<DEPRECIATION> 98,831
<TOTAL-ASSETS> 1,111,560
<CURRENT-LIABILITIES> 140,306
<BONDS> 0
0
835,000
<COMMON> 17,498
<OTHER-SE> 118,756
<TOTAL-LIABILITY-AND-EQUITY> 1,111,560
<SALES> 2,170,927
<TOTAL-REVENUES> 2,170,927
<CGS> 1,393,844
<TOTAL-COSTS> 844,944
<OTHER-EXPENSES> 18,361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 222
<INCOME-PRETAX> (86,444)
<INCOME-TAX> (14,000)
<INCOME-CONTINUING> (72,444)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (72,444)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
