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, 1999
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
Incorporation or Organization) Identification No.)
14950 North 83rd Place, Suite 1
Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (480) 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 $463,590.
The aggregate market value of voting stock held by non-affiliates of the
Company was approximately $7,278,868 as of March 24, 2000.
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date of March 24, 2000 was 27,026,235.
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BAYWOOD INTERNATIONAL, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
Page
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PART I -
ITEM 1. DESCRIPTION OF BUSINESS 4
GENERAL 4
COMPANY OBJECTIVE 4
GROWTH STRATEGY 5
PRODUCTS 5
INTERNATIONAL 7
MANUFACTURING 7
DISTRIBUTION 7
MARKETING AND COMPETITION 8
RISK FACTORS 8
TRADEMARKS AND PATENTS 9
EMPLOYEES 11
ITEM 2. DESCRIPTION OF PROPERTY 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 12
ITEM 6. MANAGEMENT'S DISCUSSION AND PLAN OF OPERATION 13
ITEM 7. FINANCIAL STATEMENTS 17
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL MATTERS 17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION16(a) OF THE EXCHANGE ACT 17
ITEM 10. EXECUTIVE COMPENSATION 18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 20
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 22
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 23
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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. 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 natural-based consumer products. Currently, the Company's natural
consumer products consist of two dietary supplement lines, PURECHOICE(TM)and
SOLUTIONS(TM). 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. Helth-Pro had no operations prior to 1992..
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. In
addition, 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.
Throughout 1998 and the first six months of 1999, the Company completely
revamped its corporate strategy to turn itself around from a primarily
internationally focus with no proprietary brand lines to a domestic focus with
identifiable brands across retail channels. The result of this turn-around
strategy was a fundamentally different company with a new corporate logo,
product lines, marketing campaign, and distribution channels. 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 lines,
PURECHOICE(TM) and SOLUTIONS(TM) 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 (480)
951-3956.
COMPANY OBJECTIVE AND MISSION
The Company's objective is to become a recognized leader in the provision
of high quality brand name natural products that are marketed in niche market
segments in which its products can be among the market leaders in their
respective categories. The Company's potential for growth at this time involves
the continued development of niche products within the PURECHOICE(TM) and
SOLUTIONS(TM) lines, which were launched in July 1999, and the establishment of
other branded lines that can be marketed and sold into retail channels. Retail
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channels include health food, pharmacy, grocery and drug chains, mail order and
internet distribution. The Company considers its biggest potential to involve
the development and marketing of a broad base of consumer products that are
based on natural compounds rather than a specific category of natural products.
Through consistent active involvement in the trends that affect consumers, the
Company will attempt to focus on building brand identity for each of the types
of product lines it develops either internally or attains through acquisitions
of other natural product companies. Additionally, the Company strives to achieve
its objective by identifying brands with favorable demographic appeal, quickly
modifying products and promotions in response to changing consumer demands, and
developing creative and cost-effective marketing and advertising programs.
The direction the Company takes in carrying out its objective is based upon
the following mission and will remain as the primary focus by the Company's
management:
MAKE LIFE BETTER(TM) THROUGH THE DEVELOPMENT OF HIGH QUALITY NATURAL
CONSUMER PRODUCTS THAT PEOPLE WANT AND NEED WHILE PROVIDING THE HIGHEST
ACCESSIBILITY AMONGST ALL CONSUMER CHANNELS.
GROWTH STRATEGY
The Company will continue to seek sales increases through a combination of
internal growth and acquisitions. Management feels that the potential for
internal growth from existing and new product development remains substantial
due to the continued recognition and potential of natural based compounds for
consumer benefit for either condition specific applications or everyday use as
part of a better quality of life. In addition, due to the breadth of the retail
channels which the Company attempts to penetrate, management believes that it
can accomplish sales increases by the continued penetration of existing products
and the introduction of new products. Currently, the Company estimates that it
has penetrated less than 5% of retail channels.
Acquisitions afford the Company the opportunity to capture brands with
existing market appeal and utilize existing distribution channels to attain
sales increases. The Company seeks to acquire brands with unrealized potential
that have been under-marketed by other firms or have achieved success in limited
geographic regions. The Company focuses its acquisitions efforts on niche
markets in the consumer products sector where it is able to gain a significant
market position. As of December 31, 1999, the Company has not acquired any other
brands.
PRODUCTS
Currently, the Company's natural consumer products consist of two dietary
supplement lines, PURECHOICE(TM) and SOLUTIONS(TM). Although there may be a
fixed number of different products within each line at any time, variable
factors such as counts and sizes of each product make the total number of SKU's
(Shelf Keeping Units) available within each line subject to change at any time.
In addition, the Company often incorporates product displays for its products
that hold from six (6) to twenty (20) bottles of each product as a marketing aid
to help its retail customers display and sell the products to their consumers.
Since the launch of the PURECHOICE(TM) and SOLUTIONS(TM) lines in July of 1999,
the Company has developed four (4) products. The total number of SKU's totals
approximately twenty-five (25).
SOLUTIONS(TM)
This line of products is formulated with what the Company considers the
most effective ingredients and dosages to target specific needs and conditions
of consumers. SOLUTIONS(TM) currently includes the following products:
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Product Name Targeted Function
------------ -----------------
Dr. Harris' Original Snore Formula Relief of Snoring
Dr. Harris' Original Allergy Formula Relief of Allergies
DR. HARRIS' ORIGINAL SNORE FORMULA. This unique formulation includes a
patented combination of 100% natural enzymes and herbs formulated and tested
specifically for snoring. The enzymes act to digest the secretions that
accumulate in the body throughout the day, allowing the body to metabolize and
absorb them. The herbs reduce the tissue swelling and congestion. The result is
that the airway is opened, the airflow is smoothed out and the snoring is
markedly decreased or eliminated. For maximum benefits, the dosage of the
product is initially determined by weight on an empty stomach.
DR. HARRIS' ORIGINAL ALLERGY FORMULA. This patented formula contains a
unique combination of 100% natural herbs and enzymes extracted by a special
process from botanicals. The enzymes digest the excess secretions and allow the
body to absorb and remove them. They also act as a potent anti-inflammatory
agent, thereby reducing the irritation of the respiratory mucous membranes. The
herbs reduce the tissue swelling and the allergic reaction. The combination of
these actions serves to reduce the nasal discharge, reduce the nasal congestion,
open up the eustachian tube, open up the channels leading from the sinuses,
decrease the mucous membrane inflammation and reduce the sneezing and coughing.
For maximum benefits from the product, the adult dosage is l to 2 caplets every
4 to 6 hours as needed for symptoms of allergy or sinusitis.
DR. HARRIS' ORIGINAL SNORE AND ALLERGY FORMULAS were developed by Dennis H.
Harris, M.D. The Company has entered into an exclusive license agreement with
Dr. Harris and his affiliated companies to market and sell DR. HARRIS' ORIGINAL
SNORE AND ALLERGY FORMULAS into all retail channels in the United States. Dr.
Harris has been issued a patent for the products under patent #5,618,543.
PURECHOICE(TM)
This line is composed of single ingredient products that target those needs
of the consumer for a specific product in the marketplace. Where the
SOLUTIONS(TM) line may combine a variety of ingredients to target a specific
ailment, PURECHOICE(TM) may include only one component for the consumer to
choose. Single ingredients may include, but are not limited to, vitamins,
minerals, herbs, botanical extracts or other organic sulfur and non-sulfur
compounds. PURECHOICE(TM) currently includes the following products:
Product Name Function
------------ --------
SAMe Joint and Emotional Health
Colostrum IgG30 1000 Immune System Support and Energy
SAME. This is a substance that is synthesized in the body from the amino
acid Methionine. An enzyme called Methionine S-adenosyltransferase (MAT)
catalyzes a reaction between Methionine and ATP to form SAMe. SAMe has numerous
actions within the body. It detoxifies cell membranes (by being a precursor for
cysteine, glutathione and taurine), synthesizes neurotransmitters (DNA, RNA,
protein and phospholipids) and synthesizes spermine, spermidine and putrescine,
which are essential for cell growth and differentiation. From its role as an
antioxidant to its help in raising serotonin levels in the brain, SAMe is one of
the most important compounds to enter the health industry.
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COLOSTRUM IGG 30 1000. This is the clear liquid that a mammal produces
before their breast milk comes in. It is the first food the cow produces upon
the birth of a calf and flows for approximately 48 hours, during which time its
contents gradually change from colostrum to milk. As the first 12-hour
collection, it is the most important containing the highest content of
immunoglobulins (anti-bodies) and other immune boosting and energizing elements.
While humans get at least 90% of their immune factors passed on before birth
through placenta feeding, the calf is born with no immunity to airborne,
disease-causing organisms. Therefore it must have colostrum to kick start its
immune system. Because of this post partum, external delivery system, the
contents of colostrum are extremely concentrated. In fact, colostrum contains at
least 10 to 20 times more immune and other relevant health boosting factors than
found in human colostrum.
The Company intends to develop other new products and SKU's within these
lines in the future. Management believes that there may be products that are
developed outside of these lines that need their own separate identity. In
addition, there may be products that are developed internally that are part of
different categories and products that are attained through acquisition that
have already established their brand identity within the marketplace. Management
can provide no assurances as to the continued viability of any current products
within the marketplace or the expected marketability of any future products that
the Company may develop or acquire.
INTERNATIONAL
Certain of the Company's products are sold in Canada. Sales in Canada are
conducted through distributors who service various retail outlets in their
respective territories.
MANUFACTURING AND QUALITY CONTROL
The Company uses third-party manufacturers for all of its products.
Currently, the Company utilizes three different manufacturers who manufacture
and package the Company's products according to formulas and packaging
guidelines that the Company dictates. In addition and in order to minimize the
cost of goods, the Company may elect to purchase raw materials directly from
various raw material suppliers and have them shipped to its manufacturers so
that the Company may incur only tableting, encapsulating and/or packing costs
and avoid the additional mark-up on the raw material. Manufacturing delays could
cause disruption in the Company's ability to timely receive shipments and fill
orders which could adversely affect its business. However, if this occurs, the
Company believes that other contract manufacturers could be quickly secured if
any of its current contractors cease to perform adequately.
The Company has not experienced any material adverse effect on its business
as a result of shortages of raw materials or packaging materials used in the
manufacture of its products. An unexpected interruption or a shortage in supply
could adversely affect the Company's business derived from these products.
At this time, the Company 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. To monitor the quality
of the products that the third-party manufacturers produce, the Company randomly
tests its products through independent labs to insure potency. In addition, the
Company selects those manufacturers who themselves adhere to high standards of
GMP (Good Manufacturing Practices).
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DISTRIBUTION
The Company's products are marketed and sold through retail channels
including independent and chain health food stores and pharmacies, grocery
stores, drug chains and direct-to-consumer catalogs and internet sites. Certain
of the Company's customers currently include Vitamin World, GNC and
SelfCare.com. The Company's products reach these retail channels either through
distributors or through direct shipments from the Company. The Company also
utilizes brokers as needed for grocery and drug chain accounts. Currently, no
customer accounts for more than 10% of the Company's sales.
The Company generally maintains sufficient inventories to meet customer
orders as received absent unusual and infrequent situations. At present, the
Company has no significant backlog of customer orders and is promptly meeting
customer requirements.
The Company does not generally experience wide variances in the amount of
inventory it maintains. However, management anticipates that inventory levels
will increase in the coming quarters as demand, the number of larger accounts
and the number of SKU's increase. The Company guarantees efficacy on all of its
products. In certain circumstances and in an effort to support its retail
channels, the Company allows its customers to return unsold merchandise if it
does not turnover in a timely manner.
MARKET AND COMPETITION
The market for natural products 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 pharmacies 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.
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 the timely execution of its strategic objective and
mission for niche products in certain niche markets both internationally and
domestically.
RISK FACTORS
The Company's business is subject to a number of risks. In addition to the
other information contained in this Form 10-KSB, the following risk factors are
also outlined.
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 three manufacturers. Although the Company believes that a number
of alternative manufacturers 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.
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PRODUCT DEVELOPMENT. The Company's future growth is also dependent on new
product development. New product initiatives may not be successfully implemented
because of difficulty in assimilation, development costs and diversion of
management time. The Company evaluates opportunities to develop new products
through product line extensions and product modifications in the ordinary course
of its business. Product line extensions and product modifications involve
numerous risks, including difficulties in the assimilation of the developed
products, the expenses incurred in connection with the product development and
the diversion of management's attention from other business concerns. There can
be no assurance that the Company will successfully develop product line
extensions or integrate newly developed products into the Company's business. In
addition, there can be no assurance that newly developed products will
contribute favorably to the Company's operations and financial condition.
PUBLIC PERCEPTION. The Company's dietary supplement business could be
adversely affected if any of its products or similar products distributed by
other companies prove to be harmful to consumers or if scientific studies
provide unfavorable findings regarding the safety or effectiveness of its
products or any similar products.
The Company's dietary supplement products contain vitamins, minerals, herbs
and other ingredients that the Company regards as safe when taken as directed by
the Company and that various scientific studies have suggested may offer health
benefits. While the Company conducts quality control testing on its products,
the Company is highly dependent upon consumers' perception of the overall
integrity of the dietary supplements business, as well as the safety and quality
of products in that industry and similar products distributed by other companies
which may not adhere to the same quality standards as the Company. There can be
no assurance that any of the Company's products will not suffer from negative
public perception.
PRODUCT LIABILITY AND INSURANCE. The Company is constantly at risk that
consumers and users of its products will bring lawsuits alleging product
liability. The Company is not aware of any claims pending against it or its
products that if adversely decided would adversely affect its business. While
the Company will continue to attempt to take what it considers to be appropriate
precautions, there can be no assurance that these precautions will enable the
Company to avoid significant product liability exposure in the future. The
Company maintains product liability insurance through third party providers. The
Company believes its insurance coverage is adequate; however, there can be no
assurance that the Company will be able to retain its existing coverage or that
this coverage will be cost-justified or sufficient to satisfy any future claims.
In addition to carrying its own coverage, the Company also requires its
manufacturers to carry product liability insurance.
VOLATILITY OF STOCK PRICE. The trading price of the Company's common stock
could be subject to significant fluctuations in response to variations in the
results of the Company's operations, its financial position, general trends in
the consumer products industry, the relative illiquidity of the Company's common
stock and stock market conditions generally.
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.
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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.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was
enacted on October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic
Act by defining dietary supplements, which include vitamins, mineral,
nutritional supplements, herbs and botanicals, as a new category of food
separate from conventional food. DSHEA provides a regulatory framework to ensure
safe, quality dietary supplements and to foster the dissemination of accurate
information about such products. Under DSHEA, the FDA is generally prohibited
from regulating dietary supplements as food additives or as drugs unless product
claims, such as claims that a products may diagnose, mitigate, cure or prevent
an illness, disease or malady, permit the FDA to attach drug status to a
product.
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.
TRADEMARKS AND PATENTS
The establishment and continued recognition by the marketplace of our
trademarks is of material importance to our business. In fiscal year 1999,
substantially all of our net sales were from products bearing the PURECHOICE(TM)
and SOLUTIONS(TM) brand names.
From time to time, the Company registers its principal brand names in the
United States and certain foreign countries. Sometimes, however, the names used
to describe some of the Company's products are either too generic or commonplace
to register. One example is SAMe which is the name of the raw material in the
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product and can be used by other companies in our industry. No assurance can be
provided that the steps the Company takes to protect its proprietary rights in
its brand names will be adequate to prevent the misappropriation of these
registered brand names in the United States or abroad. 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.
Additionally, as the Company licenses certain intellectual property from
third parties, it can provide no assurance that these third parties can
successfully maintain their intellectual property rights. The sales of certain
of the Company's products rely on its ability to maintaining these licensing
agreements. If the Company loses the right to use these licenses, its business
could be adversely affected.
EMPLOYEES
At December 31, 1999, the Company had eleven (11) 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.
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 approximately
3,000 square feet of office space under an operating lease that expires on July
31, 2000. Subsequent to December 31, 1999, the Company has leased an additional
4,800 square feet of office and warehouse space in the same location. Management
believes that this additional 7,800 square feet under its new lease will provide
sufficient capacity to handle the Company's growth in the coming year. The
future minimum lease obligation for the remaining term of the lease, the period
January 1, 2000 to July 31, 2000 is $25,542.
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. In 1999 the Company has paid in full all of the
amounts due and payable pursuant to such settlement agreements.
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.
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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 expired unexercised on December 10, 1999. 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, 1999.
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:
9
<PAGE>
Year Ended December 31, 1999 High Low
- - ---------------------------- ---- ---
March 31, 1999 .30 .03
June 30, 1999 .34 .13
September 30, 1999 .34 .19
December 31, 1999 .31 .20
Year Ended December 31, 1998
- - ----------------------------
March 31, 1998 .22 .10
June 30, 1998 .21 .06
September 30, 1998 .15 .06
December 31, 1998 .09 .03
The above quotations represent inter-dealer quotations without retail
markup, markdown or commissions and may not represent actual transactions.
As of December 31, 1999, 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 2000. The declaration and payment of dividends
and the amount paid, if any, is subject to the discretion of the Board of
10
<PAGE>
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
Currently, the Company's natural consumer products consist of two dietary
supplement lines, PURECHOICE(TM) and SOLUTIONS(TM). The Company's objective is
to become a recognized leader in the provision of high quality brand name
natural products that are marketed in niche market segments in which its
products can be among the market leaders in their respective categories. The
Company's potential for growth at this time involves the continued development
of niche products within the PURECHOICE(TM) and SOLUTIONS(TM) lines and the
establishment of other branded lines that can be marketed and sold into retail
channels. Retail channels include health food, pharmacy, grocery and drug
chains, mail order and internet distribution. The Company considers its biggest
potential to involve the development and marketing of a broad base of consumer
products that are based on natural compounds rather than a specific category of
natural products. Through consistent active involvement in the trends that
affect consumers, the Company will attempt to focus on building brand identity
for each of the types of product lines it develops either internally or that it
attains through acquisitions of other natural product companies. Additionally,
the Company strives to achieve its objective by identifying brands with
favorable demographic appeal, quickly modifying products and promotions in
response to changing consumer demands, and developing creative and
cost-effective marketing and advertising programs.
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 by
effectively buying raw materials directly that can be supplied to the
manufacturer in addition to 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 the success of its business will come through
the efficient execution of its growth strategy both internationally and
domestically. The Company can provide no assurance as to the timing and success
in the execution of its growth strategy.
RESULTS OF OPERATIONS
The following table sets forth income statement data of the Company as a
percentage of net sales for the periods indicated.
11
<PAGE>
1999 1998
% %
------ ------
Net Sales 100.0 100.0
Cost of Sales 62.2 59.6
------ ------
Gross Profit 37.8 40.4
S, G & A Expenses:
Marketing 151.5 56.5
General and Administrative 104.8 56.9
Depreciation and Amortization .3 --
------ ------
Other (Income) and Expense - net 29.1 44.5
------ ------
Loss Before Income Taxes (247.9) (117.5)
Income Tax Provision -- (18.6)
------ ------
Net (Loss) (247.9) (136.1)
====== ======
COMPARISONS OF YEAR 1999 TO 1998:
Net sales for the year ended December 31, 1999 were $463,617 compared to
net sales of $809,899 for the year ended December 31, 1998, a decrease of 42.8%.
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), had been 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. When sales to this Chinese customer are
eliminated from the comparison, the Company's net sales for the year ended
December 31, 1999 increased $408,508 or 741.3% compared to the same period last
year. This increase is due to sales of the Company's new product lines that were
launched in July 1999, PURECHOICE(TM) and SOLUTIONS(TM), where the Company is
distributing smaller orders to more customers domestically rather than
distributing larger orders to fewer customers in the international market. In
addition, the net sales of the Company in the domestic retail market are more
diversified and a result of the sales of several different products rather than
one main product which the Company had previously relied on for sales in the
international market.
The Company is focused on building a broader customer base so that its
historical reliance on a few major customers is lessened and so that the
volatility of sales from quarter to quarter is decreased. The Company is
continuing to broaden its customer base through the introduction of other new
products under its PURECHOICE(TM) and SOLUTIONS(TM) lines into retail channels
and through the continued support of the Company's advertising and promotional
programs.
The Company's gross profit margin for the year ended December 31, 1999 was
37.8% compared to 40.4% for the same period last year. The variation in gross
profit margin is due to the dramatic change in the Company's product lines that
were sold in 1999 compared to 1998. In addition to this change in product lines,
the significant shift in distribution channels will impact the Company's gross
profit margins in the future based on such factors as discounts and promotions
that are often utilized as part of the Company's marketing programs.
Selling, general and administrative expenses for the year ended December
31, 1999 were $1,188,243 compared to $903,412 for the same period last year, an
increase of 31.5%. Overall corporate expenditures as a percentage of sales have
decreased compared to the same period last year inclusive of legal fees, bad
debt expense and rent while marketing expenditures have increased including
advertising, sales salaries and new product development expenses. Advertising,
promotions and expenses related to new products and program development were the
largest portion of selling, general and administrative expenses for 1999
totaling approximately $373,000.
12
<PAGE>
There is no income tax benefit recorded because any potential benefit of
the operating loss carryforwards has been equally offset by an increase in the
valuation allowance on the deferred income tax asset.
Net loss for year ended December 31, 1999 was $(1,149,385) or $(0.04) per
share compared to a net loss of $(1,102,516) or $(0.05) per share for the same
period last year.
The Company's reliance on computer information systems is such that it does
not anticipate that the "year 2000 problem" will have any material, adverse
effect on its financial condition, operation or financial statements. The
Company is not aware of any significant problems being encountered by its
customers and vendors.
OTHER INFORMATION
Interest Expense was $101,981 and $2,780 in 1999 and 1998, respectively.
The increase is due to the Company's interest expense incurred from interest on
notes payable to officers, directors and third parties.
The Company's investment in Baywood Nutritionals, S.A. incurred costs which
contributed to a net loss in the equity of the investment in the amount of
$40,028 for the year ended December 31, 1999.
In order to compensate certain officers and key employees, the Board of
Directors has granted options to purchase the Company's common stock. The Board
of Directors granted 3,750,000 options in 1999. The exercise price of those
options is $0.15 per share and vest according to certain performance guidelines
as set forth by the Board of Directors. Further details of these option grants
are incorporated herein by reference to the Company's 1999 Definitive Proxy
Statement dated June 29, 1999.
Under the terms of note payable agreements with certain officers, directors
and third parties, the Company has granted warrants to purchase the Company's
common stock. The warrants accrue to the noteholders after the six month term of
the notes and are thereafter exercisable by the noteholders at prices ranging
from $0.05 to $0.26 per share. As of December 31, 1999, approximately $950,000
has been borrowed from these noteholders and approximately 770,000 warrants have
so far been accrued under them.
Interest income for 1999 of $145 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 and promoting more heavily in domestic programs.
The market for natural products industry 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 pharmacies 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
13
<PAGE>
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.
CAPITAL EXPENDITURES
During 1999 and 1998, the Company incurred $19,880 and zero capital
expenditures for computers and equipment, respectfully. As of December 31, 1999,
the Company had no material commitments for capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $234,928 in current assets of
which $162,649 or 69.2% was cash and receivables. Total current liabilities for
the same period totaled $1,520,088. This represents a ratio of current assets to
current liabilities of .11 at December 31, 1999. The Company has extended
payment terms with certain vendors and has borrowed funds from certain officers
and directors. The terms of the debt with the officers and directors are such
that the debt is classified as current liabilities as of December 31, 1999.
Management is currently exploring alternatives for raising debt or equity
financing in order to properly fund the Company's working capital needs and to
significantly increase the Company's sales growth of new products into new
distribution channels. Certain officers, directors and third parties have funded
operations throughout 1999 through loans to the Company. In addition, certain
officers have elected to defer the payment of their salaries to conserve cash.
These deferred salaries have been accrued and are properly reflected in the
financial statements of the Company. Management intends to pay these deferred
salaries in the future when the Company is able to maintain a higher cash
balance. It is expected that the Company will require $750,000 to $1,000,000 in
debt or equity financing within the next six to nine months to support its
operations. In addition, another $500,000 may be required as officer and
director notes become due and payable. Management believes that it will be
successful in raising the funds required to meet its obligations. However, there
can no assurances that the cash can be successfully raised. If the Company
cannot raise the capital, the effect may be that the Company will not meet its
projections for growth.
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, 1999, BII has had no
material operations as the parties jointly investigate acquisition
opportunities. In connection with the agreement, the Company is issued 791,557
shares of common stock to the third party as part of a related consulting
agreement. 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.
YEAR 2000 ISSUES
For the year ended December 31, 1999, the "Year 2000 Issue" did not present
any operational problems for the Company and did not materially effect the
Company's relationships with customers, vendors and others. The "Year 2000
Issue" arose because many existing computer programs use only the last two
14
<PAGE>
digits to refer to a year. Therefore, these computer programs do not properly
recognize a year that begins with "20" instead of the familiar "19". If not
corrected, many computer applications could fail or create erroneous results.
The Company also relies on standard office productivity software which is
represented as being Y2K compliant.
The Company implemented various modifications to ensure that its computer
applications and equipment functioned properly in the Year 2000 and beyond. (For
this purpose, the term "computer equipment and applications" includes systems
commonly referred to as information technology systems ("IT Systems"), such as
data processing, accounting, telephone, and other miscellaneous systems as well
as systems that are not commonly referred to as IT Systems such as fax machines,
etc.
All internal and external costs associated with the Company's Year 2000
compliance activities were expensed as incurred. The Company believes that the
costs of addressing the Year 2000 issue did not have a material impact on the
Company's financial position.
ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An audited balance sheet for the year ended December 31, 1999 and audited
statements of income, changes in stockholders' equity and cash flows for the
years ended December 31, 1999 and 1998 are set forth commencing on page F-1.
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 30 Chairman of the Board, President &
Chief Executive Officer
Karl H. Rullich 66 Vice-President, Secretary & Director
Glen Holt 70 Director
Dr. Michael B. Shapiro 45 Director
Dr. David M. Franey 48 Director
Dr. Denise Forte-Pathroff 43 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 had 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.
15
<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 it had developed prior to 1996.
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.
16
<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, 1999 (the only "named
executive officer" within the meaning of Regulation S-B, Item 402(a)(2)
Instruction (1)), is as follows:
<TABLE>
<CAPTION>
Other
Name and Annual Restricted Securities LTIP All Other
Principal Compen- Stock Underlying Payouts Compen-
Position Year Salary ($) Bonus ($) sation ($) Awards ($) Options/SARs (#) ($) sation ($)
-------- ---- ---------- --------- ---------- ---------- ---------------- --- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mr. Reithinger 99 15,000 -0- -0- -0- 2,500,000 -0- -0-
CEO 98 57,000 -0- -0- -0- 100,000 -0- -0-
97 -0- -0- -0- -0- -0- -0- -0-
</TABLE>
DIRECTORS
DIRECTOR COMPENSATION TABLE
<TABLE>
<CAPTION>
Number of
Annual Securities
Retainer Meeting Consulting Number of Underlying
Name Fees($) Fees($)(1) Fees/Other Fees($) Shares(#) Options/SARs(#)(2)
---- ------- ---------- ------------------ --------- ------------------
<S> <C> <C> <C> <C> <C>
Neil Reithinger -0- -0- -0- -0- 2,500,000
Karl Rullich -0- -0- -0- -0- 500,000
Glen Holt -0- 1,000 -0- -0- 100,000
Dr. Michael Shapiro -0- 1,000 -0- -0- 100,000
Dr. Denise Forte-Pathroff -0- 1,000 -0- -0- 100,000
Dr. David M. Franey -0- -0- -0- -0- 100,000
</TABLE>
(1) Each "outside" Director not residing in Arizona (Messrs. Holt, Shapiro and
Ms. Forte-Pathroff) each received reimbursement for travel related expenses
during fiscal year 1999 associated with their attendance at the Company's
annual meeting.
(2) The vesting of these options is set forth in more detail in Item 12 -
Certain Relationships and Related Transactions.
EMPLOYMENT CONTRACTS
There are currently no Employment Contract, severance or change-in-control
agreements with any of the named executive officers of the Company.
17
<PAGE>
ADDITIONAL INFORMATION CONCERNING THE BOARD OF DIRECTORS OF THE COMPANY
During 1999, the Board of Directors held two (2) meetings. Five (5) out of
six members attended both of the meetings, constituting a quorum. The
Compensation Committee held one (1) meeting in which two-thirds of all members
were present and the Nominating Committee held one (1) meeting in which
two-thirds of all members were present. Three (3) meetings were held via
unanimous consent. In addition to regularly scheduled meetings, a number of
Directors were involved in numerous informal discussions 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 24, 2000 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
25,941,259 shares outstanding on March 24, 2000 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
Amount and
Name and Address of Nature of Percent
Title of Class Beneficial Owner Beneficial Owner of Class
- - -------------- ---------------- ---------------- --------
Common Francis Choi (1) 7,301,587 25.8%
Hong Kong, China
Common Linda Lee (2) 1,466,147 5.2%
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. Ms. Lee holds 1,466,147 common
shares.
18
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
Amount and
Name and Address of Nature of Percent
Title of Class Beneficial Owner Beneficial Owner of Class
- - -------------- ---------------- ---------------- --------
Common Neil Reithinger (1)(8) 1,644,900 5.8%
Scottsdale, AZ
Common Karl H. Rullich (3)(8) 955,000 3.4%
Scottsdale, AZ
Common Glen Holt (4)(8) 437,500 1.5%
Encino, CA
Common Dr. Michael Shapiro (5)(8) 322,500 1.1%
Madison, WI
Common Dr. Denise Forte-Pathroff (6)(8) 170,500 (2)
Bismarck, ND
Common Dr. David M. Franey (7)(8) 164,500 (2)
Scottsdale, AZ
Common All Officers and Directors 3,694,900 13.1%
as a Group (1) - (8)
(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 and granted May 13, 1999, which expires May 13, 2009 to purchase
1,400,000 common shares at $0.15 per share with vesting schedules as set
forth in "Item 12 - Certain Relationships and Related Transactions".
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 780,000 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 May 13,
1999, which expires May 13, 2009 to purchase 150,000 common shares at $0.15
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 and granted May 12, 1999, which expires
May 12, 2009 to purchase 100,000 common shares at $0.15 per share.
19
<PAGE>
(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 and granted May 12, 1999, which expires May 12,
2009 to purchase 100,000 common shares at $0.15 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 and granted May 12, 1999, which expires May 12,
2009 to purchase 100,000 common shares at $0.15 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 and granted May 12, 1999, which expires May 12, 2009 to
purchase 100,000 common shares at $0.15 per share.
(8) Director
CHANGES IN CONTROL
None
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On May 12, 1999, each outside director (Holt, Shapiro, Forte-Pathroff and
Franey) was granted options to purchase 100,000 shares of Common Stock at $0.15
per share which expire May 12, 2009 with 50,000 vesting immediately and 50,000
vesting after one year of service.
On May 13, 1999, the Board of Directors granted Neil Reithinger options to
purchase 2,500,000 shares of Common Stock at $0.15 per share which expire May
13, 2009 with 300,000 vesting immediately, 350,000 vesting when revenues reach
$3.0 million annually, 350,000 vesting when the market price of the Common Stock
reaches $1.00, 400,000 vesting when revenues reach $5.0 million annually,
500,000 vesting when revenues reach $10.0 million annually and 600,000 when
revenues reach $15.0 million annually.
On May 13, 1999, the Board of Directors granted Karl Rullich options to
purchase 500,000 shares of Common Stock at $0.15 per share which expire May 13,
2009 with 150,000 vesting immediately, 150,000 vesting after one year of service
and 200,000 after two years of service.
20
<PAGE>
Item 13 - Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Name Method of Filing
- - ------ ------------ ----------------
<S> <C> <C>
3.1 Articles of Incorporation, as amended *
3.2 By-Laws **
4.1 Specimen Common Stock Certificate ***
4.2 Description of Common Stock ****
4.3 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
</TABLE>
* 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.
(b) Reports on Form 8-K
None
21
<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, 2000 /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 Date
- - --------- ----- ----
/s/ Neil Reithinger Chairman of the Board, President 03/24/00
- - ------------------------------ & Chief Executive Officer
Neil Reithinger
/s/ Karl H. Rullich Vice-President, Secretary 03/24/00
- - ------------------------------ and Director
Karl H. Rullich
/s/ Glen Holt Director 03/30/00
- - ------------------------------
Glen Holt
/s/ Dr. Michael Shapiro Director 03/30/00
- - ------------------------------
Dr. Michael Shapiro
/s/ Dr. Denise Forte-Pathroff Director 03/30/00
- - ------------------------------
Dr. Denise Forte-Pathroff
Director
- - ------------------------------
Dr. David M. Franey
22
<PAGE>
BAYWOOD INTERNATIONAL, INC.
December 31, 1999 and 1998
INDEX TO FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT AUDITORS F-2
BALANCE SHEET AS OF DECEMBER 31, 1999 F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998 F-4
STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS
ENDED DECEMBER 31, 1999 AND 1998 F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998 F-6
NOTES TO FINANCIAL STATEMENTS F-7
F-1
<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, 1999 and the related statements of operations, stockholders'
deficit and cash flows for each of the two years in the period ended December
31, 1999. 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, 1999, and the results of its operations and cash flows for each
of the two years in the period ended December 31, 1999, 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 $1,285,160 at
December 31, 1999. 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.
/s/ King, Weber & Associates, P.C.
Tempe, Arizona
March 20, 2000
F-2
<PAGE>
BAYWOOD INTERNATIONAL, INC.
BALANCE SHEET
As of December 31, 1999
ASSETS
CURRENT ASSETS
Cash and equivalents $ 15,242
Accounts receivable (net of allowance of $21,970) 147,407
Inventories 49,762
Prepaid expenses and other current assets 22,517
-----------
Total current assets 234,928
-----------
PROPERTY & EQUIPMENT
Computers & Equipment
(net of accumulated depreciation of $96,547) 18,712
-----------
OTHER ASSETS
Investment in BII Acquisition Company 75,000
-----------
Total assets $ 328,640
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 382,153
Sales commissions payable 7,027
Interest payable 83,884
Accrued liabilities 112,636
Convertible notes payable 934,388
-----------
Total current liabilities 1,520,088
-----------
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
Class D, 20,000 shares issued, aggregate
liquidation preference of $20,000 55,000
Common stock, $.001 par value, 50,000,000
shares authorized, 25,941,259 shares
issued and outstanding 25,942
Additional paid-in capital 6,486,211
Accumulated deficit (7,758,601)
-----------
Total stockholders' deficit (1,191,448)
-----------
Total liabilities and stockholders' deficit $ 328,640
===========
See accompanying notes to financial statements.
F-3
<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
Year ended December 31,
----------------------------
1999 1998
------------ ------------
NET SALES $ 463,590 $ 809,899
COST OF SALES 288,548 483,021
------------ ------------
Gross profit 175,042 326,878
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Marketing expenses 702,835 457,828
General and administrative expenses 485,707 445,584
Depreciation and amortization 1,168 15,602
------------ ------------
Total selling, general
and administrative expenses 1,189,710 919,014
------------ ------------
Operating loss (1,014,668) (592,136)
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 145 17,718
Miscellaneous expense (3,566) --
Miscellaneous income 10,713 1,601
Interest expense (101,981) (2,780)
Settlement expense -- (192,761)
Write-off of intangibles -- (164,186)
Equity in net loss of investee (40,028) (19,972)
------------ ------------
Total other expense (134,717) (360,380)
------------ ------------
LOSS BEFORE INCOME TAXES (1,149,385) (952,516)
INCOME TAX PROVISION -- (150,000)
------------ ------------
NET LOSS $ (1,149,385) $ (1,102,516)
============ ============
NET LOSS PER COMMON SHARE $ (0.04) $ (0.05)
============ ============
DILUTED NET LOSS PER COMMON SHARE $ (0.04) $ (0.05)
============ ============
WEIGHTED AVERAGE OF COMMON SHARES OUTSTANDING 25,606,355 21,888,917
============ ============
See accompanying notes to financial statements.
F-4
<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
---------------------- ---------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
--------- ---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998 1,055,000 $1,055,000 17,498,115 $ 17,498 $5,314,139 $(5,500,200) $ 886,437
Conversion of Preferred Stock (920,000) (920,000) 7,301,587 7,302 912,698 --
Conversion of Preferred Stock (100,000) (100,000) 100,000 100 99,900 --
Net Loss (1,102,516) (1,102,516)
--------- ---------- ---------- --------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1998 35,000 $ 35,000 24,899,702 $ 24,900 $6,326,737 $(6,602,716) $ (216,079)
--------- ---------- ---------- --------- ---------- ----------- -----------
Issuance of Preferred Stock for Cash 20,000 20,000 (19,022) 978
Common Stock Issued for Consulting Fees 791,557 792 74,208 75,000
Exercise of Stock Options 250,000 250 35,250 35,500
Value of options issued 31,065 31,065
Discount on debt for conversion features 37,973 37,973
Preferred Dividend (6,500) (6,500)
Net Loss (1,149,385) (1,149,385)
--------- ---------- ---------- --------- ---------- ----------- -----------
BALANCE, DECEMBER 31, 1999 55,000 $ 55,000 25,941,259 $ 25,942 $6,486,211 $(7,758,601) $(1,191,448)
========= ========== ========== ========= ========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
BAYWOOD INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,149,385) $(1,102,516)
Adjustments to reconcile net loss to cash used
by operating activities:
Depreciation and amortization 1,168 15,602
Issuance of common stock and options for services performed 106,065 --
Note receivable write-off 10,000
Write-off of intangibles -- 164,186
Deferred payments on legal settlements -- 169,768
Amortization of debt discounts 22,165 150,000
Equity in loss of investee 40,028 19,972
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (145,236) 272,279
(Increase) decrease in inventory 16,341 (43,712)
(Increase) in prepaid expenses (1,738) (155)
Increase in interest payable 83,884 --
Increase (decrease) in accounts payable and accrued liabilities 213,522 (157,928)
----------- -----------
Net cash (used) by operating activities (803,186) (512,504)
----------- -----------
INVESTING ACTIVITIES:
Purchase of computer equipment (19,880) --
Investment in Baywood Nutritionals, S.A -- (60,000)
Investment in BII Acquisition Company -- (75,000)
----------- -----------
Net cash (used) by investing activities (19,880) (135,000)
----------- -----------
FINANCING ACTIVITIES:
Proceeds from notes payable 875,196 75,000
Issuance of preferred stock for cash 20,000 --
Fees paid in connection with offering of preferred stock (19,022) --
Proceeds from exercise of options for common stock 35,500 --
Principal payments on notes payable (114,235) (55,533)
----------- -----------
Net cash provided by financing activities 797,439 19,467
----------- -----------
CASH AND EQUIVALENTS USED DURING YEAR (25,627) (628,037)
CASH AND EQUIVALENTS, BEGINNING OF YEAR 40,869 668,906
----------- -----------
CASH AND EQUIVALENTS, END OF YEAR $ 15,242 $ 40,869
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 3,685 $ 2,181
Income taxes $ 50 $ 50
NONCASH INVESTING AND FINANCING ACTIVITIES:
Accrued preferred stock dividend $ 6,500 $ --
Notes payable issued in connection with legal settlements $ -- $ 169,788
Issuance of common stock and options for services $ 106,065 $ --
Debt discount for beneficial conversion feature $ 37,973 $ --
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
BAYWOOD INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Baywood International, Inc. (the "Company"), develops, markets and
distributes nutritional supplements. Currently, the Company's natural consumer
products consist of two dietary supplement lines, PURECHOICE(TM) and
SOLUTIONS(TM). 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.
Beginning in the year ended December 31, 1999, the Company began to develop and
market a new line of nutritional supplements and implemented strategies to
establish marketing and distribution into health food stores in the United
States. 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. Retail channels include health
food, pharmacy, grocery and drug chains, mail order and internet distribution in
the United States.. The Company considers its biggest potential to involve the
development and marketing of a broad base of consumer products that are based on
natural compounds rather than a specific category of natural products. 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 a working capital deficiency of $1,285,160 at
December 31, 1999. The Company has had material operating losses and has had to
rely on borrowings from officers, directors and other third parties 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 year ended December 31, 1998. The Company has since implemented a new
strategic direction with new products and distribution. However, the ability to
implement this strategy to result in profitable operations 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. Sales returns are
recorded as a reduction to sales when a customer and the Company agree a return
is warranted. The Company provides certain guarantees for product movement and
estimates sales returns. Estimated sales returns are recorded in net sales.
Sales returns historically have not been significant.
PROPERTY, EQUIPMENT AND DEPRECIATION
Furniture, fixtures, computers and equipment are depreciated using the
straight-line method over their estimated useful lives of five years. Net book
value of $18,712 at December 31, 1999 relates to computer equipment.
Depreciation expense for the years ended December 31, 1999 and 1998 was $1,168
and $15,602, respectively.
F-7
<PAGE>
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 primarily of finished product, but at times will
include certain raw materials, packaging and labeling 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's advertising primarily consists of print in trade and consumer
publications. The Company expenses advertising costs as incurred. Advertising
expense totaled approximately $236,000 and $198,000 for the years ended December
31, 1999 and 1998, respectively, and is included in marketing expenses in the
accompanying financial statements.
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.
F-8
<PAGE>
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 wrote off its investment
in Baywood Nutritionals, S.A. in the year ended December 31, 1999, due to lack
of the entity's ability to demonstrate the generation of substantive revenue.
The Company accounts for its approximately 15% interest in 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 years ended December 31,
1999 and 1998 because the effect of their inclusion would be antidilutive.
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
Per Per
Loss Shares share Income Shares share
----------- ---------- ------ ----------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Net (Loss) $(1,149,385) $(1,102,516)
Preferred stock dividends (6,500) --
----------- -----------
BASIC LOSS PER SHARE
Loss available to common
stockholders $(1,155,885) 25,606,355 $(0.04) $(1,102,516) 21,888,917 $(0.05)
Effect of dilutive securities N/A N/A
DILUTED LOSS PER SHARE $(0.04) $(0.05)
</TABLE>
Preferred stock convertible to 55,000 shares of common stock and warrants
and options to purchase 6,830,392 shares of common stock were outstanding at
December 31, 1999. 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. These securities were excluded from the computation of
diluted earnings per share because the effect of their inclusion would be
anti-dilutive. Preferred stock dividends of $6,500 and interest on convertible
debentures of $75,387 would be added to reduce the net loss available to common
stockholders for purposes of calculating diluted loss per share for the year
ended December 31,1999.
F-9
<PAGE>
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, 1999, BII has had no
material operations. The parties intend to jointly investigate acquisition
opportunities. The Company intends to continue its relationship with BII, and
believes the investment has ongoing value on the basis of the continued efforts
to locate acquisition targets and finance prospective deals. The Company
accounts for its investment in BII under the cost method. In connection with the
agreement, the Company is issued 791,557 shares of common stock to the third
party as part of a related consulting agreement.
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. As of December 31, 1999, BNSA had yet to generate substantive
revenue. Due to the uncertainty of realizing a benefit from BNSA and the
Company's focus away from international markets, the Company wrote off the
remaining book value of its investment in BNSA in the year ended December 31,
1999. The total loss for the year ended December 31,1999 relative to BNSA was
$40,028.
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, 1999) 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.
F-10
<PAGE>
In the year ended December 31, 1999, the Company issued 20,000 shares of
Class D preferred stock for $20,000. The offering was on a best efforts basis
and after expenses associated with the offering, the net proceeds to the Company
were $928. The Class D preferred stock is redeemable at the sole discretion of
the Company up to one year after issuance. The redemption rate is $1 per share
plus a 12% annual return in cash, plus an amount of the Company's common stock
equal to an 18% annual return, determined by the average 20 day closing price of
the Company's common stock. Also, the Class D preferred stock is convertible
into shares of the Company's common stock. The conversion rate is equal to an
amount of the Company's common stock, determined by the stated value of the
preferred stock divided by 85% of the average 20 day closing price of the
Company's common stock, plus an amount of the Company's common stock equal to a
30% annual return, determined by 85% of the average 20 day closing price of the
Company's common stock, plus warrants to purchase the Company's common stock
equal to the number of shares of common stock determine for conversion at a rate
of 150% of the average 20 day closing price of the Company's common stock.
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 stock has 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 borrowed $722,696 and $75,000 from officers and directors in
the years ended December 31, 1999 and 1998, respectively (Note 12). In
connection with these borrowings, the Company issued 1,595,392 warrants to
purchase the Company's common stock. The Company is indebted to one of its
officers in the amount of $646,000 plus accrued interest of $57,569 at December
31, 1999. Total notes payable and accrued interest due to officers and directors
at December 31, 1999 was $797,696 and $73,634, respectively. Interest expense on
debt to officers and directors was $71,637 for the year ended December 31, 1999.
NOTE 7 - LEASE OBLIGATIONS
The Company leases its offices and warehouse under an operating lease that
expires on July 31, 2000. The future minimum lease obligation for the remaining
term of the lease, the period January 1, 2000 to July 31, 2000, is $25,542. Rent
expense was $42,000 and $49,000 for the years ended December 31, 1999 and 1998,
respectively.
F-11
<PAGE>
NOTE 8 - GEOGRAPHIC AREA DATA BY PRODUCT LINE
The Company now generates its revenue from numerous customers, primarily in
the United States. Prior to 1999, the Company's revenue was generated from sales
concentrated with one primary customer in China. During 1998, the Company's
sales to its primary customer ceased due to certain regulatory matters the
customer had encountered in China and the Company generated no revenue from this
customer in 1999. 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. The following table outlines the
breakdown of sales to unaffiliated customers domestically and internationally:
GROSS REVENUES
1999 1998
-------- --------
Nutritional and Dietary Supplements:
United States $427,491 $ 4,805
China -- 772,640
Other 36,099 32,454
-------- --------
Total $463,590 $809,899
======== ========
NOTE 9 - CREDIT RISK AND OTHER CONCENTRATIONS
Prior to 1999, 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% of total net sales for the year ended December 31, 1998.
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 Company has
not generated any revenue from this customer since the first quarter of 1998.
The Company does not believe it has any material concentrations with
customers at December 31,1999.
From time to time, the Company's bank balances exceed federally insured
limits. At December 31, 1999, 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, key
employees and members of the Board of Directors. 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 to employees. Had compensation cost for the Company's stock
options been determined based on the fair value at the grant date for awards in
1999 and 1998, 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:
F-12
<PAGE>
1999 1998
----------- -----------
Net Loss - as reported $(1,149,385) $(1,102,516)
Net Loss - pro forma $(1,220,302) $(1,137,416)
Loss per share - as reported $ (0.04) $ (0.05)
Loss per share - pro forma $ (0.04) $ (0.05)
Under the provisions of SFAS No. 123, the number of fully vested options
granted of 450,000 options plus 250,641 proportionately vested options for the
year ended December 31, 1999 and 850,000 fully vested for the year ended
December 31, 1998 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:
1999 1998
---- ----
Dividend yield None None
Volatility 1.143 0.998
Risk free interest rate 6.00% 5.25%
Expected asset life 5 years 4 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 amended to 5,500,000 in 1999. 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.
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, 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 expired 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. However, these options were repriced in March of 1999 by
the Company. The new exercise price is $0.25 per share which exceeded the
trading value of the Company's stock which, at the time of the repricing, was
approximately $0.16. No expense was recognized in connection with the repricing.
These 500,000 options were exercised subsequent to December 31, 1999.
During the year ended December 31, 1999, the Company granted 3,750,000
options to certain key employees. Of these options, 450,000 vested immediately
and another 350,000 vest over two years. The remaining 2,950,000 vest on the
basis of the Company attaining certain annual revenue levels. The options were
granted at an exercise price of $0.15 per share, the fair market value of the
underlying shares on the date of grant. The options expire ten years from date
of grant. The Company also granted 400,000 options to certain non-employee
members of the Board of Directors. The options were granted at an exercise price
of $0.15 per share, the fair market value of the underlying shares on the date
F-13
<PAGE>
of grant. The options expire ten years from date of grant, 200,000 vested
immediately and the balance over a one year period. In accordance with SFAS No.
123, the Company recognized an expense of $31,065 associated with the granting
of these options in the year ended December 31, 1999. The amount of the expense
was determined using the fair value method utilized for all options issued
during the year.
The summary of activity for the Company's stock options is presented below:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
1999 Price 1998 Price
---- ----- ---- -----
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 1,405,000 $ 0.47 1,755,000 $ 0.37
Granted 4,180,000 $ 0.15 850,000 $ 0.17
Exercised (250,000) 0
Terminated/Expired (400,000) $ 0.25 (1,200,000) $ 0.30
Options outstanding at end of year 4,935,000 $ 0.16 1,405,000 $ 0.47
Options exercisable at end of year 1,435,000 $ 0.18 1,405,000 $ 0.45
Options available for grant at end of year 1,075,000 245,000
Price per share of options outstanding $0.06 - $0.42 $0.06 - $1.00
Weighted average remaining contractual lives 8.5 years 4.2 years
Weighted Average fair value of options granted
during the year $0.11 $0.04
</TABLE>
In conjunction with notes payable issued by the Company, 1,900,392 warrants
were issued to purchase shares of the Company's common stock during the year
ended December 31, 1999. The exercise price of the warrants was determined based
on the 90 day average of the closing price of the Company's common stock. The
exercise price of these warrants ranges from $0.05 to $0.26 per share. The
weighted average exercise price is $0.17.
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, 1999.
Deferred tax assets totaling $3,001,000 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 $2,880,000 of the deferred tax asset. The balance of the
deferred tax asset relates to differences in book and tax accounting relative to
the previous write-off of intangibles, allowances on accounts receivable,
write-off of investment in equity investee and compensation related to stock
options. The Company has federal and state net operating loss carryforwards of
$6,923,000 and $6,722,000, respectively, at December 31, 1999. The deferred
federal loss carryforwards expire in 2002 through 2019 and state loss
carryforwards expire 2000 through 2004.
F-14
<PAGE>
Income taxes for years ended December 31:
1999 1998
---------- ----------
Current Benefit $ 462,486 $ 391,204
Deferred Benefit (Provision) (462,486) (541,204)
---------- ----------
Net income tax provision $ -0- $ (150,000)
========== ==========
The income tax benefit of $462,486 generated for the year ended December
31, 1999 was offset by an equal increase in the valuation allowance. The total
increase in the valuation allowance for the year ended December 31, 1999 was
$480,077. 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. An alternative minimum tax credit of $10,174
exists at December 31, 1999.
A reconciliation for the differences between the effective and statutory
income tax rates is as follows:
1999 1998
----------------- -----------------
Federal statutory rates $(390,791) (34)% $(323,855) (34)%
State income taxes (91,951) (8)% (57,151) (6)%
Valuation allowance for operating
loss carryforwards 480,077 42% 520,671 55%
Other 2,665 -- 10,335 1%
--------- ----- --------- -----
Effective rate $ -0- 0% $ 150,000 16%
========= ===== ========= =====
NOTE 12 - CONVERTIBLE NOTES PAYABLE
Convertible notes payable at December 31, 1999 consisted of the following:
Convertible notes payable to officers and directors. The
notes bear interest at 15% per annum and are due January
31, 2000 through October 31, 2000. The notes are
unsecured. $797,696
Convertible notes payable - other. The notes bear
interest at 15% per annum and are due August through
December, 2000. The notes are unsecured. 152,500
--------
Face value of notes 950,196
Unamortized discount on notes (15,808)
--------
Net carrying amount of debt $934,388
========
F-15
<PAGE>
All of the notes payable were issued with non-detachable warrants to
purchase 1,900,392 of the Company's common stock. See Note 10. The notes contain
conversion features that allow the holders to convert the principal and accrued
interest to common stock at a price that is 75% of the average 90 day closing
price of the stock. This beneficial conversion feature was valued at $37,973 at
the date of issuance and is recorded as a discount to the face value of the
debt. The discount is being amortized to interest expense over the one year term
of the notes resulting in an effective interest rate of approximately 20%.
Amortization of the discount was $22,165 for the year ended December 31, 1999.
The Company failed to make scheduled repayments of $249,500 on the notes
due to two officers in December 1999 through February 2000. These officers have
indefinitely extended the due dates of the notes.
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.
The Company paid off the settlement in the year ended December 31, 1999.
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 1998 balance sheet.
The Company paid off the settlement in the year ended December 31, 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 expired unexercised in December 1999. The balance of the $75,000 cash
award remaining at December 31, 1998 was $50,000. The Company paid off the
settlement in the year ended December 31, 1999.
The Company incurred settlement costs, excluding its own legal fees, of
$192,761 in the year ended December 31, 1998.
F-16
<PAGE>
NOTE 14 - INTANGIBLE ASSETS
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.
NOTE 15 - COMMITMENTS
The Company enters into arrangements with third parties for royalties based
on sales of certain products. Some of these agreements contain minimum sales
provisions payable to the third party regardless of the sales volume. At
December 31, 1999, the Company has met all minimum sales volume commitments
under these royalty agreements.
* * * * * *
F-17
<PAGE>
BAYWOOD INTERNATIONAL, INC.
SCHEDULE II
Schedule of Valuation and Qualifying Accounts
December 31, 1999
<TABLE>
<CAPTION>
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs Other End of
Description Year Expenses Accounts Deductions Year
----------- ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful collection
on related party note receivable $ 146,891 $ -- $(146,891) $ --
Deferred tax asset
valuation allowance $1,999,297 $ 520,671 $ -- $2,519,968
Allowance for doubtful accounts
receivable $ 18,840 $ -- $ (3,205) $ 15,635
</TABLE>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<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-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 15,242
<SECURITIES> 0
<RECEIVABLES> 169,374
<ALLOWANCES> 21,970
<INVENTORY> 49,762
<CURRENT-ASSETS> 234,928
<PP&E> 19,880
<DEPRECIATION> 1,168
<TOTAL-ASSETS> 328,640
<CURRENT-LIABILITIES> 1,520,088
<BONDS> 0
0
55,000
<COMMON> 26,066
<OTHER-SE> (1,272,514)
<TOTAL-LIABILITY-AND-EQUITY> 328,640
<SALES> 463,617
<TOTAL-REVENUES> 463,617
<CGS> 288,548
<TOTAL-COSTS> 1,189,411
<OTHER-EXPENSES> 135,044
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,149,386)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,149,386)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,149,386)
<EPS-BASIC> (0.04)
<EPS-DILUTED> 0
</TABLE>
