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
--------------------- ----------------------
March 31, 1997 33-10236
BAYWOOD INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Nevada
(state or other jurisdiction of incorporation or
organization)
77-0125664
(I.R.S. Employer Identification Number)
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 March 31, 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 March 31, 1997 3
Statements of Operations for the three months ended March 31, 1997
and 1996 4
Statements of Cash Flows for the three months ended March 31, 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 11
Item 3 - Defaults Upon Senior Securities 11
Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
BALANCE SHEET
-------------
March 31, 1997
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS
Cash and equivalents $ 158,817
Accounts receivable 558,449
Inventories 75,532
Interest receivable 11,321
Deferred income taxes 150,000
Prepaid expenses and other current assets 46,138
-----------
Total current assets 1,000,257
-----------
PROPERTY & EQUIPMENT
Furniture, fixtures, computers and equipment
(net of accumulated depreciation of $88,951) 33,328
-----------
OTHER ASSETS
Note receivable - related party
(net of allowance of $73,466) 73,425
Contracts & marketing rights
(net of accumulated amortization of $61,189) 93,711
Formulas & product lines
(net of accumulated amortization of $61,189) 93,711
-----------
Total other assets 260,847
-----------
Total assets $ 1,294,432
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 249,902
Sales commissions payable 33,813
Accrued liabilities 7,395
-----------
Total current liabilities 291,110
-----------
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 (5,263,315)
-----------
Total stockholders' equity 203,322
-----------
Total liabilities and stockholders' equity $ 1,294,432
===========
</TABLE>
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
NET SALES $ 515,371 $ 784,527
COST OF SALES 301,153 472,232
------------ ------------
Gross profit 214,218 312,295
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing expenses 55,302 134,293
General and administrative expenses 220,040 104,739
Depreciation and amortization 12,685 12,909
------------ ------------
Total selling, general and administrative expenses 288,027 251,941
------------ ------------
Operating profit (loss) (73,809) 60,354
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 7,373 4,140
Miscellaneous expense -- (75)
Miscellaneous income 282 17,038
Interest expense (222) (21,717)
------------ ------------
Total other income (expense) 7,433 (614)
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (66,376) 59,740
INCOME TAX BENEFIT 26,000 --
------------ ------------
NET INCOME (LOSS) $ (40,376) $ 59,740
============ ============
NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE: $ (0.002) $ 0.004
============ ============
WEIGHTED AVERAGE OF COMMON SHARES
AND EQUIVALENTS OUTSTANDING 18,333,115 14,661,468
============ ============
</TABLE>
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (40,376) $ 59,740
Adjustments to reconcile net income (loss) to cash used in operating activities:
Depreciation and amortization 12,685 12,909
Changes in assets and liabilities:
(Increase) in accounts receivable (54,623) (151,961)
(Increase) in interest receivable (3,673) (4,128)
(Increase) decrease in inventory 3,985 (7,309)
(Increase) in prepaid expenses (36,988) (2,396)
(Decrease) in interest payable -- (2,283)
(Decrease) in customer deposits -- (16,140)
Increase (decrease) in accounts payable and accrued liabilities (491,145) 1,661
--------- ---------
Net cash (used) by operating activities (610,135) (109,907)
--------- ---------
INVESTING ACTIVITIES:
Purchase of furniture, computers and equipment -- (1,011)
--------- ---------
Net cash (used) by investing activities -- (1,011)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable -- 50,000
--------- ---------
Net cash provided by financing activities -- 50,000
--------- ---------
CASH AND EQUIVALENTS (USED) DURING PERIOD (610,135) (60,918)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 768,952 107,709
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 158,817 $ 46,791
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ -- $ 24,000
</TABLE>
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<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 March 31, 1997 and the results of
operations for the three months ended March 31, 1997 and 1996 and the cash flows
for the three months ended March 31, 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.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
Item 2 - Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
General
The focus of Baywood International, Inc. is private labeling consumer
health products in nutrition, dietary and skin care. The Company defines its
role as a private label company 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 chain drug
stores, grocery chains, network marketing companies and warehouse distributors
in the United States is also part of the Company's marketing strategy. The
Company has employed a national sales director to broaden its customer base by
targeting the domestic market in these specific areas.
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
revolve around one industry segment.
Results of Operations
Net sales for the three months ended March 31, 1997 were $515,371
compared to net sales of $784,527 for the same period last year, a decrease of
$269,156 or 34.3%. The decrease in net sales for the three months ended March
31, 1997 compared to the same period in 1996 is due to reduced volumes of
nutrition and dietary product sold, particularly to one customer in the Pacific
Rim. This customer accounted for $503,194 or 97.6% of net sales for the three
months ended March 31, 1997. In May 1997, the Company received a substantial
order from this customer for shipment through the third quarter of 1997. This
indicates to management that the decrease in net sales to this customer in the
first quarter ended March 31, 1997 is not a result of a decrease in the demand
for the products, but rather represents fluctuations in the timing of orders
during a particular quarter. International sales for the three months ended
March 31, 1997 represented 98.8% of the Company's net sales compared to 98.2%
for the same period last year. Distribution of the nutrition and dietary line
remains as the main source of revenue for the first three months of 1997,
accounting for 99.8% of net sales. Distribution of the beauty and hygiene line
accounted for less than 1% of net sales for the same period. Net sales of
product in the beauty and hygiene line had surged significantly in the fourth
quarter of 1996. The Company believes that the decrease in sales in the first
quarter of 1997 does not indicate a decrease in the demand for the products, but
rather represents fluctuations in the timing of orders during a particular
quarter. Due to high demand
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
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 months ended March 31,
1997 was 41.6% compared to 39.8% for the same period last year, an increase of
1.8%. Gross margins on higher volumes of aloe based product both in the
nutrition and dietary and beauty and hygiene lines sold in the Pacific Rim in
the three months ended March 31, 1996 were offset by lower volumes of a mix of
products with lower gross margins.
Selling, general and administrative expenses for the three months ended
March 31, 1997 were $288,027 or 55.9% of net sales compared to $251,941 or 32.1%
of net sales for the same period last year. This represents an overall increase
of 14.3%. Legal Fees of $46,573 were the largest portion of selling, general and
administrative expenses, representing 9% of net sales. Sales commissions as a
percentage of net sales decreased slightly due to lower commissions compared to
the first quarter of 1996. The Company also accrued and paid performance bonuses
to two of its officers in the first quarter of 1997 totalling $39,000. Bonus
plans were not in effect in the first quarter of 1996.
Net loss before income taxes for the three months ended March 31, 1997
was $(40,376) or $(.002) per share compared to net income of $59,740 or $.004
per share for the same period last year.
A current income tax benefit of $26,000 was recognized in the first
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 first quarter of 1997.
Other Information
Interest expense for the three months ended March 31, 1997 was $222
compared to $21,717 for the same period last year. The decrease is due to the
payoff of notes payable in the second quarter of 1996. The balance of notes
payable and interest payable at March 31, 1997 was zero.
Total miscellaneous income for the three months ended March 31, 1997 as
compared to the same period last year decreased from $17,038 to $282. The
decrease of $16,756 is mainly due to benefits recognized in the first quarter of
1996 from settlements of amounts payable from 1995.
The majority of the Company's interest revenue was generated by the
interest due from contracts with the sale of the right to distribute and use the
products in the Aurore-B Line to Royal Products, Inc.
Subsequent to March 31, 1997, product from a sale made in 1996 was
returned. The Company accrued a $27,200 allowance against accounts receivable
for the return of the product. This amount represents the difference between the
sale amount and the cost of the product.
Capital Expenditures
During the three months ended March 31, 1997, the Company had not
incurred material expenditures for property and equipment.
-8-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
Liquidity and Capital Resources
As of the three months ended March 31, 1997, the Company had $1,000,257
in current assets of which $158,817 or 15.9% was cash. Total current liabilities
for the same period totalled $291,110. This represents a ratio of current assets
to current liabilities of 3.44 for the three months ended March 31, 1997. 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 $9,351 of discounts under
these agreements in the three months ended March 31, 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. Recently, due to good relations with 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 in 1997.
The Company may require additional capital and may attempt to raise
capital through the sale of preferred and common stock and through private
placements in the short and long term. The Company may continue to obtain
financing through loans.
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<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 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, could 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
management had determined that options to purchase 1,000,000 shares of the
Company's common stock, allegedly granted to Mr. Shannon on January 1, 1993,
were invalid. As anticipated by the Item 3 disclosure, Mr. Shannon filed a
demand for arbitration with the American Arbitration Association on April 15,
1997 seeking a determination that the alleged options are valid and in effect
until January 1, 1998, for compensatory damages based upon the Company's refusal
of his attempt to exercise a portion of the options in February 1997 and for his
costs and attorneys' fees. On April 28, 1997, the Company answered Mr. Shannon's
demand and moved to dismiss the arbitration. The Company seeks the dismissal of
the arbitration and an award of its attorneys' fees and costs.
On April 28, 1997, the Company filed an action in Maricopa
County Superior Court against Mr. Shannon, the Company's former Chairman and
continuing substantial shareholder, and his affiliated company entitled Baywood
International, Inc. v. John Arthur Shannon and Darlene Shannon, Royal Products,
Inc. et al, CV 97-07724. The Company's complaint alleges claims against certain
or all of the defendants for breaches of fiduciary duty, fraudulent issuance of
securities, misappropriation and conversion of corporate assets, self-dealing in
issuing stock for overvalued or worthless intangibles, fraudulent transfer of
assets, fraud, constructive fraud and negligent misrepresentation. The Company
seeks the cancellation of certain of the Shannons' shares, indemnification,
punitive damages, pre- judgement and post-judgement interest and the Company's
costs and attorneys' fees.
Item 2 - Changes in Securities
---------------------
None
Item 3 - Defaults upon Senior Securities
-------------------------------
None
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 10, 1997, the Company held its Annual Meeting of
Stockholders (the "Annual Meeting"). The following matters were voted on at the
Annual Meeting:
1. The directors of the Company were all elected by the
following votes:
NAME VOTES FOR WITHHELD
---- --------- --------
Harvey Turner 11,708,369 3,945,148
Neil Reithinger 11,662,869 3,990,648
Karl Rullich 11,150,119 4,503,398
Stephen Kuehn 14,891,708 761,809
Glen Holt 11,134,869 4,518,648
Dr. Michael Shapiro 11,657,869 3,995,648
-11-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
2. The appointment of King, Weber & Associates, P.C. as the
Company's independent auditors for the fiscal year ending December 31, 1997 was
ratified by the following votes:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
15,504,547 88,403 60,567
3. The Change of Domicile from Nevada to Arizona was approved
with the following votes:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
6,341,869 4,541,632 92,040
4. The 1 for 2 1/2 Reverse Stock Split was approved with the
following votes:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
10,253,575 5,065,407 38,985
The foregoing matters are described in detail in the
Registrant's definitive proxy statement dated March 17, 1997, for the Annual
Meeting of Stockholder's held on April 10, 1997 and corrective letter to
shareholders dated March 21, 1997 and filed by amendment to Schedule 14A on
March 21, 1997.
Item 5 - Other Information
-----------------
As disclosed in the Company's prior periodic reports, on May
8, 1996, the Company issued 800,000 preferred shares in a private placement to
Linda Lee 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. On May 5,
1997, the Company's management reached a preliminary agreement with Linda Lee's
representative by which the right of redemption will be cancelled and the right
of conversion to common stock deferred until May 8, 1998 and Ms. Lee will
receive a stock dividend of 120,000 additional preferred shares which would also
be available for conversion on May 8, 1998. The deferment transaction is subject
to the negotiation of formal instruments and documents acceptable to Ms. Lee and
the Company's Board of Directors.
The Company's prior background disclosures regarding its
Directors and Executive Officers is amended to reflect that Mr. Turner did not
receive a degree from Washington University at St.
Louis, Missouri.
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
None
-12-
<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)
/s/ Harvey Turner Date: May 13, 1997
- ---------------------------------------
Harvey Turner
Chairman of the Board,
President & C.E.O.
/s/ Neil Reithinger Date: May 13, 1997
- ---------------------------------------
Neil Reithinger
Chief Financial Officer,
Secretary & Treasurer
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 806175
<NAME> Baywood International, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 158,817
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<CURRENT-LIABILITIES> 291,110
<BONDS> 0
0
835,000
<COMMON> 17,498
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<INCOME-PRETAX> (66,376)
<INCOME-TAX> (26,000)
<INCOME-CONTINUING> (40,376)
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</TABLE>
