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
--------------------- ----------------------
June 30, 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 June 30, 1998, there were 24,899,702 shares of Baywood International,
Inc. common stock, $.001 par value outstanding.
<PAGE>
BAYWOOD INTERNATIONAL, INC.
INDEX
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Page
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheet as of June 30, 1998 3
Statements of Operations for the three and six months ended June 30,
1998 and 1997 4
Statements of Cash Flows for the three and six months ended June 30,
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 13
Item 4 - Submission of Matters to a Vote of Security Holders 13
Item 5 - Other Information 14
Item 6 - Exhibits and Reports on Form 8-K 14
SIGNATURES 16
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
BALANCE SHEET
-------------
June 30, 1998
ASSETS
------
CURRENT ASSETS
Cash and equivalents $ 554,239
Accounts receivable 1,097
Inventories 22,532
Prepaid expenses and other current assets 12,174
-----------
Total current assets 590,042
-----------
PROPERTY & EQUIPMENT
Furniture, fixtures, computers and equipment
(net of accumulated depreciation of $87,747) 7,632
-----------
OTHER ASSETS
Deferred income taxes 150,000
Contracts & marketing rights
(net of accumulated amortization of $80,552) 74,348
Formulas & product lines
(net of accumulated amortization of $80,551) 74,349
-----------
Total other assets 298,697
===========
Total assets $ 896,371
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 77,489
Customer deposits 4,195
Accrued liabilities 30,000
-----------
Total current liabilities 111,684
-----------
STOCKHOLDERS' EQUITY
Preferred Stock, $1 par value,
10,000,000 shares authorized, 35,000 35,000
shares issued and outstanding
Common stock, $.001 par value, 50,000,000
shares authorized, 24,899,702 shares
issued and outstanding 24,900
Additional paid-in capital 6,326,737
Accumulated deficit (5,601,950)
-----------
Total stockholders' equity 784,687
===========
Total liabilities and stockholders' equity $ 896,371
===========
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
3 Months Ended June 30, 6 Months Ended June 30,
1998 1997 1998 1997
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
NET SALES $ 7,466 $ 782,118 $ 762,328 $ 1,297,489
COST OF SALES 3,522 489,694 449,522 790,846
----------- ----------- ----------- -----------
Gross profit 3,944 292,424 312,806 506,643
----------- ----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing expenses 86,000 94,277 192,991 149,580
General and administrative expenses 133,751 121,312 212,133 341,352
Depreciation and amortization 11,730 12,685 23,459 25,371
----------- ----------- ----------- -----------
Total selling, general and administrative expenses 231,481 228,274 428,583 516,303
----------- ----------- ----------- -----------
Operating profit (loss) (227,537) 64,150 (115,777) (9,660)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 7,553 7,223 12,648 14,597
Miscellaneous income 1,253 6,333 1,379 6,615
Interest expense -- -- -- (222)
----------- ----------- ----------- -----------
Total other income 8,806 13,556 14,027 20,990
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (218,731) 77,706 (101,750) 11,330
PROVISION FOR INCOME TAXES -- (26,000) -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (218,731) $ 51,706 $ (101,750) $ 11,330
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ (0.01) $ * $ * $ *
=========== =========== =========== ===========
DILUTED NET INCOME (LOSS) PER COMMON SHARE $ ** $ * $ ** $ *
=========== =========== =========== ===========
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 20,143,728 18,333,115 18,828,230 18,333,115
=========== =========== =========== ===========
</TABLE>
* less than $.01 per share
** antidilutive
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
3 Months Ended June 30, 6 Months Ended June 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (218,731) $ 51,706 $ (101,750) $ 11,330
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization 11,730 12,686 23,459 25,372
Inventory write-down for samples and shrinkage -- 12,000 -- 12,000
Changes in assets and liabilities:
Decrease in accounts receivable 507,092 283,704 273,353 229,081
(Increase) in interest receivable -- (3,672) -- (7,345)
(Increase) decrease in inventory 853 (36,253) (141) (29,374)
(Increase) decrease in prepaid expenses 5,500 19,614 8,450 (20,268)
Increase in customer deposits 4,195 -- 4,195 --
(Decrease) in accounts payable and accrued liabilities (25,249) (50,276) (322,233) (541,422)
----------- ----------- ----------- -----------
Net cash provided by (used) by operating activities 285,390 289,509 (114,667) (320,626)
----------- ----------- ----------- -----------
CASH AND EQUIVALENTS
PROVIDED BY (USED) DURING PERIOD 285,390 289,509 (114,667) (320,626)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 268,849 158,817 668,906 768,952
=========== =========== =========== ===========
CASH AND EQUIVALENTS, END OF PERIOD $ 554,239 $ 448,326 $ 554,239 $ 448,326
=========== =========== =========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Conversion of preferred stock to common stock: $ 1,020,000 $ -- $ 1,020,000 $ --
=========== =========== =========== ===========
</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 June 30, 1998 and the results of
operations for the three and six months ended June 30, 1998 and 1997 and the
cash flows for the three and six months ended June 30, 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. Since its inception,
the Company has directed most of its sales efforts toward international markets
and had 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 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 in the past had been 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 had been 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 most recently completed a new line of dietary supplements
for introduction through the health food store market in the United States. This
new line of nutraceuticals follows the Company's introduction of Beta-s(TM),
formulated to maintain healthy cholesterol levels. Beta-s(TM) had also been
marketed internationally under the Count Down 200(TM) name. This new line of
products is formulated with what the Company considers the most effective
ingredients and dosages to target specific needs of consumers. The products
include sinuS(TM) for soothing sinus support, anti-OX(TM) as a powerful
antioxidant for molecular and cellular protection, energy+(TM) for support
against fatigue, joints(TM) for connective tissue and joint support,
stop-snore(TM) for relief of snoring, eyeZ(TM) for support for healthy vision,
memor-E(TM) for memory and brain support, cardio-V(TM) for healthy
cardiovascular support, immune+(TM) for immune system support and moodZ(TM) for
natural mood enhancement. All of these products are intended for domestic and
international distribution through the Company's new marketing program and
existing and new distributors.
The Company has also entered into an agreement with two other
individuals who have experience in the Chilean as well as South American market.
A Chilean company was formed in Santiago, Chile called Baywood Nutritionals S.A.
The Company owns 41% of Baywood Nutritionals
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
S.A. This company is intended to be the marketing and distribution center for
two lines of nutritional products into two separate areas of the Chilean market.
It is expected that a sports nutrition line will be sold through health clubs
and gyms and a nutraceutical line will be sold through physicians. Each line
will be developed and marketed as a Company brand as part of establishing the
continued brand penetration and recognition of the Company's products into the
international market. The Company expects to begin sales of these products in
the late part of the third quarter. The Chilean company is also expected to be
the Company's avenue for penetration into other potential Latin American
markets.
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 and six months ended June 30, 1998 were $7,466
and $762,328, respectively, compared to net sales of $782,118 and $1,297,489,
respectively, for the same period last year, a decrease of $774,652 or 99% and
$535,161 or 41.3%. The decrease in net sales for the three and six months ended
June 30, 1998 is entirely due to the recent ban on network marketing companies
in China where the Company's freeze dried aloe vera and mineral drink,
Aloe-Minerals Plus(TM), was sold to one major customer. This major customer is a
direct marketing company and accounted for $754,790 or 99% of net sales for the
six months ended June 30, 1998.
Dependence on One Customer. 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. There have been similar
restrictions put in effect by the Chinese government in the past. As the Company
had previously reported in its March 31, 1998 10-QSB and a subsequent news
release, sales to one principal customer in China accounted for all of the
Company's net sales in the quarter ended March 31, 1998. This recent ban has
forced the Company to discontinue its distribution of products to that customer.
The Company is attempting to expand its customer base both domestically and
internationally through a new business strategy implemented in the first quarter
of this year, but expects that it could take a significant amount of time in
order to replace that business. The Company's Chinese customer could continue to
order again at any time as regulations change or as efforts to change
distribution channels become successful. Any continuing potential problems with
the ban on network marketing in China could have a long-term and substantial
adverse impact on the Company's business in that area. U.S. network marketing
companies operating in China such as Amway and Avon including the Company's
customer, have since received approval by the Chinese Government to resume
operations under a modified marketing concept of direct selling. The Company has
not received any orders from this customer since the end of the quarter ended
March 31, 1998.
The Company specifically began working to diversify its customer base
in the late part of 1997. Management believes that these efforts will be
successful as evidenced by the Company receiving smaller orders in the third
quarter of 1998 from new customers for new products.
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<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 located in Colorado accounted for 100%
of product purchases in the six months ended June 30, 1998. The Company's other
supplier located in Texas accounted for no product purchases in the quarter
ended June 30, 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.
International sales for the three and six months ended June 30, 1998
represented 60% and 99.6% of the Company's net sales. Distribution of the
nutrition and dietary line remains as the main source of revenue for the first
six months of 1998, accounting for 100% of gross sales. The Company is
continually focused on building a broader customer base so that its historical
reliance on a few major customers 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 six months ended
June 30, 1998 was 52.8% and 41%, respectively, compared to 37.4% and 39.1% for
the same period last year, an overall increase of 1.9% for the six months. The
increase in gross margin percentage in the three months ended June 30, 1998 as
compared to the same period last year is due to the higher gross margin
percentages on sales of product into the domestic market.
Selling, general and administrative expenses for the three and six
months ended June 30, 1998 were $231,481 and $428,583, respectively, compared to
$228,274 and $516,303 for the same period last year. This represents an overall
decrease of $87,720 for the six month period. Overall corporate expenditures
have decreased compared to the same period last year inclusive of administrative
salaries, legal fees, bad debt expense and rent. Advertising and new product
development expenses of $76,546 were the largest portion of selling, general and
administrative expenses for the six month period ended June 30, 1998,
representing 10% of net sales. Sales commissions as a percentage of net sales
decreased due to lower commission rates negotiated by the Company compared to
the period ended June 30, 1997.
Net loss for the three and six months ended June 30, 1998 was
$(218,731) or $(.01) per share and $(101,750) or less than $(.01) per share,
respectively, compared to net income of $51,706 or less than $.01 per share and
$11,330 or less than $.01 per share for the same period last year.
A current income tax benefit of $76,000 and $35,000 for the three and
six months ended June 30, 1998, respectively, was offset by an equal increase in
the deferred tax asset valuation allowance.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
The Company's reliance on computer information systems is such that it
does not anticipate that the "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.
Capital Expenditures
During the three and six months ended June 30, 1998, the Company had
not incurred material expenditures for property and equipment.
Liquidity and Capital Resources
As of June 30, 1998, the Company had $590,042 in current assets of
which $555,336 or 94.1% was cash and receivables. Total current liabilities for
the same period totalled $111,684. This represents a ratio of current assets to
current liabilities of 5.3 at June 30, 1998. Accounts receivable at June 30,
1998 decreased to $1,097 from $531,118 at March 31, 1998. 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 had fluctuated significantly based on the
timing of these transactions. 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 $6,125 of discounts under these agreements in the six months ended
June 30, 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 strength of the U.S. Dollar against major foreign currencies around
the world has had some adverse effect on the Company's sales. This currency
problem is presently magnified in countries such as Indonesia, Malaysia, Taiwan,
South Korea, Japan, Thailand and the Philippines where historically the Company
has not had significant sales. Countries such as China and Hong Kong have not
yet experienced devaluation of their currencies against the U.S. Dollar where
the Company has had significant sales. Any future change in currency
fluctuations could adversely affect sales.
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 has affected its sales to its primary Chinese
customer. Management believes that it may have to obtain additional working
capital through debt or equity financing in order to significantly increase the
Company's sales growth of new products into new distribution channels.
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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, 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 have
continued to 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
-----------------
As set forth in the Company's Annual Report, the Company was included
as a defendant in a New York state court action filed October 10, 1995 by St.
Anthony's Parish of Somerville, Massachusetts and other plaintiffs against
Krystal Kleer, Inc. The lawsuit was dismissed on March 20, 1996 in favor of an
Arizona federal court action filed February 29, 1996. Plaintiffs seek
compensatory and punitive damages of $900,000 against the Company and other
defendants. Plaintiffs have obtained a judgment against Krystal Kleer, Inc. in
the amount of $645,000 and are seeking to collect damages from the Company on
the theory that the Company was involved in a fraudulent transfer in connection
with the issuance of common stock in exchange for certain equipment, fixtures
and furnishings of Krystal Kleer, Inc. The Company has obtained an expert
opinion that the Company's transaction with Krystal Kleer, Inc. was unfair to
the Company and not to Krystal Kleer, Inc. The court denied the Company's motion
to dismiss at this time and set the case for trial on September 29, 1998. The
plaintiffs have now also amended their complaint to include an additional
$100,000 unjust enrichment claim against the Company for benefits it allegedly
received pursuant to certain loans made from the plaintiffs to Krystal Kleer,
Inc. The Company appears to have a strong basis for and intends to vigorously
pursue its defenses. At this stage of the proceeding, not 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.
As set forth 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.
The hearing has been postponed and is now set for October 28, 1998. The Company
intends to vigorously defend against Ms. Aadland's claim 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.
As set for in the Company's Annual Report, 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 ("Exchange Act"). 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-judgement interest and the Company's costs
and attorneys' fees. The Company moved for summary judgement on a portion of
Shannon's transactions that he has not yet publicly disclosed. The court granted
the Company's motion for partial summary judgment and awarded approximately
$8,040 to the Company. The Company is in the process of obtaining a final
judgment and intends to move for interest and attorney's fees pursuant to the
judgment.
Item 2 - Changes in Securities
---------------------
As previously disclosed under Item 11 - "Changes in Control" of the
Company's Annual Reports on Form 10-KSB for the fiscal years ended December 31,
1997 and 1996 and on Form 8-K filed May 28, 1998, on April 11, 1997, the Company
issued 1,466,147 shares of Common Stock and 800,000 shares of
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BAYWOOD INTERNATIONAL, INC.
Class "B" Preferred Stock to Linda Lee, a citizen of Hong Kong, China, in a
private placement in exchange for $800,000 cash. Hong Kong investor Francis
Choi, or Choi Chee Ming, is a relative of Ms. Lee and the beneficial owner of
the 1,466,147 shares of Common Stock and the 800,000 shares of Preferred Stock.
The original 800,000 shares of Class "B" Preferred Stock were
redeemable for cash or convertible to shares of Common Stock on May 8, 1997. On
May 5, 1997, the Company reached an agreement with Ms. Lee to exchange her
800,000 shares of Class "B" Preferred Stock for 800,000 shares of Class "C"
Preferred Stock which would no longer be redeemable for cash and which would not
be convertible to Common Stock until one year later, or May 8, 1998. In
consideration for this transaction, the Company agreed to issue Ms. Lee 120,000
additional shares of Class "C" Preferred Stock, with the same conversion
privileges, as a Preferred Stock dividend. The 920,000 Class "C" Shares are
convertible into that number of shares which results from $920,000 divided by
the average price of the Company's shares of Common Stock for the three months
prior to May 8, 1998, as set forth in paragraphs 1(a) and 1(b) (i) of the
"Certificate Describing Rights and Restrictions of Class "C" Preferred Shares"
filed with the Secretary of State of Nevada and included as Exhibit 4.5 to the
Company's Annual Report on form 10-KSB for the fiscal year ended December 31,
1997.
On May 12, 1998, Mr. Choi, as beneficial owner of the shares held in
the name of Ms. Lee, confirmed to the Company his intention to convert the
920,000 shares of Class "C" Preferred Stock to shares of Common Stock and
thereafter tendered the certificates for conversion. According to the conversion
rights of the Class "C" Preferred Shares, and based upon an average share price
of $0.126 per share of the Company's Common Stock prior to May 8, 1998, Mr. Choi
received 7,301,587 shares of Common Stock upon conversion. The restrictive
legend placed on the shares states that the shares are subject to resale
restrictions and may be resold only pursuant to a registration statement or in
reliance upon a valid exemption from registration. After the conversion, Mr.
Choi now beneficially owns 8,767,737 or 35.21% of the Company's resultant
24,899,702 issued and outstanding shares of Common Stock.
The Company knows of no arrangements or understandings between Mr. Choi
and Ms. Lee with respect to election of directors. No special arrangements exist
between the Company or its Management and Mr. Choi or Ms. Lee with respect to
election of directors.
Item 3 - Defaults upon Senior Securities
-------------------------------
None
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On May 29, 1998, the Company held its Annual Meeting of Stockholders
(the "Annual Meeting"). The following matters were voted on at the Annual
Meeting:
-13-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
1. The directors of the Company were all elected by the following
votes:
NAME VOTES FOR WITHHELD
---- --------- --------
Neil Reithinger 11,959,236 1,962,818
Karl Rullich 11,189,236 2,732,818
Glen Holt 11,660,736 2,261,318
Dr. Michael Shapiro 11,964,736 1,957,318
Dr. David Franey 11,964,711 1,957,343
Dr. Denise Forte-Pathroff 11,964,736 1,957,318
2. The appointment of King, Weber & Associates, P.C. as the Company's
independent auditors for the fiscal year ending December 31, 1998 was ratified
by the following votes:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
11,510,035 1,766,117 645,902
3. The 1998 Non-Employee Director Stock Option Plan was approved with
the following votes:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
10,820,189 3,020,281 81,584
4. The 1 for 3 through 10 Reverse Stock Split was approved with the
following votes:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
9,743,705 4,164,797 13,552
5. The authority to vote on any business that may properly come before
the meeting was approved with the following votes:
VOTES FOR VOTES AGAINST ABSTAIN
--------- ------------- -------
11,241,986 2,520,421 159,647
The foregoing matters are described in detail in the Registrant's
definitive proxy statement dated April 29, 1998, for the Annual Meeting of
Stockholder's held on May 29, 1998.
Item 5 - Other Information
-----------------
None
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
-14-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
<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 *****
10.1 Distribution and Licensing Agreement Exhibit filed herewith
10.2 Shareholder Agreement 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.
**** 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 May 28, 1998, the Company filed a Current Report on Form
8-K regarding the conversion of Mr. Choi's Class "C" Preferred Stock into the
Company's Common Stock.
-15-
<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: August 13, 1998
--------------------------------------
Neil Reithinger
Chairman of the Board,
President, C.E.O. and Principal Accounting
Officer
-16-
DISTRIBUTION AND LICENSING AGREEMENT
This DISTRIBUTIQN AND LICENSING AGREEMENT (the "Agreement") is made and
entered into as of this 12th day of May, 1998 by and between BAYWOOD
INTERNATIONAL, LTD., a Nevada corporation ("BII") and BAYWOOD NUTRITIONALS, SA.,
a(n) CHILOAN corporation ("BNSA").
WHEREAS: BII is a marketer of health and nutrition products and other
BII-authorized products (collectively referred to herein as "BII Products") and
desires to contract with BNSA for the sales and marketing of BII Products in
Mexico, Central America and South America (the "Territory") in accordance with
the terms and provisions of this Agreement;
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the sufficiency of which is hereby acknowledged by each of the parties
hereto, the parties hereby agree as follows:
1. TERM OF AGREEMENT. The term of this Agreement shall be in perpetuity
unless agreed otherwise by both BII and BNSA in writing within at least ninety
(90) calendar days prior to any intent not to continue this Agreement or unless
either BII or BNSA is in breach of the agreement, and such breach is not
remedied or forgiven by the other party within thirty (30) calendar days
pursuant to Section 19 herein.
2. MARKETING RIGHTS. BII hereby grants, and BNSA hereby accepts, the
exclusive right to sell and market BII Products in the Territory and a first
right of refusal to market all other products that Baywood introduces in the
Territory pursuant to the terms and provisions of this Agreement.
3. GENERAL OBLIGATIONS.
3.1 Distribution and Marketing Obligations. BNSA agrees to use
its best efforts during the term of this Agreement to actively promote,
in all lawful ways and to the maximum extent possible, the marketing
and sale of BII Products in the Territory.
3.2 Presentation of BII Products and Image. BNSA shall present
BII Products in a manner which informs such channels properly as to the
specifications, features, benefits and applications of the BII
Products.
3.3 Business Conduct. BNSA shall conduct its operations in a
manner which shall not reflect adversely upon the reputation, quality
or credibility of BII or the BII Products.
<PAGE>
3.4 Complaints. In the event that BNSA becomes aware of any
complaints, charges or claims concerning BII or the BII Products, BNSA
shall immediately notify BII of such complaints, charges or claims.
BNSA shall respond to such complaints only as directed by BII after
consultation with BII.
3.5 Compliance With Laws. BNSA shall comply with all
applicable international, national, territorial, state and local laws
and regulations in performing its duties hereunder.
3.6 BNSA Authority. BNSA shall have no authority to bind BII
by any promise or representation, unless specifically authorized in
writing to do so.
3.7 Other Product Lines. BNSA may market and sell products
other than the BII Products. It is understood that via the Board of
Directors of BNSA, BII will be informed of any such products that are
integrated as part of BNSA's marketing plan so that such products that
use BII's name are consistent with BII's direction in the natural
products industry.
4. PRICING, The current price schedule for BII Products is set forth on
Exhibit "A" attached hereto and made a part hereof. No assurance can be given by
BII as to what actual retail price for BII Products to the marketplace will be
or what the actual price margins for BII Products will be since such margins are
determined by the marketplace and customer demand, and the actual price charged
for BII Products will be independently determined. Notwithstanding the
foregoing, the pricing of the BII Products charged by BII may be subject to
change as BII's costs may change. Any such changes in the costs of products to
BII will change BII's pricing to BNSA according the same pricing structure which
includes the new cost plus 10%.
5. GENERAL BII OBLIGATIONS. BII agrees to deliver BII Products, at
BNSA's expense, to BNSA during this Agreement. BII shall also provide such
product support as, in BII's sole judgment, is reasonably required by BNSA for
BNSA's sale and marketing of the BII Products. BII shall provide the BII
Products undamaged and in a "saleable" quality. BII does not guarantee the
resale of any BII Product. Since BII Products are manufactured by third parties
and are subject to regulatory factors, trade regulations and availability of
common carriers, BII's obligation shall be to use reasonable efforts to fill all
orders. In the event of product shortages, BII may allocate available BII
Products to the third-party distributorship and retail locations specified by
BNSA based upon factors such as prior order volume, sales growth and other
criteria developed by BII in its sole discretion. All final sales and pricing
for the Products shall be at the sole and absolute discretion of BNSA.
6. PRODUCT INFORMATION. Upon the written request of BNSA, BII shall
provide BNSA with information regarding the BII Products reasonably required by
the BNSA for the sale and marketing of the BII Products.
2
<PAGE>
7. BNSA COVENANTS. WARRANTIES AND REPRESENTATIONS. BNSA acknowledges
that its strict performance of the obligations of this Agreement is essential to
the success of its sales and marketing of BII Products. BNSA therefor,
covenants, represents and warrants the following to BII:
7.1 Licenses and Permits. BNSA holds all necessary
international, national, state, territorial and local licenses and
permits (the "BNSA Permits") required for the sale and marketing of BII
Products to distributors, retail locations and directly in accordance
with applicable law. BNSA will maintain all such licenses and permits
and obtain such additional licenses and permits as may, in the future,
be required from time to time by applicable law. BNSA shall also
require all distributors and retail locations to whom it distributes to
be properly licensed for the selling of BII Products and all such sales
by such parties shall comply with applicable law.
7.2 No Actions or Proceedings. There are no actions or
proceedings pending or contemplated within the knowledge of BNSA that
would in any way jeopardize any BNSA Permits.
7.3 Authority. BNSA is in good standing under the laws of the
state, territory and nation in which it is located, has all requisite
corporate or organizational authority required to perform its
obligations under this Agreement and has taken all corporate or
organizational actions required for the performance of its obligations
under this Agreement.
7.4 No Violation of Agreements. BNSA's performance of its
obligations under this Agreement will not violate any agreement or
contract to which it is a party.
8. PRICING. ORDERS AND PAYMENT.
8.1 Product Cost. The cost of the BII Products to BNSA shall
be at Baywood's cost plus ten percent (10.0%). Currently, all BII
Products are listed on Exhibit "A" and are accepted by BNSA, and all
distributors and retail locations to whom BNSA distributes, in advance
of sales. Additions or subtractions of items are made to the product
list upon mutual agreement.
8.2 Placement of Orders. All orders for BII Products (each a
"BII Product Order" and collectively "BII Product Orders") shall be
placed by BNSA in the manner and using such systems as specified by
BII's ordering policies and procedures then in effect (the "BII Order
Policies"). BII may, from time to time, change or modify the
requirements and procedures of the BII Order Policies upon provision of
five (5) business days written notice of such changes or modifications
to BNSA. All orders are subject to acceptance by BII.
3
<PAGE>
8.3 Terms of Payment: Late Payment. Terms of payment for each
BII Product Order shall be Net 30 and payable in U.S. Dollars only. The
terms of payment shall be specified in the invoice provided by BII to
BNSA (the "BII Invoice") upon delivery of the BII Products specified by
the BII Invoice. If full payment of the amount due and owing pursuant
to a BII Invoice is not made to BII by BNSA on or before the date on
which such payment is due (the "Due Date"), BNSA shall be charged a
late fee equal to one percent (1%) per month of the total past due
payments.
9. BII POLICIES AND PROCEDURES. BII understands that the sales and
marketing programs and policies established by BNSA within the territory are
unique to that territory and that BII will be a party to any discussions via the
Board of Directors of BNSA.
10. ADVERTISING AND MARKETING MATERIALS. Except for any materials
provided to BNSA by BII, BII understands that any and all marketing or sales
materials related to the BII Products will be discussed with BII via the Board
of Directors of BNSA.
11. TRADE PRACTICES AND WARRANTIES. BNSA shall at no time engage in any
unfair trade practices with respect to BII or the BII Products and shall make no
false or misleading representations or claims with respect to BII or the BII
Products. BNSA shall refrain from communicating any representations, guarantees
or warranties with respect to the BII Products, except such as are expressly
authorized by BII in writing or are set forth in written materials provided by
BII.
12. FOREIGN CORRUPT PRACTICES ACT REPRESENTATIONS AND WARRANTIES. BNSA
acknowledges that the Company is relying upon the following representations and
warranties to determine that the distribution and licensing contemplated by this
Agreement does not violate the Foreign Corrupt Practices Act of 1977, as amended
("FCPA") or any similar federal or state law prohibiting corrupt influence of
foreign public officials or govermnents. BNSA represents and warrants that, in
conjunction with the distribution of BII Products under this Agreement, BNSA has
not, and will not take any action to further any offer, payment, promise or
giving anything of value to--
(a) any foreign official, foreign political party (or party official or
candidate) for purposes of (i) influencing any act or decision of such party or
persons in their official capacity, or (ii) inducing such party or persons to do
or omit to do any act in violation of their lawful duty, or (iii) to use their
influence with a foreign government or instrumentality thereof to affect or
influence any act or decision of such government or instrumentality, in order to
assist BII or any other U.S. person or entity domiciled or principally located
in the U.S. in obtaining or retaining business with, or directing business to,
any person; or
(b) any person, while knowing or being aware of a substantial
likelihood that all or a portion of such money or thing of value will be
offered, given, or promised, directly or indirectly, to the persons or entities
and for the purposes referred to in subsection (a)
4
<PAGE>
13. INDEPENDENT CONTRACTOR. BII and BNSA specifically agree that for
all purposes hereunder, BNSA is, and shall be deemed to be, an independent
contractor. Neither BNSA nor BNSA's employees, agents or representatives shall
be deemed to be employees, agents or representatives of BII, nor shall any of
them have the power to enter into any contract, agreement or obligation on
behalf of BII or to otherwise legally bind BII in any way, nor enlarge upon or
extend any warranty or representation regarding BII Products beyond that made by
BII or the manufacturer of such products. BNSA shall be free to devote such
portion of its time, energy and skill thereto as it shall deem fit and to such
persons, firms or businesses as it deems advisable. Nothing contained in this
Agreement shall be construed as making BNSA a joint venturer, partner, employee
or agent of BII, nor shall either party have authority to bind the other in any
manner, it being the intent of the parties that each shall remain an independent
contractor responsible for its own actions. BNSA shall be responsible for all
costs incurred by BNSA in the performance of its obligations under this
Agreement.
14. INSURANCE. LICENSES AND TAXES. BNSA shall be responsible for
obtaining and paying for any and all bonds, insurance and licenses required for
BNSA's sale and marketing of the BII Products. Except for tobacco taxes required
by the state of delivery in the United States to be paid on BII Products, which
BII shall collect and pay unless prohibited by the law in that particular state,
BNSA shall also be further responsible for the collection, payment and reporting
of any and all taxes required by any federal, state, territorial or local
government including, but not limited to, any and all sales, use, employee
withholding, use and valued added taxes.
15. CONFIDENTIAL INFORMATION. BNSA recognizes that as a result of this
relationship, BNSA has in the past and may in the future develop, obtain or
learn about certain information which is the property of BII, or which BII is
under an obligation to treat as confidential (as defined below "Confidential
Information").
a. Agreement to Protect Confidential Information. BNSA agrees
to use its best efforts and the utmost diligence to guard, protect and
keep confidential said Confidential Information, and BNSA agrees that
BNSA will not, during or for a period of three years after the period
of this Agreement, use for BNSA or others, or divulge to others any of
said Confidential Information which BNSA may develop, obtain or learn
about during or as a result of its BNSA relationship with BII, unless
authorized to do so by BII in writing or that is already in the public
domain.
b. Definition of Confidential Information. For the purposes of
this Agreement, the term "Confidential Information" shall include but
not be limited to the following: customer lists outside of the
Territory; business contacts; business plans; all intellectual property
including all patents, trademarks, trademark registration and
applications, service marks, copyrights, trade secrets, and know-how;
books and records including lists of customers outside of the
Territory; processes; technology; or any information of whatever nature
which gives to BII an opportunity to obtain an advantage
5
<PAGE>
over their competitors who do not know or use it. Additionally, any
document or information deemed to be confidential by BII under this
section shall be stamped "CONFIDENTIAL". Notwithstanding the foregoing,
both parties acknowledge that BII, as a public company, may be required
to provide notice of this Agreement in press releases and reports filed
with the Securities and Exchange Commission.
c. No Contact with BII's Customers and Others. Except as
authorized by this Agreement or otherwise by BII in writing, BNSA
agrees it shall not contact directly or indirectly any of BII's
customers outside of the Territory.
d. Injunctive Relief for Breach, In the event of a breach or
threatened breach by the BNSA of the provisions of this section, BII
shall be entitled to an injunction restraining the BNSA from
disclosing, in whole or in part, any confidential information, or from
rendering any services to any person, firm, partnership, joint venture,
association, or other entity to whom such confidential information, in
whole or in part, has been disclosed. Nothing herein shall be construed
as prohibiting BII from pursuing any other remedies available to BII
for such breach or threatened breach, including the recovery of damages
from the BNSA.
16. INTELLECTUAL PROPERTY RIGHTS.
16.1 Property of BII All intellectual property rights related
to or regarding the BII Products and this Agreement, including all
trademarks, logos, copyrights, trade names, trade designations, trade
dress, patents, inventions, know-how, business methods, trade secrets
and other intellectual property rights (together, the "Intellectual
Property"), are and shall remain the property of BII. BNSA
acknowledges that it has paid no consideration to obtain any right in
such Intellectual Property and shall acquire no interest in the
Intellectual Property by virtue of this Agreement or the performance of
its duties hereunder.
16.2 Infringement of Intellectual Property. BNSA shall
promptly inform BII of any action or conduct of any person which may
infringe upon any of BII's rights in and to the Intellectual Property.
BII shall have the sole discretion whether to take legal action against
any such infringement and any damages or other monies recovered on
account of such infringement, whether by judgment, settlement or
otherwise, shall belong exclusively to BII. BNSA shall cooperate fully
with BII in connection with any legal action taken by BII in connection
with any such infringement.
16.3 Use of Intellectual Property. During the term of this
Agreement, BNSA shall have the right to use the Intellectual Property
in the promotion of BII Products. However, except for Intellectual
Property contained in materials provided to BNSA by BII expressly for
use in the distribution, sale and marketing of the BII Products, any
use of Intellectual Property by BNSA or the distribution or retail
locations to whom BNSA
6
<PAGE>
distributes shall be subject to BII's prior, written approval, which
approval shall be obtained by BNSA at least ten (10) days prior to such
use of the Intellectual Property and provided further that all such use
shall disclose the Intellectual Property in a manner to preserve its
value and ownership rights. BNSA shall refrain from using, in any
manner which BII, in its sole discretion, may consider misleading or
otherwise objectionable, the Intellectual Property or any other names
closely resembling the trademarks and trade names comprising part of
the Intellectual Property. Upon the termination of this Agreement, BNSA
shall immediately discontinue any and all use of the Intellectual
Property.
16.4 Limited Grant of Non-Exclusive License for BII Name. BII
will grant BNSA a limited, non-exclusive license to use the name
"Baywood" in South America for its company name and marketing purposes,
but BII retains all other ownership rights to the Baywood name.
17. COVENANT NOT TO COMPETE.
a. Interests to be Protected. The parties acknowledge that
during the term of this Agreement, BNSA and BII will each gain valuable
insight as to each others operations, personnel and need for services.
In addition, BNSA and BII may be exposed to, have access to, and be
required to work with, a considerable amount of each other's
confidential and proprietary information, including but not limited to:
information concerning each other's methods of operation, strategic
planning, operational strategies, marketing plans and strategies,
acquisition strategies, and customer leads. The parties also expressly
acknowledge that each party provides a highly specialized service and
replacing either party in this position would require BII to incur
substantial expense. The parties expressly recognize that should BNSA
compete with BII in any manner whatsoever outside of the Territory, it
could seriously impair the goodwill and diminish the value of BII's
business. The parties acknowledge that the covenant not to compete
contained in this section has an extended duration; however, they agree
that this covenant is reasonable and it is necessary for the protection
of BII and BNSA, its shareholders and employees. For these and other
reasons, and the fact that there are many other opportunities available
to BII and BNSA if this Agreement should terminate, the parties are in
full and complete agreement that the following restrictive covenants
are fair and reasonable and are freely, voluntarily and knowingly
entered into. Further, each party was given the opportunity to consult
with independent legal counsel before entering into this Agreement.
b. Restrictions on Competition. BII and BNSA each agree that
it shall not during the term of this Agreement and for a period of one
(1) year from the date of termination of this Agreement, directly or
indirectly, either as partner, shareholder, joint venturer, consultant,
member or otherwise, own any interest in, manage, control, or in any
manner compete, directly with the business of BII outside the Territory
or BNSA inside the Territory from the date of the Agreement's
termination. At any time and from
7
<PAGE>
time to time, each party agrees, at its expense, to take action and to
execute and deliver documents as may be reasonably necessary to
effectuate the purposes of this Covenant.
c. Judicial Amendment. If the scope of any provision of this
covenant not to compete is found by any Court to be too broad to permit
enforcement to its full extent, then such provision shall be enforced
to the maximum extent permitted by law. The parties agree that the
scope of any provision of this Agreement may be modified by a judge in
any proceeding to enforce this Agreement, so that such provision can be
enforced to the maximum extent permitted by law. If any provision of
this Agreement is found to be invalid or unenforceable for any reason,
it shall not affect the validity of the remaining provisions of this
Agreement.
d. Injunction: Remedies for Breach. Since a breach of the
provisions of this section of this Agreement could not adequately be
compensated by money damages, BII and BNSA shall be entitled, in
addition to any other right or remedy available to it at law or equity,
to an injunction restraining the breach or threatened breach and to
specific performance of any provision of this section of this
Agreement, and, in either case, no bond or other security shall be
required in connection therewith, and the parties hereby consent to the
issuance of such an injunction and to the ordering of specific
performance.
18. INDEMNIFICATION. If any action is brought against BII or its
affiliates, subsidiaries, officers, directors, shareholders, representatives or
agents as a result of the actions of BNSA, its affiliates, subsidiaries,
officers, directors, shareholders, representatives or agents, and if BII is
required to incur costs for legal fees or court costs as a result thereof and if
the BII loses such action or if it is determined by a court of competent
jurisdiction that the actions of BNSA, its affiliates, subsidiaries, officers,
directors, shareholders, representatives or agents were a cause or contributing
cause of BII suffering damage, then in that event, BNSA shall reimburse and
indemnify BII and its affiliates, subsidiaries, officers, directors, or agents
for all damages suffered, including the amount of any judgment, reasonable
attorney fees, court and collection costs. BII will indemnify BNSA and its
directors, officers and shareholders from any products liability claims relating
to the BII Products distributed by BNSA pursuant to this Agreement.
19. TERMINATION. In addition to the non-renewal provisions of Paragraph
1 of this Agreement, the Agreement may be terminated as follows:
19.1 By BII. Subject to the applicable cure periods, BII may
terminate this Agreement upon the occurrence of any of the following
events:
19.1.1 The institution of insolvency, bankruptcy or
similar proceedings by or against BNSA, any assignment or
attempted assignment by BNSA for the benefit of creditors, or
any appointment, or application for such appointment, of a
receiver for BNSA.
8
<PAGE>
19.1.2 BNSA's failure to adequately cure, in BII's
sole and complete discretion, any breach of any terms or
covenants of this Agreement within forty-five (45) days of BII
sending written notice of such breach to BNSA.
19.1.3 BNSA's failure to pay any amounts due to BII
hereunder within forty-five (45) days of BII sending written
notice of such failure to pay to BNSA.
19.2 By BNSA. Subject to the applicable cure periods, BNSA may
terminate this Agreement upon the occurrence of any of the following
events:
19.2.1 The institution of insolvency, bankruptcy or
similar proceedings by or against BII, any assignment or
attempted assignment by BII for the benefit of creditors, or
any appointment, or application for such appointment, of a
receiver for BII.
19.2.2 BII's failure to deliver any of the goods as
specified by an accepted BII Product Order within forty-five
(45) calendar days of BII's receipt of written notice from
BNSA of such failure to deliver.
20. DISCLAIMER OF IMPLIED WARRANTIES. Unless considered unenforceable
or unlawful under applicable law, all implied warranties relating to any
products sold by BII to BNSA, INCLUDING BUT NOT LIMITED TO ANY IMPLIED
WARRANTIES FOR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE are hereby
disclaimed. BII's liability, if any, to BNSA for alleged defective products
shall, under any legal or equitable theory, be limited to repair or replacement
of the product, at the sole option of BII, and shall in no event include damages
of any kind, whether incidental, consequential or otherwise.
21. AGREEMENT TO PERFORM NECESSARY ACTS. Each party to this Agreement
agrees to perform any further acts reasonably required under the terms of this
Agreement and to execute and deliver any documents which may be reasonably
necessary to carry out the provisions of this Agreement.
22. GOVERNING LAW. This Agreement has been made and entered into in
the State of Arizona and, subject only to applicable international law, shall be
construed in accordance with the laws of the State of Arizona, United States of
America, excluding its choice of law provisions. The parties agree that, subject
only to applicable international law, the Courts of Arizona, including Maricopa
County, Arizona Superior Court shall be the proper and exclusive forum for any
action relating to a dispute between the parties arising out of, or related to,
this Agreement. Each party consents to the in personam jurisdiction of said
court.
23. ENTIRE AGREEMENT. This Agreement, together with any exhibits,
schedules and other documents contemplated hereby, constitute the final written
expression of all of the agreements between the parties, and is a complete and
exclusive statement of those terms. It
9
<PAGE>
supersedes all understandings and negotiations concerning the matters specified
herein. Any representations, promises, warranties or statements made by any
party that differ in any way from the terms of this written Agreement, and the
exhibits, schedules and other documents contemplated hereby, shall be given no
force or effect. The parties specifically represent, each to the other, that
there are no additional or supplemental agreements between them related in any
way to the matters herein contained unless specifically included or referred to
herein. No addition to or modification of any provision of this Agreement shall
be binding upon any party unless made in writing and signed by all parties.
Furthermore, no course of prior dealings between the parties and no usage of the
trade shall be relevant to supplement or explain any term used in this
Agreement. Acceptance or acquiescence in a course of performance rendered under
this Agreement shall not be relevant to determine the meaning of this Agreement
even though the accepting or acquiescing party has knowledge of the nature of
the performance and opportunity for objection. Each of the exhibits and
schedules hereto, if any, is incorporated herein by this reference and
constitutes a part of this Agreement.
24. GENDER. When the context in which the words are used in this
Agreement indicate that such is the intent, the singular and plural number shall
be deemed to include the other, and, the masculine, feminine and neuter genders
shall be deemed to include the other. The term "person" shall include an
individual, corporation, partnership, trust, estate or any other entity.
25. ATTORNEYS' FEES. The prevailing party in any dispute arising under
this Agreement shall be entitled to receive its costs, fees, and expenses,
including attorneys' fees. Reasonable attorneys' fees shall be determined by the
court and not a jury.
26. SURVIVAL. Any obligation or agreement herein which has not been or
cannot be fully performed prior to the termination or expiration of this
Agreement shall survive such termination or expiration.
27. NOTICES. The service of any notice provided for in this Agreement
shall be complete and effective on the date such notice is placed in the United
States Mail, certified or registered with return receipt requested, postage
prepaid, and addressed to the respective parties as follows:
10
<PAGE>
to BII:
BAYWOOD INTERNATIONAL, INC.
Attention: Neil T. Reithinger
14950 North 83rd Place, Suite 1
Scottsdale, Arizona 85260
Facsimile: (602) 483-2168
with a copy to:
TITUS, BRUECKNER & BERRY, P.C.
Attention: Jon A. Titus
7373 North Scottsdale Road
Suite B-252
Scottsdale, Arizona 85253
Facsimile: (602) 483-3215
to BNSA:
BAYWOOD NUTRITIONALS, S.A.
Tomas Guevara 2972, Aptd 202
Providencia
Santiago, Chile
Facsimile: O11 (56) 225 16151
28. SECTION HEADINGS. The section headings contained in this Agreement
are for convenience only and shall in no manner be construed as a part of this
Agreement.
29. SEVERABILITY. In case any one or more of the provisions contained
in this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provision, and this Agreement shall be construed as
if such invalid, illegal, or unenforceable provision had never been included in
the Agreement.
30. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute the same instrument, For the purposes of this Agreement, a facsimile
signature shall be deemed an original.
31, BINDING ON SUCCESSORS AND ASSIGNS. Subject to the provisions
herein, all covenants and agreements in this Agreement shall extend to and be
binding upon the heirs, legal representatives, successors and assigns of the
respective parties hereto.
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IN WITNESS WHEREOF the parties hereto have hereunto set their hands as
of the date first above written.
"BII" "BNSA"
BAYWOOD INTERNATIONAL, LTD. BAYWOOD NUTRITIONALS, S.A.
By: /s/ Neil Reithinger By: /s/ Anamaria Schiaffino Faez
---------------------------- ---------------------------
Neil Reithinger, President and Anamaria Schiaffino Faez
Chief Executive Officer General Manager
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EXHIBIT A
PRICE SCHEDULE
SHAREHOLDER AGREEMENT
THIS SHAREHOLDER AGREEMENT ("Agreement") is entered into by and among
Baywood International, Inc., a Nevada corporation ("BII"), Michael A.
Pentopoulos and Anamaria Schiaffino Faez (BII, Pentopoulos and Schiaffino are
collectively referred to as the "Parties" or the "Shareholders") regarding the
formation and management of a company named Baywood Nutritionals, S.A.
("BNSA").
WHEREAS, the Shareholders desire to promote their mutual interests,
and those of BNSA, and to ensure the proper formation, continuity of management
and control of BNSA and for this purpose to provide restrictions upon the sale
and transfer of common stock of BNSA held by each Stockholder ("Shares"), to
provide BNSA and each Shareholder rights to purchase the shares from the other
Shareholders, and to require the purchase of the shares under certain
circumstances, on the terms and conditions hereinafter set forth;
AND WHEREAS, the Shareholders recognize that BNSA has not yet been
incorporated and that they are therefore not yet shareholders of BNSA, but
nonetheless desire to set forth, in this Agreement, the terms and conditions of
their rights and obligations to each other and BNSA which shall govern them upon
their becoming shareholders;
NOW, THEREFORE, in consideration of the mutual covenants contained and
the acts to be performed by the parties hereto, the receipt and sufficiency of
which is hereby acknowledged, it is agreed as follows:
1. Organization. The Parties will incorporate BNSA, within thirty (30)
days of the execution of this Agreement, as a corporation under Chilean law or
under such other jurisdiction as the Parties shall mutually agree.
2. Limited Grant of Non-Exclusive License for BII Name. BII will grant
BNSA a limited, non-exclusive license to use the name "Baywood" in Mexico,
Central America and South America (the "Territory") for its company name and
marketing purposes, but BII retains all other ownership rights to the Baywood
name. BNSA has paid no consideration for the use of BII's trademarks, logos,
copyrights, trade names, trade designations, patents, inventions, know-how, or
trade secrets (collectively, BII's "Proprietary Rights"), and nothing contained
in this Agreement shall give BNSA any interest in any of BII'S Proprietary
Rights. BII will not at any time during or after this Agreement assert or claim
any interest in or engage in any act or assist in any act that (i) may adversely
affect the validity or enforceability of any such Proprietary Rights or (ii)
result or lead to any infringement thereon.
<PAGE>
3. Authorized and Outstanding Capital Stock. BNSA shall initially have
three shareholders, BII, Schiaffino and Pentopoulos. BNSA's articles of
incorporation shall authorize two classes of stock, as follows where the number
of authorized shares equals the number of outstanding shares:
Class Authorized Par Value
----- ---------- ---------
Common Stock 38,900 $0.01
Preferred Stock 61,100 $1.4742
a. Shareholder Interests. The name of the persons who shall
receive capital stock upon BNSA's formation, the number of shares of
each class to be issued and the price paid follows: by such persons
for the shares in cash at the time of issuance, shall be as
Number Total
of Subscription
Class Name Shares Price
----- ---- ------------
Common Stock A. Schiaffino 27,800 $278
Common Stock M.A. Pentopoulos 11,100 $111
------ ----
Total: 38,900 $389
Preferred Stock BII 40,700 $60,000
Preferred Stock M.A. Pentopoulos 20,400 $30,000
------ -------
61,100 $90,000
constituting all of the outstanding shares of Common and Preferred
Stock initially issued by BNSA in conjunction with its formation.
b. Conversion Rights. At the option of the holder thereof, each
share of Preferred Stock is convertible at any time into Common Stock
on the basis of one share of Preferred Stock for one share of Common
Stock.
c. Voting Rights. The holders of shares of Common and Preferred
Stock shall be entitled to one vote per share on all matters on which
BNSA's stockholders are entitled to vote, in addition to any voting
rights required by law. The votes per share of Preferred Stock shall
at all times be equal to the number of votes per share of Common
Stock.
d. Distributions. The holders of shares of both Common and
Preferred Stock shall be entitled to share ratably in all dividends
and other distributions, when and if declared by the Board of
Directors in their sole discretion, except that (i) the Board of
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Directors of BNSA shall have discretion to allocate up to 10.0% of
distributions pursuant to an incentive compensation plan, and (ii)
shares of Preferred Stock shall, with respect to dividend rights,
rights on redemption and rights on liquidation, winding up and
dissolution, have preference over and rank prior to shares of Common
Stock and in the event that amounts payable upon such events of
distribution are not paid in full, the holders of Preferred Stock
shall share ratably in the payment of dividends or other
distributions, including accumulations, if any, in accordance with the
sums which would be payable on such shares if all dividends were
declared or discharged and paid in full.
e. Redemption of Preferred Stock. BNSA may, at its option,
from a date that is 10 years after the original date of issuance,
redeem all or any portion of the outstanding shares of Preferred Stock
unless restricted by the laws of the country. The redemption price
shall be [$1.4742] per share plus the payment of all accrued and
unpaid dividends on the shares so redeemed and shall be paid only in
cash.
4. Board of Directors. The Shareholders agree that upon formation, the
Board of Directors shall initially consist of the following three persons: Neil
T. Reithinger, Michael A. Pentopoulos and Anamaria Schiaffino Faez. BII,
Pentopoulos and Schiaffino shall have a power of appointment of at least one
member each of the Board of Directors for five years or until such earlier date
as any of such parties ceases to be a Shareholder. Neil T. Reithinger, or such
other person as BII shall designate, shall be the Chairman of the Board of
Directors for the first five years. The Shareholders agree to vote their Shares
in such a manner as to elect and reelect directors and the Chairman in order to
effect the purposes of this paragraph.
5. Management: Schiaffino Employment Agreement. Among other officers
which are required to be appointed by the jurisdiction of formation or which the
Board of Directors, in its sole discretion deems necessary or in BNSA's best
interest, the Board of Directors will appoint a General Manager, who will
initially be Schiaffino. Upon formation, BNSA will enter into an Employment
Agreement with Schiaffino, substantially in the form attached as Exhibit "A,"
under which Schiaffino will direct all of BNSA's operations, will receive an
initial annual salary of $36,000 and will covenant not to compete with BNSA for
six months after she ceases to be an employee of BNSA, provided that BNSA, at
its election, makes payments to her, during such non-competition period, of the
salary she was receiving at the time she ceased to be employed. The Shareholders
specifically acknowledge that BNSA will not enter any Employment Agreement with
Pentopoulos or grant him any compensation, unless otherwise determined by the
Board of Directors.
6. Two Year Right of Repurchase - shares Held By Schiaffino. If,
pursuant to the terms of her Employment Agreement, or otherwise, Schiaffino
ceases to be employed by BNSA, Schiaffino will immediately offer to BII and
Pentopoulos, pro rata in proportion to their holdings, that portion of her
Shares which corresponds to the following schedule:
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Months After Shares
Inception of Required to
Employment Resell
---------- ------
Less than 3 16,700
3 to 6 14,612
6 to 9 12,525
9 to 12 10,437
12 to 15 8,350
15 to 18 6,263
18 to 21 2,087
21 to 24 none
BII and Pentopoulos shall have sixty (60) days after the date that
Schiaffino ceases to be employed by BNSA to purchase Schiaffino's Shares. BII
and Pentopoulos shall have the right to purchase the number of Schiaffino's
shares pro rata according to the relative number of Shares in each of their own
names as shown on the books of BNSA. Neither BII and Pentopoulos may elect to
purchase less than all of the Shares offered. However, BII and Pentopoulos may
waive their right to pro rata purchase and may act together in purchasing all of
the Shares of the Offering Shareholder or if either BII or Pentopoulos elects
not to purchase its or his pro rata portion, the other may purchase all of the
Shares offered.
7. BII Purchase Right to Raise its Holdings to 51.0% of Outstanding
Shares. From 24 months after BNSA's formation and thereafter, as long as BII
remains a Shareholder, BII shall have the right to purchase from Pentopoulos
and/or Schiaffino, on a pro rata basis and at fair market value, an additional
10.3% of BNSA's outstanding voting shares or such other number of voting Shares
as is necessary to increase BII's total holdings to 51.0% of BNSA's total
outstanding shares of voting Common and Preferred Stock. Pentopoulos and
Schiaffino shall have the option to receive, as payment for their BNSA Shares so
purchased, either cash or the fair market value equivalent of unregistered,
restricted BII Common Stock, subject to the availability of an exemption from
registration for, and their entry into Subscription Agreements acceptable to
BII's Board of Directors for, the issuance of the restricted BII Common Stock.
Pentopoulos and Schiaffino acknowledge that, if they elect to receive BII shares
as payment for their BNSA Shares pursuant to this paragraph, there shall be no
registration rights associated with the shares.
8. Restrictions on Disposition of Shares. Each Shareholder shall hold
all shares that he or she may now own or hereafter acquire in his or her own
name and only in his or her own name. The shares of Common and Preferred Stock
held by Pentopoulos and Schiaffino but not those held by BII, shall be
non-transferrable for two years from the date of issuance. Except as hereinafter
expressly provided, from two years after BNSA's formation and thereafter, no
transfer of any shares that are owned or acquired by the Shareholders shall be
made upon the books of BNSA or be of any effect as against BNSA or any
Shareholders, and no Shareholder shall sell, assign, pledge, encumber,
hypothecate or otherwise transfer any Shares, either voluntarily,
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<PAGE>
involuntarily, or by operation of law, and any attempt so to do shall be void
and of no force or effect, unless and until such Shareholder (including his or
her heirs, assigns or legal representatives and all persons succeeding to or
standing in his or her place or holding under him or her, whether by his or her
act or by operation of law, and hereinafter called the "Offering Shareholder")
shall first receive written consent from all other Shareholders or shall first
offer to the other Shareholders, the shares that the offering shareholder
desires to sell, assign, pledge, encumber, hypothecate, or otherwise transfer to
each proposed buyer or transferee in the following manner:
a. Notice of Proposed Sale. The Offering Shareholder shall
notify BNSA and all of the other Shareholders in writing of his or her
desire to sell Shares, with the notice setting forth (i) the number of
shares he or she proposes to sell, (ii) a statement that he or she has
received a bona fide offer to purchase the shares and that he or she
is willing to accept the offer, (iii) the name and address of the
offeror and the terms of the offer, and (iv) an offer ("Offer") to
sell the shares to BNSA, unless restricted by the laws of the country,
or to the other Shareholders of BNSA at the same price and on the same
terms as have been offered to the offering shareholder.
b. Notice of Proposed Transfer Other Than Sale. The Offering
Shareholder shall notify BNSA and all of the other Shareholders in
writing of his or her desire to transfer shares by way of gift,
pledge, hypothecation, assignment, or in any manner other than
pursuant to a bona fide offer to purchase, with the notice setting
forth (i) the number of shares he or she proposes to transfer, (ii) a
statement of the manner in which he or she proposes to make the
transfer, accompanied by copies of any related agreements, deeds of
gift, trust instruments, loan or hypothecation agreements, or
otherwise, (iii) the name and address of the proposed transferee, and
(iv) an Offer to sell the shares to BNSA unless restricted by the laws
of the country or, should BNSA decline to accept the Offer, to the
other Shareholders of BNSA, at fair market value.
c. Right of Refusal. BNSA shall have thirty (30) days after
the receipt of the notice within which to accept the Offer which Offer
shall be in writing unless restricted by the laws of the country. BNSA
must give written notice to all Shareholders of its intent either to
purchase or not to purchase the Shares. If BNSA rejects the Offer, or
if the Offer is not accepted before the termination of the thirty (30)
day period, the Offer shall automatically be extended to the other
Shareholders, who shall have thirty (30) days after notification by
BNSA of its intent to reject the Offer or after the initial thirty
(30) day period, whichever is earlier, within which to accept it.
Subject to BNSA's right to purchase the Shares, each Shareholder shall
have the right to purchase the number of shares of the Offering
Shareholder equal to the ratio of the number of shares standing in his
or her name as shown on the books of BNSA to the aggregate number of
shares standing in the names of all of the Shareholders exercising
their rights to purchase. Neither BNSA nor the other Shareholders may
elect to purchase less than all of the shares offered. However, BNSA
and the other Shareholders may act together in purchasing all of the
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<PAGE>
shares of the Offering Shareholder. If the Offer is accepted, BNSA or
the other Shareholders, as the case may be, shall have the later of
(i) twenty (20) days after receipt of notice of the acceptance of all
the shares offered or (ii) such time frame as set forth in the Offer,
within which to purchase the Shares.
d. Waiver of Restrictions. BNSA, by a resolution signed by all
members of it Board of Directors may, in any particular instance or
for any particular period, waive or modify any one or more of the
foregoing provisions in any manner not rendering the same more onerous
to the Offering Shareholder.
e. Effect of Consent. If written consent pursuant to this Section
is granted, or if the option to purchase is not exercised by BNSA or
the other Shareholders, the Offering Shareholder shall have the right
for a period of one-hundred and twenty (120) days after (i) the
consent; (ii) the failure to exercise the purchase option; (iii) the
written notification by BNSA and the other Shareholders of their
rejection of the Offer; or (iv) until the expiration of the Offer,
whichever first occurs, to sell, transfer, or otherwise dispose of the
Shares, but only for consideration not less than, and on terms no more
favorable to the buyer or transferee than, those specified in the
Offer, and provided that the shares so transferred shall remain
subject to the restrictions in this Agreement and the transferee
thereof shall be bound by the terms and conditions of this Agreement.
Any transfer not made in accordance with the terms of this Section
shall automatically be deemed null and void, At the request of BNSA,
any transferee, and the spouse of the transferee, if any, shall
execute and deliver an appropriate written instrument acknowledging
that the transferee, the spouse of the transferee, and the shares
owned beneficially or of record by the transferee are subject to and
bound by all of the terms and conditions of this Agreement. After the
expiration of such one-hundred and twenty (120) day period, the shares
and any offer for such shares shall be subject to all terms and
restrictions set forth herein.
9. Right of Purchase Upon 51% or More Change in Control of BII
a. Offer. The undersigned agree that upon a change of 51.0% or
more of the direct or beneficial ownership of BII, BII shall
immediately submit to BNSA, through the Board of Directors, a written
offer to sell all of the shares then standing in BII's name for cash
at fair market and in accordance with Section 8.
b. Time of Offer. If the offer specified in paragraph a. is not
actually made, the offer shall be deemed to have been made and
received fifteen (15) days after BNSA acquires actual knowledge of the
occurrence of the change in control of BII. BNSA shall notify all
other Shareholders of the occurrence of the change in control of BII
immediately thereafter.
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<PAGE>
c. Right to Purchase. After a change in control of BII has
occurred, BNSA, unless restricted by the laws of the country, shall
have thirty (30) days after the determination of the fair market value
of the shares and in accordance with Section 8. BNSA must give written
notice to all Shareholders of its intent to accept or reject the
offer. If BNSA rejects the offer, the offer shall automatically be
extended to the other Shareholders who shall have thirty (30) days
within which to accept it. Each Shareholder shall have the right to
purchase the number of shares equal to the ratio of the number of
shares standing in his or her name as shown on the books of BNSA to
the aggregate number of shares standing in the names of all of the
Shareholders exercising their rights to purchase. If the other
Shareholders do not exercise the right to purchase, then BII may
retain its shares despite the occurrence of the change in control of
BII, but subject to all other provisions of this Agreement. Neither
BNSA nor the other Shareholders may accept less than all of the shares
offered. BNSA and the other Shareholders may act together in
purchasing all of the shares of the Offering Shareholder, If the offer
is accepted, BNSA or the other Shareholders, as the case may be, shall
have twenty (20) days after the date of acceptance within which to
purchase the shares for cash.
10. Purchase and Sale Upon Death or Dissolution of Shareholder. BNSA,
unless restricted by the laws of the country, and each of the Shareholders agree
that upon the death or dissolution of a Shareholder, BNSA or the other
Shareholders shall purchase, and the deceased Shareholder's spouse or the estate
of the deceased Shareholder or the Shareholder in liquidation shall sell, all of
the shares owned by the Shareholder and his or her spouse at the time of his or
her death, at fair market value and in accordance with Section 8.
a. Payment. BNSA shall pay the purchase price under this
Section 3 in cash within one hundred twenty (120) days after the date
of the Shareholder's death or dissolution.
b. Life Insurance Proceeds. Notwithstanding the foregoing, if
BNSA is the beneficiary of life insurance on the life of any
Shareholder, on the death of that Shareholder the proceeds of the
insurance up to the full purchase price shall be applied within ninety
(90) days after the proceeds are received by BNSA toward purchase of
the shares that BNSA is obligated to purchase. Until payment of any
insurance proceeds is made, any such proceeds received by BNSA may
only be invested in the form of time certificates of deposit or
savings accounts in national banking institutions during the interim
period before payment is made. The balance of any life insurance
proceeds after being applied for the purchase of the shares shall be
retained by BNSA.
11. Shareholders' Duties Upon Divorce. Each Shareholder agrees that if
any Shareholder shall become divorced, the Shareholder first will have the
option of purchasing his or her divorced spouse's interest in the Shares as may
be determined by the governing jurisdiction of the Shareholders place of
residence at fair market value and upon such terms and conditions as may be
agreed and in accordance with Section 8 unless such divorced spouse has at or
before
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<PAGE>
divorce transferred his or her interest in the shares to the Shareholder or to a
trust under the terms of which disposition of the shares can be made only under
the terms of this Agreement with the Shareholder having the sole and exclusive
right to vote such shares for all purposes whatsoever during his or her
lifetime. If the Shareholder does not exercise his or her right to purchase such
shares, the other Shareholders shall have such right according to the same terms
and conditions.
12. Where Repurchase Illegal. If BNSA shall not be permitted under
applicable law to purchase the shares as provided for or required by any Section
of this Agreement, each Shareholder agrees to vote or to sign a consent
resolution to authorize BNSA to purchase shares under this Agreement to the
maximum extent permitted by law. The Shareholders further agree to take all
proper action, to the extent permitted by law, to enable BNSA to carry out its
obligation to purchase the shares pursuant to the terms of this Agreement.
Notwithstanding the foregoing, no Shareholder shall be required to make
additional capital contributions to BNSA.
13. Restrictions on Successors. Any transferee of Shares, whether by
gift, sale, bequest, inheritance, foreclosure, execution, or otherwise, shall
automatically be deemed to be a party to this Agreement, without the execution
of any additional instruments, and shall be bound by the terms and conditions of
this Agreement as if such transferee were an original party hereto.
14. Restrictive Legend. The undersigned hereby acknowledges and
consents to the placement of the following restrictive legends on the stock
certificates or other document(s), if any, evidencing the Shares:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT OR DOCUMENT
HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAWS OF ANY STATE. WITHOUT SUCH REGISTRATION,
THE SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED, EXCEPT UPON DEIIVERY TO BNSA OF AN
OPINION OF COUNSEL SATISFACTORY TO COUNSEL FOR BNSA THAT
REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE
SUBMISSION TO BNSA OF SUCH OTHER EVIDENCE AS MAY BE
SATISFACTORY TO THE OFFICERS AND/OR DIRECTORS TO THE EFFECT
THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED
THEREUNDER.
NOTICE IS HEREBY GIVEN THAT THE SALE, ASSIGNMENT, TRANSFER
PLEDGE OR OTHER DISPOSITION OF THE SHARES OF CAPITAL STOCK
REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A CERTAIN
RESTRICTIVE AGREEMENT BETWEEN THE CORPORATION AND THE
8
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STOCKHOLDERS, A COPY OF WHICH AGREEMENT IS ON FILE IN THE
OFFICE OF THE SECRETARY OF THE CORPORATION.
15. Right of First Refusal to Provide Additional Financing. The
Shareholders shall have a first right of refusal to provide any additional
financing to BNSA on a pro rata basis according to their existing equity
ownership percentages before BNSA enters into any agreement to obtain such
financing from a third party, provided however, that the Board of Directors
determines that the financing offered by the Shareholder or Shareholders is on
terms no less favorable to BNSA than financing that could be obtained from an
independent third party lender or lenders.
16. No Joint Venture. BII's sole relationship with BNSA is that of a
Shareholder, licensor and potential creditor and BNSA disclaims any partnership,
joint venture, employment or other relationship with the BII, Pentopoulos or
Schiaffino and vice versa.
17. Customer Records.
a. Shareholder's Obligations Regarding Customer Records. Each
undersigned Shareholder acknowledges that the list of BNSA's customers
or clients as it may exist from time to time is a valuable, special
and unique asset of BNSA's business. The Shareholder shall not, during
or after his association with BNSA, divulge, furnish or make
accessible to anyone (other than in the regular course of BNSA's
business) any names, addresses or telephone numbers of those
individuals who conduct business with BNSA. In addition, the contents
of customers' files or portfolios, or any other such information shall
be kept confidential during and after the Shareholder's association
with BNSA. All original records and all copies thereof of those
customers who do business with BNSA, including names, or any other
such information, as well as all other secrets and confidential
information of BNSA shall remain the property of BNSA during and after
the Shareholders association with BNSA.
b. Injunctive Relief for Breach, In the event of a breach or
threatened breach by the Shareholder of the provisions of this
section, BNSA shall be entitled to an injunction restraining the
Shareholder from disclosing, in whole or in part, the list of BNSA's
customers, any names, addresses or telephone numbers of those
individuals who conduct business with BNSA, or from rendering any
services to any person, firm, partnership, joint venture, association,
or other entity to whom such information, in whole or in part, has
been disclosed or is threatened to be disclosed. Nothing herein shall
be construed as prohibiting BNSA from pursuing any other remedies
available to BNSA for such breach or threatened breach, including the
recovery of damages from the Shareholder.
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18. Confidential Information.
a. Shareholder's Obligations Regarding Confidential Information.
Shareholder has in the past and may in the future develop, obtain or
learn about confidential information which is the property of BNSA or
which BNSA is under obligation not to disclose. Shareholder agrees to
use his best efforts and the utmost diligence to guard and protect
said information, to treat such information as confidential, and
Shareholder agrees that the Shareholder will not, during or after the
period of his association with BNSA, use for Shareholder or others, or
divulge to others any of said confidential information which
Shareholder may develop, obtain or learn about during or as a result
of his association with HNSA, unless authorized to do so by BNSA in
writing. Shareholder further agrees that if Shareholder ceases to be a
Shareholder or to have any other association with BNSA, Shareholder
will not take, but will leave with BNSA or return to BNSA, all
documents, records and papers and all matters of whatever nature which
bears or may bear BNSA's confidential information or which is in any
way related, directly or indirectly to BNSA.
b. Definition of Confidential Information, For the purposes of
this Agreement, the term "confidential information" shall include but
not be limited to the following: customer lists; product designs;
pricing policies; marketing strategies; business contacts; business
plans; computer software, including all rights under licenses and
other contracts relating thereto; source code and all documents
relating thereto; all intellectual property including without
limitation all trademarks, trademark registrations and applications,
service marks, copyrights, patents, trade secrets, proprietary
marketing information and know-how; books and records including lists
of customers; credit reports; sales records; price lists; sales
literature; advertising material; manuals; processes; technology;
designs; statistics data; techniques; or any information of whatever
nature which gives to BNSA an opportunity to obtain an advantage over
its competitors who do not know or use it, but it is understood that
said terms do not include knowledge, skills or information which is
common to the trade or profession of the Shareholder. "Confidential
information" shall not include: (i) information that has become
publicly available other than through a breach of this Agreement; or
(ii) information required to be disclosed by a court of competent
jurisdiction, to the extent specifically ordered by such court.
c. Contact with Customers and Third Parties. Upon Shareholder's
transfer of all of his shares of BNSA or his termination of
association with BNSA, BII, Pentopoulos and Schiaffino agree that for
a period of (18) months from the date of termination of association
that they shall not contact directly or indirectly any of BNSA's
customers or companies with which it does business, or is affiliated
with in any way, or any third parties which have any direct or
indirect business dealings with Company in the area of dietary food
supplements.
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d. Injunctive Relief for Breach. In the event of a breach or
threatened breach by the Shareholder of the provisions of this section,
BNSA shall be entitled to an injunction restraining the Shareholder
from disclosing, in whole or in part, any confidential information, or
from rendering any services to any person, firm, partnership, joint
venture, association, or other entity to whom such confidential
information, in whole or in part, has been disclosed. Nothing herein
shall be construed as prohibiting BNSA from pursuing any other remedies
available to BNSA for such breach or threatened breach, including the
recovery of damages from the Shareholder.
19. Representations and Warranties of Pentopoulos and Schiaffino.
Pentopoulos, Schiaffino and BIL warrant and represent the following, each of
which constitutes a condition precedent to the Parties entry into the Agreement:
a, that all information provided to BNSA regarding their prior
experience, education, litigation and bankruptcy history and credit
worthiness is complete and accurate, including all information
included in the due diligence questionnaire provided.
b. they have no relationship with, or have terminated any
relationship with, any client or product in the Territory which is
competitive to that portion of BII's product line which BNSA intends
to market;
c. they have the ability, expertise and capacity to market BII's
products on BNSA's behalf to the full extent of BII's requirements as
contemplated by the form of "Distribution and Licensing Agreement"
attached as Exhibit "B."
d. they understand that ELI is solely a shareholder of BNSA and
is not the issuer of, nor makes any representation to them regarding
the advisability of investing in BNSA, that BII's operations are
totally separate from those of BII and that they do not, by investing
in BII, have any claim or interest whatsoever in BII;
e. they (i) have adequate means of providing for their current
needs and possible contingencies, and have no need for liquidity of
their investment in the Shares, (ii) can bear the economic risk of
losing the entire amount of my investment in the Shares, and (iii)
have such knowledge and experience in business and financial affairs
that they are capable of evaluating the relative risks and merits of
an investment in the shares or they are being advised by others with
such knowledge and experience that they together are capable of making
such evaluation.
f. the addresses set forth below are their true and correct
addresses, and they have no present intention of becoming a resident
of any other state or jurisdiction.
g. they have not utilized the services of a "Purchaser
Representative, as defined in Regulation D promulgated under the
Securities Act.
11
<PAGE>
h. they acknowledge that they: (i) have received and thoroughly
reviewed, and are all documents, records and books pertaining to BNSA,
financial and otherwise, and that all such documents have been made
available or delivered to them.
i. in deciding to invest in the Shares, they have relied solely
upon their own investigation and determinations, or upon the advice of
their own legal counsel, accountants or other financial advisers with
respect to the tax and other consequences involved in purchasing
shares and specifically acknowledge that they have been encouraged to
seek the advice of such independent professionals.
j. they have had an opportunity to ask questions of and receive
answers concerning the terms and conditions of their proposed
investment in the Shares, and the proposed operatl0ns of BNSA.
k. they understand the risks implicit in the structure and
operation of BNSA, and that among other things that BNSA does not
intend to make distributions of earnings, but rather will reinvest
profits, and that their ability to redeem shares is severely limited.
1. other than as set forth in this Agreement, no person or entity
has made any representation or warranty whatsoever with respect to any
matter or thing concerning BNSA and the shares that they will receive.
m. they understand that no shares have been registered under the
Securities Act, nor have they been registered pursuant to the
provisions of the securities or other laws of applicable
jurisdictions, and are subject to substantial restrictions on transfer
as provided in this Agreement.
n. the shares for which they subscribe are being acquired solely
for their own accounts, for investment and are not being purchased
with a view to or for their resale or distribution. In order to induce
BNSA to sell shares to them, BNSA will have no obligation to recognize
the ownership, beneficial or otherwise, of the shares by anyone but
me.
o. they are aware that the shares are an extremely speculative
investment which involves a high degree of risk; and their interest in
the shares is not readily transferable; it may not be possible for
them to liquidate their investment in the Shares.
p. they understand that no federal or state agency, including
the Securities and Exchange Commission or the securities regulatory
agency of any state, has approved or disapproved the Shares, passed
upon or endorsed the merits of the shares being acquired or made any
finding or determination as to the fairness of the shares for
investment.
12
<PAGE>
q. the foregoing representations and warranties are true and
accurate as of the date hereof, shall be true and accurate as of the
date of the delivery of the funds to BNSA and shall survive such
delivery. If, in any respect, such representations and warranties are
not true and accurate prior to delivery of the funds, they will give
written notice of that fact to BNSA, specifying which representations
and warranties are not true and accurate and the reasons therefor.
20. Distribution and Licensing Agreement. BNSA and BII shall enter a
Distribution and Licensing Agreement in the form attached as Exhibit "B."
21. Indemnification. The undersigned agree to indemnify and hold
harmless BNSA, its officers, directors, shareholders, employees, agents,
attorneys and affiliates from and against all damages, losses, costs and
expenses (including reasonable attorneys' fees) which they may incur by reason
of the failure of the undersigned to fulfill any of the terms or conditions of
this Agreement, or by reason of any breach of the representations and warranties
made by the undersigned herein or in any document provided by the undersigned to
BNSA. BNSA agrees to fully indemnify each of the undersigned for any liability
which each of the undersigned incurs related to BNSA, Pentopoulos, Schiaffino,
or the Agreement. BII agrees to indemnify BNSA, Pentopoulos, and Schiaffino from
liability for products liability claims relating to the products BII licenses to
BNSA.
22. Miscellaneous.
a. Notices. All offers, exercises of options, acceptances, and
notices under this Agreement shall be in writing and shall be
considered to have been received when delivered personally, or when
deposited in the mail if sent by certified or registered mail, return
receipt requested, to the addresses set forth below, or to such other
addresses that may be specified in writing to all parties hereto.
b. Voting. No Shareholder may participate in any vote as an
officer, director, or Shareholder of BNSA involving the possible
acquisition by BNSA of any of his or her shares pursuant to this
Agreement.
c. Gender. All words used in any gender in this Agreement shall
extend to and include both genders and the neuter.
d. Governing Law. This Agreement is made and is intended to be
performed in the State of Arizona and it shall in all respects be
governed by and construed in accordance with the laws of that state.
e. Entire Contract. This Agreement and the exhibits attached
hereto set forth the entire agreement of the parties and supersedes
any and all previous oral or written agreements regarding the
transactions contemplated hereby.
13
<PAGE>
f. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the Shareholders and their heirs, personal
representatives, and permitted successors, assigns, and transferees.
g. Further Instruments. A duly authorized officer of BNSA and the
Shareholders, their spouses or their representatives shall make,
execute and deliver any documents necessary to carry out this
Agreement.
h. Specific Performance. The parties agree that the shares are
unique property, that a remedy at law for non-performance of
obligations under this Agreement is not adequate and that such
obligations may be specifically enforced and that a petition for
specific performance may be made without the requirement of any bond
or indemnity.
i. Modification or Waiver. No modification of this Agreement
shall be deemed effective unless in writing and signed by the parties
hereto. No waiver shall be effective unless in writing and executed by
the party against whom enforcement of the waiver is sought. This
Agreement may be amended by written instrument signed by all living
Shareholders, provided, however that no such amendment shall affect
the rights and obligations of any deceased Shareholder.
j. Headings. The headings in this Agreement have been inserted
for convenience only and shall not affect the meaning or
interpretation of any provision in this Agreement.
k. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original, and
such counterparts together shall constitute one and the same
instrument.
1. Severability, If for any reason any provision of this
Agreement shall be determined by a court of competent jurisdiction to
be invalid, unenforceable, illegal, or inoperable, its invalidity
shall not affect the validity and effect of the other provisions
hereof.
m. Termination. This Agreement shall terminate and the shares
shall be released from the terms of this Agreement should any of the
following occur:
(i) Sale of all of the shares in BNSA to a third party; or
(ii) Written agreement of BNSA and the then living
Shareholders, provided, however, that no such termination shall
affect the rights and obligations of any Shareholder then
deceased; or
14
<PAGE>
(iii) Cessation of BNSA's business.
Upon termination of this Agreement for any of the reasons set forth
above, the shares held by each Shareholder shall be surrendered to
BNSA and BNSA shall issue new certificates for the same number of
Shares, but without the restrictive legend required herein.
n. Time of Essence. Time is of the essence of this Agreement.
o. Third Party Beneficiaries. Nothing in this Agreement, express
or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any persons other than the parties to it,
nor is anything in this Agreement intended to relieve or discharge the
obligation or liability of any third person to any party to this
Agreement.
p. Attorneys' Fees. BII' s attorneys will draft any necessary
documents relating to this Agreement and shall retain foreign counsel
as needed, all at BII's expense. If any litigation arises in
connection with this Agreement, any prevailing party to such
litigation shall be reimbursed by the other party or parties for all
costs and expenses of such litigation, including reasonable attorneys'
fees to be fixed by the court, and the amount of such costs and
expenses shall be added to the amount of such judgment. For purposes
of this paragraph, the term "prevailing party" shall mean, in the case
of the plaintiff, one who is successful in obtaining substantially all
of the relief sought by the plaintiff, and in the case of the
defendant, one who is successful in defeating substantially all of the
relief sought by the plaintiff.
15
<PAGE>
Dated this 12th day of May, 1998.
"BII"
Baywood International, Inc.
By: /s/ Neil T. Reithinger /s/ Michael A. Pentopoulos
---------------------------- --------------------------------
Neil T. Reithinger, President Michael A. Pentopoulos
And Chief Executive Officer
460 North Civic Drive
14950 N. 83rd Place Suite 203
Suite 1 Walnut Creek, California 94596
Scottsdale, Arizona 85260 Facsimile: (510) 937-4272
Facsimile: (602) 482-2168
/s/ Anamaria Schiaffino Faez
--------------------------------
Anamaria Schiaffino Faez
Tomas Guevara 2972, Aptd 202
Providencia
Santiago, Chile
Facsimile: 011 (56) 225 16151
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 806175
<NAME> Baywood International, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 554,239
<SECURITIES> 0
<RECEIVABLES> 25,480
<ALLOWANCES> 24,383
<INVENTORY> 22,532
<CURRENT-ASSETS> 590,042
<PP&E> 95,379
<DEPRECIATION> 87,747
<TOTAL-ASSETS> 896,371
<CURRENT-LIABILITIES> 111,684
<BONDS> 0
0
35,000
<COMMON> 24,900
<OTHER-SE> 724,787
<TOTAL-LIABILITY-AND-EQUITY> 896,371
<SALES> 762,328
<TOTAL-REVENUES> 762,328
<CGS> 449,522
<TOTAL-COSTS> 428,583
<OTHER-EXPENSES> (14,027)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (101,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (101,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (101,750)
<EPS-PRIMARY> 0.00 <FN>
<EPS-DILUTED> 0
<FN>
* Less than $(.01) per share
</FN>
</TABLE>
