UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-KSB
ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission file No. 0-22024
BAYWOOD INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Nevada 77-0125664
(state or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14950 North 83rd Place, Suite 1 85260
Scottsdale, Arizona (Zip Code)
(Address of principal executive offices)
Issuer'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 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 [ ]
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $809,899.
The aggregate market value of voting stock held by non-affiliates of the Company
was approximately $3,757,517 as of March 26, 1999.
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date of March 26, 1999 was 24,899,702.
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BAYWOOD INTERNATIONAL, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I..................................................................... 4
Item 1 - Description of Business.......................................... 4
Item 2 - Description of Property.......................................... 8
Item 3 - Legal Proceedings................................................ 9
Item 4 - Submission of Matters to a Vote of Security Holders.............. 9
PART II.................................................................... 9
Item 5 - Market for Common Equity and Related Stockholder Matters......... 9
Item 6 - Management's Discussion and Analysis or Plan of Operation........ 10
Item 7 - Financial Statements and Supplementary Data...................... 16
Item 8 - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................. 16
PART III.................................................................... 16
Item 9 - Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act....... 16
Item 10 - Executive Compensation.......................................... 18
Item 11 - Security Ownership of Certain Beneficial Owners,
Management and Changes in Control............................... 19
Item 12 - Certain Relationships and Related Transactions.................. 21
Item 13 - Exhibits and Reports on Form 8-K................................ 22
SIGNATURES.................................................................. 24
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"CAUTION REGARDING FORWARD-LOOKING STATEMENTS"
CERTAIN STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT RELATED TO
HISTORICAL RESULTS, INCLUDING, WITHOUT LIMITATION, 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 competition, 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 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 year. In particular, China's recent ban on direct marketing has
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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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
Baywood International, Inc. (the "Company"), develops, markets and
distributes nutritional supplements. The predecessor to the Company, Baywood
Financial, Inc., was originally incorporated in Nevada on June 13, 1986. Baywood
Financial, Inc. remained inactive until January 11, 1988 when it acquired all of
the assets of Helth-Pro International, Inc. ("Helth-Pro"), a Nevada corporation.
Helth-Pro's primary business was the marketing of animal food supplements and
other related products under an exclusive marketing agreement previously
acquired by Helth-Pro.
From 1988 until 1992, Baywood Financial, Inc. was inactive. In March
1992, the Company changed its name from Baywood Financial, Inc. to Baywood
International, Inc. Thereafter, the Company commenced the acquisition of
formulas, trademarks, marketing rights and product lines of dietary supplements
and skin care products from several companies. The Company had expanded its
product lines into fragrances for men and women and into animal health products
for horses and domestic pets. Due to the higher demand and market potential of
nutritional supplements and skin care products, the Company significantly scaled
down its efforts to promote and sell the fragrance and animal health lines.
Since the end of 1997, the Company has focused primarily on the development,
marketing and distribution of dietary supplements. The Company did not sell any
skin care products in 1998.
Since its inception, the Company had directed most of its sales efforts
toward international markets and had established either distribution or
registration of its products into certain Pacific Rim and European Countries.
Prior to 1998, the Company's product line had not been expanded in order to
capture the domestic market. As a result, the Company relied on the continued
distribution of one main product, Aloe Minerals Plus(TM), to one major customer
in China. In March of 1998, due to governmental restrictions in China, this
customer discontinued its purchases of Aloe Minerals Plus(TM) which caused a
dramatic decrease in the Company's sales for 1998.
The Company had not developed any market for its products prior to 1998
in the United States. Throughout 1998, the Company developed a new line of
nutritional supplements and implemented strategies to establish marketing and
distribution into health food stores. At this time, the Company is continually
exploring the international market, but has focused on strengthening the
domestic marketing and sales of its new branded product line in the United
States.
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.
COMPANY STRATEGY
The Company's primary objective is to become a recognized leader in the
provision of natural products that are based on natural compounds. The Company's
potential for growth at this time involves developing niche product lines that
can be marketed and sold into niche distribution channels. Niche product lines
include but are not limited to vitamins, minerals, herbs, nutraceuticals and
herbal teas. Niche distribution channels include retail in health food and
grocery and drug chains, mail order and physician distribution. The Company's
current product lines include nutraceutical products with current distribution
into health food retail in the United States. Through consistent active
involvement in the trends that affect the natural products industry, the Company
creates or improves products to fit market needs.
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DEVELOPMENTS IN 1998
The Company pursued and implemented the following fundamental
developments during 1998 that are considered to be instrumental components
toward positioning the Company for long-term growth:
DEVELOPMENT OF CORPORATE IDENTITY. Historically, Baywood has sustained
a minimal level of operational growth based on a few large customers in the Far
East that purchased a few basic products. Moreover, Baywood acted as a private
labelling company which in effect eradicated brand recognition for the Company's
name. Beginning in early 1998, the Company created and implemented a new
marketing image and corporate logo. In April 1998, two specific new product
developments occurred under a new brand: a line of nutraceutical supplements
under a new Condition Specifics(TM) line was added and two separate lines of
nutraceutical products were developed for the international market for sports
nutrition and for daily essential needs.
DEVELOPMENT OF CONDITION SPECIFICS(TM) BRAND OF PRODUcts. The Company's
line of nutraceuticals follows the 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 and conditions of consumers. The products include
sinuS(TM) for soothing sinus support, anti-OX(TM) as an antioxidant for
molecular and cellular protection, energy+(TM) for support against fatigue,
jointS(TM) for connective tissue and joint support, 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 (please see our web site at
www.baywoodinternational.com for more product information). The Company intends
to target many other specific nutritional needs of consumers and continually add
to this line of nutraceuticals under its new brand label. This line is currently
being marketed to health food stores across the United States. In 1999, the
Company intends to intensify its marketing efforts in this particular channel
and to emphasize its quality and unique brand.
DEVELOPMENT OF MARKETING AND ADVERTISING CAMPAIGN. The Company is
marketing its Condition Specifics(TM) brand of products directly and through
wholesale distributors which distributes to health food stores across the United
States. To create awareness at the retail and consumer levels, the Company
advertises through any number of channels including the distributor's
newsletters and catalogs, independent trade and consumer publications, direct
mailings to health food stores, radio and cable television.
FORMATION OF BAYWOOD NUTRITIONALS, S.A. IN SANTIAGO, CHILE. The
Company's sports nutrition line was specifically designed for the South American
market and is being marketed through a new sales and marketing office in Chile
formed as a joint venture in 1998 under the name of Baywood Nutritionals S.A.
The Company owns approximately 41% of Baywood Nutritionals S.A. This line which
will be marketed and distributed through health clubs includes ProPlus(TM) as a
comprehensive multi-vitamin, AminoPlus(TM) as an amino acid supplement,
SportsPlus(TM) for energy, ProteinPlus(TM) in a chocolate flavor for additional
protein supplementation and FiberPlus(TM) as a chewable for additional dietary
fiber and as a convenient snack. The Company is also introducing a line of
products marketed through physician's including ProTech(TM) as a comprehensive
multi-vitamin, LifeTech(TM) for antioxidant protection, DietTech(TM) as a fat
burner, SportsTech(TM) for energy, FiberTech(TM) as a chewable for additional
dietary fiber and as a convenient snack, CareTech(TM) for cardiovascular support
and PrimeTech(TM) to help maintain healthy cholesterol. The purpose of
establishing this office in Santiago, Chile is to facilitate the marketing and
distribution of branded products using the Company's brand name. It is intended
that the establishment of brand recognition in Chile will provide the proper
catalyst to open up other countries in Latin America as well as other
international markets.
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FORMATION OF BAYWOOD ESPANA IN BARCELONA, SPAIN. In January of 1999,
the Company established Baywood Espana in Barcelona, Spain. The entity was
formed to place the Company in a position to supply and service European
manufactured products to the Company's customers in the European Common Market
countries on a duty free and tariff-free basis.
ENGAGEMENT OF INVESTMENT BANKING FIRM AS BUY-OUT PARTNER FOR
ACQUISITIONS. In September of 1998, the Company signed an agreement with Abacus
Capital, L.L.C. ("Abacus") as part of its strategic plan of acquiring other
companies in the nutritional supplement industry. Abacus is a merchant banking
firm which specializes in the acquisition of private companies ranging from $5
million to $50 million in revenues in emerging growth niches. The Company's
engagement of Abacus demonstrates the first step toward initiating its
acquisition plan of other unique companies within the natural products industry.
It is anticipated that Abacus will facilitate the Company's needs for raising
the necessary capital to fund the Company's acquisition of other companies
within the nutritional supplement industry. Through this agreement, the Company
acquired a 15% interest in BII Acquisition Company ("BII") for $75,000. An
additional 10% interest may be obtained through a future management agreement.
BII is the holding company that has been organized to acquire the target
companies. It is anticipated that Abacus, through its informal commitments with
its institutional investors, will arrange for the financing through BII to
buyout any such targets. Through share exchanges at agreed upon future stock
prices, the Company has the ability to acquire such target companies from BII.
The aggregate amount of cash required at any point in time to fund any
acquisitions may exceed the Company's cash balance. The Company has no
additional commitments to provide cash to BII to fund acquisitions although BII
may need to seek substantial debt or equity financing to make acquisitions that
are synergistic within the existing business plans of the Company. Although the
Company expects that through its relationship with Abacus it will be able to
identify and complete acquisitions through BII of other growth companies within
the industry, none yet are specifically under contract and no assurance can be
given that any acquisitions will occur or will be profitable to the Company.
PRODUCT DEVELOPMENT
All of the Company's products are currently manufactured by third party
manufacturers. While management recognizes the primary importance of
establishing brand loyalty of its products internationally or domestically, it
also realizes the eventual importance of certain manufacturing capabilities as
the Company grows to reduce dependence on third party manufacturers, to assist
in maintaining any proprietary nature of its products, to reduce product costs
and to increase product capacity for itself and its large volume customers.
At this time, the Company also relies on its third party manufacturers
to maintain the quality of product components as new products are assessed and
developed. As the Company evaluates the needs for certain products within
existing or new markets, the Company develops the most effective formulas and
relies on its third party manufacturers to manufacture the product. Products are
then sampled and tested for final approval and packaging.
MARKET AND COMPETITION
The market for nutritional supplements is highly competitive in each of
the Company's existing and anticipated product lines and methods of
distribution. Numerous manufacturers and distributors compete with the Company
for customers throughout the United States and internationally in the packaged
nutritional supplement industry selling products to retailers such as mass
merchandisers, drug store chains, independent drug stores and health food
stores. Many of the Company's competitors are substantially larger and more
experienced than the Company, have longer operating histories and have
materially greater financial and other resources than the Company. Many of these
competitors are private companies, and therefore, the Company cannot compare its
revenues with respect to the sales volume of each competitor. There can be no
assurance that the Company will be able to compete successfully with its more
established and better capitalized competitors.
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Although certain of the Company's competitors are substantially larger
than the Company and have greater financial resources, the Company believes that
it competes favorably with other nutritional supplement companies because of its
quality of products and focus on certain niche products for certain niche
markets both internationally and domestically.
DEPENDENCE ON THIRD PARTY SUPPLIERS
There are numerous companies that produce or supply the types of
products the Company distributes. 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
approximately 92% and 99% of product purchases in the fiscal years ended
December 31, 1998 and 1997. The Company's other supplier, located in Oregon,
accounted for approximately 8% of product purchases in the fiscal year ended
December 31, 1998. The Company did not purchase any products from this supplier
in 1997.
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 of its third party suppliers could have a
significant adverse impact on the Company's operations.
PROPRIETARY INFORMATION
The Company does not hold any patents and currently relies upon a
combination of contractual rights, trademark laws and specially formulated
products to protect its proprietary rights in its products or packaging. The
Company seeks to protect its proprietary rights in its formulas through
restrictions on disclosure and use. Despite the Company's efforts to protect its
formulas, it may be possible for third parties, without authorization, to copy
or duplicate proprietary formulas or packaging, or to obtain and use its
proprietary information. Existing trademark laws afford only limited practical
protection for the Company's product lines. The laws and the level of
enforcement of such laws in certain foreign countries where the Company markets
its products often do not protect the Company's proprietary rights in its
products to the same extent as the laws of the United States. Because of the
rapid pace of the natural product industry's development, the Company believes
that the legal protection for its products is less significant to the Company's
success than the knowledge, technical expertise and marketing skills of the
Company's personnel, the frequency of product expansion and pace of market
penetration.
PRODUCT LIABILITY
The Company believes that its distribution of consumable products
generally involves a higher level of risk for product liability claims than the
distribution of its non-consumable products. The Company protects itself from
possible claims through product liability insurance coverage that is reviewed
and renewed annually depending on the changes in distribution and sales of the
Company's consumable and non- consumable products. In addition to carrying its
own coverage, the Company also requires its manufacturers to carry product
liability insurance.
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GOVERNMENT REGULATION
Advertising claims made by the Company with respect to its products are
subject to the jurisdiction of the Federal Trade Commission ("FTC") as well as
the Food and Drug Administration ("FDA"). In both cases the Company is required
to obtain scientific data to support any advertising or labeling health claims
it makes concerning its products, although no pre-clearance or filing is
required to be made with either agency.
The Company's products and its business operations may at any time be
subject to regulation by one or more federal agencies. The FDA in particular, is
primarily responsible for regulation of the labeling, manufacture and sale of
nutritional supplements which the FDA believes to be unapproved drugs or food
additives rather than food supplements. These products are primarily regulated
by the FDA under the auspices of the Federal Food, Drug and Cosmetic Act (the
"FFDCA"). Under the FFDCA, most dietary supplements are currently regulated as
foods, which require no approval from the FDA prior to marketing. Therefore, the
regulation of dietary supplements is far less restrictive than that imposed upon
manufacturers and distributors of prescription drugs. Dietary supplements,
however, must be labeled correctly to avoid being misbranded under the FFDCA.
Health claims made by nutritional supplement companies with respect to their
product are specifically regulated by the FDA. If such products make unapproved
health claims, the FDA may consider them as unapproved drugs, which require
approval by the FDA prior to marketing.
To the extent the Company establishes its own manufacturing facilities
in the future and produces products deemed by the FDA now or in the future to be
a food or dietary supplement, the operation of the Company's manufacturing
facilities will be subject to regulation by the FDA in compliance with good
manufacturing practices (GMP) just as the Company's third party manufacturers
currently are subjected to. Although the Company does not anticipate any
difficulties in complying with the GMP, any such difficulties that are
encountered at such a time could have a material adverse effect on the Company.
The regulations prohibit the use of any health claim on a dietary
supplement unless the health claim is supported by a significant scientific
agreement and is pre-approved by the FDA. Accordingly, most dietary supplements
will be precluded from bearing most health claims. The FDA regulations do not at
present limit consumer access to dietary supplements, unless such products
present safety concerns. The Company cannot determine at this time whether the
new regulations will have any adverse effect on its operations, although it
believes that they will not have a material adverse effect.
Overseas, registration is mandatory in each country prior to
distribution. This process may take from several months to over a year. The
Company, at any one time, may have several products awaiting approval for
registration and eventual distribution. The Company can provide no assurance as
to the timing of such approvals.
EMPLOYEES
At December 31, 1998, the Company had four (4) full-time employees.
Consultants are utilized as needed in marketing and sales. Commissioned
personnel include personnel that the Company may hire from time to time in sales
and marketing.
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ITEM 2 - DESCRIPTION OF PROPERTY
The Company's principal executive office is located at 14950 North 83rd
Place, Suite 1, Scottsdale, Arizona 85260. The Company leases its offices under
an operating lease that expires on July 31, 2000. Due to the initial low volume
of the Company's shipments domestically, the need for smaller space for
inventory items and to cut down on certain costs, the Company is able to utilize
its remaining office space to handle necessary functions at the current time.
Future minimum annual lease obligations for the remaining term of the lease are
as follows:
1999 $ 40,903
2000 24,542
--------
$ 65,445
The Company holds no other real estate interests.
ITEM 3 - LEGAL PROCEEDINGS
As of the date hereof, the Company has no current pending litigation.
In 1998, the Company reached settlement agreements in all of its then pending
cases on the terms set forth below.
The Company settled all claims against it by St. Anthony's Parish of
Somerville, Massachusetts and other plaintiffs. Pursuant to such settlement, the
Company agreed to pay to the Plaintiffs a total of $100,000 over 12 months. The
obligations of the Company were secured by a stock pledge. The Company had been
included as a defendant in a case filed by the Plaintiffs against Krystal Kleer,
Inc. Plaintiffs sought compensatory and punitive damages of $900,000 against the
Company and other defendants.
In December 1998, the Company formally settled all claims against it by
former director and officer Georgia Aadland. The Company agreed to pay Ms.
Aadland approximately $52,000 over 6 months. Ms. Aadland originally sought
approximately $210,374 plus interest, attorney's fees and costs for an alleged
breach of an employment agreement.
In December 1998, the Company reached a mutual settlement agreement to
resolve all pending and potential claims and disputes between the Company and
John A. Shannon. Pursuant to this settlement, the Company agreed to pay Mr.
Shannon $75,000 in cash and provided Mr. Shannon with options to purchase
400,000 shares of the Company's common stock at an exercise price of $0.25. The
options expire on December 10, 1999. Most recently, Mr. Shannon had filed a
complaint against the Company seeking approximately $750,000 for royalties
allegedly due to Mr. Shannon under a consulting agreement. The settlement
agreement covered Mr. Shannon's lost royalties claim and all other claims
against the Company.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
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PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock under the registered name of Baywood
International, Inc. was first quoted in May of 1992, and began trading on the
Over-the-Counter ("OTC") Bulletin Board under the symbol "BYWD".
Set forth below are the high and low closing prices for the Company's
common stock as reported on the OTC Bulletin Board for the last eight quarters:
YEAR ENDED DECEMBER 31, 1998 HIGH LOW
- - ---------------------------- ---- ---
March 31, 1998 .22 .10
June 30, 1998 .21 .06
September 30, 1998 .15 .06
December 31, 1998 .09 .03
YEAR ENDED DECEMBER 31, 1997
- - ----------------------------
March 31, 1997 .56 .28
June 30, 1997 .32 .18
September 30, 1997 .39 .20
December 31, 1997 .27 .10
The above quotations represent inter-dealer quotations without retail
markup, markdown or commissions and may not represent actual transactions.
As of December 31, 1998, there were approximately 680 holders of record
of the Company's common shares not including those shares held in brokerage
accounts.
The Company has not paid dividends on its common shares and has no
intention of paying dividends in 1999. The declaration and payment of dividends
and the amount paid, if any, is subject to the discretion of the Board of
Directors and will necessarily be dependent on the earnings, financial
condition, capital and surplus requirements of the Company and any other factors
the Board of Directors may consider relevant.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
Prior to 1998, the Company's main dietary supplement products included
bee pollen, bee propolis, royal jelly and a freeze dried aloe vera and mineral
drink. The Company's most popular product had been a freeze dried aloe vera and
mineral drink under the brand name, Aloe-Minerals Plus(TM), which was part of
the Company's Royal(TM) Line. This line had been the primary name under which
most of the Company's dietary supplements were sold internationally, accounting
for 93.2% of total net sales for the year ended December 31, 1998. The majority
of the Company's sales were comprised of Aloe-Minerals Plus(TM) to one
particular customer in China. This major customer accounted for 93.2% and 93.4%
of total net sales for the year ended December 31, 1998 and 1997, respectively.
The decrease is entirely due to the Chinese government's ban on direct marketing
firms in China. This decision by the Chinese government which affected the
Company's current major and other customers had 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
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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 distributed no skin care products in 1998. Net sales of
skin care products for the years ended December 31, 1998 and 1997 were zero and
$2,603, respectively. The decrease in sales of skin care was through one
particular customer in China with several products in the Company's La Vraie(TM)
line such as cleanser, toner, nurture cream, activator and lift powder. The
reduction in total net sales in skin care products was due to both the suddenly
imposed import restrictions of finished skin care product to China and the ban
on network marketing by the Chinese Government. Chinese Government regulations
which may change periodically, prohibit any further import of both finished
cosmetic and skin care products. Both cosmetic and skin care products must be
manufactured in China and must carry a Chinese manufacturing labor content of
over fifty percent. The Company believes that the decrease is not a result of
the decreased demand for the products.
Domestically, the Company's new Condition Specifics(TM) line accounted
for less than 1% of total net sales.
The Company concentrates on increasing profits by expanding sales
volume while containing or reducing costs since growth opportunities in the
Company's markets are driven by volume increases rather than price increases.
The Company's cost reduction efforts will be driven by economies of scale and
current out-sourcing of the production items supplied to the manufacturer such
as packaging and labels. As the Company grows, it also realizes the eventual
importance of certain manufacturing capabilities to reduce dependence on third
party manufactures, to assist in maintaining any proprietary nature of its
products, to reduce product costs and to increase product capacity for itself
and its large volume customers.
The Company anticipates that future growth of its business will come
through the efficient execution of its business strategy both internationally
and domestically. The Company can provide no assurance as to the timing and
success in the execution of its business strategy.
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RESULTS OF OPERATIONS
The following table sets forth income statement data of the Company as
a percentage of net sales for the periods indicated.
1998 1997
% %
------ -----
Net Sales 100.0 100.0
Cost of Sales 59.6 62.7
------ -----
Gross Profit 40.4 37.3
S, G & A Expenses:
Marketing 56.5 13.4
General and Administrative 56.9 26.8
Depreciation and Amortization -- 1.6
------ -----
Other (Income) and Expense - net 44.5 .4
------ -----
Loss Before Income Taxes (117.5) (4.9)
Income Tax Provision (18.6) --
Net (Loss) (136.1) (4.9)
====== =====
COMPARISONS OF YEAR 1998 TO 1997:
Net sales for the year ended December 31, 1998 were $809,899 compared
to net sales of $3,234,056 for the year ended December 31, 1997, a decrease of
75%. The decrease in net sales is entirely due to the 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 93.2% of net sales for
the year ended December 31, 1998. In 1998 international sales represented 99% of
the Company's total net sales compared to 99.1% for 1997. Distribution of
nutritional supplements remained as the main source of revenue for 1998. Net
sales of nutritional supplements and skin care products for the year ended
December 31, 1998 were $809,899 or 100% of total net sales and zero of total net
sales, respectively. Net sales of nutritional supplements and skin care products
for the year ended December 31, 1997 were $3,231,453 or 99.9% of total net sales
and $2,603 or less than 1% of total net sales, respectively.
The Company's gross profit margin for the year ended December 31, 1998
was 40.4% compared to 37.3% in 1997. The increase in gross profit for the year
ended December 31, 1998 is mainly due to total net sales being comprised of
nutritional supplements instead of a mix of both nutritional supplements and
skin care products in 1997. Skin care products have typically carried lower
gross margins compared to nutritional supplements. Additionally, cost of sales
in 1997 included an additional write-down of $105,000 for the remainder of the
Company's obsolete inventories.
Marketing, general and administrative expenses for the year ended
December 31, 1998 were $903,412 compared to $1,299,649 for the same period ended
December 31, 1997, a decrease of 30.5%. The primary factors in the decrease were
a reduction in overall corporate expenditures including a reduction in sales
commission expense as a percentage of net sales, legal fees, administrative
salaries and bad debt expense. The single largest expense in 1998 was for
advertising and promotional expenses relating to the Company's new line of
products and entrance into the domestic market which totalled $197,648 or 21.9%
of total marketing, general and administrative expenses.
-12-
<PAGE>
Net loss before income taxes for 1998 and 1997 was $(1,102,516) or
$(.05) per share as compared to $(157,260) or $(.02) per share, respectively. An
income tax provision was recorded in 1998 in the amount of $150,000 related to
the write-off of the Company's deferred tax asset.
The Company analyzed the value of the intangible assets related to its
skin care line at December 31, 1998. Because there was no revenue on this
product line for the year ended December 31, 1998, only $2,603 for the year
ended December 31, 1997, and the prospects for significant future revenue
uncertain, management determined that the remaining net book value of the assets
at December 31, 1997 of $164,186 was impaired. The Company wrote off that
balance in the fourth quarter of 1998.
In the year ended December 31, 1998, the Company entered into various
agreements with plaintiffs in claims filed against the Company.
The Company was named as a defendant in a $900,000 claim filed against
an entity controlled by its former chairman that related to the transfer to the
Company of certain furnishings and equipment by that related entity. Management
believed that it was named in the suit only by its association with a former
chairman and the Company intended to vigorously defend this claim. Management
believed it had a strong defense, but due to the probability of incurring
material costs associated with defending this case, the Company agreed to settle
with the plaintiff. The settlement was for $100,000 cash payable over twelve
months through September 30, 1999. Payments under the settlement are
collateralized by a pledge of 1,818,783 shares of the Company's common stock.
A former director and officer filed a demand for arbitration against
the Company. The demand sought $210,374 plus interest, attorney's fees and costs
for a breach of an employment agreement. The matter was arbitrated in 1998. The
Company settled with the former officer for approximately $52,000 in the year
ended December 31,1998. The $52,000 amount payable under this settlement at
December 31, 1998 is included in accrued liabilities in the accompanying balance
sheet. The balance is scheduled to be paid through a series of six payments
through May 1999.
An arbitrator ruled against the Company in a case related to the
invalidation of 1,000,000 options allegedly issued to the Company's former
chairman. The Company had claimed that the options were issued without proper
Board of Directors' approval. The arbitrator awarded the 1,000,000 options to
the former chairman. The options were exercisable at $0.25 and they were allowed
to expire on January 1, 1998. Also awarded were legal fees presented as
$124,338. The Company contested the fees awarded as unreasonable. The matter was
ultimately settled by an agreement wherein the Company will pay $75,000 cash and
the award of 400,000 options at an exercise price of $0.25 per share. The
options expire in December 1999. The balance of the $75,000 cash award remaining
at December 31, 1998 was $50,000 and is included in notes payable in the
accompanying balance sheet.
The Company incurred settlement costs, excluding its own legal fees, of
$192,761 in the year ended December 31, 1998.
Also during the year ended December 31, 1998, the Company acquired an
interest of 41% in Baywood Nutritionals, S.A. ("BNSA"). BNSA was formed to
market and distribute the Company's products in Chile. The investment is
accounted for under the equity method. The functional currency of BNSA is the
Chilean peso.
The Company invested cash of $60,000 in BNSA as part of the initial
capitalization. There is no commitment for the Company to provide additional
capital to BNSA. The Company intends to begin sales to BNSA in 1999. BNSA had
not yet started generating revenue at December 31, 1998. The Company's equity in
the loss of BNSA for the year ended December 31, 1998 was $19,972.
-13-
<PAGE>
OTHER INFORMATION
Interest Expense was $2,780 and zero in 1998 and 1997, respectively.
The increase is due to the Company's settlement in October of 1998 of litigation
with regard to the St. Anthony's Parish. Under this settlement, the Company
agreed to pay $100,000 over a period of twelve months.
Interest income for 1998 of $17,718 was generated from the Company's
invested cash balance in interest-bearing money market accounts.
The Company expects its expenditures for marketing costs to increase as
it attempts to diversify its customer base and expand in the domestic market.
The Company will be selective in its expenditures for marketing related items
and intends to begin advertising more heavily in domestic publications.
The Company has experienced significant loss in revenue due to Chinese
government's 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 1998, 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 nutritional products industry is highly competitive. There are many
companies with greater financial strength and marketing and distribution
capabilities than the Company. As indicated in industry publications, the
industry is evolving rapidly and undergoing major changes as the United States
market becomes saturated with new companies and more similar products. The
Company recognizes that its business in the natural products industry may be at
risk because the Company is small and competes against better known companies
with large advertising and marketing budgets and substantially greater sales
volume and financial resources.
CAPITAL EXPENDITURES
During 1998 and 1997, the Company incurred no capital expenditures for
property and equipment. As of December 31, 1998, the Company had no material
commitments for capital expenditures.
-14-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had $129,922 in current assets of
which $40,869 or 31.5% was cash. Total current liabilities for the same period
totalled $386,029. This represents a current ratio of current assets to current
liabilities of .34. Trade accounts payable remained in good standing due to good
relations, credit terms and payment histories with major suppliers and vendors.
The Company believes that as it increases its sales volume, liquidity will
improve greatly. Sales terms generally include either a 50% deposit at the time
of the order and the balance prior to shipment or 100% payment prior to shipment
for new customers. The Company has from time to time extended credit to its
major customers once they have established good payment histories. The Company
may require additional warehousing capabilities as the distribution grows in the
Unites States Market since the nature of the shipments are more volume of
smaller orders. The need for significant working capital is not anticipated for
accounts receivable and inventories due to timely turnover on accounts
receivable.
The Company neither anticipates any significant capital expenditures
nor are material capital expenditures required to meet expected growth through
existing operations. The Company may require additional capital and may attempt
to raise capital through the sale of preferred and common stock and through
private placements in the short and long term for the purpose of acquiring other
companies. Management recognizes the need to expand its distribution not only
through effective marketing of its current products in order to maintain its
competitive position in the marketplace, but also through either the merger
and/or acquisition of other companies in the natural products industry. The
Company believes that it will be able to obtain adequate sources of financing
should the opportunities for any potential mergers or acquisitions arise.
At this time the Company does not anticipate any large expenditures of
cash for research and development costs. Marketing costs associated with the
distribution of new products will be paid for by cash flows from existing
operating activities and through additional debt or equity financing.
The Company's cash balance decreased to $40,869 at December 31, 1998
from $668,906 at December 31, 1997. The accounts receivable balance decreased to
$2,171 from $274,450 at December 31, 1997. The Company consumed its cash funding
the operating loss, payments on legal settlements and investments in BII
Acquisition Company and Baywood Nutritionals S.A. The Company is attempting to
raise equity capital. Since December of 1998, the Company has relied on it
officers to fund short-term capital requirements in the form of loans from such
officers. Since December 1998, these officers have provided approximately
$300,000 to the Company. The Company will be dependent upon obtaining equity
capital in order to implement is business plan of penetrating the U.S. retail
distribution. The Company's present plan is to raise approximately $1,400,000.
Management believes that with funding of this amount, the Company will be
appropriately capitalized to meet the inventory and marketing related expenses
associated with developing a new customer base. However, there can be no
assurances that the Company will be successful in raising capital or
implementing its business plan.
During the year ended December 31, 1998, the Company entered into an
agreement with a third party to jointly form a new entity for the purpose of
seeking and making acquisitions of other entities with synergistic operations.
The Company invested $75,000 cash for a 15% interest in the newly formed entity,
BII Acquisition Company ("BII"). Under the agreement with the third party, the
Company will have the opportunity to obtain an additional 10% interest of BII
Acquisition Company by entering into a management agreement with BII when
operations commence. Also, the Company will have additional opportunities to
acquire a controlling interest in BII. As of December 31, 1998, BII has had no
material operations as the parties jointly investigate acquisition
opportunities. The Company is presently analyzing several target companies.
However, the Company has not yet entered into an agreement for an acquisition.
BII will raise capital separately to fund prospective acquisitions.
-15-
<PAGE>
YEAR 2000 ISSUES
The Company's accounting system is represented to be non-compliant
relative to Year 2000 ("Y2K") issues. The cost to update this software is not
expected to be material and the Company intends to identify suitable
alternatives and to correct any non-compliance issues by the end of the third
quarter of 1999. The Company's business relies on integrated accounting, order
entry, and inventory control systems. The Company also relies on standard office
productivity software which is represented as being Y2K compliant.
The Company does not anticipate any material adverse effect on the
business as a result of any failure by customers or vendors to achieve Y2K
readiness and no assurance is provided that these parties will have accurately
assessed their Y2K readiness status.
The Company does not currently have a contingency plan in place to
handle a "worst case scenario", as the Company believes that any non-compliant
systems do not pose a material risk to the Company. If, and to the extent that
the Company identifies material risks from non-compliance of third parties,
appropriate plans will be formulated at that time.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An audited balance sheet for the year ended December 31, 1998 and
audited statements of income, changes in stockholders' equity and cash flows for
the years ended December 31, 1998 and 1997 are set forth commencing on page 27.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
Name Age Position or Offices Held
- - ---- --- ------------------------
Neil T. Reithinger 29 Chairman of the Board, President &
Chief Executive Officer
Karl H. Rullich 65 Vice-President, Secretary & Director
Glen Holt 69 Director
Dr. Michael B. Shapiro 44 Director
Dr. David M. Franey 47 Director
Dr. Denise Forte-Pathroff 42 Director
Mr. Neil T. Reithinger has been the Company's Chairman of the Board,
President and Chief Executive Officer since April 3, 1998 and previously served
as Interim President from December 10, 1997. He was elected as a Director on
February 18, 1997. He was elected Chief Financial Officer, Secretary and
Treasurer on October 28, 1996. Mr. Reithinger has been Controller of the Company
since January 1994. Prior to joining the Company and from July 1992 through
December 1993, Mr. Reithinger worked in branch operations for Bank of America.
He received a Bachelors degree in accounting from the University of Arizona in
1992 and his certification as a Certified Public Accountant in 1996.
-16-
<PAGE>
Mr. Karl H. Rullich has been a Director since 1991. He was appointed
Vice-President on April 3, 1998 and has served as the Company's Director of
International Sales since May 1996. Prior to April 19, 1996, he served as
President, Chief Executive Officer and Treasurer of the Company. He worked as a
Marketing Director, General Manager and Vice President for Pfizer Hospital
Products Group in their international businesses and operations for over 25
years. Mr. Rullich holds a degree in economics from the Business College in
Essen, Germany. He emigrated from Germany to the United States in 1956 and
became a naturalized citizen in 1961.
Mr. Glen Holt has been a Director of the Company since 1992. As a
rancher and successful breeder for over 35 years, Mr. Holt, is an expert on
animal health and nutrition. He is a graduate from the University of Smith
Cornel. He is married to actress Annette Funicello, who is associated with the
Company's Cello by Annette(TM) fragrance line.
Dr. Michael B. Shapiro has been a Director of the Company since August
1995. Dr. Shapiro is an ophthalmologist at the University of Wisconsin, Madison.
He has also been Chairman of Davis Duehr Eye Associates, S.C. in Wisconsin since
1994 and is currently President of Eye-Deal Ocular Safety Products. Dr. Shapiro
received his degree in medicine from the Washington University in St. Louis,
Missouri. He completed his internship at Mercy Hospital and Medical Center at
the University of San Diego and his residency at the University of Wisconsin,
Madison. Dr. Shapiro has consulted for companies such as Bausch and Lomb,
Allergan and Unilens.
Dr. David M. Franey has been a Director of the Company since May of
1998. Dr. Franey is Associate Medical Director for Intergroup of Arizona. He is
board certified by the American Board of Internal Medicine. Dr. Franey received
his undergraduate and medical school education from the University of Wisconsin,
Madison. He completed his residency in internal medicine at Good Samaritan/VA
Hospital Program in Phoenix. He was in private practice from 1981 to 1985 before
joining The Scottsdale Clinic. After the acquisition of The Scottsdale Clinic by
Thomas-Davis Medical Centers in 1990, he became site medical director. He has
served as Department of Medicine Chair for SMH-North Hospital, Medical Records
Committee Chair for TDMC, and a member of the TDMC Q1 Committee. Dr. Franey is a
member of the American Medical Association, the Arizona Medical Association,
Maricopa County Medical Society, and the American College of Physician
Executives.
Dr. Denise Forte-Pathroff has been a Director of the Company since May
of 1998. Dr. Forte-Pathroff is a dermatologist in private practice in Bismarck,
North Dakota. She is currently President of DFP, Inc., a dermatological skin
care products company, and serves on the Board of Directors of BNC National
Bank. Dr. Forte-Pathroff received her degree in medicine from Tufts University
Medical School in Boston, Massachusetts and completed her residencies at the
University of Minnesota in Minneapolis, Minnesota and Temple University Skin &
Cancer Hospital in Philadelphia, Pennsylvania. She completed her internal
medicine internship at Abington Memorial Hospital in Abington, Pennsylvania. She
has been Board Certified with the American Academy of Dermatology since 1986 and
is a Clinical Associate Professor of Internal Medicine at the University of
North Dakota.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following persons did not file any Forms 4 during the fiscal year
ended December 31, 1998 and have not provided the Company with a written
representation that no such forms were required: Glen Holt, Dr. Michael B.
Shapiro, Dr. David M. Franey and Dr. Denise Forte-Pathroff.
-17-
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Summary compensation information for Mr. Neil Reithinger, the Company's
Chief Executive Officer for the year ended December 31, 1998 (the only "named
executive officer" within the meaning of Regulation S-B, Item 402(a)(2)
Instruction (1)), is as follows:
<TABLE>
<CAPTION>
Name and Other Restricted Securities LTIP
Principal Annual Stock Underlying Payouts All Other
Position Year Salary ($) Bonus ($) Compensation ($) Awards ($) OPTIONS/SARS (#) ($) Compensation ($)
- - -------- ---- ---------- --------- ---------------- ---------- ---------------- --- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mr. Reithinger 98 57,000 -0- -0- -0- 100,000 -0- 1,200 (1)
CEO 97 -0- -0- -0- -0- -0- -0- -0-
96 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
(1) The Company paid Mr. Reithinger a phone allowance of $1,200 during
fiscal year 1998 in his capacity as Chairman of the Board.
DIRECTORS
DIRECTOR COMPENSATION TABLE
<TABLE>
<CAPTION>
Number of
Annual Consulting Securities
Retainer Meeting Fees/other Number of Underlying
Name Fees ($) Fees ($) Fees ($) SHARES (#) Options/SARS (#)
- - ---- -------- -------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Neil Reithinger -0- -0- 1,200 -0- 100,000
Karl Rullich -0- -0- 1,200 -0- 100,000
Glen Holt -0- 1,000 -0- -0- 62,500
Dr. Michael Shapiro -0- 1,000 -0- -0- 62,500
Dr. Denise Forte-Pathroff -0- 1,000 -0- -0- 62,500
Dr. David M. Franey -0- -0- -0- -0- 62,500
</TABLE>
(1) Each "outside" Director not residing in Arizona (Messrs. Holt,
Shapiro and Forte-Pathroff) each received reimbursement for travel related
expenses during fiscal year 1998 associated with their attendance at the
Company's annual meeting.
(2) Mr. Reithinger and Mr. Rullich received a phone allowance of $1,200
in their capacity as Directors of the Company.
-18-
<PAGE>
EMPLOYMENT CONTRACTS
The Company had previously entered into an Employment Agreement with
Harvey J. Turner on July 19, 1996. On December 10, 1997, Mr. Turner resigned as
the Company's Chairman of the Board, President and Chief Executive Officer. The
Company and Mr. Turner entered a Settlement Agreement, dated January 9, 1998,
which provided that Mr. Turner would continue to receive his current monthly
salary until April 18, 1998, that he would cooperate with the Company in
maintaining its relationships and that he would remain subject to the covenant
not to compete provisions of his original Employment Agreement.
There are currently no other Employment Agreements with any officers of
the Company.
ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS OF THE COMPANY
During 1998, the Board of Directors held three (3) meetings. All
Directors attended at least two (2) of the three (3) meetings. The Compensation
Committee held one (1) meeting in which all members were present and the
Nominating Committee held one (1) meeting in which all members were present. Two
(2) meetings were held via unanimous consent. In addition to regularly scheduled
meetings, a number of Directors were involved in numerous informal meetings with
management, offering advice and suggestions on a broad range of corporate
matters.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND
CHANGES IN CONTROL
The following table sets forth certain information regarding shares of
common stock beneficially owned as of March 26, 1999 by (i) each person or
group, known to the Company, who beneficially owns more than 5% of the common
stock; (ii) each of the Company's officers and directors; and (iii) all officers
and directors as a group. The percentage of beneficial ownership is based on
24,899,702 shares outstanding on March 26, 1999 plus, for each person or group,
any securities that person or group has the right to acquire within 60 days
pursuant to options, warrants, conversion privileges or other rights. Unless
otherwise indicated, the following persons have sole voting and investment power
with respect to the number of shares set forth opposite their names:
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Owner Percent of Class
- - -------------- ---------------- ---------------- ----------------
Common Francis Choi (1) 7,301,587 27.8%
Hong Kong, China
Common Linda Lee (2) 1,466,147 5.6%
Hong Kong, China
(1) Mr. Choi is a citizen of Hong Kong, China. Mr. Choi holds 7,301,587 common
shares.
(2) Ms. Lee is a citizen of Hong Kong, China and a prior director of the
Company. Ms. Lee holds 1,466,147 common shares.
-19-
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Owner Class
- - -------------- ---------------- ---------------- -----
Common Neil Reithinger (1)(8) 244,900 (2)
Scottsdale, AZ
Common Karl H. Rullich (3)(8) 657,000 2.5%
Scottsdale, AZ
Common Glen Holt (4)(8) 337,500 1.3%
Encino, CA
Common Dr. Michael Shapiro (5) 222,500 (2)
Madison, WI
Common Dr. Denise Forte-Pathroff (6) 70,500 (2)
Bismarck, ND
Common Dr. David M. Franey (7) 64,500 (2)
Scottsdale, AZ
Common All Officers and Directors 1,596,900 6.1%
as a Group (1) - (7)
(1) Mr. Reithinger is the Company's Chairman of the Board, President and Chief
Executive Officer. He holds 124,900 common shares, an option, granted
January 29, 1997, which expires January 29, 2007 to purchase 20,000 common
shares at $0.42 per share and an option, granted February 26, 1998, which
expires February 26, 2008 to purchase 100,000 common shares at $0.13 per
share. Members of Mr. Reithinger's immediate family hold approximately an
additional 325,000 common shares for which Mr. Reithinger disclaims all
beneficial interest and control.
(2) Less than one percent
(3) Mr. Rullich is Vice-President, Secretary and a Director of the Company. Mr.
Rullich beneficially owns 530,000 shares, 505,000 shares of which are owned
in joint tenancy with his wife, Florence Rullich. He also holds an option,
granted January 29, 1997, which expires January 29, 2007, to purchase
25,000 common shares at $0.42 per share and an option, granted February 26,
1998, which expires February 26, 2008 to purchase 100,000 common shares at
$0.13 per share.
(4) Mr. Holt directly owns 125,000 common shares. He also beneficially owns
150,000 common shares held by his wife, Annette Funicello. He holds an
option, granted July 7, 1998, which expires July 7, 2008 to purchase 62,500
common shares at $0.06 per share.
(5) Dr. Shapiro directly owns 160,000 common shares. He holds an option,
granted July 7, 1998, which expires July 7, 2008 to purchase 62,500 common
shares at $0.06 per share.
(6) Dr. Forte-Pathroff directly owns 8,000 common shares. She holds an option,
granted July 7, 1998, which expires July 7, 2008 to purchase 62,500 common
shares at $0.06 per share.
(7) Dr. Franey directly owns 2,000 common shares. He holds an option, granted
July 7, 1998, which expires July 7, 2008 to purchase 62,500 common shares
at $0.06 per share.
(8) Director
-20-
<PAGE>
CHANGES IN CONTROL
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 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,
including Ms. Lee, 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.
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<PAGE>
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 29, 1997, the Board of Directors granted Neil Reithinger and
Karl Rullich each an option to purchase 20,000 and 25,000 shares of Common Stock
at $0.42 per share, respectively, exercisable immediately and until its
expiration on January 29, 2007. The options were granted pursuant to the
Company's 1996 Incentive Option Plan which was approved by the Stockholders.
The Company contracted for freight services with M-7 Consolidation,
Inc. and paid $104,737 to this entity in the year ended December 31, 1997. The
Company's accounts payable at December 31, 1997 includes $6,555 due to M-7.
Harvey J. Turner, the Company's former Chairman of the Board, President and
Chief Executive Officer, has been a substantial stockholder of M-7 since May of
1997 and a director of M-7 since August of 1997.
ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Method of
Exhibit Number Exhibit Name 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 Specimen Preferred Stock Certificate *****
4.4 Conditions of Preferred Certificate ******
4.5 Certificates Describing Rights and Restrictions *******
of Class "A", "B" and "C" Preferred Shares
as filed with the Secretary of State of Nevada
on July 18, 1997.
27.1 Financial Data Schedule Exhibit filed herewith
* Incorporated by reference to Exhibit 3.1 of annual report on Form
10-KSB (file no. 33- 10236) filed on April 18, 1997.
** 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 annual report on Form
10-KSB (file no. 33- 10236) filed on April 18, 1997.
****** Incorporated by reference to Exhibit 4.4 of annual report on Form
10-KSB (file no. 33- 10236) filed on April 18, 1997.
******* Incorporated by reference to Exhibit 4.5 of annual report on Form
10-KSB (file no. 33- 10236) filed on March 30, 1998.
-22-
<PAGE>
(b) Reports on Form 8-K
(i) On February 25, 1998, the Company filed a Current Report on
Form 8-K regarding Mr. Turner's resignation as a director of
the Company.
(ii) On May 28, 1998, the Company filed a Current Report on Form
8-K regarding Mr. Choi's conversion, as beneficial owner, of
Ms. Lee's 920,000 Class "C" Preferred Shares to 7,301,587
common shares.
(iii) On October 16, 1998, the Company filed a Current Report on
Form 8-K regarding a settlement agreement with St. Anthony's
Parish of Somerville, Massachusetts.
-23-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: March 24, 1999 /s/ Neil Reithinger
Baywood International, Inc. --------------------------------
Neil Reithinger
Chairman of the Board, President
& Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated:
Signature Title
/s/ Neil Reithinger Chairman of the Board, 03/24/99
- - ------------------------------ President &
Neil Reithinger Chief Executive Officer
/s/ Karl H. Rullich Vice-President, Secretary 03/24/99
- - ------------------------------ and Director
Karl H. Rullich
/s/ Glen Holt
- - ------------------------------ Director 03/31/99
Glen Holt
/s/ Dr. Michael Shapiro Director 03/25/99
- - ------------------------------
Dr. Michael Shapiro
/s/ Dr. Denise Forte-Pathroff Director 03/25/99
- - ------------------------------
Dr. Denise Forte-Pathroff
/s/ Dr. David M. Franey Director 03/26/99
- - ------------------------------
Dr. David M. Franey
-24-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
December 31, 1998 and 1997
INDEX TO FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT AUDITORS 26
BALANCE SHEET AS OF DECEMBER 31, 1998 27
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 28
STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS
ENDED DECEMBER 31, 1998 AND 1997 29
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 30
NOTES TO FINANCIAL STATEMENTS 31 - 41
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 42
-25-
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and Board of Directors of
Baywood International, Inc.:
We have audited the accompanying balance sheet of Baywood
International, Inc. as of December 31, 1998 and the related statements of
operations, stockholders' deficit and cash flows for each of the two years in
the period ended December 31, 1998. These financial statements are the
responsibility of Baywood's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Baywood
International, Inc. as of December 31, 1998, and the results of its operations
and cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.
As disclosed in Note 1, the accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The Company
has experienced material operating losses, primarily due to the loss of its
single largest customer, and had a net working capital deficiency of $256,107 at
December 31, 1998. Management is seeking equity capital and is implementing a
business plan that it believes will result in profitable operations. There can
be no assurances that the Company will obtain sufficient capital nor that
operations will become profitable. These and other conditions raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying financial statements do not include any adjustments that might be
necessary should the Company be unable to continue as a going concern.
Our audit was conducted for the purpose of forming an opinion on the
financial statements taken as a whole. The accompanying SCHEDULE II - Valuation
and Qualifying Accounts is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The information contained in the accompanying SCHEDULE II
- - - Valuation and Qualifying Accounts has been subjected to the auditing
procedures applied in the audit of the financial statements and, in our opinion,
is fairly stated in all material respects in relation to the financial
statements taken as a whole
/s/ King, Weber & Associates, P.C.
Tempe, Arizona
March 22, 1999
-26-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
BALANCE SHEET
As of December 31, 1998
ASSETS
CURRENT ASSETS
Cash and equivalents $ 40,869
Accounts receivable (net of allowance of $15,635) 2,171
Inventories 66,103
Prepaid expenses and other current assets 20,779
-----------
Total current assets 129,922
-----------
OTHER ASSETS
Investment in Baywood Nutritionals, S.A. 40,028
Investment in BII Acquisition Company 75,000
-----------
Total other assets 115,028
===========
Total assets $ 244,950
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 189,971
Sales commissions payable 363
Accrued liabilities 81,460
Notes Payable 114,235
-----------
Total current liabilities 386,029
-----------
NOTES PAYABLE - long-term portion 75,000
-----------
Total liabilities 461,029
-----------
STOCKHOLDERS' DEFICIT
Preferred stock, $1 par value, convertible
10,000,000 shares authorized
Class A, 35,000 shares issued, aggregate
liquidation preference of $35,000 35,000
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 (6,602,716)
-----------
Total stockholders' deficit (216,079)
===========
Total liabilities and stockholders' deficit $ 244,950
===========
See accompanying notes to financial statements.
-27-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
1998 1997
------------ ------------
NET SALES $ 809,899 $ 3,234,056
COST OF SALES 483,021 2,029,077
------------ ------------
Gross profit 326,878 1,204,979
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing expenses 457,828 433,747
General and administrative expenses 445,584 865,902
Depreciation and amortization 15,602 49,939
------------ ------------
Total selling, general and
administrative expenses 919,014 1,349,588
------------ ------------
Operating loss (592,136) (144,609)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 17,718 16,914
Miscellaneous expense -- (38,853)
Miscellaneous income 1,601 9,288
Interest expense (2,780) --
Settlement Expense (192,761) --
Write-off of Intangibles (164,186) --
Equity in Net Loss of Investee (19,972) --
------------ ------------
Total other expense (360,380) (12,651)
------------ ------------
LOSS BEFORE INCOME TAXES (952,516) (157,260)
INCOME TAX PROVISION (150,000) --
------------ ------------
NET LOSS $ (1,102,516) $ (157,260)
============ ============
NET LOSS PER COMMON SHARE $ (0.05) $ (0.02)
============ ============
DILUTED NET LOSS PER COMMON SHARE $ -- $ --
============ ============
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 21,888,917 17,498,115
============ ============
See accompanying notes to financial statements.
-28-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Preferred Stock Common Stock
Shares Amount Shares Amount
------ ------ ------ ------
BALANCE, DECEMBER 31, 1996 35,000 $ 35,000 17,593,115 $17,593
Recognition of preferred stock
in connection with claim 100,000 100,000
Retirement of Treasury Stock (95,000) (95)
Reclass of Redeemable
Preferred Stock 800,000 800,000
Issuance of Preferred
Stock Dividend 120,000 120,000
Net Loss
--------- ---------- ---------- -------
BALANCE, DECEMBER 31, 1997 1,055,000 $1,055,000 17,498,115 $17,498
--------- ---------- ---------- -------
Conversion of Preferred Stock (920,000) (920,000) 7,301,587 7,302
Conversion of Preferred Stock (100,000) (100,000) 100,000 $ 100
Net Loss
--------- ---------- ---------- -------
BALANCE, DECEMBER 31, 1998 35,000 $ 35,000 24,899,702 $24,900
--------- ---------- ---------- -------
<TABLE>
<CAPTION>
Additional
Paid-in Treasury Accumulated
Capital Stock Deficit Total
------- ----- ------- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $5,510,144 $ (96,100) $(5,222,939) $ 243,698
Recognition of preferred stock
in connection with claim (100,000)
Retirement of Treasury Stock (96,005) 96,100
Reclass of Redeemable
Preferred Stock 800,000 800,000
Issuance of Preferred
Stock Dividend (120,000)
Net Loss (157,260) (157,260)
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $5,314,139 $ -- $(5,500,200) $ 886,437
---------- ----------- ----------- -----------
Conversion of Preferred Stock 912,698 -- --
Conversion of Preferred Stock 99,900
Net Loss (1,102,516) (1,102,516)
---------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 $6,326,737 $ -- $(6,602,716) $ (216,079)
---------- ----------- ----------- -----------
</TABLE>
See accompanying notes to financial statements
-29-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
Year ended December 31,
1998 1997
-------- --------
OPERATING ACTIVITIES:
Net loss $(1,102,516) $(157,260)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation and amortization 15,602 49,939
Gain on sale of equipment -- (1,292)
Allowance on note and interest receivable -- 81,073
Write-off of intangibles 164,186
Deferred payments on legal settlements 169,768 --
Deferred income taxes 150,000 --
Equity in loss of investee 19,972
Changes in assets and liabilities:
Decrease in accounts receivable 272,279 229,376
(Increase) decrease in inventory (43,712) 57,126
(Increase) in prepaid expenses (155) (11,474)
(Decrease) in accounts payable and
accrued liabilities (157,928) (349,534)
----------- ---------
Net cash used by operating activities (512,504) (102,046)
----------- ---------
INVESTING ACTIVITIES:
Investment in Baywood Nutritionals, S.A (60,000) --
Investment in BII Acquisition Company (75,000) --
Proceeds on sale of computers and equipment -- 2,000
----------- ---------
Net cash (used) provided by
investing activities (135,000) 2,000
----------- ---------
FINANCING ACTIVITIES:
Proceeds from notes payable 75,000 --
Principal payments on notes payable (55,533) --
----------- ---------
Net cash provided by financing activities 19,467 --
----------- ---------
CASH AND EQUIVALENTS USED DURING YEAR (628,037) (100,046)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 668,906 768,952
=========== =========
CASH AND EQUIVALENTS, END OF YEAR $ 40,869 $ 668,906
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 2,181 $ --
Income taxes $ 50 $ 10,174
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of preferred stock dividend $ -- $ 120,000
Notes payable issued in connection with
legal settlements $ 169,788 $ --
Payment of trade payable through disposal
of equipment $ -- $ 3,000
Class B redeemable preferred stock converted
to Class C preferred stock $ -- $ 800,000
See accompanying notes to financial statements
-30-
<PAGE>
Note 1 - ORGANIZATION AND BASIS OF PRESENTATION
Baywood International, Inc. (the "Company"), develops, markets and
distributes nutritional supplements. Since its inception, the Company had
directed most of its sales efforts toward international markets and had
established either distribution or registration of its products into certain
Pacific Rim and European Countries. Prior to 1998, the Company's product line
had not been expanded in order to capture the domestic market. As a result, the
Company relied on the continued distribution of one main product, Aloe Minerals
Plus(TM), to one major customer in China. In March of 1998, due to governmental
restrictions in China, this customer discontinued its purchases of Aloe Minerals
Plus(TM) which caused a dramatic decrease in the Company's sales for 1998.
The Company had not developed any market for its products prior to 1998
in the United States. Throughout 1998, the Company developed a new line of
nutritional supplements and implemented strategies to establish marketing and
distribution into health food stores. At this time, the Company is continually
exploring the international market, but has focused on strengthening the
domestic marketing and sales of its new branded product line in the United
States.
The Company's primary objective is to become a recognized leader in the
provision of natural products that are based on natural compounds. The Company's
potential for growth at this time involves developing niche product lines that
can be marketed and sold into niche distribution channels. Niche product lines
include but are not limited to vitamins, minerals, herbs, nutraceuticals and
herbal teas. Niche distribution channels include retail in health food and
grocery and drug chains, mail order and physician distribution. The Company's
current product lines include nutraceutical products with current distribution
into health food retail in the United States. Through consistent active
involvement in the trends that affect the natural products industry, the Company
creates or improves products to fit market needs.
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As reflected in the
accompanying balance sheet, the Company had negative working capital of $256,107
at December 31, 1998. The Company has had material operating losses and has had
to rely on borrowings from officers to meet operating obligations. The Company
experienced the loss of its primary customer that was responsible for generating
approximately 95% of the Company's revenue in the years ended December 31, 1998
and 1997. The ability to generate future revenue from this customer is
uncertain. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of liabilities
that might be necessary should the Company be unable to continue as a going
concern.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Revenue is recognized when the product is shipped. Historically the
majority of the product is shipped to the customer directly from the Company's
suppliers and manufacturers. Payments from customers prior to shipment are
recorded as customer deposits. Sales returns are recorded as a reduction to
sales when a customer and the Company agree a return is warranted. Sales returns
historically have not been significant.
-31-
<PAGE>
PROPERTY, EQUIPMENT AND DEPRECIATION
Furniture, fixtures, computers and equipment are depreciated using the
straight-line method over their estimated useful lives of five years. All
property and equipment, with a gross cost of $95,379, was fully depreciated at
December 31, 1998. Depreciation expense for the years ended December 31, 1998
and 1997 was $15,602 and $18,959, respectively.
CASH AND EQUIVALENTS
The Company considers cash to be all short-term, highly liquid
investments that are readily convertible to known amounts of cash and have
original maturities of three months or less.
INVENTORIES
Inventories consist of finished product, packaging and labelling
materials and are recorded at the lower of cost or market on a first-in,
first-out basis.
STOCK-BASED COMPENSATION
Statements of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, ("SFAS 123") established accounting and disclosure
requirements using a fair-value based method of accounting for stock-based
employee compensation. In accordance with SFAS 123, the Company has elected to
continue accounting for stock based compensation using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The proforma effect of the fair value method is
discussed in Note 10.
INCOME TAXES
The Company accounts for income taxes under the liability method
pursuant to the Statement of Financial Accounting Standards No. 109 ("SFAS
109"), ACCOUNTING FOR INCOME TAXES. Deferred taxes arise from temporary
differences, due to differences between accounting methods for tax and financial
statement purposes.
LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the year. In 1998, the Company adopted
SFAS No. 128 EARNINGS PER SHARE the effect of such was not material.
ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising expense
totaled approximately $198,000 and $61,000 for the years ended December 31, 1998
and 1997, respectively, and is included in marketing expenses in the
accompanying financial statements.
-32-
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FINANCIAL INSTRUMENTS
Financial instruments consist primarily of cash, accounts receivable,
investments in closely held entities and obligations under accounts payable,
accrued expenses and notes payable. The carrying amounts of cash, accounts
receivable, accounts payable notes payable and accrued expenses approximate fair
value because of the short term maturity of those instruments. The Company has
not determined the fair value of its investments due to the lack of
marketability and liquidity of those investments.
INVESTMENTS
The Company accounts for its approximately 41% interest in Baywood
Nutritionals, S.A. using the equity method. The Company accounts for its
approximately 15% interest BII Acquisition Company using the cost method.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's investee, Baywood Nutritionals
S.A. ("BNSA") is the Chilean peso. The entity was formed and began operations in
Chile in the year ended December 31, 1998. Assets and liabilities of BNSA are
denominated in Chilean pesos. The Company's investment is translated to U.S.
dollars at the exchange rate existing at the balance sheet date. The cumulative
translation adjustment at December 31, 1998 was insignificant. Revenues, cost
and expenses denominated in Chilean pesos used to determine the Company's equity
in the loss of BNSA are translated at the weighted average exchange rate for the
period.
NOTE 3 - LOSS PER SHARE
Convertible preferred stock and outstanding options were not considered
in the calculation for diluted earnings per share for the year ended December
31, 1998 and 1997 because the effect of their inclusion would be antidilutive.
-33-
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---- ----
Per Per
Loss Shares Share Income Shares Share
---- ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net Income (Loss) $(1,102,516) $(157,260)
Preferred stock dividends (120,000)
BASIC EARNINGS PER SHARE
Loss available to common
stockholders $(1,102,516) 21,888,917 $(0.05) $(277,260) 17,498,115 $(0.02)
Effect of dilutive securities N/A N/A
DILUTED EARNINGS PER SHARE N/A N/A
</TABLE>
Preferred stock convertible to 35,000 shares of common stock and
options to purchase 1,405,000 shares of common stock were outstanding at
December 31, 1998. Preferred stock convertible to 1,055,000 shares of common
stock and options to purchase 1,755,000 shares of common stock were outstanding
at December 31, 1997. These securities were excluded from the computation of
diluted earnings per share because the effect of their inclusion would be
anti-dilutive.
Note 4 - INVESTMENTS
During the year ended December 31, 1998, the Company entered into an
agreement with a third party to jointly form a new entity for the purpose of
seeking and making acquisitions of other entities with synergistic operations.
The Company invested $75,000 cash for a 15% interest in the newly formed entity,
BII Acquisition Company ("BII"). Under the agreement with the third party, the
Company will have the opportunity to obtain an additional 10% interest of BII
Acquisition Company by entering into a management agreement with BII when
operations commence. Also, the Company will have additional opportunities to
acquire a controlling interest in BII. As of December 31, 1998, BII has had no
material operations as the parties jointly investigate acquisition
opportunities. The Company accounts for its investment in BII under the cost
method. In connection with the agreement, the Company is committed to issuing
791,557 shares of common stock to the third party.
Also during the year ended December 31, 1998, the Company acquired an
interest of 41% in Baywood Nutritionals, S.A. ("BNSA"). BNSA was formed to
market and distribute the Company's products in Chile. The investment is
accounted for under the equity method. The functional currency of the BNSA is
the Chilean peso.
The Company invested cash of $60,000 in BNSA as part of the initial
capitalization. There is no commitment for the Company to provide additional
capital to BNSA. The Company intends to begin sales to BNSA in 1999.
-34-
<PAGE>
The following is unaudited summary financial information of BNSA,
translated to U.S. dollars, as of and for the period ended December 31, 1998:
Total Assets $ 42,228
Total Liabilities $ 1,367
Revenue $ 0
Net Loss $ (49,071)
Equity Interest 40.7%
Equity in Net Loss $ (19,972)
Note 5 - PREFERRED STOCK
The Company has issued three classes of preferred stock with differing
features and privileges. The first series, Class A preferred stock ($1 par
value, 35,000 shares issued and outstanding at December 31, 1998) is convertible
by the holder at any time into common stock on the basis of one share of
preferred for one share of common stock. The preferred shares have a preference
in liquidation of up to $1.00 per share. The preferred shares are non-voting and
have no stated dividend preferences or rights. The holder of 100,000 shares of
the Class A preferred shares converted those shares to 100,000 shares of common
stock at $1 per share during the year ended December 31, 1998.
The 920,000 shares of Class C preferred shares issued and outstanding
at December 31, 1997 were converted to common stock in 1998. The Class C $1 par
value preferred shares included conversion rights, at the option of the single
holder, of one share of common per one share of preferred if the average price
of the Company's common stock for the three month period prior to May 8, 1998
was greater than $1.00. If that average price was less than $1.00, the
conversion rate was equal to the number of common shares resulting from dividing
$920,000 by that average price. Based on the three month average price for the
period up to May 8, 1998, of $0.126 per share, the number of common shares
issued upon conversion was 7,301,587. The Class C preferred shares also have par
value liquidation preferences, dividend preferences and no voting rights.
All of the issued Class B and Class C preferred have been converted to
common stock. The Board of Directors may determine any preferences and features
for the unissued shares of preferred stock as they are issued in the future. The
total authorization for all classes of preferred stock is 10,000,000 shares.
Note 6 - RELATED PARTY TRANSACTIONS
The Company contracted for freight services with a company in which the
Company's former Chairman of Board, President and Chief Executive Officer is a
stockholder and director. The Company paid $104,737 to this related entity
during the year ended December 31, 1997. The Company did not utilize this
company for any freight services in the year ended December 31, 1998.
The Company borrowed $75,000 from one of its officers and directors in
the year ended December 31, 1998 (Note 12).
-35-
<PAGE>
Note 7 - LEASE OBLIGATIONS
The Company leases its offices and warehouse under an operating lease
that expires on July 31, 2000. Future minimum annual lease obligations for the
remaining term of the lease are as follows:
December 31:
------------
1999 $ 40,903
2000 24,542
--------
$ 65,445
Rent expense was $49,000 and $61,000 for the years ended December 31,
1998 and 1997, respectively.
-36-
<PAGE>
Note 8 - GEOGRAPHIC AREA DATA BY PRODUCT LINE
The Company's revenue was generated from sales concentrated with one
primary customer. The Company's product lines include primarily nutritional and
dietary supplements. The Company operates in only one reportable segment and
holds all of its assets in the United States. During 1998, the Company's sales
to its primary customer ceased due to certain regulatory matters the customer
had encountered in China. Due to these matters, continued revenue from the
Chinese customer is uncertain. The following table outlines the breakdown of
sales to unaffiliated customers domestically and internationally:
GROSS REVENUES
1998 1997
---- ----
Nutritional and Dietary Supplements:
United States $ 4,805 $ 52,872
China 772,640 3,019,162
Other
32,454 159,419
-------- ----------
Total 809,899 3,231,453
-------- ----------
Skin Care Products:
United States -- 1,415
China -- --
Other -- 1,188
-------- ----------
Total -- 2,603
-------- ----------
Total Revenue $809,899 $3,234,056
======== ==========
Note 9 - CREDIT RISK AND OTHER CONCENTRATIONS
The majority of the Company's sales were comprised of one particular
product to one particular customer in China. This major customer accounted for
93.2% and 93.4% of total net sales for the years ended December 31, 1998 and
1997, respectively. During 1998, this Chinese customer encountered regulatory
difficulties in China. Due to the Chinese government restricting the customer's
distribution methods, sales to this customer ceased after the first quarter of
1998. The ability of the Company to generate future revenue from this customer
is uncertain.
-37-
<PAGE>
From time to time, the Company's bank balances exceed federally insured
limits. At December 31, 1998, the Company's balance did not exceed insured
limits.
The Company receives virtually all of its products from two vendors.
Management believes alternative sources are available if required.
Note 10 - STOCKHOLDERS' EQUITY
The Company issues stock options from time to time to executives and
key employees. The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and continues to account for stock based compensation using the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no compensation cost
has been recognized for the stock options granted. Had compensation cost for the
Company's stock options been determined based on the fair value at the grant
date for awards in 1998 and 1997, consistent with the provisions of SFAS No.
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below:
1998 1997
---- ----
Net Loss - as reported $(1,102,516) $(157,260)
Net Loss - pro forma $(1,137,416) $(190,473)
Loss per share - as reported $ (0.05) $ (0.02)
Loss per share - pro forma $ (0.05) $ (0.02)
Under the provisions of SFAS No. 123, the number of fully vested
options granted of 850,000 for the year ended December 31, 1998 and 55,000 fully
vested options plus 41,000 proportionately vested options for the year ended
December 31, 1997 were used to determine net earnings and earnings per share
under a pro forma basis.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option- pricing model with the following assumptions for
years ended December 31:
1998 1997
---- ----
Dividend yield None None
Volatility 0.998 0.927
Risk free interest rate 5.25% 5.69%
Expected asset life 4 years 5 years
Under the Employee Incentive Stock Option Plan approved by the
stockholders in 1996, the total number of shares of common stock that may be
granted is 500,000. The plan provides that shares granted come from the
Corporation's authorized but unissued common stock. The price of the options
granted pursuant to these plans will not be less than 100 percent of the fair
market value of the shares on the date of grant. The options expire ten years
from date of grant.
-38-
<PAGE>
Under a Board of Directors resolution, options for 250,000 shares of
the Company's common stock were approved for members of the Board of Directors.
All 250,000 options were granted in the year ended December 31, 1998. The
options were granted at an exercise price of $0.06 per share, the fair market
value of the underlying shares on the date of grant. The options expire ten
years from date of grant.
As part of the settlement with the Company's former Chairman (Note 13),
the Company granted options to purchase 400,000 of the Company's common stock to
this individual. The exercise price of the options is $0.25 per share and expire
in December 1999.
In 1995, as an inducement to convert notes payable to common stock, the
Company issued options to purchase 500,000 shares of the Company's common stock
at $1.00 per share. The options expire on May 3, 2000. The exercise price
approximated the closing prices of the Company's common stock at the time the
options were granted.
The summary of activity for the Company's stock options is presented
below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
1998 Price 1997 Price
---- ----- ---- -----
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 1,755,000 $ 0.37 1,700,000 $ 0.37
Granted 850,000 $ 0.17 55,000 $ 0.42
Exercised 0 0
Terminated/Expired 1,200,000 $ 0.30 0
Options outstanding at end of year 1,405,000 $ 0.47 1,755,000 $ 0.37
Options exercisable at end of year 1,405,000 $ 0.45 1,755,000 $ 0.37
Options available for grant at
end of year 245,000 445,000
Price per share of options outstanding $0.06 - $1.00 $0.25 - $1.00
Weighted average remaining contractual lives 4.2 years 2.0 years
Weighted Average fair value of options
granted during the year $ 0.04 $ 0.31
</TABLE>
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<PAGE>
Note 11 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. No deferred tax
liabilities existed at December 31, 1998.
Deferred tax assets totaling $2,520,000 were offset by an equal
valuation allowance. The valuation allowance was provided due to the uncertainty
of future realization of federal and state net operating loss carryforwards that
give rise to approximately $2,452,000 of the deferred tax asset. The balance of
the deferred tax asset relates to differences in book and tax accounting
relative to the write-off of intangibles, allowances on accounts receivable. The
Company has federal and state net operating loss carryforwards of $5,822,000 and
$5,710,000, respectively, at December 31, 1998. The deferred federal loss
carryforwards expire in 2002 through 2018 and state loss carryforwards expire
1999 through 2004.
Income taxes for years ended December 31:
1998 1997
---- ----
Current Benefit $ 391,204 $ 33,529
Deferred Benefit (Provision) (541,204) (33,529)
--------- --------
Net income tax provision $(150,000) $ 0
========= ========
The income tax benefit of $391,204 generated for the year ended
December 31, 1998 was offset by an equal increase in the valuation allowance.
The total increase in the valuation allowance for the year ended December 31,
1998 was $520,671. The valuation allowance was increased due to uncertainties as
to the Company's ability to generate sufficient taxable income to utilize the
net operating loss carryforwards.
A reconciliation for the differences between the effective and
statutory income tax rates is as follows:
1998 1997
---- ----
Federal statutory rates $(323,855) (34)% $(46,444) (26)%
State income taxes - net
of federal benefit (57,151) (6)% (9,435) (6)%
Valuation allowance for
operating loss
carryforwards 520,671 55% 43,589 28%
Other 10,335 1% 6,290 4%
--------- --- -------- ---
Effective rate $ 150,000 16% $ 0 0%
========= === ======== ===
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<PAGE>
Note 12 - DEBT
Notes payable at December 31, 1998 consisted of the following:
Note payable to officer. The note bears
interest at 15% per annum and is due
January 31, 2000. The note is unsecured. $ 75,000
Note payable to plaintiff in settlement.
Plaintiff agreed to accept $100,000 payable
over a twelve month period through September 1999.
The scheduled payments were discounted at 10%,
resulting in an original principal balance of $94,788.
The note is collateralized by a pledge of
1,818,783 shares of the Company's common stock. 64,000
Note payable to the Company's former Chairman of the
Board. The note bears interest at 10% per annum
and is unsecured. The note matures March 1999. 50,000
---------
Total 189,255
Less current portion (114,255)
Long-term portion $ 75,000
=========
The Company borrowed an additional $220,000 from its officers
subsequent to December 31, 1998.
All of the long-term portion is due in the year 2000.
NOTE 13 - LEGAL SETTLEMENTS
In the year ended December 31, 1998, the Company entered into various
agreements with plaintiffs in claims filed against the Company.
The Company was named as a defendant in a $900,000 claim filed against
an entity controlled by its former chairman that related to the transfer to the
Company of certain furnishings and equipment by that related entity. Management
believed that it was named in the suit only by its association with a former
chairman and the Company intended to vigorously defend this claim Management
believed it had a strong defense, but due to the probability of incurring
material costs associated with defending this case, the Company agreed to settle
with the plaintiff. The settlement was for $100,000 cash payable over twelve
months through September 30, 1999. Payments under the settlement are
collateralized by a pledge of 1,818,783 shares of the Company's common stock.
-41-
<PAGE>
A former director and officer filed a demand for arbitration against
the Company. The demand sought $210,374 plus interest, attorney's fees and costs
for a breach of an employment agreement. The matter was arbitrated in 1998. The
Company settled with the former officer for approximately $52,000 in the year
ended December 31,1998. The $52,000 amount payable under this settlement at
December 31, 1998 is included in accrued liabilities in the accompanying balance
sheet. The balance is scheduled to be paid through a series of six payments
through May 1999.
An arbitrator ruled against the Company in a case related to the
invalidation of 1,000,000 options allegedly issued to the Company's former
chairman. The Company had claimed that the options were issued without proper
Board of Directors' approval. The arbitrator awarded the 1,000,000 options to
the former chairman. The options were exercisable at $0.25 and they were allowed
to expire on January 1, 1998. Also awarded were legal fees presented as
$124,338. The Company contested the fees awarded as unreasonable. The matter was
ultimately settled by an agreement wherein the Company will pay $75,000 cash and
the award of 400,000 options at an exercise price of $0.25 per share. The
options expire in December 1999. The balance of the $75,000 cash award remaining
at December 31, 1998 was $50,000 and is included in notes payable in the
accompanying balance sheet.
The Company incurred settlement costs, excluding its own legal fees, of
$192,761 in the year ended December 31, 1998.
Note 14 - INTANGIBLE ASSETS
The cost of marketing rights, contracts, investments in formulas and
product lines acquired by the issuance of preferred or common stock was recorded
at fair value of the stock issued or assets acquired. Fair value of restricted
common stock issued to acquire the assets was generally considered to be the
average bid price during the thirty day period prior to the transaction,
discounted 50 percent for the restrictions imposed on sale or transfer of the
stock for two years from date of issuance.
The Company evaluates the carrying value of intangible assets based on
estimated future cash flows from product sales to which the specific contracts,
rights or formulas relate. In the year ended December 31, 1998, the Company
determined that these assets were impaired due to the fact the there had been
only $2,600 in revenue generated from these skin care products in 1997 and no
such revenue in 1998. The Company wrote-off the net balance of these assets of
$164,186 in the year ended December 31, 1998. The full amount of the write-off
occurred in the fourth quarter.
-42-
<PAGE>
BAYWOOD INTERNATIONAL, INC.
SCHEDULE II
Schedule of Valuation and Qualifying Accounts
December 31, 1998
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs Other End of
Year Expenses Accounts Deductions Year
- - ------------ ---------- ---------- ---------- ----------
$ 146,891 $ -- $(146,891) $ --
$ 1,999,297 $520,671 $ -- $2,519,968
$ 18,840 $ -- $ (3,205) $ 15,635
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 806175
<NAME> BAYWOOD INTERNATIONAL, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 40,869
<SECURITIES> 0
<RECEIVABLES> 17,806
<ALLOWANCES> 15,635
<INVENTORY> 66,103
<CURRENT-ASSETS> 129,922
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 244,950
<CURRENT-LIABILITIES> 386,029
<BONDS> 0
0
35,000
<COMMON> 24,900
<OTHER-SE> (275,979)
<TOTAL-LIABILITY-AND-EQUITY> 244,950
<SALES> 809,899
<TOTAL-REVENUES> 809,899
<CGS> 483,021
<TOTAL-COSTS> 919,014
<OTHER-EXPENSES> 360,380
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (952,516)
<INCOME-TAX> 150,000
<INCOME-CONTINUING> (1,102,516)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,102,516)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
