UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
--------------------- ----------------------
September 30, 1998 0-22024
BAYWOOD INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 77-0125664
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 September 30, 1998, there were 24,899,702 shares of Baywood International,
Inc. common stock, $.001 par value outstanding.
<PAGE>
BAYWOOD INTERNATIONAL, INC.
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Balance Sheet as of September 30, 1998 3
Statements of Operations for the three and
nine months ended September 30, 1998 and 1997 4
Statements of Cash Flows for the three and
nine months ended September 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 12
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
SIGNATURES 15
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
BALANCE SHEET
September 30, 1998
ASSETS
CURRENT ASSETS
Cash and equivalents $ 164,512
Accounts receivable 6,366
Inventories 38,680
Prepaid expenses and other current assets 87,524
-----------
Total current assets 297,082
-----------
PROPERTY & EQUIPMENT
Furniture, fixtures, computers and equipment
(net of accumulated depreciation of $91,731) 3,648
-----------
OTHER ASSETS
Investment in Baywood Nutritionals, S.A 45,842
Investment in BII Acquisition Company 75,000
Deferred income taxes 150,000
Contracts & marketing rights (net of
accumulated amortization of $84,424) 70,476
Formulas & product lines (net of
accumulated amortization of $84,424) 70,476
-----------
Total other assets 411,794
-----------
Total assets $ 712,524
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 141,703
Accrued liabilities 30,000
-----------
Total current liabilities 171,703
-----------
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 (5,845,816)
-----------
Total stockholders' equity 540,821
-----------
Total liabilities and stockholders' equity $ 712,524
===========
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 31,608 $ 873,439 $ 793,937 $ 2,170,927
COST OF SALES 15,018 602,998 464,541 1,393,844
----------- ----------- ----------- -----------
Gross profit 16,590 270,441 329,396 777,083
----------- ----------- ----------- -----------
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES:
Marketing expenses 137,193 117,884 330,184 267,464
General and administrative expenses 101,637 198,073 313,769 540,115
Depreciation and amortization 11,730 12,685 35,189 37,365
----------- ----------- ----------- -----------
Total selling, general and
administrative expenses 250,560 328,642 679,142 844,944
----------- ----------- ----------- -----------
Operating profit (loss) (233,970) (58,201) (349,746) (67,861)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income 4,186 4,600 16,833 11,853
Miscellaneous expense -- (44,173) -- (36,983)
Miscellaneous income 75 -- 1,454 6,769
Interest expense -- -- -- (222)
Equity in net income (loss)
of investee (14,158) -- (14,158) --
----------- ----------- ----------- -----------
Total other income (9,897) (39,573) 4,129 (18,583)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (243,867) (97,774) (345,617) (86,444)
PROVISION FOR INCOME TAXES -- 14,000 -- 14,000
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (243,867) $ (83,774) $ (345,617) $ (72,444)
=========== =========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ (0.01) $ * $ (0.01) $ *
=========== =========== =========== ===========
DILUTED NET INCOME (LOSS) PER
COMMON SHARE $ ** $ * $ ** $ *
=========== =========== =========== ===========
WEIGHTED AVERAGE OF COMMON SHARES
OUTSTANDING 24,899,702 18,333,115 20,874,294 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 9 Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(243,867) $ (83,774) $(345,617) $ (72,444)
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization 11,730 12,684 35,189 38,056
Inventory write-down for samples and
shrinkage -- 91,626 -- 103,626
Note receivable write-down -- 37,000 -- 37,000
Interest receivable write-down -- 11,017 -- 11,017
Equity in net loss of investee 14,158 -- 14,158 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (5,269) 213,002 268,084 442,083
(Increase) in interest receivable -- (3,672) -- (11,017)
(Increase) decrease in inventory (16,148) 3,448 (16,289) (28,820)
(Increase) decrease in prepaid expenses (75,350) (4,365) (66,900) (21,739)
Increase (decrease) in customer deposits (4,195) -- -- --
(Decrease) in accounts payable and
accrued liabilities 64,214 (100,528) (258,019) (641,950)
--------- --------- --------- ---------
Net cash provided (used) by operating
activities (254,727) 176,438 (369,394) (144,188)
--------- --------- --------- ---------
INVESTING ACTIVITIES:
Investment in Baywood Nutritionals, S.A (60,000) -- (60,000) --
Investment in BII Acquisition Company (75,000) -- (75,000) --
--------- --------- --------- ---------
Net cash (used) by investing activities (135,000) -- (135,000) --
--------- --------- --------- ---------
CASH AND EQUIVALENTS
PROVIDED BY (USED) DURING PERIOD (389,727) 176,438 (504,394) (144,188)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 554,239 448,326 668,906 768,952
--------- --------- --------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 164,512 $ 624,764 $ 164,512 $ 624,764
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES AND
CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes $ -- $ 8,874 $ -- $ 8,874
</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 September 30, 1998 and the results
of operations for the three and nine months ended September 30, 1998 and 1997
and the cash flows for the three and nine months ended September 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. Since its inception, the Company has
directed most of its sales efforts toward international markets and had
established distribution of a few main products to a few main customers which
made up a majority of the Company's revenues. Establishing distribution into
health food stores, chain drug stores and grocery chains in the United States is
also part of the Company's marketing strategy. At this time, the Company is
focused on broadening its international distribution to more customers with more
products, 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 developed new line of dietary supplements is
currently being launched 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. 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 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
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
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 early part of the fourth quarter. The Chilean company is
also expected to be the Company's avenue for penetration into other potential
Latin American markets.
RESULTS OF OPERATIONS
Net sales for the three and nine months ended September 30, 1998 were
$31,608 and $793,937, respectively, compared to net sales of $873,439 and
$2,170,927, respectively, for the same period last year, a decrease of $841,831
or 96.4% and $1,376,990 or 63.4%. The decrease in net sales for the three and
nine months ended September 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 95.1%
of net sales for the nine months ended September 30, 1998.
Dependence on One Customer. In April 1998, the Chinese government
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. This recent
ban has forced the Company to discontinue its distribution of products to its
major 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 orders in the third quarter of
1998 from new customers for new products, both internationally and domestically.
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.
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.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
International sales for the three and nine months ended September 30,
1998 represented 93% and 99% of the Company's net 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 nutritional supplements for
health and well being both domestically and internationally, the Company
anticipates this line to be the primary foundation for revenue growth and
profitability in the future.
The Company's gross profit margin for the three and nine months ended
September 30, 1998 was 52.5% and 41.5%, respectively, compared to 31% and 35.8%
for the same period last year, an overall increase of 5.7% for the nine months.
The increase in gross margin percentage for the nine months ended September 30,
1998 as compared to the same period last year is due to the higher gross margin
percentages on sales of product shipped to new customers in the domestic and
international market.
Selling, general and administrative expenses for the three and nine
months ended September 30, 1998 were $250,560 and $679,142, respectively,
compared to $328,642 and $844,944 for the same period last year. This represents
an overall decrease of $165,802 for the nine 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 $135,583 were the largest portion of
selling, general and administrative expenses for the nine month period ended
September 30, 1998, representing 17.1% of net sales.
Net loss for the three and nine months ended September 30, 1998 was
$(243,867) or $(.01) per share and $(345,617) or $(.01) per share, respectively,
compared to a net loss of $(83,774) or less than $(.01) per share and $(72,444)
or less than $(.01) per share for the same period last year.
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.
The Company's investment in Baywood Nutritionals, S.A. incurred
start-up costs which contributed to a net loss in the equity of the investment
in the amount of $14,158.
CAPITAL EXPENDITURES
During the three and nine months ended September 30, 1998, the Company
had not incurred material expenditures for property and equipment.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had $297,082 in current assets of
which $170,878 or 57.5% was cash and receivables. Total current liabilities for
the same period totalled $171,703. This represents a ratio of current assets to
current liabilities of 1.73 at September 30, 1998. 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 $6,369 of discounts under these
agreements in the nine months ended September 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 is currently exploring alternatives for raising debt or
equity financing in order to properly fund the Company's working capital needs
and to significantly increase the Company's sales growth of new products into
new distribution channels. The Company recognizes that the outcome of any recent
settlements of outstanding litigation will necessitate the implementation of
more immediate debt or equity financing.
The Company entered into an agreement with Abacus Capital, L.L.C.
("Abacus") on August 31, 1998 as investment bankers for the Company. The nature
of the agreements entered into with Abacus is to facilitate the Company's needs
for raising the necessary capital to fund the Company's acquisitions of other
companies within the natural products industry. Through these agreements, the
Company acquired a 15% interest in BII Acquisition Company ("BII") for $75,000.
The Company has no additional commitments to provide cash to BII although BII
may raise substantial debt or equity financing to make acquisitions that are
synergistic within the existing business plans of the Company.
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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
A full description of the Company's material legal proceedings was
provided under Part I, Item 3 of the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997. No new reportable events or material
developments have occurred in the third quarter except for the following:
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 sought
compensatory and punitive damages against the Company and other defendants of
approximately of $1,200,000. On or about October 1, 1998, the Company formally
entered into a written agreement with St. Anthony's Parish of Somerville,
Massachusetts and other plaintiffs to settle all of the plaintiffs' claims
against the Company for $100,000.
As set forth in the Company's Annual Report, John A. Shannon filed a
petition against the Company for $124,338.17 in attorney's fees. The petition
was based on an arbitration order awarding Shannon attorney's fees pursuant to
his demand for arbitration filed against the Company to seek a determination
that 1,000,000 in options granted to him on January 3, 1993 were valid and in
effect until January 1, 1998. A hearing on the attorney's fees issue was held on
October 27, 1998, and the arbitrator issued an award against the Company for
$50,000 in attorneys' fees.
On or about September 11, 1998, John A. Shannon filed a complaint in
the Arizona Superior Court against the Company and certain principals of the
Company for royalties allegedly due to Shannon under a consulting agreement.
Shannon claims that the Company and certain principals of the Company wrongfully
induced him to waive his rights under his consulting agreement to these
royalties. Shannon is seeking approximately $750,000 plus interest in damages.
At this stage of the proceeding, no prediction can be made as to the likelihood
of an unfavorable outcome and no estimate can be made of the amount or range of
potential loss, if any.
Item 2 - CHANGES IN SECURITIES
None
Item 3 - DEFAULTS UPON SENIOR SECURITIES
None
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
Item 5 - OTHER INFORMATION
None
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Exhibit Name Method of Filing
- -------------- ------------ ----------------
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 Authorization to Proceed Exhibit filed herewith
10.2 Safekeeping Agreement Exhibit filed herewith
10.3 Memorandum of Agreement Exhibit filed herewith
10.4 Stock Purchase Agreement Exhibit filed herewith
10.5 Consulting Agreement Exhibit filed herewith
27.1 Financial Data Schedule Exhibit filed herewith
* 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.
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<PAGE>
BAYWOOD INTERNATIONAL, INC.
(b) Reports on Form 8-K
On October 20, 1998, the Company filed a Current Report on
Form 8-K regarding the settlement of the lawsuit with St. Anthony's Parish of
Somerville, Massachusetts.
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<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: November 13, 1998
------------------------------
Neil Reithinger
Chairman of the Board, President,
C.E.O. and Principal Accounting Officer
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AUTHORIZATION TO PROCEED
This Authorization to Proceed is entered into as of the date set forth
below by and between Baywood International, Inc. ("Baywood") and Abacus Capital,
L.L.C. ("Abacus") with respect to the following.
A. Baywood and Abacus have had preliminary discussions with respect to a
transaction (the "Transaction"), whereby Baywood, Abacus and additional parties,
as yet unidentified, would form an acquisition company (the "Company") to
acquire a target company.
B. Baywood desires that these discussions proceed with the intent to
finalize formation of the Company and the basic terms of the Transaction with
Abacus, and Abacus is willing to proceed on the terms and conditions set forth
herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and conditions set forth below, and intending to be legally bound, the parties
hereby agree as follows:
1. DEPOSIT. In consideration of Abacus' agreement to continue negotiations
with respect to the Transaction and to have documentation drawn by counsel to
effectuate the Transaction, Baywood hereby agrees to deposit with Monahan &
Biagi, P.L.L.C., Ten Thousand Dollars ($10,000) (the "Deposit") to be held
pursuant to the terms of the Safekeeping Agreement attached as Exhibit A hereto.
2. DOCUMENTATION. Abacus agrees to have drafted the documentation to
further negotiate and finalize the Transaction, and to deliver initial drafts of
such documentation to Baywood within five (5) business days after receipt of the
Deposit.
3. FINALIZATION OF TRANSACTION; TERMINATION OF AGREEMENT. Upon delivery of
the above-referenced documentation, Baywood and Abacus shall negotiate in good
faith toward finalization of the Transaction. If, within thirty days thereafter,
for any reason the parties or either of them are unable to reach final agreement
with respect to the Transaction, then, unless the parties agree otherwise, this
Agreement shall terminate.
(a) Upon termination of this Agreement, Baywood shall be refunded one-half
of the Deposit, without interest, or $5,000, and Abacus shall receive the
remaining one-half.
(b) If the Transaction is finalized, the full amount of the Deposit shall
be applied to the purchase by Baywood of stock in the Company.
<PAGE>
(c) If the Transaction is finalized and Baywood fails to close the
acquisition of stock in the Company, this Agreement shall terminate and the
entire Deposit shall be payable to Abacus.
4. ACKNOWLEDGMENTS OF REPRESENTATION. The parties acknowledge and accept
that Monahan & Biagi, P.L.L.C. ("M&B") is counsel for Abacus. In the event of
any dispute hereunder, Baywood agrees that M&B shall not be disqualified from
continuing to represent Abacus as a result of its involvement with this
transaction.
5. DISBURSEMENTS FROM SAFEKEEPING. During the term of this Agreement,
Abacus shall be permitted to direct disbursements from the Deposit (and out of
Safekeeping), to a maximum aggregate of $5,000, to M&B for services rendered in
connection with the Transaction and drafting of the documentation in connection
therewith.
IN WITNESS WHEREOF the parties hereby execute this Authorization to Proceed
this 27th day of July, 1998.
ABACUS CAPITAL, L.L.C. BAYWOOD INTERNATIONAL, INC.
/s/ Jerry L. Smith /s/ Neil Reithinger
- -------------------------- ---------------------------------
Jerry L. Smith, Manager Neil Reithinger, President/CEO
SAFEKEEPING AGREEMENT
This Safekeeping Agreement is entered into effective the 27th day of July,
1998, between Abacus Capital, L.L.C. ("Abacus") and Baywood International, Inc.
("Baywood").
RECITALS
A. Baywood is depositing the sum of Ten Thousand Dollars ($10,000) (the
"Deposit") pursuant to the Authorization to Proceed executed by and between the
parties (the "Agreement"). Capitalized terms used and not defined herein shall
have the meanings assigned to them in the Agreement.
B. The parties desire that the Deposit be held in safekeeping by Monahan &
Biagi P.L.L.C, pursuant to the terms set for below.
NOW THEREFORE, based upon the above recitals and in consideration of the
covenants contained herein, the parties agree as follows:
AGREEMENT
1. The parties hereby deliver Ten Thousand Dollars ($10,000) (the "Funds")
to Monahan & Biagi, P.L.L.C. to hold in safekeeping subject to the provisions
contained herein.
2. Monahan & Biagi P.L.L.C. shall hold the Funds in safekeeping in a trust
account and shall disburse the Funds in accordance with the Agreement.
Notwithstanding the foregoing, Monahan & Biagi P.L.L.C. shall comply with any
written instructions which shall be agreed to by the parties. Upon actual
receipt of written instructions by a party hereto (the "instructing party") to
take any action inconsistent with the Agreement, Monahan & Biagi, P.L.L.C. shall
forthwith notify the non-instructing party in writing of its receipt of such
instruction and that Monahan & Biagi P.L.L.C. shall comply with said instruction
unless a written objection thereto is actually received by Monahan & Biagi,
P.L.L.C. on or before the tenth (10th) day following the non-instructing party's
actual receipt of said notice. If no objection is received by Monahan & Biagi,
P.L.L.C. within said ten (10) day period, Monahan & Biagi, P.L.L.C. shall
release the Funds to the instructing party. Any objection provided to Monahan &
Biagi, P.L.L.C. shall include specific facts supporting the objection and, if
possible, documentary evidence supporting those facts.
3. If a party objects in writing to the release of the Funds pursuant to
paragraph 2 above, or if at any time during the life of this Safekeeping
Agreement any reasonable uncertainty exists, or any dispute shall arise between
any of the parties hereto, or their respective successors or assigns, as to the
<PAGE>
delivery by Monahan & Biagi, P.L.L.C. of the Funds, as to the ownership or right
of possession thereto, or as to any matter pertaining to this Safekeeping
Agreement, Monahan & Biagi, P.L.L.C. may, at its sole and absolute discretion,
hold in its possession, without liability, the Funds until such dispute or
uncertainty shall have been settled to Monahan & Biagi, P.L.L.C.'s satisfaction;
or interplead or commence any similar action and deposit said Funds with the
Clerk of the Superior Court for King County; or deposit said Funds with an
escrow agent of its own choosing, and thereupon shall be relieved of any and all
liability, whatsoever, with respect thereto; and the parties jointly and
severally agree to pay all costs and attorneys' fees Monahan & Biagi, P.L.L.C.
incurs in any such suit or dispute.
4. The parties expressly indemnify and hold harmless Monahan & Biagi,
P.L.L.C., its agents, attorneys and employees for any and all acts under this
Agreement except for willful misconduct or recklessness in the deposit and
handling and delivery of the Funds.
5. The parties hereto expressly acknowledge and accept that Monahan &
Biagi, P.L.L.C. has acted as and is the attorney at law for Abacus in connection
with the underlying transactions referred to herein.
6. The undersigned expressly acknowledge that each has read the foregoing
agreement and understands and agrees to the terms contained herein.
7. Any notice or other communication which is required or permitted
hereunder shall be in writing and shall be deemed to have been delivered and
received (a) on the day of (or, if not a business day, the first business day
after) its having been personally delivered or telecopied to the following
address or telecopy number; (b) on the first business day after its having been
sent by overnight delivery service to the following address; or (c) if sent by
regular, registered or certified mail, when actually received at the following
address;
If to Abacus:
Abacus Capital L.L.C.
10900 NE 8th Street, Suite 900
Bellevue, WA 98004
Attention: Jerry L. Smith
Telecopier No.: (425) 450-0764
Telephone No.: (425) 450-0686
If to the Baywood:
Baywood International, Inc.
14950 North 83rd Place, Suite 1
<PAGE>
Scottsdale, AZ 85260
Telecopier No.: (602) 483-2168
Telephone No.: (602) 951-3956
If to Monahan & Biagi, P.L.L.C.
Monahan & Biagi
701 Fifth Avenue
Suite 5701
Seattle, WA
Attention: Susan E. Lehr
Telecopier No.: (206) 587-5710
Telephone No.- (206) 587-5700
ABACUS CAPITAL, L.L.C. BAYWOOD INTERNATIONAL, INC.
By /s/ Jerry L. Smith By /s/ Neil Reithinger
---------------------------- -------------------------------
Jerry L. Smith, Manager Neil Reithinger, President/CEO
The above Safekeeping Agreement provisions are received and accepted this
day ____ of _____________________, 1998.
MONAHAN & BIAGI, P.L.L.C.
/s/ James F. Biagi, Jr.
----------------------------------
James F. Biagi, Jr.
Manager
MEMORANDUM OF AGREEMENT
This is a Memorandum of Agreement ("Memorandum") entered into as of the
31st day of August, 1998, by and between Baywood International, Inc. ("Baywood")
and Abacus Capital, L.L.C. ("Abacus").
The parties have previously entered into an Authorization to Proceed and
Safekeeping Agreement, whereby Baywood has deposited Ten Thousand Dollars
($10,000) (the "Deposit"), and the parties have agreed to proceed in good faith
to negotiate and finalize this Memorandum and the other agreements contemplated
herein.
In consideration of the covenants set forth herein, and intending to be legally
bound, the parties hereby agree as follows:
1. STOCK PURCHASE AND CONSULTING. Baywood and Abacus are contemporaneously
herewith entering into the Stock Purchase Agreement annexed as Exhibit A (the
"Stock Agreement"), for the stock of BII Acquisition Company ("Newco"), as set
forth in the Stock Agreement, and the Consulting Agreement annexed as Exhibit B
(the "Consulting Agreement"), for services as set forth in the Consulting
Agreement. The Deposit shall be applied against the purchase price under the
Stock Agreement.
2. ACQUISITION OF TARGET. The parties intend that Newco shall acquire a Target,
and that up to and as of the date of acquisition thereof (the "Acquisition
Date"), Baywood will own 15% of Newco. The parties' intent is that upon the
acquisition of the Target, Baywood's interest in Newco will be 15%, taking into
account, or making provision for, any interests convertible into equity of
Newco.
3. RESPONSIBILITIES OF ABACUS. Upon (i) closing of the purchase and sale under
the Stock Agreement and (ii) payment to Abacus of the consideration called for
in the Consulting Agreement, Abacus agrees to use its best efforts to identify a
Target and negotiate and close an associated acquisition transaction that meet
the parameters set forth on Schedule 1 hereto (the "Parameters"). Upon Baywood's
acceptance of such Target, Abacus shall use its best efforts to have Newco
acquire the Target on such terms as are consistent with those set forth on
Schedule 1 and are commercially reasonable, including the ability to obtain
commercially reasonable financing, and as are acceptable to Baywood. The parties
recognize that it may not be possible to identify a Target that meets each and
every Parameter, but the parties agree to use their best efforts to identify a
Target that is mutually acceptable to Baywood and Abacus. The parties also
recognize that it may not be possible, despite the parties' best efforts, to
identify a mutually acceptable Target or to close the acquisition of a Target
and that the transactions contemplated below will not occur. If the transactions
contemplated hereby have not occurred within one year of the
<PAGE>
closing under the Stock Agreement, or if the closing has not occurred under the
Stock Agreement as contemplated therein, either party may terminate this
Memorandum of Agreement and all of the parties' rights and obligations
hereunder. Abacus shall have the right to terminate this Memorandum of Agreement
and the parties' rights and obligations hereunder if Baywood fails to pay the
Fee as set forth in the Consulting Agreement.
4. SHAREHOLDER AGREEMENT. The parties intend that Abacus will finance the
acquisition of the Target through the participation of an equity or debt
investor or investors (the "Investor"), who may receive some percentage of the
stock of Newco outstanding as of the Acquisition Date. The parties acknowledge
that they may be required to enter into a Shareholder Agreement with the
Investor whereby, if required by the Investor, the Investor may have voting
control of a sufficient amount of Abacus' Newco stock (the "Escrowed Abacus
Stock") to give the Investor majority voting control of Newco as of the
Acquisition Date or if certain operating criteria are not met. In addition,
pursuant to the terms of the Shareholder Agreement, some or all of the Escrowed
Abacus Stock may be transferable to the Investor if Newco does not meet certain
performance criteria, with the remainder being retained by Abacus. The parties
acknowledge that the Investor may require different or additional terms in the
Shareholder Agreement, and the parties shall use their best efforts to reach a
form of Shareholder Agreement that is acceptable to all parties. Subject to the
foregoing, Abacus agrees to use its best efforts to vote its Newco stock to
elect a director of Newco nominated by Baywood, and to obtain the Investor's
agreement to do the same.
5. MANAGEMENT OF NEWCO. As part of the acquisition transaction contemplated
herein, Abacus may, to the extent necessary, hire management to operate Newco
upon completion of such acquisition. In such event, Abacus may provide
management with the opportunity to earn up to ten percent (10%) of the stock of
Newco (calculated in the same manner as Baywood's 15% is calculated) for meeting
performance goals established by Abacus and the Investor. If acceptable to the
Investor, Baywood shall have the opportunity to manage Newco and earn the
additional stock.
6. EXIT STRATEGY. The parties intend to use their best efforts to improve the
operations and/or financial position of Newco so that it may be taken to a
public market or acquired by Baywood through share exchanges. Additionally, the
parties shall negotiate with the Investor to provide Baywood with an option to
acquire additional Newco stock from Abacus and the Investor, based upon the
performance of Newco and Baywood. To the extent acceptable to the Investor,
Abacus agrees that it will exchange its Newco stock for free trading Baywood
stock (the "Baywood Exchange Shares") upon or after the acquisition of the
Target. If within thirty (30) days of the date of acquisition of the Target (the
"Acquisition Date") Baywood elects to effect such exchange, the valuation of
Abacus' Newco stock shall be based on the acquisition price of the Target;
<PAGE>
provided, however, that Baywood shall deliver the Baywood Exchange Shares to
Abacus within ninety (90) days of its election to exchange. If Baywood does not
deliver the Baywood Exchange Shares within such ninety days, the valuation of
Abacus' Newco stock shall be based on the acquisition price of the Target,
subject to adjustment for increases in earnings or other events that occur after
the acquisition of the Target. The number of Baywood Exchange Shares shall be
determined as set forth in the Consulting Agreement, using the twenty (20)
trading days immediately prior to the Acquisition Date.
7. AFFILIATES. Baywood acknowledges that Abacus will retain affiliates,
including, without limitation, Gateway Group and McRobert & Associates in
connection with the transactions contemplated hereby.
8. COUNTERPARTS. This Memorandum may be signed in one or more counterparts, and
by facsimile transmission, and each such counterpart shall be deemed an
original, and all of such counterparts together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum as of the
date first set forth above.
BAYWOOD INTERNATIONAL, INC.
By /s/ Neil Reithinger
-------------------------------
Neil Reithinger, President
ABACUS CAPITAL, L.L.C.
By /s/ Jerry L. Smith
-------------------------------
Jerry L. Smith, Manager
<PAGE>
SCHEDULE 1
PARAMETERS OF TARGET
Type of Business: Natural products industry
Geographic Areas: Worldwide
Business Performance: EBITDA minimum of $500,000; minimum gross revenues of
$2,000,000.
Maximum Acquisition Value: 5 times EBITDA (subject to particular business
attributes and industry conditions)
Maximum Amount of Acquisition Debt: 100% if Seller-financed; 70% if
institutional.
Maximum Terms of Acquisition Debt: Target must be able to repay acquisition debt
over maximum of 7 years from current (i.e., pre-acquisition) EBITDA, as adjusted
for differences between new and current management compensation.
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT, dated as of August 31st, 1998 (the
"Agreement"), is between Abacus Capital, L.L.C. ("Seller"), and Baywood
International, Inc., a Nevada corporation ("Buyer").
WHEREAS Seller and Buyer have entered into a Memorandum of Agreement of
even date herewith (the "Memorandum"), pursuant to which the parties have agreed
to enter into a business relationship through an acquisition company;
WHEREAS Seller is the holder of Eighty-Five Thousand (85,000) shares of
Class A common stock and Fifteen Thousand (15,000) shares of Class B common
stock of BII Acquisition Company, a Washington corporation ("Company"); and
WHEREAS Seller desires to sell and Buyer desires to purchase from the
Seller all of Seller's shares of Class B common stock of Company (the "Purchased
Stock"), on the terms and subject to the conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants herein contained
and intending to be legally bound hereby, the parties agree as follows:
1. THE TRANSACTION
1.1 SALE AND PURCHASE OF STOCK. On the terms and subject to the conditions
set forth in this Agreement, on the Closing Date (as hereafter defined), the
Seller shall sell the Purchased Stock to the Buyer and the Buyer shall purchase
the Purchased Stock from the Seller.
1.2 CONSIDERATION. At the closing Buyer shall pay to Seller total
consideration of Seventy-Five Thousand Dollars ($75,000) in cash (the "Purchase
Price"). Buyer shall receive credit against the Purchase Price for Ten Thousand
Dollars ($10,000) previously deposited pursuant to the Authorization to Proceed
dated as of July 27, 1998.
2. REPRESENTATION AND WARRANTIES OF THE BUYER
2.1 BUYER'S SOPHISTICATION. The Buyer, with the assistance of its
professional advisors, has such knowledge and experience in financial and
business matters that Buyer is capable of evaluating and has evaluated the
merits and risks of this purchase of the Purchased Stock for Buyer's own
account.
2.2 INVESTMENT OBJECTIVE. Buyer is acquiring the Purchased Stock pursuant
to this Agreement for investment for its own account and not with a view to the
sale or distribution of any part thereof. Buyer has no present intention of
selling, granting participation in or otherwise distributing the same. Buyer
acknowledges that the Purchased Stock has been offered and sold pursuant to
exemptions from registration under the Securities Act of 1933 and relevant state
securities laws and that the reliance of the Seller upon such exemptions is
predicated on the accuracy of Buyer's representations and
<PAGE>
warranties herein. Buyer has no current intention with respect to any such
future sale.
2.3 AUTHORIZATION AND ENFORCEABILITY. Buyer has all requisite power and
authority to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
authorized, executed and delivered by Buyer and constitutes the valid and
binding obligation of Buyer, fully enforceable in accordance with its terms.
2.4 NO FINDER. Buyer has not taken any action which would give to any firm,
corporation, agency or other person a right to a consultant's or finder's fee or
any type of brokerage commission in relation to or connection with the
transactions contemplated by this Agreement.
2.5 EFFECTIVE AGREEMENT. The execution, delivery, and performance of this
Agreement by Buyer and the consummation of the sale contemplated hereby will
not, with or without the giving of notice or lapse of time or both, result in
the breach of or conflict with any terms, covenant, condition or provision of,
result in the modification or termination of, constitute a default under, or
result in the creation or imposition of any lien, security interest, charge, or
encumbrance upon any of the properties or assets of the Buyer pursuant to any
charter, bylaw, commitment, contract or other agreement or instrument, to which
Buyer is a party or by which any of its assets or properties is or may be bound
or affected or from which it derives a benefit.
2.6 RESTRICTIONS, BURDENSOME AGREEMENTS. Buyer is not a party to any
contract, commitment or agreement, and Buyer or any of its properties and assets
is not subject to or bound or affected by any charter, bylaw or other corporate
restriction, or any order, judgment, decree, law, statute, ordinance, rule,
regulation or other restriction of any kind or character, which would prevent
Buyer from entering into this Agreement or from consummating the sale
contemplated hereby.
3. REPRESENTATION AND WARRANTIES OF THE SELLER
Seller represents and warrants to Buyer that, except as otherwise set forth
herein, or otherwise specifically disclosed:
3.1 ALL AUTHORIZED CAPITALIZATION, OUTSTANDING SHARES, TITLE. Seller is the
record and beneficial owner of and has legal and valid title to the Purchased
Stock, free and clear of all liens, pledges, charges, claims and other
encumbrances, actual or alleged. Delivery of the shares to Buyer upon execution
of this Agreement will transfer to Buyer legal and valid title to the shares
sold hereunder, free and clear of any liens, pledges, charges, claims and other
encumbrances. As of the date hereof, Seller is the sole shareholder of Company,
and the total issued and outstanding stock of Company is 85,000 shares of Class
A common stock and 15,000 shares of Class B common stock.
3.2 AUTHORIZATIONS AND ENFORCEABILITY. Seller has all requisite power and
authority to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly and validly
authorized, executed and delivered by Seller and constitutes the
<PAGE>
valid and binding obligation of Seller fully enforceable in accordance with its
terms.
3.3 EFFECTIVE AGREEMENT. The execution, delivery, and performance of this
Agreement by Seller and the consummation of the sale contemplated hereby will
not, with or without the giving of notice or lapse of time or both, result in
the breach of or conflict with any terms, covenant, condition or provision of,
result in the modification or termination of, constitute a default under, or
result in the creation or imposition of any lien, security interest, charge, or
encumbrance upon any of the properties or assets of the Seller pursuant to any
charter, bylaw, commitment, contract or other agreement or instrument, to which
Company or Seller is a party or by which any of either's assets or properties is
or may be bound or affected or from which either derives a benefit, which
violation would have a material adverse affect on the value of the shares being
purchased.
3.4 RESTRICTIONS, BURDENSOME AGREEMENTS. Seller is not a party to any
contract, commitment or agreement, and neither Company nor the Seller or any of
their respective properties and assets are subject to or bound or affected by
any charter, bylaw or other corporate restriction, or any order, judgment,
decree, law, statute, ordinance, rule, regulation or other restriction of any
kind or character, which would prevent Seller from entering into this Agreement
or from consummating the sale contemplated hereby.
3.5 ADDITIONAL STOCK ISSUANCES. Until such time as a Target (as defined in
the Memorandum of Agreement) is acquired, Abacus will not permit the Company to
issue any additional stock or other equity, or interest convertible into stock
or other equity, without the prior consent of Buyer. After the acquisition of a
Target, Abacus agrees that it will not vote its stock in the Company to permit
the Company to engage in an Extraordinary Common Stock Event as described in
paragraph 3.4(d)(i), (ii) or (iii) of the Company's Articles of Incorporation
without the prior consent of Buyer.
4. EXEMPTION FROM REGISTRATION-DISCLOSURE-ACCESS TO INFORMATION
4.1 INFORMATION AVAILABLE TO BUYER. A partial inducement to the Seller to
enter into this Agreement is the representation by Buyer that it has a high
degree of business and financial sophistication concerning the industry and the
business operations and prospects of Company. Buyer has available to itself and
its advisors all business and financial data of Company. Although Seller has
made such information available, based on its knowledge of relevant operating
data, the scope and examination by and on behalf of Buyer has been determined by
Buyer, based on its own sophistication and experience. Buyer has received all of
the information regarding Company and its business which has been requested.
4.2 RISK OF LOSS. Buyer recognizes that the Purchased Stock being purchased
hereunder involves a high degree of risk and that the entire amount of the
purchase price might be lost.
5. ACCESS TO INFORMATION
Buyer represents that its access to information has been as set forth
above. Without limiting the general nature of the representation, Buyer
acknowledges and represents that it has had access to certain specific matters
<PAGE>
and the opportunity to consider in detail the business and investment
ramifications of information obtained.
6. CLOSING; ISSUANCE OF CERTIFICATES
The purchase and sale contemplated hereunder shall take place at the
offices of Monahan & Biagi, P.L.L.C., 701 Fifth Avenue, Suite 5701, Seattle, WA
98104, at such time and within thirty (30) days of the execution hereof on such
date as is mutually agreed by the parties, and such date shall be the "Closing
Date." Issuance and delivery of the consideration to be paid to Seller pursuant
to the Consulting Agreement between Buyer and Seller of even date herewith (the
"Consulting Agreement") shall be a condition precedent to Seller's obligations
to close. Such issuance and delivery may be conducted simultaneously with the
closing hereunder. In addition to any other rights or remedies available at law
or in equity, Seller shall have the right to terminate this Agreement and its
rights and obligations hereunder if the closing shall not have occurred as
provided herein.
7. OTHER PROVISIONS
7.1 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given when
personally delivered or, if mailed, three days after mailed by United States
first-class, certified or registered mail, postage prepaid, to the other party
at the following addresses (or at such other address as shall be given in
writing by any party to the other):
7.1.1 If to Buyer, then to:
Baywood International, Inc.
Attn: Neil Reithinger, President
14950 North 83rd Place, Suite 1
Scottsdale, AZ 85260
Fax: (602) 483-2168
With a copy to:
Titus, Brueckner & Berry
Attn: Jon Titus
Scottsdale Center
7373 North Scottsdale Road, Suite B-252
Scottsdale, AZ 85253
Fax: (602) 483-3215
7.1.2 If to Seller, then to:
ABACUS CAPITAL, L.L.C.
Attn: Jerry L. Smith
10900 NE 8th St., Suite 900
Bellevue, WA 98004
Fax: (425) 450-0764
<PAGE>
with a copy to:
MONAHAN & BIAGI, P.L.L.C.
Attn: Susan E. Lehr
701 Fifth Avenue, Suite 5701
Seattle, WA 98104-7003
Fax:(206) 587-5710
7.2 SUCCESSORS AND ASSIGNS. This Agreement, and all rights and powers
granted hereby, shall bind and inure to the benefit of the parties and their
respective successors and assigns.
7.3 GOVERNING LAW. This Agreement has been made, executed and delivered in
and is to be governed and construed in accordance with the laws of the State of
Washington.
7.4 CAPTIONS. The captions in this Agreement are inserted solely for
convenience of reference and do not constitute a part of this Agreement, nor
shall they affect its meaning, construction or effect.
7.5 FURTHER ASSURANCES. Each party shall cooperate and take such action as
may be reasonably requested by another party in order to carry out the
provisions and purposes of this Agreement and the transactions contemplated
hereby.
7.6 AMENDMENT AND WAIVER. The parties may by mutual agreement amend this
Agreement in any respect, and any party, but only as to such party, may (a)
extend the time for the performance of any of the obligations of any other
party; (b) waive any inaccuracies in representations by any other party; (c)
waive compliance by any other party with any of its agreements contained herein
and the performance of any obligations by such other party; and (d) waive the
fulfillment of any condition that is precedent to the performance by such party
of any of its obligations under this Agreement. To be effective, all such
amendments or waivers must be in writing and be signed by the party against whom
enforcement of the amendment or waiver is sought.
7.7 ENTIRE AGREEMENT. This Agreement, the Memorandum and the Consulting
Agreement set forth all of the promises, covenants, agreements, conditions and
undertakings between the parties hereto with respect to the subject matter
hereof, and supersede all prior and contemporaneous agreements and
understandings, and inducements or conditions, if any, expressed or implied, and
whether oral or written.
7.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by facsimile transmission, each of which shall be deemed an
original and all of which together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Stock Purchase
Agreement as of the date first above written.
DATED this 31st day of August, 1998.
ABACUS CAPITAL, L.L.C.:
By /s/ Jerry L. Smith
-------------------------
Jerry L. Smith, Manager
BAYWOOD INTERNATIONAL, INC.
By /s/ Neil Reithinger
-------------------------
Neil Reithinger, President
<PAGE>
NUMBER SHARES
2B 15,000
See the restrictions on transfer
as provided for on the reverse
of this certificate
BII ACQUISITION COMPANY
a Washington corporation
The corporation is authorized to issue 2,000,000 shares of common stock -
no par value
This Certifies that Baywood International, Inc. is the
-----------------------------
registered holder of Fifteen Thousand and no/100 Shares
-----------------------------
fully paid and nonassessable shares
of the Class B Common Stock of BII Acquisition Company, no par value
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this Fifteenth day of September A.D. 1998
----------- -----------
/s/ Jerry L. Smith /s/ Susan E. Lehr
- ------------------------ ---------------------------
President Secretary
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement") made effective August 31st,
1998, is between Baywood International, Inc., a Nevada corporation (the
"Company"), and Abacus Capital, L.L.C., a Washington limited liability company
("Consultant").
WHEREAS, the Company desires to retain Consultant and Consultant has
consented to provide consulting services for the Company;
NOW, THEREFORE, the Company and Consultant agree to the following terms and
conditions of Agreement.
AGREEMENT
1. RETENTION. Beginning on the Effective Date, which is the date hereof,
the Company will retain Consultant, and Consultant will accept retention by the
Company, as a consultant reporting to the Company's President in accordance with
the terms of this Agreement.
2. DUTIES. Consultant's primary duties during the term of this Agreement
will be to assist the Company in identifying acquisition prospects, negotiating
for the purchase of such prospects, completing due diligence and other
conditions to a closing of such transactions, and arranging financing of such
transactions, as contemplated by that certain Memorandum of Agreement between
the Company and Consultant, of even date herewith (the "Memorandum"), and such
reasonable other duties as the Board of Directors of the Company may reasonably
require.
3. TIME OBLIGATIONS. Consultant will devote a reasonable amount of time and
its best efforts to its duties during the term of this Agreement.
4. COMPENSATION.
4.1 For all services rendered by Consultant under this Agreement, the
Company will pay Consultant total consideration of Seventy Five Thousand Dollars
($75,000.00) (the "Fee") plus the Options (as hereinafter defined). The Fee
shall be payable within sixty (60) days of the date hereof in either (a) cash,
or (b) free trading common shares of the Company (the "Consideration Shares").
The number of Consideration Shares shall be determined as follows:
(a) if the common stock of the Company is listed on any established
stock exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers, Inc.,
Automated Quotation System ("NASDAQ"), the average closing sales price for such
stock totaling $75,000.00 in consideration (or the closing bid, if no sales were
reported, then as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the immediately prior 20
consecutive trading days before the date hereof) as reported in the Wall Street
Journal or such other source the parties deem reliable totaling $75,000.00 in
consideration; or
(b) if the common stock of the Company is quoted on NASDAQ (but not on
the National Market System thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, then the average of the
means between the high and low asked prices for the common stock of the Company
on the immediately prior 20 consecutive trading days before the date hereof, as
reported in the Wall Street Journal or such other source as the parties deem
reliable.
4.2 If a Target (as defined in the Memorandum) is acquired as
contemplated therein, and the acquisition price of the Target exceeds
$15,000,000, Company shall issue to Consultant registered options (the
"Options") to acquire common stock of the Company at an
<PAGE>
exercise price (the "Exercise Price") equal to the greater of (a) 10% of the
then-current share price, or (b) the price per share of the Consideration
Shares. The number of Options shall be determined by dividing 50,000 by the
Exercise Price and multiplying the quotient by each $5,000,000 increment, or
part thereof, where each $5,000,000 (or part thereof) represents one increment,
by which the acquisition price of the Target exceeds $15,000,000. The Options
shall vest immediately upon grant and shall have a term of five (5) years.
5. TERM AND TERMINATION.
5.1 Unless otherwise terminated as provided in Section 5, this
Agreement shall expire on the first anniversary of the Effective Date.
5.2 This Agreement shall also be terminated upon the following:
(a) Death of Consultant's principals; or
(b) For cause as provided in Sections 6.1, 6.2 and 6.3; or
(c) Failure of the Company to deliver the Fee to Consultant
within sixty (60) days of the date hereof.
5.3 Consultant shall be entitled to compensation received through the
date of termination if termination is with cause by the Company. If Consultant
is terminated by Company without cause, Consultant shall be entitled to its full
compensation hereunder. Consultant and Company shall each use reasonable efforts
to mitigate any monetary damages suffered by each as a result of the termination
of Consultant's employment. If this Agreement is terminated by Company upon the
death of Consultant's principals, and the acquisition contemplated by the
Memorandum has not been consummated, Consultant shall be entitled to retain so
much of the compensation received through the date of termination to cover all
costs and expenses incurred by Consultant in performance of its duties
hereunder, and shall refund the remaining amount of such compensation, if any;
provided, however, that Company shall not be entitled to terminate this
Agreement without terminating any pending acquisition transaction and paying for
all costs and expenses associated with or arising out of such termination,
including costs of counsel for Newco (as defined in the Memorandum).
6. CAUSE AND BREACH.
6.1 Where reference is made in this Agreement to termination being by
the Company with or without cause, "cause" shall mean cause given by Consultant
to the Company and is limited to the following:
(a) Repeated failure to carry out the reasonable directions of
the Company, provided such directions are consistent with the duties
and obligations herein set forth to be performed by Consultant; or
(b) Violation of a state or federal law involving the commission
of a crime against the Company or a felony materially adversely
affecting the Company; or
(c) Any material breach of this Agreement or the Memorandum or of
any covenant herein or the material falsity of any material
representation or warranty not corrected as provided in Section 6.3
hereof; or
(d) The bankruptcy or insolvency of Consultant.
6.2 Where reference is made in this Agreement to termination being by
Consultant with or without cause, "cause" shall mean any breach of this
Agreement by the Company not corrected as provided in Section 6.3 hereof
<PAGE>
6.3 Whenever a breach of this Agreement by either party is relied upon
as a justification for any action taken by a party pursuant to any provision of
this Agreement, before such action is taken, the party asserting the breach
shall give the other party written notice of the existence and nature of the
breach and the opportunity to correct such breach during the period of twenty
(20) business days following such notice.
7. NOTICE. All notices and requests in connection with this Agreement shall
be in writing and may be given by personal delivery, registered or certified
mail, return receipt requested, telegram, telecopy or any other customary means
of communications addressed as follows:
Consultant: Abacus Capital, L.L.C.
Attn: Jerry L. Smith, Manager
10900 N.E. 8th Street, Suite 900
Bellevue, Washington 98004
Fax: (425) 450-0764
With a copy to: Monahan & Biagi, P.L.C.C.
c/o Susan Lehr
701 Fifth Avenue, Suite 5701
Seattle, Washington 98104-7003
Fax: (206) 587-5710
Company: Baywood International, Inc.
Attn: Neil Reithinger, President
14950 North 83rd Place, Suite I
Scottsdale, Arizona 85260
Fax: (602) 483-2168
With a copy to: Titus, Brueckner & Berry
Attn: Jon Titus
Scottsdale Center
7373 North Scottsdale Road, Suite B-252
Scottsdale, AZ 85253
Fax: (602) 483-3215
or to such other address as the party to receive the notice or request shall
designate by notice to the other. The effective date of any notice or request
shall be five days from the date which it is sent by the addresor by registered
or certified mail, or when delivered to a telegraph company, properly addressed
as above with charges prepaid, or when personally delivered.
8. ASSIGNMENT. The rights of either party shall not be assigned or
transferred either voluntarily or by operation of law without the other party's
written consent, nor shall the duties of either party be delegated in whole or
in part either voluntarily or by operation of law without the other party's
written consent. Any unauthorized assignment, transfer or delegation shall be of
no force or effect.
9. COMPANY'S COUNSEL. The Company has retained independent legal counsel to
advise it with respect to this Agreement and is not relying on the Consultant or
its counsel for legal or tax advice.
10. MISCELLANEOUS.
10.1 WAIVER. No waiver of any of the provisions of this Agreement
shall be valid unless in writing, signed by the party against whom such waiver
is sought to be enforced, nor shall failure to enforce any right hereunder
constitute a continuing waiver of these same or a waiver of any other right
hereunder.
<PAGE>
10.2 AMENDMENTS. All amendments of this Agreement shall be made in
writing, signed by the parties, and no oral amendment shall be binding on the
parties.
10.3 RELATIONSHIP OF PARTIES. Consultant is an independent contractor
and not an employee of the Company and agrees to comply with federal and state
tax and social security legislation as applicable to such independent
contractors. Consultant has no authority to bind the Company or incur any
obligation on behalf of the Company.
10.4 INTEGRATION. This Agreement, the Memorandum and the agreements
referenced therein, constitute the entire agreement between the parties relating
to the subject matter hereto and supersede and cancel any other prior agreements
and understandings of the parties in connection with such subject matter.
10.5 SEVERABILITY. The unenforceability or invalidity of any provision
or provisions of this Agreement shall not render any other provision or
provisions hereof unenforceable or invalid; if any one or more of the provisions
of this Agreement shall for any reason be excessively broad as to duration,
scope, activity or subject, it shall be construed by reducing such provisions,
so as to be enforceable to the extent compatible with applicable law.
10.6 HEADINGS. The headings or titles in this Agreement are for the
purpose of reference only and shall not in any way affect the interpretation or
construction of this Agreement.
10.7 GOVERNING LAW. This Agreement will be governed by the law of the
State of Washington, applicable to agreements between Washington residents to be
performed within the State of Washington.
10.8 ATTORNEYS' FEES. In the event of litigation to enforce this
Agreement, the prevailing party will be entitled to recover its reasonable
attorneys' fees as determined by the court.
10.9 COUNTERPARTS. This Agreement may be signed in one or more
counterparts, and by facsimile, and each such counterpart shall constitute an
original, and all taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
COMPANY: CONSULTANT:
Baywood International, Inc. Abacus Capital, L.L.C.
/s/ Neil Reithinger /s/ Jerry L. Smith
- -------------------------- ----------------------------
By: Neil Reithinger By: Jerry L. Smith
Its: President Its: Manager
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