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, 1998 0-22024
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, 1998, 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, 1998 3
Statements of Operations for the three months ended March 31, 1998
and 1997 4
Statements of Cash Flows for the three months ended March 31, 1998
and 1997 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 12
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 14
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
BALANCE SHEET
-------------
March 31, 1998
ASSETS
------
CURRENT ASSETS
Cash and equivalents $ 268,849
Accounts receivable 508,189
Inventories 23,385
Prepaid expenses and other current assets 17,674
-----------
Total current assets 818,097
-----------
PROPERTY & EQUIPMENT
Furniture, fixtures, computers and equipment
(net of accumulated depreciation of $83,762) 11,617
-----------
OTHER ASSETS
Deferred income taxes 150,000
Contracts & marketing rights
(net of accumulated amortization of $76,679) 78,221
Formulas & product lines
(net of accumulated amortization of $76,679) 78,221
-----------
Total other assets 306,442
-----------
Total assets $ 1,136,156
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 77,108
Sales commissions payable 25,630
Accrued liabilities 30,000
-----------
Total current liabilities 132,738
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value,
10,000,000 shares authorized, 1,055,000
shares issued and outstanding 1,055,000
Common stock, $.001 par value, 50,000,000
shares authorized, 17,498,115 shares
issued and outstanding 17,498
Additional paid-in capital 5,314,139
Accumulated deficit (5,383,219)
-----------
Total stockholders' equity 1,003,418
-----------
Total liabilities and stockholders' equity $ 1,136,156
===========
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 754,862 $ 515,371
COST OF SALES 446,000 301,153
------------ ------------
Gross profit 308,862 214,218
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing expenses 106,990 55,302
General and administrative expenses 78,382 220,040
Depreciation and amortization 11,729 12,685
------------ ------------
Total selling, general and administrative expenses 197,101 288,027
------------ ------------
Operating profit (loss) 111,761 (73,809)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 5,220 7,373
Miscellaneous income -- 282
Interest expense -- (222)
------------ ------------
Total other income 5,220 7,433
------------ ------------
INCOME BEFORE INCOME TAXES 116,981 (66,376)
INCOME TAX BENEFIT -- 26,000
------------ ------------
NET INCOME (LOSS) $ 116,981 $ (40,376)
============ ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ **
============ ============
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ * $ **
============ ============
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 17,498,115 18,333,115
============ ============
</TABLE>
* Less than $ .01 per share
** Less than $ (.01) per share
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 116,981 $ (40,376)
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization 11,729 12,685
Changes in assets and liabilities:
(Increase) in accounts receivable (233,739) (54,623)
(Increase) in interest receivable -- (3,673)
(Increase) decrease in inventory (994) 3,985
(Increase) Decrease in prepaid expenses 2,950 (36,988)
(Decrease) in accounts payable and accrued liabilities (296,984) (491,145)
--------- ---------
Net cash (used) by operating activities (400,057) (610,135)
--------- ---------
CASH AND EQUIVALENTS (USED) DURING PERIOD (400,057) (610,135)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 668,906 768,952
========= =========
CASH AND EQUIVALENTS, END OF PERIOD $ 268,849 $ 158,817
========= =========
</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, 1998 and the results of
operations for the three months ended March 31, 1998 and 1997 and the cash flows
for the three months ended March 31, 1998 and 1997. 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 1997 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 1997 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
Baywood International, Inc. (the "Company"), develops, markets and
distributes nutritional supplements and skin care products. The Company had
expanded its product lines into fragrances for men and women and into animal
health products for horses and domestic pets. Due to the higher demand and
market potential of nutritional supplements and skin care products, the Company
significantly scaled down its efforts to promote and sell the fragrance and
animal health lines.
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 the Pacific Rim Countries (China, Malaysia,
Hong Kong, Taiwan and Indonesia) as well as Europe (Italy, Germany, Austria,
England and Switzerland). Establishing distribution into health food stores,
chain drug stores, grocery chains and network marketing companies
internationally and in the United States is also part of the Company's marketing
strategy. At this time, the Company is focused on strengthening its
international distribution, building its distribution of branded products
through health food stores in the United States and acquiring or merging with
other companies in the natural products business. All of the Company's products
are currently manufactured by third party manufacturers.
The Company's principal executive offices are located at 14950 North
83rd Place, Suite 1, Scottsdale, Arizona 85260 and its telephone number is (602)
951-3956.
The Company's main dietary supplement products include bee pollen, bee
propolis, royal jelly and a freeze dried aloe vera and mineral drink. The
Company includes as separate products multiple sizes and potencies of certain
products. At any point depending on customer demand or market opportunity, the
Company may add to its dietary supplement line of products making the number of
products and the mix in the types of products sensitive to change constantly
toward the demands of what customers or the markets desire. The Company's most
popular product is a freeze dried aloe vera and mineral drink under the brand
name, Aloe-Minerals Plus(TM), which is part of the Company's Royal(TM) Line.
This line is the primary name under which most of the Company's dietary
supplements are sold internationally. Depending on the demands of a particular
customer, the Company may also supply most products unlabeled, in bulk or under
a private label. Although the Company considers the potential of unlabeled or
privately labeled products to be substantial, emphasizing the Company's own
branded products for presentation to the international and domestic market is
important toward the Company's recognition in the natural products industry.
The Company's dietary supplement products also include products that
target specific nutritional needs, or what are referred to as nutriceuticals.
These products are being marketed through the Company's natural healthcare line.
The main product in this line is a cholesterol product designed and marketed to
maintain healthy cholesterol. Under the Company's Royal(TM) Line marketed
internationally, this product is called Count Down 200(TM). This product is also
marketed under another brand name internationally called LDL Tab(TM).
Domestically, this is the Company's first product called Beta-s(TM) and it is
being marketed into health food stores across the United States. The Company
intends to build upon the successful launch of this product into the United
States through the introduction of other products for the natural healthcare
line including those products which are formulated for certain needs such as
joint support, allergy, cardiovascular support, memory and concentration, mood
support, energy, eyes,
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
immune system support, snore relief and a potent antioxidant.
In addition to dietary supplements, the Company also has a line of skin
care products. The main products in this line are marketed together as a facial
system and include a cleanser, lift powder with activator, toner and a nurture
cream. The products are aloe vera based and are primarily marketed under the
Company's La Vraie(TM) brand line.
Results of Operations
Net sales for the three months ended March 31, 1998 were $754,862
compared to net sales of $515,371 for the same period last year, an increase of
$239,491 or 46.5%. The increase in net sales for the three months ended March
31, 1998 is due to higher volumes of the Company's freeze dried aloe vera and
mineral drink, Aloe-Minerals Plus(TM), sold to one major customer in China. This
major customer is a direct marketing company and accounted for $754,790 of net
sales for the three months ended March 31, 1998.
Dependence on One Customer. Sales to one principal customer in China
accounted for all of the Company's net sales in the quarter ended March 31,
1998. 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. The Company has not received any
orders from this customer since the end of the quarter ended March 31, 1998.
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 located in Colorado accounted for 100%
of product purchases in the quarter ended March 31, 1998. The Company's other
supplier located in Texas accounted no product purchases in the quarter ended
March 31, 1998.
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 supplier could have a significant adverse impact
on the Company's operations.
Recently, the Chinese government has announced a ban on direct
marketing firms in China. This decision by the Chinese government which affects
the Company's current major and other customers has been met with opposition by
a U.S. Trade Representative on behalf of direct marketing companies such as
Amway, Avon Products and Mary Kay according to several publications in an effort
to convince Beijing to distinguish between legitimate direct marketing firms'
practices as opposed to the proliferation of other pyramid and illegal business
practices. As the Company proceeds into the second and coming quarters of 1998,
it may face diminished revenues and profits due to this recent ban as the
Company attempts to replace that business. The Company cannot project the short
term and long term effects of
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
this issue, if any. There have been similar restrictions put in effect by the
Chinese government in the past. However, the Company's concentration in China is
now much greater.
International sales for the three months ended March 31, 1998
represented 100% of the Company's net sales compared to 98.8% 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 1998, accounting for 100%
of gross sales. 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 months ended March 31,
1998 was 40.9% compared to 41.6% for the same period last year, an overall
decrease of .7% for the three months.
Selling, general and administrative expenses for the three months ended
March 31, 1998 were $197,101 or 26.1% of net sales compared to $288,027 or 55.9%
of net sales for the same period last year. This represents a decrease of 29.8%
on net sales. Overall corporate expenditures have decreased compared to the same
period last year inclusive of administrative salaries, legal fees, bad debt
expense and rent. Legal Fees of $19,562 were the largest portion of selling,
general and administrative expenses for the three months ended March 31, 1998,
representing 2.6% of net sales. Although certain legal proceedings continue,
legal fees for the three month period ended March 31, 1998 were less than fees
of $46,573 in the three months ended March 31, 1997. Management anticipates
legal fees to be less significant for 1998. Sales commissions as a percentage of
net sales decreased due to lower commission rates negotiated by the Company
compared to the period ended March 31, 1997.
Net income for the three months ended March 31, 1998 was $116,981 or
$.01 per share compared to a net loss of $(40,376) or less than $(.01) per share
for the same period last year. Reductions in selling, general and administrative
expenses along with increased revenues were the main factors affecting net
income.
A current income tax provision of $32,000 in the first quarter of 1997
was offset by utilization of net operating loss carryforwards.
The Company's reliance on computer information systems is such that it
does not anticipate that the so-called "year 2000 problem" will have any
material, adverse effect on its financial condition, operation or financial
statements. The Company is not aware of any significant problems being
encountered by its customers and vendors.
Other Information
The Company's interest revenue was generated from interest earned on
the Company's invested cash balance.
-9-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
Capital Expenditures
During the three months ended March 31, 1998, the Company had not
incurred material expenditures for property and equipment.
Liquidity and Capital Resources
As of March 31, 1998, the Company had $818,097 in current assets of
which $777,038 or 95.0% was cash and receivables. Total current liabilities for
the same period totalled $132,738. This represents a ratio of current assets to
current liabilities of 6.2 at March 31, 1998. Accounts receivable at March 31,
1998 increased to $531,118 from $274,450 at December 31, 1997. The Company's
primary customer in China accounted for $510,187 of this balance at March 31,
1998 of which all has been collected. 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 $6,098 of discounts under
these agreements in the three months ended March 31, 1998. The Company believes
that as it increases its sales volume, liquidity will improve. 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 of certain Far
Eastern (Malaysia, Taiwan and Indonesia) countries. 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.
Management believes that there is adequate liquidity to continue the
introduction of new products and to provide for the necessary marketing to new
and prospective customers despite the uncertainties related to governmental
regulations in China which may affect its sales to its primary Chinese customer.
-10-
<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. In particular, China's recent ban on direct marketing
could materially affect sales to the Company's main customer. 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.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
-----------------
A full description of the Company's material legal proceedings was
provided under Part I, Item 3 of the Company's Annual Report on Form 10-KSB for
the fiscal year December 31, 1997. No new reportable events or material
developments have occurred in the first quarter except for the following:
As previously reported in the Company's Annual Report, on March 3,
1997, former director and officer Georgia Aadland filed a demand for arbitration
against the Company with the American Arbitration Association. Ms. Aadland seeks
$210,374 plus interest, attorney's fees and costs for breach of an employment
agreement. A hearing has now been sent for July 14 through 16, 1998. The Company
intends to vigorously defend against Ms. Aadland's claims and, at this stage of
the proceeding, no prediction can be made of the likelihood of an unfavorable
outcome and no estimate can be made of the amount or range of potential loss, if
any.
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
-----------------
None
-12-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
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 *****
27.1 Financial Data Schedule Exhibit filed herewith
Method of Filing
</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.
**** 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
On February 25, 1998, the Company filed a Current Report on
Form 8-K regarding Mr. Turner's resignation as a Director.
-13-
<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/ Neil Reithinger Date: May 14, 1998
- ------------------------------------------
Neil Reithinger
Chairman of the Board,
President, C.E.O. and Principal Accounting
Officer
-14-
<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-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 268,849
<SECURITIES> 0
<RECEIVABLES> 531,118
<ALLOWANCES> 22,929
<INVENTORY> 23,385
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<PP&E> 11,617
<DEPRECIATION> 83,762
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<CURRENT-LIABILITIES> 132,738
<BONDS> 0
0
1,055,000
<COMMON> 17,498
<OTHER-SE> (69,080)
<TOTAL-LIABILITY-AND-EQUITY> 1,136,156
<SALES> 754,862
<TOTAL-REVENUES> 754,862
<CGS> 446,000
<TOTAL-COSTS> 197,101
<OTHER-EXPENSES> (5,220)
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 116,981
<INCOME-TAX> 0
<INCOME-CONTINUING> 116,981
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,981
<EPS-PRIMARY> 0.01
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</TABLE>
