U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
(Fee required)
For the fiscal year ended December 31, 1996
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[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
(No fee required)
For the transition period from __________ to ___________
Commission file number 1-13048
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HEALTHY PLANET PRODUCTS, INC.
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(Name of Small Business Issuer in Its Charter)
Delaware 94-2601764
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1700 Corporate Circle, Petaluma, California 94954
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(Address of Principal Executive Offices) (Zip Code)
(707) 778-2280
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value American Stock Exchange
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of Class)
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(Title of Class)
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports),and (2)
has been subject to such filing requirements for past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of 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. [X]
The Issuer's revenues for its most recent fiscal year ended December
31, 1996 were $4,632,400.
On March 14, 1997, the aggregate market value of the voting stock of
Healthy Planet Products, Inc. (consisting of Common Stock, $.01 par value) held
by non-affiliates of the Registrant was approximately $6,040,000 based on the
closing price for such Common Stock on said date as reported by the American
Stock Exchange.
In making the foregoing calculation, the Company has, for calculation
purposes only, (i) included all presently outstanding 186,341 shares of its
Series D Preferred Stock convertible into shares of Common Stock on a
share-for-share basis and (ii) assumed that any shareholder owning 10% or more
of its Common Stock (or Series D Preferred Stock) is an affiliate and has
excluded such shares in making the calculation.
On March 11, 1997, there were 1,827,362 shares of Common Stock, $.01
par value, issued and outstanding (exclusive of 833 shares of non-voting Series
B Preferred Stock convertible into 3,500 shares of Common Stock, and exclusive
of 186,341 shares of voting Series D Preferred Stock convertible into 186,341
shares of Common Stock).
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item l. Business
Incorporation
Healthy Planet Products, Inc. (hereinafter referred to as the
"Registrant" or the "Company") was originally organized under the laws of the
state of California on July 12, 1979 under the name of Carolyn Bean Publishing,
Ltd. On April 12, 1985, the Company effected a domiciliary reincorporation
pursuant to which the Company was reincorporated under the laws of the State of
Delaware, and the California corporate entity was merged into a new Delaware
corporation of the same name. On August 2, 1993, the Company changed its name to
Healthy Planet Products, Inc. The Company's executive offices and warehouse
facilities are located at 1700 Corporate Circle, Petaluma, California 94954, and
its telephone number is (707) 778-2280, fax number (707) 778-0307.
Special Note Regarding Forward-Looking Statements
Certain statements in this Form 10-KSB, including information set forth
under Item 6 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Act").
Healthy Planet Products, Inc. (the "Company") desires to avail itself of certain
"safe harbor" provisions of the Act and is therefore including this special note
to enable the Company to do so. Forward-looking statements included in this Form
10-KSB or hereafter included in other publicly available documents filed with
the Securities and Exchange Commission, reports to the Company's stockholders
and other publicly available statements issued or released by the Company
involve known and unknown risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ from the future results, performance (financial or
operating) achievements expressed or implied by such forward looking statements.
Such future results are based upon management's best estimates based upon
current conditions and the most recent results of operations. These include
purchasing plans and programs of certain large chain buyers relating to holiday
product, recently experienced decline in gross margin as well as marginal
increases in general and administrative expenses, the recent adverse trend in
the general retail environment, general economic conditions, competition
generally and specifically relating to greeting cards having environmental,
nature or wildlife themes and the ability of the Company to sustain consumer
demand for the Company's principal Sierra Club card line. In addition, the
ability of the Company to enhance and expand its product mix and to successfully
introduce new products which will meet with consumer acceptance may also affect
future results. The Company to date has been materially dependent upon the
efforts of Messrs. Bruce Wilson and M. Scott Foster, who constitute the
Company's core senior management. The loss of either Mr. Wilson's or Mr.
Foster's services may have a materially adverse effect upon the business or
operations of the Company.
Principal Industry in Which the Company is Engaged
The Company designs, publishes and markets, throughout the United
States and Canada, a diversified line of cause related, nature and wildlife
contemporary greeting cards, note cards,
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holiday cards, stationery and gifts. The Company also licenses the right to the
use of the Healthy Planet Products name, trademark and art work in connection
with the manufacture, sale and distribution of the Company's products in certain
foreign countries. See "Business - General Business Developments During Most
Recent Fiscal Year".
In response to environmental considerations, and in connection with its
identification with the Sierra Club as a licensor, all of the Company's paper
products are produced on recycled paper using soy-based ink. The Company
publishes and markets over 500 everyday, occasional and seasonal cards,
including over 300 images which comprise the Company's principal Sierra Club
card line. The Company's products are predominantly marketed through
approximately 130 independent sales representatives to over 4,900 retail sales
outlets comprised of card shops, stationery stores, gift, notion and variety
shops, drug stores, book stores, department stores and miscellaneous chain and
retail sales outlets.
The Company is the exclusive licensee of the Sierra Club, a nationally
known environmental and conservationist organization, for the use of the Sierra
Club name on a line of wilderness and wildlife cards, stationery, tablets and
magnets. The Sierra Club line has evolved to become the principal line of the
Company, accounting for approximately 82.2% of the Company's net sales for the
year ended December 31, 1996 and for approximately 85.1% of the Company's net
sales for the year ended December 31, 1995.
In furtherance of its business strategy of directing its main focus to
the sale of cause-related, nature and wildlife product lines in the fourth
quarter of 1993, the Company obtained an exclusive license from The Humane
Society of the United States to use its name on a line of greeting cards. This
line is comprised of a series of 24 Holiday images. The Humane Society line
features domestic and wild animals in holiday like settings. For the year ended
December 31, 1996, this line accounted for approximately 5.9% of the Company's
net sales and for the year ended December 31, 1995 the Humane Society line
accounted for approximately 5.1% of the Company's net sales.
The Company also markets its SEA DREAMS(R) line, which is presently
comprised of 123 designs in a 5x7 blank notecard format and 32 designs in a 4x5
boxed blank notecard format. SEA DREAMS(R) is a collection of underwater
photographs of the sea and its creatures, and features corals, fish, sea-mammals
and other inhabitants of the sea. For the years ended December 31, 1996 and
1995, this line accounted for approximately 5.5% and 4.7%, respectively, of the
Company's net sales.
The Company's products utilize both graphics and greetings to appeal to
a broad spectrum of consumer tastes. In the case of the Company's Sierra Club
products (which presently constitute the Company's principal line in terms of
dollar amount of gross sales) and the Company's new sea life and wildlife card
lines consist of high quality wilderness, wildlife and underwater photographic
images which are intended to evoke an identification with environmental issues,
nature and wildlife. Everyday note cards contain no written message, whereas
seasonal greeting cards contain short contemporary messages, which the Company
believes fulfills a desire for simplicity in communication.
The greeting card occupies a unique place in the American retail
market, and has been incorporated into the everyday lives of Americans. Over
seven billion greeting cards are sent
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in America each year, one third being Christmas cards. Since greeting cards are
an inexpensive personalized gift, sales tend to continue to increase even during
difficult economic times.
There is little, if any, price competition in the card industry. The
retail prices of the Company's cards range from $.73 to $1.95 with most at the
$1.75 price range. The Company has met no price resistance to its retail price
structure for two reasons that apply generally to industry retail sales as a
whole: first, greeting cards are one of the least expensive forms of gifts, and
second, cards have become a socially required form of communication for everyday
and special occasions. At the wholesale level, competition generally does not
relate to price, but rather to quality of service, the number of different
images that can be placed on store card displays, how quickly cards sell at the
retail level, and the compatibility between the buyer's tastes and the card
lines offered.
The market for contemporary cards, and more particularly cause related
and nature theme cards, is of recent origin, having developed primarily in the
last ten years to appeal to a large segment of the population with a taste for
more contemporary graphics and copy or those who wish to express their support
of a particular social cause by utilizing cards associated with the cause.
Contemporary, cause related and nature theme cards, including those published by
the Company, creatively join graphics and copy to express a message or convey a
thought or sentiment or, in the case of its Sierra Club(R), Sea Dreams(R) Humane
Society(R) and Nature Baby(R) lines, high quality wildlife, wilderness and
nature photography. These have been sold in the past predominantly through
single-location, independently-owned businesses, such as boutiques, gift shops
and book stores, rather than through stationery, card, drug or department
stores, which have been the traditional outlet for more conservative,
mass-marketed cards published by the major card companies. The more traditional
marketplace represents a large sales source for contemporary and cause related
cards. The Company believes that the market for cause related cards will
continue to grow for the foreseeable future as consumers express a desire to
express support for a particular cause while satisfying their greeting card
needs. It has been estimated that the total number of retail outlets for cards
exceeds 350,000 outlets, of which the traditional outlets are a substantial
portion. See "Item l. Business - Marketing and Sales".
Charitable/Environmental Contributions.
The Board of Directors and Management of the Company have adopted a
corporate policy whereby the Company has committed the Company to providing
desirable, high quality products to the ever increasing number of
environmentally conscious consumers. In furtherance of this commitment, the
Company has decided to contribute a portion of its wholesale proceeds from the
sale of its SEA DREAMS(R) and Healthy Planet product lines to scientific,
research, environmental and other charitable institutions. During fiscal year
1996, the Company contributed approximately $53,000 to organizations such as the
Marine Mammal Center located in Sausalito, California, the Petaluma California
Soup Kitchen and the Petaluma California Boys & Girls Club. These contributions
are made at the discretion of the Company.
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General Business Developments
During Most Recent Fiscal Year
Introduction of Nature Baby(R) Line
In December 1996, the Company introduced its Nature Baby(R) line. This
new line, which had been in development for two years, is the first product
which has de-emphasized counter cards and was specifically designed for the gift
market. The line is comprised of 48 images of baby animals in the wild, and
includes cards, magnets, journals, laser compatible stationery and envelopes,
matted prints and 16"x20" prints.
New License Agreement with the Zoological Society of San Diego
On September 30, 1996, the Company entered into a License Agreement
with the Zoological Society of San Diego pursuant to which the Company has been
licensed to use the registered marks "Zoological Society of San Diego," "Center
for Reproduction of Endangered Species" and "CRES" in connection with the
Company's Nature Baby(R) line. The license continues through September 30, 1999
and provides for the payment of a royalty of 3% of the adjusted gross invoice
price of the licensed product, with a minimum royalty of $5,000.
Extension of Humane Society License
Since March of 1993, the Company has been licensed by The Humane
Society of the United States to utilize The Humane Society name and logo in
connection with greeting cards. This license agreement was extended for an
additional two year term through December 31, 1998.
License for New Zealand and Australia
On September 3, 1996, the Company entered into separate License
Agreements with Stanley Newcomb & Co. Ltd. of New Zealand and Taylorgraphic Pty.
Ltd. of Australia for the use of the Healthy Planet Product name and images on
products in their respective markets. These license agreements, for terms
expiring in September, 1998, provide that the Company receive a royalty of 7% of
net sales of licensed products sold by each of the licensed companies.
License for Europe
The Company has entered into an agreement with Twin Oaks Publishing
pursuant to which it granted an exclusive license to Twin Oaks, a licensee, to
use the Healthy Planet Products name for certain products in Europe. The Company
may license the rights to others to use its Healthy Planet trademarks for
certain product categories.
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Products
Source of Product and Arrangement with Photographers and Others
Published Product.
While the overall concept and design of its products are developed by
the Company in-house, it principally relies on independent, unaffiliated
photographers to create images for its product lines. Agreements between the
Company and its photographers apply to specific images submitted by a
photographer and accepted by the Company, and are exclusive as to those images,
and do not normally cover all of a photographer's works. The Company utilizes an
available pool of 600-700 photographers. It additionally receives unsolicited
submissions from time to time from various photographers. When utilizing the
work of a particular photographer, the Company generally makes a one time
payment of $300-$400, which entitles the Company to utilize the particular work
for three to five years without further royalty payments.
No single photographer with whom the Company has entered into a license
or purchase of rights agreement has created products which have accounted for 4%
or more of the Company's sales.
License Agreements
The following are the principal license agreements to which the Company
is a party.
A. The Sierra Club.
Since June 4, 1980, the Company has been licensed by the Sierra Club to
use its name on an exclusive worldwide basis on a line of greeting, note and
seasonal cards as well as stationery products, tablets and magnets. This license
agreement has been extended through December 31, 2005. Sales of the Sierra Club
line represented approximately 82.2% and 85.1% of the Company's sales for the
years ended December 31, 1996 and 1995, respectively. The Sierra Club card line
is comprised of over 275 everyday designs and over 50 holiday designs, all of
which are printed on recycled paper using soy-based ink. All products developed
by the Company which comprise the Sierra Club line are subject to the prior
approval of the Sierra Club. Under the current license agreement, the Sierra
Club received an annual guaranteed minimum royalty of $321,000 for the calendar
year 1996, with an annual guaranteed minimum royalty of $321,000 for each year
thereafter increased by 7% per year for each year through the year 2000, and 5%
per year for each year through the year 2005. In addition to the minimum annual
guaranteed royalty, the Company paid Sierra Club a one time additional royalty
of $60,000 for the year 1995 and will pay $50,000 for the year 2001. The license
agreement may be terminated by the Sierra Club prior to its regular expiration
date in the event of a material breach or default by the Company of its material
obligations which remains uncured for 60 days. The material obligations of the
Company principally relate to the payment of royalties. The experience of the
Company with its Sierra Club line has been that sales in each license year have
exceeded the base levels on which the guaranteed minimum is to be paid. For the
year ended December 31, 1996, the Company paid aggregate royalties of $331,000
to the Sierra Club. No assurance may be given that actual royalties to the
Sierra Club in future years will equal or exceed the minimum guaranteed royalty.
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The Company's Sierra Club line is comprised of 5x7 blank note cards
which utilize over 275 images and retail for $1.75 each; 4x5 boxed cards which
consist of eight cards and envelopes and have a suggested retail price of $5.95.
Holiday boxed cards have a suggested retail price of $10.95 and consist of 15
cards and envelopes.
The Company believes that the loss of the Sierra Club line would have a
material adverse affect upon the Company's business unless and until such time
as other lines having an established substantial consumer acceptance are
developed. No assurance can be given that, in the event of the loss of the
Sierra Club line, other lines can be developed that would enable the Company to
be profitable, if at all.
B. The Humane Society of the United States.
In furtherance of its focus and concentration on the design and
development of cause- related, nature and wildlife card lines, the Company, on
March 1, 1993, entered into a license agreement with The Humane Society of the
United States (the "Humane Society"), pursuant to which the Company was granted
the right to use the Humane Society name and logo in the United States and
Canada in connection with greeting cards. The license agreement is to continue
through December 31, 1998 and may be extended by either party for one additional
two-year period. In consideration for the grant of the license, the Company is
to pay the Humane Society a license fee of 5% of the wholesale price for the
first $100,000 of net sales of licensed product during the term of the
agreement, increasing to 7% of net sales in excess of $100,000. The license
agreement may be terminated by the Humane Society in the event of the failure of
the Company to make any license payment or furnish any required statement, and
which default continues for a period of 30 days after written notice, or in the
event the Company fails to cure any other breach of the license agreement after
30 days written notice. The Humane Society line is available in boxed holiday
cards. For the year ended December 31, 1996, sales of this line represented
approximately 5.9% of the Company's net sales.
C. The Wilderness Society.
On June 24, 1994, the Company entered into a License Agreement with The
Wilderness Society, a nonprofit corporation headquartered in Washington, D.C.
Pursuant to the License Agreement, the Company is granted an exclusive worldwide
license to use The Wilderness Society name, logo and artwork in connection with
the manufacture, sale and distribution of everyday, Christmas and/or special
occasion bookmarks and refrigerator magnets produced using recycled paper and
recycled plastic materials. The license is for a three year term through June
31, 1997 with the right to extend for one additional three year period. The
Company is to pay to The Wilderness Society a royalty of 5% of the wholesale
price of net sales for the licensed products with a minimum annual royalty of
$10,000. The Company has been granted the right to promote the licensed products
in two issues per year of The Wilderness Society Magazine. All licensed products
are subject to prior approval of the licensor. The License Agreement is subject
to early termination in the event of the failure of the Company to make royalty
payments, the uncured breach of the Agreement by the Company, or the filing by
the Company for protection under federal bankruptcy laws. For the year ended
December 31, 1996 sales of this line represented approximately 2.5% of the
Company's net sales.
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D. The Marine Mammal Center.
On July 28, 1994, the Company entered into a License Agreement with The
Marine Mammal Center, a not for profit organization headquartered in The Golden
Gate National Recreational Area, Sausalito, California, and whose principal
activities relate to the preservation of marine mammals and related research.
Pursuant to the License Agreement, the Company was granted the exclusive
worldwide license to use The Marine Mammal Center name and logo in connection
with greeting cards, stationery, journals, tablets, bookmarks, magnets, blank
books, kites and puzzles. The license was for an initial term commencing August
1, 1994 through December 31, 1995. The Company has renewed the license for an
additional four-year term. The Company paid a guaranteed minimum royalty of
$2,500 for the year 1994 and a guaranteed minimum royalty of $5,000 for the year
1995 against a royalty of 3% of net sales of licensed products. All licensed
products are subject to prior approval of the licensor. For the years ended
December 31, 1996 and 1995, sales of this line represented approximately 5.5%
and 4.7% of the Company's net sales.
Manufacture of Cards
The Company does not manufacture its products, nor does it have the
equipment to do so. Rather, it contracts for the physical production of its
products with independent contractors, using different suppliers at each stage
of production, so as not to rely on any one specific supplier to satisfy its
needs. The Company believes that there are ample suppliers and production
facilities available to it at competitive costs.
Proposed and New Product Lines
Given the Company's particular identification with the Sierra Club and
environmental and other causes, the Company has created new non-card product
lines marketed under the name "Healthy Planet Products", which trademark has
been registered with the United States Patent and Trademark Office.
As part of its proposed Healthy Planet Products line, the Company has
designed, developed and marketed diverse paper and gift products, including
stationery and other gift items. As previously described, the Company has
entered into an agreement with Twin Oaks Publishing pursuant to which it granted
an exclusive license to Twin Oaks, a licensee, to use the Healthy Planet
Products name for certain products in Europe. Similar license agreements have
been entered into for New Zealand and Australia. The Company may license the
rights to others to use its Healthy Planet trademarks for certain product
categories.
The Company currently markets its Sierra Club card line under the
HEALTHY PLANET PRODUCTS(R) trademark. In addition, the Company's SEA DREAMS(R)
card line was introduced in the fourth quarter of 1993 and are also marketed
under the Company's HEALTHY PLANET PRODUCTS(R) trademark, as is the Company's
NATURE BABY(R) line, which was introduced in 1996. The Company also produces a
line of social stationery comprising everyday boxed notes, stationery, journals,
magnets and tablets which feature various nature and wildlife themes. The themes
utilized are images which are the most popular images in the Company's Sierra
Club line. Social stationery is sold in boxes of twenty sheets and coordinated
envelopes with a suggested retail price of $11.95 per box. Magnetized note pads
incorporate similar nature and
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wildlife themes and are sold in packages of two 50-sheet pads with a suggested
retail price of $4.95. Journals have a suggested retail price of $11.95 each and
consist of approximately 100 lined sheets of recycled paper, enclosed between
two extra heavyweight sheets of recycled "chip" board. The covers feature most
of the photographic images utilized for the social stationery products.
As a licensee of The Wilderness Society, the Company, during the second
half of 1994, developed a line of refrigerator magnets which feature nature and
wildlife themes. Consistent with environmental considerations, the magnets are
made from 100% recycled plastic. The Company also utilizes images from its Sea
Dreams(R) and Nature Baby(R) lines for separate refrigerator magnet lines which
are marketed utilizing The Marine Mammal Center trademark in the case of Sea
Dreams(R) and the CRES trademark in the case of Nature Baby(R). Refrigerator
magnets are priced at a $3.50 retail price and are sold in units of 48 on a
cylindrical display.
Marketing and Sales
The Company's products are marketed to over 4,900 retail sales outlets
which are comprised of card shops; stationery stores; gift, book stores, notions
and variety shops; drug stores, and department stores; and miscellaneous and
multiple retail outlets. With the exception of Barnes & Noble Superstores, a
national chain of bookstores which accounted for approximately 12.1% of the
Company's net sales for the year ended December 31, 1996, no single customer of
the Company accounted for 6% or more of the Company's net sales. The Company
does not have an on-going contract or agreement with Barnes & Noble Superstores
with respect to future purchase commitments. The Company views its relations
with Barnes & Noble Superstores to be good. No assurance may be given as to
future purchases, if any, which may be effected to this account. The Company
does not consider that the loss of this account or an overall reduction in its
purchasing volume would have an overall material adverse long term effect on the
Company.
The Company utilizes approximately 130 independent sales
representatives who also represent the products of other companies. Independent
sales representatives accounted for approximately 64% of Company sales for the
year ended December 31, 1996 (with the balance of Company sales being generated
via direct customer contact). Independent sales representatives are paid a fixed
sales commission ranging from 5% to 20% of sales. For the year ended December
31, 1996, a total of $471,000 in commissions were paid to the sales
representatives. During this period, no single sales representative accounted
for more than 10% of the Company's sales.
The Company has developed various merchandising programs which have
been designed to provide increasing levels of benefits to its customers as
customers' commitments to the Company's product lines increase. The Company's
product line has been segmented and is targeted to specific markets. Sales
literature, trade advertising and catalogs explain and highlight the Company's
programs and products, and are used by sales representatives in presentations to
customers. The Company provides a range of options, from small "promotional"
displays to larger "departmental" displays.
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Seasonal Aspects of the Company's Business
The greeting card, social stationery and gift industry in which the
Company is engaged has historically experienced seasonal sales effects,
primarily due to the emphasis on Christmas and holiday product. These effects
generally include peak seasonal production costs in the second and third
quarters of the year, and a seasonal buildup of accounts receivable in the third
and fourth quarters, thereby resulting in an increase in capital carrying costs
during these periods. During 1996, seasonal effects on the Company's business
resulted in approximately 61% of the Company's sales being made in the third and
fourth quarters. During fiscal year 1996, approximately 21% of total annual
sales were in accounts receivable during the third and fourth quarter, and are
not collectible until the first quarter of the following fiscal year.
Approximately 59% of the cost of manufacturing inventory was incurred in the
second and third quarters of the 1996 year. Such factors require the application
of working capital to either carry accounts receivable during the last two
quarters of the year or to cover production costs during peak production
periods.
Advertising and Sales Promotion
The Company uses various methods to promote its products. It advertises
in certain trade and gift publications, and exhibits at several of the
significant industry trade shows. In addition, it produces sales materials at
the beginning of each season which feature new products and merchandising
programs. One of the Company's most effective forms of retail advertising is the
visual display of its products in display space in retail outlets. The Company
believes that its focus on cause related, nature and wildlife card and other
product lines will be the indirect beneficiary of the promotion of each
particular cause and consumer concerns for the environment and nature
preservation. As consumers become more aware of each cause, and are supportive
of the particular cause, or become more supportive of environmental
preservation, the Company believes that the market and demand for its associated
card and other product lines will increase.
Competition
The greeting card, social stationery and gift industry is highly
competitive. The Company only marginally competes with major traditional card
companies, such as Hallmark Cards, Inc., American Greetings Corporation, and
Gibson Greetings, Inc. The major greeting card companies have greater financial
resources, market penetration and experience than the Company. The Company
primarily competes with the smaller alternative card companies, several of whom
have sales and resources greater than those of the Company; i.e., Recycled Paper
Products, Paramount and Sunrise Publications, among others.
The primary basis upon which the Company competes is the marketing of
its cause related card lines and associated nature and wildlife card lines,
which can only be obtained exclusively through the Company. This factor is a
positive aspect to the business of the Company so long as there continues to be
public awareness, support and identification with a particular cause or
environmental issues. Conversely, should a cause fall out of vogue with the
public, the attractiveness of a line may diminish. The Company does not view
itself as being a significant competitive factor in the greeting card industry,
though the Company does believe that growth and opportunity does present itself
with the niche of cause related and associated card and other product lines.
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Employees
The Company currently has 24 full-time employees, including its four
executive officers, 8 in administrative, managerial, and sales positions, and 12
warehouse persons. In peak seasons, the Company may employ up to 15 temporary
employees for its warehouse operation. None of the Company's employees are
represented by a labor union, and the Company considers its relationship with
its employees to be good.
Trademarks and Copyrights
In most cases, the Company either owns or shares ownership of the
copyright with the photographers who create photographs for the Company,
although there are some photographers who have the exclusive ownership of the
copyright for the works published by the Company, in which case, the right to
market and exploit the product is licensed to the Company in return for a
royalty fee or one time payment for rights. To the extent that any single
product enjoys substantial consumer acceptance or demand, the Company is
dependent upon the validity of the copyright of such photograph. The loss or
invalidity of a copyright will not have a material adverse effect on the Company
since no single product, either published or distributed by the Company,
accounts for a material portion of the Company's sales.
The Company has commenced to utilize HEALTHY PLANET PRODUCTS(R) as a
trademark in association with its environmentally cause- related product lines,
and has completed registration of the name, logo and design of HEALTHY PLANET
PRODUCTS with the United States Patent and Trademark Office.
The Company has also registered the "Sea Dreams" name and logo and
design as a trademark used in connection with its product line featuring
underwater photographs.
The Company has registered the "Nature Baby" name and logo and design
as a trademark used in connection with its product line featuring baby animals
in natural wildlife settings.
Item 2. Properties
The Company's offices and business facilities are located in an entire
self-contained building located in Petaluma, California.
On February 12, 1996, the Company entered into a Lease Agreement with
RNM Lakeville, L.P., as landlord, for premises 1700 Corporate Circle, Petaluma,
California. The Company completed the physical relocation of its executive
offices and warehouse to the new facility in April 1996. The premises are
comprised of an entire self-contained building of tilt-up concrete construction,
fully sprinklered located in an established business park consisting of
approximately 52,000 square feet, of which approximately 6,700 square feet is
first floor office space and approximately 45,300 square feet is warehouse
space. Commencing the fourth year of the lease term, the Company will occupy an
additional 22,000 square feet which will then comprise the entire building. The
leased premises were newly constructed for occupation by the Company. The lease
is for a term of 10 years through April 30, 2006, and may be extended pursuant
to three extension options for one period of 2 years and two successive periods
of 5
11
<PAGE>
years each. The lease is on a "triple net basis" pursuant to which the Company
is to pay a monthly rent of $26,486 during the first year of the lease term,
$28,045 per month for the second and third years of the lease term, $31,161 per
month for the portion of the fourth year of the lease term until the balance of
the entire building is occupied, and $45,677 per month for the remainder of the
fourth year of the lease term through the sixth year of the lease term, and
$50,244 per month for the seventh through tenth years of the lease term. In
addition to the monthly rent provided, the Company is to pay, as additional
rent, all taxes, insurance premiums, maintenance and repair costs relating to
the Company's use and occupancy of the premises.
Item 3. Legal Proceedings
The Company is not a party to any pending legal proceedings, except for
one pending action for collection of a past due receivable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
12
<PAGE>
PART II
Item 5. Market of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters
A. Principal Market
On April 3, 1995, the Common Stock of the Registrant was accepted for
listing on the American Stock Exchange and commenced trading under the symbol
"HPP". Prior to such time, the Common Stock was traded in the over-the-counter
market and was included in the Nasdaq Small-Cap Market of The Nasdaq Stock
Market ("Nasdaq") under the Nasdaq symbol "HPPI". Prior to August 2, 1993, when
the Company changed its name from Carolyn Bean Publishing, Ltd. to Healthy
Planet Products, Inc., the Company's Common Stock was traded under the symbol
"CBEN". From May 9, 1994 through April 3, 1995, the Common Stock of the Company
was admitted for trading on the Pacific Stock Exchange under the trading symbol
"HPP.P". Simultaneously with the acceptance of listing on the American Stock
Exchange, the Company withdrew from the Pacific Stock Exchange and Nasdaq.
B. Market Information
Nasdaq
The range of high and low bid for such Common Stock for the periods
indicated below is as follows:
Year High Low
---- ---- ---
1995
1st Quarter 10 7 1/2
2nd Quarter 10 5/8 9 1/2
The above quotations, reported by Nasdaq, represent prices between dealers and
do not include retail mark-up, mark-down or commissions. Such quotations do not
necessarily represent actual transactions.
American Stock Exchange
Since its admission for trading on the American Stock Exchange on April
3, 1995, the following are the high and low closing prices for the Company's
Common Stock:
Year High Low
---- ---- ---
1995
2nd Quarter 11 1/2 9 3/8
3rd Quarter 13 5/8 10 1/2
4th Quarter 12 1/2 8 1/8
13
<PAGE>
Year High Low
---- ---- ---
1996
1st Quarter 9 3/8 7 1/4
2nd Quarter 8 6 3/4
3rd Quarter 7 1/8 5
4th Quarter 5 3/16 3 11/16
C. Dividends
The Company has never paid a dividend, whether cash or property, on its
shares of Common Stock and has no present expectation of doing so in the
foreseeable future.
D. Approximated Number of Equity Security Holders
The approximate number of record holders of the Company's Common Stock
as of March 11, 1997 was 149. Such number of record owners was determined from
the Company's shareholder records, and does not include beneficial owners of the
Company's Common Stock whose shares are held in the names of various security
holders, dealers and clearing agencies. The Company believes that the number of
beneficial owners of its Common Stock held by others as or in nominee names
exceeds 1,500 in number. In addition, and with respect to the Company's Series B
and Series D Preferred Stock (none of which are publicly traded), the number of
record holders of such classes of Preferred Stock were 1 and 16, respectively.
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The following table sets forth for the periods indicated, percentages
which certain items reflected in the financial data bear to the revenues of the
Company:
14
<PAGE>
Relationship to Total Revenues
Fiscal Year Ended
December 3l,
1994 1995 1996
---- ---- ----
Net Sales 100% 100% 100%
Operating Expenses:
Cost of Goods 37.6% 38.8% 42.4%
Selling, General and Administrative 47.4% 43.8% 55.0%
Income From Operations 14.9% 17.4% 2.6%
Interest and Other Income (Expense) 1.1% 2.3% 6.3%
Income Before Income Taxes 16.0% 19.7% 8.9%
Net Income 23.4% 36.4% 5.3%
Year End Results - Applicability of FAS 109
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $4,664,000 to be applied against future federal
taxable income, of which $2,862,000 are subject to a limitation under Section
382 of the Internal Revenue Code of $476,950 per year. The Company recognizes
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns,
including the future benefit of its net operating loss carryforwards. Temporary
differences and carryforwards which give rise to deferred assets at December 31,
1996 are as follows:
Benefits from net operating loss carryforward $1,645,800
Accounts receivable allowances 170,800
Inventory reserves 16,100
Depreciation and amortization 23,500
Other 26,800
----------
Net deferred income taxes 1,883,000
Deferred income taxes expected to be utilized
in 1997 377,000
Deferred income taxes $1,506,000
==========
Management of the Company believes that it is more likely than not that
the tax benefits of the net operating loss carryforwards, will be realized.
Management's belief is based on the Company's actual profitable results in each
of the years commencing 1992. In order to utilize the full benefit of the
deferred income tax asset, the Company needs to realize aggregate taxable income
of approximately $5,190,000, which it expects to generate during the years 1997
through 2002. The Company has estimated its future taxable income based on its
actual results for the years 1992 through 1996. The foregoing constitutes
management's best estimates based upon current conditions and most recent
results of operations. The results of operations in future years are subject to
many conditions, many of which are beyond the control of Management and
15
<PAGE>
which may affect the amount of taxable income that may be generated in future
years, and the resultant ability of the Company to fully utilize the deferred
income tax asset. Such conditions include general economic conditions,
competition generally and specifically relating to greeting cards having an
environmental and wildlife theme, the ability of the Company to continue to
renew its principal Sierra Club License Agreement which presently expires on
December 31, 2005, and continuity of present management. The net operating
losses expire as follows:
Year Ending December 31, Amount
------------------------ ------
2000 $ 201,000
2001 742,000
2002 1,919,000
2003 88,000
2004 1,300,000
2005 383,000
2006 31,000
----------
$4,664,000
==========
As of December 31, 1996, the Company had available approximately
$15,600 of Federal investment tax credits which can be carried forward and
offset against future income taxes. The Company also has $25,500 of Federal
alternative minimum tax credit carryforwards to reduce future regular income
taxes over an indefinite period.
In light of profitability for each of the last five fiscal years, the
Company is of the reasonable belief that it is more likely than not that it will
realize the tax benefits of its carryforwards based upon the assumptions and
increase in taxable income as discussed above. This anticipated growth is the
result of increased sales, continued control of costs and inflationary effects.
In calculating the benefit of the loss carryforwards, the Company has taken into
account the provisions of Section 382 of the Internal Revenue Code which limits
the maximum amount of loss to be utilized to be $476,950 per year for losses
incurred prior to 1988 and anticipated loss of benefits of one of the prior
years' losses due to the expiration of the 15- year carryforward. The Company
has not contemplated the use of any new tax planning strategies in calculating
the deferred income tax asset.
1996 Compared to 1995
Sales for the year ended December 31, 1996 were $4,632,400 reflecting a
decrease versus the prior year level of $5,892,300 of $1,259,900 or 21.3%. A
general weak retail economy during 1996 and sharply reduced holiday sales
accounted for the year to date decline. Include in the year end results was a
provision for future holiday returns of approximately $212,000. The holiday
return provision recognizes and provides for the return of unsold seasonal
merchandise from customers who have been given a return privilege in exchange
for varying levels of display of everyday merchandise year round.
During 1996, sales of the Company's largest product line, The Sierra
Club, accounted for 82.2% of total revenues and showed a year to year decline of
24.0%. The balance of 1996
16
<PAGE>
revenues were comprised of the Company's other lines, The Humane Society of the
United States, The Wilderness Society, The Marine Mammal Center, and others.
The Company reported operating income of $119,800 or $.06 per share.
This level of operating income reflected a decline versus the prior year
operating income of 88.3% due principally to a loss at gross margin on lower
revenues. Not included in operating income was approximately $293,000 in
interest and other income. Including interest and other income, income before
taxes amounted to $413,100 or $.20 per share versus the prior year income before
taxes of $1,161,700 or $.57 per share. Lost gross margin on lower revenues
accounted for the year to year decline.
Cost of sales amounted to $1,965,500 for the year ended December 31,
1996 representing 42.4% of sales. This rate compares unfavorably to the prior
year rate of 38.8% due to the impact of fixed costs on lower revenues.
Selling, shipping and marketing expenses of $898,700 were below the
prior year level of $998,300 by $99,600 or 10.0%. Lower shipping, commissions,
and sales incentives on lower revenues accounted for the year to year decline.
General and administrative expenses amounted to $1,648,400 for 1996
reflecting an increase of $67,600 or 4.3% versus the prior year level of
$1,580,800. Higher facility rent and associated triple net costs accounted for
the year to year increase.
The Company's net profit for the year ended December 31, 1996 was
$252,100 representing $.12 per share. This level compares unfavorably to the
prior year level of $1.05. Included in the prior year was a benefit from
deferred income taxes raising net profit by $983,200 or $.48 per share. A
provision for income taxes of $161,000 was made during 1996 which includes
$21,000 of estimated tax liability. This tax provision will reduce deferred tax
assets.
Total assets at December 31, 1996 amounted to $8,773,900 which
reflected an increase of $355,600 or 4.2% versus the prior year level of
$8,418,300. Increased receivables, inventories, prepaid expenses and other
assets were offset in part by a decrease in cash to result in the overall
increase. Liabilities amounted to $762,300 as of December 31, 1996 representing
an increase of $54,400 versus the prior year level of $707,900. Lower accrued
expenses and commissions payable due to the revenue shortfall offset by an
increase in dividends payable resulted in the overall increase.
1995 Compared to 1994
Sales for the year ended December 31, 1995 were $5,892,300 reflecting
an increase versus the prior year level of $4,736,400 of $1,155,700 or 24.4%.
Included in the year end results was a provision for future holiday returns of
approximately $350,000. The holiday return provision recognizes and provides for
the return of unsold seasonal merchandise from customers who have been given a
return privilege in exchange for varying levels of display of everyday
merchandise year round.
17
<PAGE>
During 1995, sales of the Company's largest product line, The Sierra
Club, accounted for 85.1% of total revenues and showed a year to year gain of
27.3%. The balance of 1995 revenues were comprised of the Company's other lines,
The Humane Society of the United States, Sea Dreams(R), The Wilderness Society
and others.
The Company reported operating income of $1,026,500 or $.50 per share.
This level of operating income represented a 45% increase versus the prior year
operating income of $707,700 or $.36 per share. Not included in operating income
was approximately $130,000 in interest income. Including interest income, income
before taxes amounted to $1,161,700 or $.57 per share versus the prior year
income before taxes of $758,500 or $.39 per share. Increased sales volume
combined with lower percentage operating costs to result in this year to year
income gain.
Cost of sales amounted to $2,286,700 for the year ended December 31,
1995 representing 38.8% of sales. This rate compares unfavorably to the prior
year rate of 37.6%. Increased sales of lower margin packaged goods combined with
an increased return provision resulted in the year to year percentage cost
increase.
Selling, shipping and marketing expenses of $998,300 were $150,900 or
17.8% above 1994 actual results. Higher shipping expenses, commissions and sales
incentives on higher Company sales accounted for this year to year increase.
General and administrative expenses amounted to $1,580,800 for 1995
reflecting an increase of $181,900 or 13.0%. Budgeted increases in staff to
support the sales increase accounted for the period to period increase.
The Company's net profit for the year ended December 31, 1995 was
$2,144,900 representing $1.05 per share. This level compares favorably to the
1994 net profit of $1,107,700 or $.57 per share. Included in both 1995 and 1994
year end results is a benefit from deferred income taxes of $983,200 and
$349,200, respectively. These benefits represent the recognition of estimated
future NOL uses.
Total assets at December 31, 1995 amounted to $8,418,300 which
reflected an increase of $2,693,800 when compared to the 1994 level of
$5,724,500. Increased cash and inventory in support of and as a result of
increased sales combined with an increase in deferred income taxes accounted for
the period to period increase. Liabilities amounted to $707,900 as of December
31, 1995 representing an increase versus the December 31, 1994 level of $674,400
of $33,500 or 5.0%. Higher accounts payable and accrued expenses accounted for
the period to period increase.
Liquidity and Capital Resources
At December 3l, 1996, the Company's working capital was $5,841,700.
This compared to the 1995 working capital of $5,849,200 for a year to year
marginal decrease of $7,500. The year to year decrease was primarily due to
increased account receivables, inventory and prepaid expenses offset in part by
a decrease in cash and increase in dividends payable.
18
<PAGE>
The primary source of the Company's liquidity is cash internally
generated from operations, the exercise of warrants and employee stock options,
the proceeds remaining on hand from the Company's June, 1993 public offering,
and the availability of a bank credit line. The Company has a secured line of
credit in the amount of $500,000 from Westamerica Bank. During the year ended
December 31, 1996, the Company did not draw under this line of credit, and as of
December 31, 1996, no amounts were outstanding under this line of credit. The
Company believes and anticipates that the primary source of its liquidity and
capital resources for its coming fiscal year will primarily be from its cash on
hand, funds available to it under its line of credit and from cash internally
generated from sales; all of which the Company believes will be adequate and
sufficient for its immediately foreseeable operating needs.
Effects of Inflation
The Company does not view the effects of inflation to have a material
effect upon its business. Increases in material and labor costs have been offset
by increases in the price of the Company's products and through higher
production runs which have reduced the unit cost of the Company's products.
While the Company has in the past increased its prices to its customers, it has
maintained its relative competitive price position.
Item 7. Financial Statements and Supplementary Data
See Index to Financial Statements attached hereto.
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
Not Applicable
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
19
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act
The Directors and Executive Officers of the Company are as follows:
Name Age Position
---- --- --------
Bruce A. Wilson 45 Chairman, President, Chief Executive,
Chief Operating and Chief Financial
Officer
Robert Fagenson 48 Director
M. Scott Foster 45 Director and Vice President - Sales and
Marketing
Rick Williams 40 Vice President - Operations
Joseph F. Furlong III 48 Director
Daniel R. Coleman 40 Director
At the Annual Meeting of Shareholders held on August 11, 1995, the
shareholders of the Company approved, among other things, an Amendment to the
Company's Certificate of Incorporation to provide for a staggered Board of
Directors. The Amendment classified the Board of Directors into three (3)
classes with initial staggered three-year terms. Class 3 Directors were elected
to serve for terms expiring at the 1996 Annual Meeting; Class 2 Directors were
elected to serve for terms expiring at the 1997 Annual Meeting; and Class 1
Directors were elected to serve for terms expiring at the 1998 Annual Meeting.
The following persons were elected for the classes and terms as follows:
Director Class Term Expires
-------- ----- ------------
Bruce A. Wilson 1 1998
M. Scott Foster 1 1998
Robert Fagenson 2 1997
Michael Jesselson 2 1997
Joseph F. Furlong III 3 1999
On August 26, 1996, Mr. Michael Jesselson resigned as a Director of the
Company and Mr. Daniel R. Coleman was elected by the Board as a Class 2 Director
to fill Mr. Jesselson's unexpired term.
20
<PAGE>
All Officers serve at the discretion of the Board of Directors. None of
the officers or directors are related to each other. Set forth below is certain
biographical information for each Director and Officer.
Bruce A. Wilson joined the Company as Vice-President of Operations on
October 15, 1987, and has been President of the Company, Chief Financial and
Chief Operating Officer since January 28, 1988, and a Director since January 28,
1988. In August, 1994, Mr. Wilson assumed the added position of Chief Executive
Officer. From 1985 to 1987, Mr. Wilson was employed by Russ Berrie and Company
Inc. as General Manager of its Russ West Division, a company whose business is
impulse gifts. Prior thereto, Mr. Wilson was employed by Richardson Vicks Inc.
in various capacities, the last of which was from 1983 to 1984 as Executive
Assistant to the Executive Vice-President at Vidal Sassoon Inc.
Robert Fagenson was first elected a Director of the Company in
November, 1986 and continued to serve in such capacity until his resignation for
health reasons in January, 1990. Mr. Fagenson was re-elected as a Director in
March, 1991. Mr. Fagenson has, for more than the past five years, been President
and a Director of Fagenson & Co., Inc., a registered broker dealer, and
Vice-President and Director of Starr Securities Inc., a registered
broker-dealer. Mr. Fagenson currently serves as a Director of the New York Stock
Exchange. Mr. Fagenson is also a Director of The Microtel Franchise and
Development Corporation, a developer of economy lodging facilities; Autoinfo,
Inc., a company engaged in the sub-prime autofinance industry; Nu-Tech Bio-Med,
Inc., a clinical laboratory company; and Rentway, Inc., which operates a chain
of rental/purchase stores.
Joseph F. Furlong III has been President of Adirondack Capital
Advisors, L.L.C., a financial firm, since May 1996. Prior to this, Mr. Furlong
was a partner of Colman Furlong & Co., a merchant banking firm from February
1991 to April 1996. Mr. Furlong has served as a Director of American HomePatient
since June 1994 and as a Director of Capstone Pharmacy Services since December
1994.
Daniel R. Coleman has, for the last five years, been a general partner
in three limited partnerships that invest in United States equity securities. He
also serves as President of Clyde Hill Research, a consulting firm to investment
managers.
Rick Williams joined the Company in 1985 as a systems analyst and,
since 1988, served as the Company's Data Processing Manager. In November, 1990,
Mr. Williams was appointed Vice President of Operations effective as of January
1, 1991.
M. Scott Foster joined the Company in April, 1993 as Vice President of
Sales and Marketing. Mr. Foster was formerly employed by Russ Berrie and Company
from June, 1980 to April, 1993, where he served in various positions in sales
management, the most recent of which was Regional Vice President of Sales, in
which capacity Mr. Foster served from January, 1990 through April, 1993.
Certain Reports; Compliance with Section 16(a) of the Exchange Act
No person who, during the fiscal year ended December 31, 1996, was a
director, officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the
21
<PAGE>
only class of securities of the Company registered under Section 12 of the
Securities Exchange Act of 1934 (the "Act") (a "Reporting Person") failed to
file on a timely basis, reports required by Section 16 of the Act during the
most recent fiscal year or prior years. The foregoing is based solely upon a
review by the Company of Forms 3 and 4 during the most recent fiscal year as
furnished to the Company under Rule 16a-3(d) under the Act, and Forms 5 and
amendments thereto furnished to the Company with respect to its most recent
fiscal year, and any representation received by the Company from any reporting
person that no Form 5 is required.
Item 10. Executive Compensation
<TABLE>
Summary Compensation
The following provides certain information concerning all Plan and
Non-Plan (as defined in Item 402 (a)(ii) of Regulation S-B) compensation awarded
to, earned by, paid or accrued by the Company during the years ended December
31, 1996, 1995 and 1994 to the Chief Executive Officer and each of the named
executive officers of the Company.
SUMMARY COMPENSATION TABLE
<CAPTION>
Annual Compensation Long term Compensation
------------------- ----------------------
Awards
----------------------
No. of
Securities
Underlying
Other Restricted Options/
Name and Principal Annual Stock SARs
Position Year Salary Bonus(1) Comp. Award(s) Granted
- ---------------------- ---- -------- -------- ------ -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bruce A. Wilson 1996 $150,000 $19,867 $23,720(2) $15,000(3) --
President, Chief Exec- 1995 $125,000 $43,707 $35,010(2) $34,000(3) --
utive, Chief Operating 1994 $125,000 $30,359 $31,794(2) $32,750(3) --
and Chief Financial
Officer
Ricky Williams 1996 $ 88,600 $ 9,000 $ 5,642(4) -- --
Vice President of 1995 $ 80,500 $12,500 $ 5,575(4) -- --
Operations 1994 $ 73,205 $10,000 $ 5,510(4) -- --
M. Scott Foster 1996 $100,000 $11,411 $24,825(5) -- --
Vice-President of 1995 $ 80,000 $57,595 $24,825(5) -- --
Sales and Marketing 1994 $ 80,000 $59,347 $24,665(5) -- --
<FN>
- -------------------------------------
(1) Mr. Wilson commenced serving as Chief Executive Officer in August,
1994. Mr. Wilson receives an incentive bonus based upon the Company's
net pre-tax profit before interest expense for each calendar year
during the term. The amount of incentive bonus ranges from 8% of the
first $100,000 of net pre-tax profit to 3% of the net pre-tax profit in
excess of $250,000. Mr. Foster receives an incentive bonus paid
quarterly and
22
<PAGE>
adjusted annually which is calculated to include (i) 1% of the
Company's net shipments on initial orders by new accounts opened by Mr.
Foster; (ii) 5% of all net shipments exceeding the prior years
shipments by 10% and (iii) a percentage of the Company's profits before
taxes. See "Employment Agreements."
(2) Includes: (i) for 1996, an automobile allowance of $12,000 and the
payment of premiums on a term life insurance policy of $2,720 and the
payment of taxes on 4,000 shares of restricted Common Stock which
vested on December 31, 1996 of $9,000; (ii) for 1995, an automobile
allowance of $12,000, the payment of premiums on a term life insurance
policy of $2,610 and the payment of taxes on 4,000 shares of restricted
Common Stock which vested on December 31, 1995 of $20,400; and (iii)
for 1994, an automobile allowance of $9,900, the payment of premiums on
a term life insurance policy of $2,244 and the payment of taxes on
4,000 shares of restricted Common Stock which vested on December 31,
1994 of $19,650.
(3) In April, 1991, Mr. Wilson was granted 60,000 restricted shares vesting
at the rate of 4,000 shares per year on December 31 of each year, over
a 15 year period subject to certain accelerations. As of December 31,
1996, an aggregate of 24,000 shares have vested. Amounts reported under
this column represent the fair market value, without giving effect to
the diminution in value attributable to the restriction of such stock,
of 4,000 shares of the Company's Common Stock which have vested each
year, as valued on December 31 of each year. See "Other Annual
Compensation", with respect to the cash payment for taxes attributable
to these shares. As of December 31, 1996, the aggregate restricted
stock holdings of Mr. Wilson consisted of 52,000 shares valued at
$195,000, the market value of these shares as of December 31, 1996,
without giving effect to the diminution in value attributable to the
restriction of such stock.
(4) Includes: (i) for 1996, an automobile allowance of $5,040 and the
payment of premiums on a term life insurance policy of $602; (ii) for
1995, an automobile allowance of $5,040 and the payment of premiums on
a term life insurance policy of $535; and (iii) for 1994, an automobile
allowance of $5,040 and payment of premiums on a term life insurance
policy of $470.
(5) Includes: (i) for 1996, an expense allowance of $24,000 and the payment
of premiums on a term life insurance policy of $825; (ii) for 1995, an
expense allowance of $24,000 and the payment of premiums on a term life
insurance policy of $825; and (iii) for 1994, an expense allowance of
$24,000 and the payment of premiums on a term life insurance policy of
$665.
</FN>
</TABLE>
STOCK OPTIONS/SAR GRANTS
No stock option grants or Stock Appreciation Rights ("SARs") were made
during the year ended December 31, 1996 to any of the named executive officers
of the Company.
23
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
The following table contains information with respect to the named
executive officers concerning options held as of the year ended December 31,
1996.
<CAPTION>
Number of
Securities
Underlying Value of
Shares Unexercised Unexercised
Acquired Options/SARS In-the-Money
on Value as of Options/SARs at
Name Exercise (#) Realized($) December 31,1996 December 31,1996(1)
---- ------------ ----------- Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Bruce A. Wilson -- $ -- 102,500/ -- $ -- / $ --
Ricky Williams -- $ -- 55,000/ -- $ -- / $ --
M. Scott Foster -- $ -- 102,500/ -- $ -- / $ --
<FN>
(1) Based upon the average closing bid and asked prices of the Company's
Common Stock on December 31, 1996 ($3.75 per share), less the exercise
price for the aggregate number of shares subject to the options, none
of the Options/SARs are in-the-money.
</FN>
</TABLE>
Employment Agreements
On May 15, 1995, the Company entered into Amended and Restated
Employment Agreements with its President, Chief Executive, Chief Operating and
Chief Financial Officer, Mr. Bruce A. Wilson, and with Mr. M. Scott Foster, its
Vice President of Sales and Marketing.
Mr. Wilson's Employment Agreement, as amended and restated, extends the
term of Mr. Wilson's employment through December 31, 1999. Mr. Wilson continues
to be employed as President, Chief Executive, Chief Operating and Chief
Financial Officer of the Company, and is to receive a base salary (the "Base
Salary") for the calendar year commencing January 1, 1995 of $125,000 per annum,
of which $20,000 is to be paid in a single lump sum on the 15th day of January,
1995 and the remainder of $105,000 is to be paid over the course of the year
pursuant to the Company's regular payroll periods; for the calendar years 1996
and 1997, the amount of Base Salary is increased to $150,000 per annum, of which
$30,000 is to be paid in a single lump sum on January 15th of each year and the
remainder of $120,000 is to be paid over the course of the year pursuant to the
Company's regular payroll periods; for the calendar years 1998 and 1999, the
amount of Base Salary is increased to $160,000 per annum, of which $40,000 is to
be paid in a single lump sum on January 15th of each year and the remainder of
$120,000 is to be paid over the course of the year pursuant to the Company's
regular payroll periods. Mr. Wilson is to further receive, for each year of the
term, an incentive bonus based upon the Company's net pre-tax profit before
interest expense for each calendar year, which incentive bonus ranges from 8% of
the first $100,000 of net pre-tax profit to 3% of the net pre- tax profit in
excess of $250,000. Mr. Wilson is to receive an automobile allowance of $ 1,000
24
<PAGE>
per month, a policy of term life insurance in the amount of $500,000 payable to
a beneficiary designated by him, and long-term disability insurance. In the
event Mr. Wilson is terminated without cause, he is to receive a severance
benefit of 24 months Base Salary if terminated after December 31, 1997, or the
remaining amount of Base Salary if terminated prior to December 31,1997. In the
event of a Change in Control in the Company (as defined) and, following such
Change in Control, there is a change in the composition of a majority of the
Directors comprising the entire Board of Directors immediately prior to the
Change in Control, Mr. Wilson may elect, within six months following the change
in the composition of the Board of Directors following the Change in Control, to
terminate his employment with the Company and, in such case, he is to receive a
special severance payment in the form of the Company paying to Mr. Wilson, with
respect to all options granted to him prior to May 15, 1995, the differential
between the strike price of Mr. Wilson's options plus $3.20 and the average of
the closing price of the Company's Common Stock for the 10 days preceding the
effective date of termination.
In connection with the amendment and restatement of his Employment
Agreement, all options granted to Mr. Wilson prior to December 31, 1999 have
been re-designated as non-incentive stock options and, to the extent such
options become vested and are presently exercisable, may be exercised through
December 31, 1999. Options granted to Mr. Wilson in accordance with an option
grant dated November 4, 1993 continue to be subject to the vesting schedule
contained in the original grant, of which 24,000 options vested on December 31,
1996. Such vesting is subject to an acceleration of vesting in the event of a
Change in Control of the Company, as defined.
In April, 1991, Mr. Wilson was granted 60,000 restricted shares under
the Company's 1991 Senior Management Incentive Plan. These restricted shares are
to vest at the rate of 4,000 shares per year over a 15 year period, subject to
acceleration of vesting in certain circumstances. Except in the event of
acceleration, each year, upon the vesting of each 4,000 shares, the Company is
to pay to Mr. Wilson a cash bonus equal to 60% of the market value of the vested
shares, for the principal purpose of offsetting taxes attributable to the
vesting of the shares. The grant of restricted shares to Mr. Wilson was in
furtherance of the desire of the Board of Directors to have Mr. Wilson have a
significant stock interest in the Company which would recognize his past
performance and incentivize his continued efforts to maximize the value of the
Company for all stockholders. As of December 31, 1996, an aggregate of 24,000
restricted shares were vested. In the event of certain Change in Control
transactions, all then unvested restricted shares become immediately vested.
Mr. Foster's Employment Agreement, as amended and restated, extends the
term of Mr. Foster's employment through December 31, 1998. Mr. Foster continues
to be employed as Vice President of Sales and Marketing of the Company and is to
receive a base salary (the "Base Salary") for the calendar year commencing
January 1, 1995 of $80,000 per annum, payable over the course of the year
pursuant to the Company's regular payroll periods. For each of the calendar
years 1996, 1997 and 1998, the amount of Base Salary is increased to $100,000
per annum, of which $20,000 is to be paid in a single lump sum on January 15th
of each of said years, and the remainder of $80,000 is to be paid over the
course of the year pursuant to the Company's regular payroll periods. Mr. Foster
is to further receive, for each year of the term, an incentive bonus as follows:
(i) 1% on net shipments on initial orders to personal sales accounts, as
defined, (ii) a commission of 5% of the amount on all Company net shipments
exceeding the preceding year's net shipments by 10% but not to exceed the sum of
$75,000, and
25
<PAGE>
(iii) an additional amount of 4% of the Company's net pre-tax profits in excess
of $ 100,000 and up to $250,000, 2% of net pre-tax profits in excess of $250,000
up to $750,000 and 1% of net pretax profits in excess of $750,000. Mr. Foster is
to receive reimbursement for all travel outside of Northern California, a policy
of term life insurance in the amount of $500,000 payable to a beneficiary
designated by him, health and longterm disability insurance. In the event Mr.
Foster is terminated without cause, he is to receive a severance benefit of 24
months Base Salary if terminated after December 31, 1997, or 24 months Base
Salary plus the amount of Base Salary from the date of termination to December
31, 1997 if terminated prior to December 31, 1997. In the event of a Change in
Control in the Company, as defined, and, following such Change in Control, there
is a change in the composition of a majority of the Directors comprising the
entire Board of Directors immediately prior to the Change in Control, Mr. Foster
may elect, within six months following the change in the composition of the
Board of Directors following the Change in Control, to terminate his employment
with the Company and, in such case, he is to receive a special severance payment
in the form of the Company purchasing from Mr. Foster all of his vested and then
presently exercisable options as of the date of his termination and which may
have been granted to him prior to May 15, 1995. Such repurchase is to be at a
price of $3.20 per option to the extent that the average closing price for the
Company's Common Stock for the 10 days preceding the effective date of
termination is less than $3.20 above the strike price of his respective options.
In connection with the amendment and restatement of his Employment
Agreement, all options granted to Mr. Foster prior to December 31, 1999 have
been re-designated as non-incentive stock options and, to the extent such
options vested and are presently exercisable, may be exercised through December
31, 1999. Options granted to Mr. Foster in accordance with an option grant dated
November 4, 1993 continue to be subject to the vesting schedule contained in the
original grant, of which 30,000 options become vested on December 31,1996. Such
vesting is subject to an acceleration of vesting in the event of a Change in
Control of the Company, as defined.
On August 5, 1996, the Company extended and modified the Employment
Agreement of Mr. Ricky Williams, Vice President of Operations. Mr. Williams'
Employment Agreement was extended through December 31, 1997. During the extended
term, Mr. Williams is to receive a salary of $90,000 for the year 1997. Mr.
Williams is entitled to elect to receive up to 10% of each year's base salary in
January in each year, with the remainder being paid to him over the course of
the year pursuant to the Company's regular payroll policies. During the
continuation of his employment, Mr. Williams is to receive an automobile
allowance of $750 per month and is to be provided with life insurance in the
amount of $250,000. In connection with his original Employment Agreement, Mr.
Williams was granted options to purchase 30,000 shares of the Company's Common
Stock at an exercise price of $4.75 per share. All of such options are vested
and are exercisable through December 31, 1997. On November 4, 1993, Mr. Williams
was granted options to purchase 30,000 shares of the Company's Common Stock at
an exercise price of $6.625 per share, exercisable through December 31, 1997,
and vesting in equal increments on December 31st of each year of the term of his
Agreement, as extended, commencing December 31, 1994.
26
<PAGE>
Senior Management Incentive Plan
The Company's 1991 Senior Management Incentive Plan (sometimes referred
to as the "Plan" or the "Management Plan") currently provides for the issuance
of up to 450,000 shares of the Company's Common Stock in connection with the
issuance of stock options and other stock purchase rights to executive officers,
key employees and consultants. To date, options to acquire a total of 390,000
shares and an additional 60,000 restricted shares have been issued under the
Plan.
The Management Plan is intended to attract and retain key executive
management personnel whose performance is expected to have a substantial impact
on the Company's long-term profit and growth potential by encouraging and
assisting those persons to acquire equity in the Company. It is contemplated
that only those executive management employees (generally the Chairman of the
Board, Vice-Chairman, Chief Executive Officer, Chief Operating Officer,
President and Vice-Presidents of the Company) who perform services of special
importance to the Company will be eligible to participate under the Management
Plan, although other full time employees of the Company are eligible to
participate under the Plan. A total of 450,000 shares of Common Stock are
currently reserved for issuance under the Management Plan. It is anticipated
that awards made under the Management Plan will be subject to three-year vesting
periods, although the vesting periods are subject to the discretion of the
Administrator of the Board.
Directors who are not otherwise employed by the Company will not be
eligible for participation in the Management Plan.
The Management Plan provides for four types of awards: stock options,
incentive stock rights, stock appreciation rights (including limited stock
appreciation rights) and restricted stock purchase agreements, as described
below.
Stock Options. Options granted under the Management Plan may be either
incentive stock options ("ISOs") or options which do not qualify as ISOs
("non-ISOs"). ISOs may be granted at an option price of not less than 100% of
the fair market value of the Common Stock on the date of grant, except that an
ISO granted to any person who owns capital stock representing more than 10% of
the total combined voting power of all classes of Common Stock of the Company
("10% stockholder") must be granted at an exercise price of at least 110% of the
fair market value of the Common Stock on the date of the grant. The exercise
price of the non-ISOs may not be less than 65% of the fair market value of the
Common Stock on the date of grant. ISOs granted to persons other than 10%
stockholders may be exercisable for a period of up to ten years from the date of
grant; ISOs granted to 10% stockholders may be exercisable for a period of up to
five years from the date of grant. No individual may be granted ISOs that become
exercisable in any calendar year for Common Stock having a fair market value at
the time of grant in excess of $100,000. Non-ISOs may be exercisable for a
period of up to 13 years from the date of grant.
Upon termination of employment or consulting services, an optionee will
be entitled to exercise the vested portion of an option for a period of up to
three months after the date of termination, except that if the reason for
termination was a discharge for cause, the option shall expire immediately, and
if the reason for termination was for death or permanent disability of
27
<PAGE>
the optionee, the vested portion of the option shall remain exercisable for a
period of twelve months thereafter.
Incentive Stock Rights. Incentive stock rights consist of incentive
stock units equivalent to one share of Common Stock in consideration for
services performed for the Company. If the employment or consulting services of
the holder with the Company terminate prior to the end of the incentive period
relating to the units awarded, the rights shall thereupon be null and void,
except that if termination is caused by death or permanent disability, the
holder or his/her heirs, as the case may be, shall be entitled to receive a pro
rata portion of the shares represented by the units, based upon that portion of
the incentive period which shall have elapsed prior to the death or disability.
Stock Appreciation Rights (SARs). SARs may be granted to recipients of
options under the Management Plan. SARs may be granted simultaneously with, or
subsequent to, the grant of a related option and may be exercised to the extent
that the related option is exercisable, except that no general SAR (as
hereinafter defined) may be exercised within a period of six months of the date
of grant of such SAR and no SAR granted with respect to an ISO may be exercised
unless the fair market value of the Common Stock on the date of exercise exceeds
the exercise price of the ISO. A holder may be granted general SARs ("general
SARs") or limited SARs ("limited SARs"), or both. General SARs permit the holder
thereof to receive an amount (in cash, shares of Common Stock or a combination
of both) equal to the number of SARs exercised multiplied by the excess of the
fair market value of the Common Stock on the exercise date over the exercise
price of the related option. Limited SARs are similar to general SARs, except
that, unless the Administrator determines otherwise, they may be exercised only
during a prescribed period following the occurrence of one or more of the
following "Change of Control" transactions: (i) the approval of the Board of
Directors of a consolidation or merger in which the Company is not the surviving
corporation, the sale of all or substantially all the assets of the Company, or
the liquidation or dissolution of the Company; (ii) the commencement of a tender
or exchange offer for the Company's Common Stock (or securities convertible into
Common Stock) without the prior consent of the Board; (iii) the acquisition of
beneficial ownership by any person or other entity (other than the Company or
any employee benefit plan sponsored by the Company) of securities of the Company
representing 25% or more of the voting power of the Company's outstanding
securities; or (iv) if during any period of two years or less, individuals who
at the beginning of such period constitute the entire Board cease to constitute
a majority of the Board, unless the election, or the nomination for election, of
each new director is approved by at least a majority of the directors then still
in office.
The exercise of any portion of either the related option or the tandem
SARs will cause a corresponding reduction in the number of shares remaining
subject to the option or the tandem SARs, thus maintaining a balance between
outstanding options and SARs.
Restricted Stock Purchase Agreements. Restricted stock purchase
agreements provide for the sale by the Company of shares of Common Stock at
prices to be determined by the Board, which shares shall be subject to
restrictions on disposition for a stated period during which the purchaser must
continue employment with the Company in order to retain the shares. Payment can
be made in cash,a promissory note or a combination of both. If termination of
employment occurs for any reason within six months after the date of purchase,
or for any reason other than death or by retirement with the consent of the
Company after the six-month
28
<PAGE>
period but prior to the time that the restrictions on disposition lapse, the
Company shall have the option to reacquire the shares at the original purchase
price.
Upon expiration of the applicable restricted period and the
satisfaction of any other applicable conditions, all or part of the restricted
shares and any dividends or other distributions not distributed to the holder
(the "retained distributions") thereon will become vested. Any restricted shares
and any retained distributions thereon which do not so vest will be forfeited to
the Company. If prior to the expiration of the restricted period a holder is
terminated without cause or because of a total disability (in each case as
defined in the Management Plan), or dies, then, unless otherwise determined by
the Administrator at the time of the grant, the restricted period applicable to
each award of restricted shares will thereupon be deemed to have expired. Unless
the Administrator determines otherwise, if a holder's employment terminates
prior to the expiration of the applicable restricted period for any reason other
than as set forth above, all restricted shares and any retained distributions
thereon will be forfeited.
Accelerating of the vesting of the awards made under the provisions of
the Management Plan shall occur on the first day following the occurrence of any
of the following: (a) the approval by the stockholders of the Company of an
Approved Transaction; (b) a Control Purchase; or (c) a Board Change. An
"Approved Transaction" is defined as (A) any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation or
pursuant to which shares of Common Stock would be converted into cash,
securities or other property other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (B) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (C) the adoption of any plan or proposal for
the liquidation or dissolution of the Company. In addition, vesting will
accelerate in the event the Company fails to renew Mr. Wilson's employment
agreement at the conclusion of the term thereon on December 31, 1993 on terms
identical to those in his present employment agreement.
A "Control Purchase" is defined as circumstances in which any person
(as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act),
corporation or other entity (other than the Company or any employee benefit plan
sponsored by the Company) (A) shall purchase any Common Stock of the Company (or
securities convertible into the Company's Common Stock) for cash, securities or
any other consideration pursuant to a tender offer or exchange offer, without
the prior consent of the Board of Directors, or (B) shall become the "beneficial
owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing twenty-five percent
(25%) or more of the combined voting power of the then outstanding securities of
the Company ordinarily (and apart from rights accruing under special
circumstances) having the right to vote in the election of directors (calculated
as provided in paragraph (d) of such Rule 13d-3 in the case of rights to acquire
the Company's securities).
A "Board Change" is defined as circumstances in which, during any
period of two consecutive years or less, individuals who at the beginning of
such period constitute the entire Board shall cease for any reason to constitute
a majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
a majority of the directors then still in office.
29
<PAGE>
Non-Employee Director Stock Option Plan
At the Annual Meeting held on August 11, 1995, the Board of Directors
presented for approval of the Stockholders the Non-Employee Director Stock
Option Plan (the "Director Plan"), which approval was granted. The Director Plan
provides for issuance of a maximum of 75,000 shares of Common Stock upon the
exercise of stock options granted under the Director Plan. Options may be
granted under the Director Plan until August 11, 2005 to (i) non-employee
Directors as defined and (ii) members of any advisory board established by the
Company who are not full time employees of the Company or any of its
subsidiaries. The Director Plan provides that each non-employee Director will
automatically be granted an option to purchase 5,000 shares of the Company's
Common Stock upon joining the Board of Directors (or, for those persons who are
directors on the date of approval of the Director Plan by the Stockholders, on
such date), and options to purchase 3,000 shares on each anniversary of the
initial date of service or date of approval, as the case may be.
Under the terms of the Director Plan, the sum of the number of shares
to be received upon any grant multiplied by the fair market value of each share
at the time of the grant may not exceed $75,000. All awards shall be reduced to
the extent that they exceed such amount. The exercise price for options granted
under the Director Plan shall be 100% of the fair market value of the Common
Stock on the date of grant (or if there is no closing price for such date of
grant, then the last preceding business day on which there was a closing price).
The "fair market value" shall mean (i) the closing price of a share of Common
Stock on the American Stock Exchange ("AMEX") or other national securities
exchange; or (ii) if the Company's Common Stock is not listed for trading on the
AMEX or other national securities exchange, then the closing bid price of a
share of Common Stock on the Nasdaq National Market System or Nasdaq SmallCap
Market (together referred to as "NASDAQ"); or (iii) in the event the Common
Stock is not traded on either the AMEX or the NASDAQ, the fair market value
shall be the price of the Common Stock as reported by the National Quotation
Bureau, Inc., or a market maker of the Company's Common Stock; or (iv) if the
Common Stock is not quoted by any of the above, by the Board of Directors acting
in good faith. Until otherwise provided in the Director Plan, the exercise price
of options granted under the Director Plan must be paid at the time of exercise,
either in cash, by delivery of shares of Common Stock of the Company or by a
combination of each. The term of each option is five (5) years from the date of
grant, unless terminated sooner as provided in the Director Plan. The Director
Plan is administered by a committee of the Board of Directors composed of not
fewer than two persons who are officers of the Company (the "Committee"). The
Committee has no discretion to determine which non-employee director will
receive options or the number of shares subject to the option, the term of the
option or the exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan do not qualify for incentive stock option treatment.
As of March 11, 1997, there were outstanding options to purchase 45,000
shares under the Director Plan, at exercise prices ranging from $5.00 to $10.50
per share, respectively.
Employee 401(k) Plan
The Company established a 401(k) Profit Sharing Plan and Trust through
the adoption of the Dun & Bradstreet Pension Services, Inc. Non-Standardized
401(k) Profit Sharing Plan and
30
<PAGE>
Trust (the "Plan"). The Plan is effective January 1, 1996 and covers all
employees of the Company. Each present employee or new hire is eligible to
participate in the Plan after one year of service. Each eligible employee may
elect to voluntarily contribute out of his or her compensation amount ranging
from 1% to 15% of compensation. The Company, though not required, may elect to
make a matching contribution equal to a discretionary percentage, to be
determined by the Company, of the employees' salary contributions. Vesting of a
participant's interest in the Plan is in accordance with a schedule of vesting
ranging from 20% after two years of service to 100% after six years of service.
Item 11. Security Ownership of Certain Beneficial
Owners and Management
The following table sets forth certain information as of March 11, 1997
with respect to the ownership of Common Stock by (i) the persons (including any
"group" as that term is used in Section 13(d)(3) of the Securities Exchange Act
of 1934, as amended), known by the Company to be the beneficial owner of more
than five percent of any class of the Company's voting securities, (ii) each
director and each officer identified in the Summary Compensation Table, and
(iii) directors and executive officers as a group:
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
31
<PAGE>
Name and Address of Amount of and Nature Percentage
Beneficial Owner of Beneficial Ownership of Class
- ---------------- ----------------------- --------
Bruce A. Wilson 154,600(1)(2) 8.0%
1700 Corporate Circle
Petaluma, CA 94954
Robert Fagenson 23,125(3) 1.3%
19 Rector Street
New York, NY 10006
Starr Securities,Inc. 131,048(4) 7.0%
19 Rector Street
New York, NY 10006
Paul Bluhdorn 181,256(5) 9.2%
P.O. Box 7854
Burbank, CA 91510
Mark S. Siegel 70,062(6) 3.8%
P.O. Box 7854
Burbank, CA 91510
Yvette Bluhdorn 71,738(6)(7) 3.9%
P.O. Box 7854
Burbank, CA 91510
Estate of
Ludwig Jesselson 182,071(8)(9) 10.0%
1301 Avenue of the Americas
New York, NY 10019
Michael Jesselson 92,062(8)(9)(10) 5.0%
1301 Avenue of the Americas
New York, NY 10019
Ricky Williams 55,000(11) 2.9%
1700 Corporate Circle
Petaluma, CA 94954
M. Scott Foster 102,500(12) 5.3%
1700 Corporate Circle
Petaluma, CA 94954
Joseph F. Furlong III 5,000(13) *
One Maritime Plaza
San Francisco, CA 94111
Daniel R. Coleman 5,000(13) *
500 108th Avenue, NE
Bellevue, WA 98004
All Officers and Directors
as a Group (6 persons in
number)(1)(2)(3)(11)(12)(13) 345,225 16.3%
32
<PAGE>
- ---------------
* Less than 1%.
(1) Includes 102,000 vested and presently exercisable options.
(2) Includes 36,000 restricted shares subject to vesting at the rate of
4,000 shares per year on December 31st in each year.
(3) Includes vested options to purchase 20,000 shares of the Company's
Common Stock and excludes unvested options to purchase 5,000 shares.
(4) Based upon (i) information contained in an amendment to a Schedule 13D
dated March 3, 1992 filed on behalf of Starr Securities, Inc. ("Starr")
and its shareholders as members of a group (the "Starr 13D") and (ii)
records of the Company indicating a transfer by Starr of 12,500
Warrants included in the Starr 13D. Includes 91,628 shares of Common
Stock owned of record by Starr. Includes 20,000 Warrants which vested
and became exercisable on November 4, 1996. According to the Starr 13D,
Starr is a registered broker-dealer and the share ownership reported
therein does not include shares held by Starr in its trading account.
(5) Based on information contained in an amendment to a Schedule 13D dated
January 27, 1993 (the "Bluhdorn 13D"), filed on behalf of Paul
Bluhdorn, Yvette Bluhdorn and Mark Siegel. Includes 31,250 shares of
the Company's Common stock owned by Mr. Bluhdorn, and 150,006 shares of
Common Stock issuable upon conversion of 150,006 shares of Series D
Preferred Stock owned by Mr. Bluhdorn. Does not include shares of
Common Stock owned by Mrs. Bluhdorn or Mr. Siegel, as to which shares
of Common Stock Mr. Bluhdorn disclaims beneficial ownership.
(6) Based on information contained in the Bluhdorn 13D and the corporate
records of the Company.
(7) Based on information contained in the Bluhdorn 13D and the corporate
records of the Company. Does not include shares of Common Stock owned
by Mr. Bluhdorn and Mr. Siegel as to which shares of Common Stock Mrs.
Bluhdorn disclaims beneficial ownership.
(8) Ludwig Jesselson died on April 3, 1993. Mr. Michael Jesselson is one of
four Executors of the estate of Mr. Jesselson. As Executor, Mr. Michael
Jesselson retains the authority with regard to the disposition of the
shares.
(9) Based on information contained in an amendment to a Schedule 13D dated
September 21, 1995 (the "Jesselson 13D") on behalf of Ludwig Jesselson,
Michael Jesselson, and the Estate of Ludwig Jesselson. Includes 175,488
shares of the Company's Common Stock owned by Ludwig Jesselson and
6,583 shares of the Common Stock owned by a trust created under the
will of Ludwig Jesselson, of which Michael Jesselson is the former
trustee. Does not include 92,062 shares of Common Stock owned by
Michael Jesselson, as to which shares of Common Stock Ludwig Jesselson
disclaims beneficial ownership.
33
<PAGE>
(10) Based on information contained in the Jesselson 13D. Does not include
229,821 shares of Common Stock beneficially owned by Ludwig Jesselson,
as to which shares of Common Stock Michael Jesselson had disclaimed
beneficial ownership. To the extent Michael Jesselson may be a
beneficiary under the Estate of Ludwig Jesselson, Michael Jesselson may
be considered an indirect beneficial owner of these shares.
(11) Includes 55,000 vested and presently exercisable options.
(12) Includes 102,500 vested and presently exercisable options.
(13) Includes 5,000 vested and presently exercisable options.
Item 12. Certain Relationships and Related Transactions
For information concerning the employment agreements of Bruce A.
Wilson, Ricky Williams and M. Scott Foster, see Item 10 "Executive
Compensation".
For information concerning the issuance of 60,000 restricted shares to
Mr. Bruce A. Wilson, see Item 10 "Executive Compensation".
On August 11, 1995, upon adoption by the Company's shareholders of a
Non-Employee Director Stock Option Plan, Messrs. Fagenson and Jesselson were
each granted 5,000 options under the Director Plan. Upon their election as
Directors, Messrs. Coleman and Furlong were each granted 5,000 options under the
Director Plan. In addition, each Director will receive automatic annual grants
of 3,000 options as provided for in the Director Plan.
Item 13. Exhibits, List and
Reports on Form 8-K
(A) 1. Financial Statements
See Index to Financial Statements Attached hereto.
2. Financial Statement Schedules
See Index to Financial Statements attached hereto.
3. Exhibits:
Incorporated by reference to the Exhibit Index at the end of this
Report.
34
<PAGE>
(B) Reports on Form 8-K
<TABLE>
During the last quarter of the period covered by this Report, the
following reports on Form 8-K were filed by the Registrant:
<CAPTION>
Date of Report Item Reported Description of Item
- -------------- ------------- -------------------
<S> <C> <C>
November 5, 1996 Item 5. Other Events Reporting License Agreement between
Registrant and the Zoological Society of San
Diego
</TABLE>
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
35
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HEALTHY PLANET PRODUCTS, INC.
By \s\ Bruce A. Wilson
-----------------------------------------------------
Bruce A. Wilson
Chairman, President, Chief Executive, Chief Operating
and Chief Financial Officer, and Principal Accounting
Officer
Dated: March 28, 1997
In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
\s\ Bruce A. Wilson March 28, 1997
- --------------------------------
Bruce A. Wilson
Chairman of the Board, President,
Chief Executive, Chief Operating
and Chief Financial Officer
\s\ Robert Fagenson March 28, 1997
- --------------------------------
Robert Fagenson
Director
\s\ M. Scott Foster March 28, 1997
- ----------------------------------
M. Scott Foster
Director, Vice President-Sales
\s\ Joseph F. Furlong III March 28, 1997
- --------------------------------
Joseph F. Furlong III
Director
\s\ Daniel R. Coleman March 28, 1997
- -------------------------------
Daniel R. Coleman
Director
36
<PAGE>
EXHIBIT INDEX
The exhibits designated with an asterisk (*) have previously been filed
with the Commission and, pursuant to 17 C.F.R. Secs. 201.24 and 240.12b-32, are
incorporated by reference to the document referenced in brackets following the
descriptions of such exhibits.
Exhibit
No. Description
--- -----------
2.1* Certificate of Merger of Carolyn Bean Publishing, Ltd.
(California) and Carolyn Bean Publishing, Ltd. (Delaware)
[Exhibit 2.l to Registration Statement on Form S-18, File No.
2-97768]
3.l* Amended and Restated Certificate of Incorporation of
Registrant [Exhibit 3 to Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1990]
3.2* Certificate of Amendment of Certificate of Incorporation filed
on August 2, 1993 effecting change in Registrant's name to
Healthy Planet Products, Inc. [Exhibit 3.2 to Annual Report on
Form 10-KSB for the year ended December 31, 1993]
3.3* By-Laws [Exhibit 3.2 to Registration Statement on Form S-18,
File No. 2-97768]
4.l* Form of Common Stock Certificate [Exhibit 4 to Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
1990]
4.3* Rights, Designation and Preferences of Series B Preferred
Stock [Exhibit 4 Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1990]
4.4* Form of Rights, Designation and Preferences of Series D
Preferred Stock [Exhibit 4 to Current Report on Form 8-K dated
January 8, 1993]
10.1* Form of Employment Agreement between Registrant and Bruce A.
Wilson [Exhibit 10.1 to Current Report on Form 8-K dated
December 21, 1990]
10.2* Extension Agreement dated February 24, 1993 between Registrant
and Bruce Wilson extending Employment Agreement [Exhibit 10.3
to Annual Report on Form 10-KSB dated March 22, 1993]
10.3* Extension and Modification Agreement dated September 10, 1993
extending Employment Agreement of Rick Williams [Exhibit 10.1
to Current Report on Form 8-K dated September 24, 1993]
10.4* Modification to Employment Agreement of M. Scott Foster
[Exhibit 10.2 to Current Report on Form 8-K dated September
24, 1993]
37
<PAGE>
10.5* Modification to Employment Agreement of Bruce A. Wilson
[Exhibit 10 to Current Report on Form 8-K dated November 3,
1993]
10.6* License Agreement between Registrant and Sierra Club dated
December 30, 1994 [Exhibit 10.1 to Current Report on Form 8-K
dated January 24, 1995]
10.7* License Agreement between Registrant and The Wilderness
Society dated June 24, 1994 [Exhibit 10.1 to Current Report on
Form 8-K dated July 1, 1994]
10.8* License Agreement between Registrant and the American Lung
Association dated June 27, 1994 [Exhibit 10.2 to Current
Report on Form 8-K dated July 1, 1994]
10.9* License Agreement between Registrant and The Marine Mammal
Center dated July 28, 1994 [Exhibit 10.10 to Form 10-KSB for
year ended December 31, 1995]
10.10* Lease for premises 1694-1736 Corporate Circle, Petaluma,
California 94954 [Exhibit 10.1 to Current Report on Form 8-K
dated February 15, 1996]
10.11* License Agreement between Registrant and Twin Oaks Publishing
Limited dated December 18, 1995 [Exhibit 10.1 to Current
Report on Form 8-K dated December 18, 1995]
10.12* License Agreement with the Zoological Society of San Diego
dated September 30, 1996 [Exhibit 10.1 to Current Report on
Form 8-K dated November 5, 1996]
11 Computation of Earnings per Common Share
23 Consent of Moss Adams, Independent Auditors, to the
incorporation by reference in the Registration Statement of
Healthy Planet Products, Inc. on Form S-8 (File No. 33-84740)
of their report dated February 7, 1997
27 Financial Data Schedule
28.l* Registrant's 1991 Senior Management Incentive Plan [Exhibit 28
to Form 8-K dated June 27, 1991]
28.2* Registrant's Non-Employee Director Stock Option Plan
38
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Page
Independent Auditor's Report
Balance Sheet - December 31, 1996
Statements of Operations -
Years ended December 31, 1996 and 1995
Statements of Shareholders' Equity -
Years ended December 31, 1996 and 1995
Statements of Cash Flows -
Years ended December 31, 1996 and 1995
Notes to Financial Statements -
December 31, 1996 and 1995
Independent Auditor's Report on
Supplementary Schedules
Valuation and Qualifying Accounts -
Years Ended December 31, 1996 and 1995
Supplementary Income Statement Information -
Years Ended December 31, 1996 and 1995
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<PAGE>
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT...............................................F - 1
FINANCIAL STATEMENTS
Balance sheets - December 31, 1995 and 1996...........................F - 2
Statements of Income -
Years ended December 31, 1995 and 1996............................F - 4
Statements of Shareholders' Equity -
Years ended December 31, 1995 and 1996............................F - 5
Statements of Cash Flows -
Years ended December 31, 1995 and 1996............................F - 6
Notes to Financial Statements.........................................F - 7
<PAGE>
MOSS ADAMS LLP
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Healthy Planet Products, Inc.
We have audited the accompanying balance sheets of Healthy Planet Products,
Inc., as of December 31, 1996 and 1995, and the related statements of income,
shareholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company'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 audits 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 that 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 Healthy Planet Products, Inc.,
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Moss Adams LLP
Santa Rosa, California
February 7, 1997
A member of
Moores Rowland
INTERNATIONAL
An association of independent
accounting firms throughout the world.
Page F - 1
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, 1995 1996
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $4,142,100 $1,650,600
Marketable securities -- 1,989,300
Accounts receivable 736,500 1,003,400
Inventories 905,300 1,418,000
Prepaid expenses 33,200 125,200
Deferred income taxes 740,000 377,000
---------- ----------
Total current assets 6,557,100 6,563,500
---------- ----------
PROPERTY AND EQUIPMENT 444,900 454,800
---------- ----------
OTHER ASSETS
Deferred income taxes 1,283,000 1,506,000
Intangible assets 116,900 83,600
Other 16,400 166,000
---------- ----------
1,416,300 1,755,600
---------- ----------
Total assets $8,418,300 $8,773,900
========== ==========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page F - 2
<PAGE>
<TABLE>
HEALTHY PLANET PRODUCTS, INC.
BALANCE SHEETS (Continued)
<CAPTION>
- ---------------------------------------------------------------------------------------
December 31, 1995 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 293,900 $ 394,800
Royalties payable 8,600 7,400
Commissions payable 156,000 118,000
Income taxes payable 9,600 21,000
Dividends payable -- 61,500
Accrued wages, bonuses and payroll taxes 131,500 70,600
Accrued liabilities 17,900 48,500
Accrued rent payable 90,400 --
------------ ------------
Total current liabilities 707,900 721,800
------------ ------------
ACCRUED RENT PAYABLE -- 40,500
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 12,000,000 shares
authorized, 1,744,028 and 1,827,362 shares
issued and outstanding, respectively 17,400 18,300
Preferred stock, with aggregate liquidation
preference totaling $952,200 25,600 18,700
Additional paid-in capital 12,189,600 12,308,200
Accumulated deficit (4,522,200) (4,333,600)
------------ ------------
Total shareholders' equity 7,710,400 8,011,600
------------ ------------
Total liabilities and shareholders' equity $ 8,418,300 $ 8,773,900
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
</FN>
</TABLE>
Page F - 3
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Years Ended December 31, 1995 1996
- --------------------------------------------------------------------------------
NET SALES $ 5,892,300 $ 4,632,400
COST OF GOODS SOLD 2,286,700 1,965,500
----------- -----------
GROSS PROFIT 3,605,600 2,666,900
----------- -----------
OPERATING EXPENSES
Selling, shipping and marketing 998,300 898,700
General and administrative 1,580,800 1,648,400
----------- -----------
2,579,100 2,547,100
----------- -----------
OPERATING INCOME 1,026,500 119,800
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 129,700 158,400
Other income 5,500 134,900
----------- -----------
135,200 293,300
----------- -----------
INCOME BEFORE INCOME TAXES 1,161,700 413,100
PROVISION FOR (BENEFIT FROM) INCOME TAXES (983,200) 161,000
----------- -----------
NET INCOME 2,144,900 252,100
DIVIDENDS PAID AND ACCUMULATED
ON PREFERRED STOCK (9,000) (9,000)
----------- -----------
INCOME APPLICABLE TO COMMON STOCK $ 2,135,900 $ 243,100
=========== ===========
EARNINGS PER SHARE $ 1.05 $ 0.12
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
AND EQUIVALENTS OUTSTANDING 2,041,645 2,013,623
=========== ===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page F - 4
<PAGE>
<TABLE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
December 31, 1995 and 1996
- ----------------------------------------------------------------------------------------------------
<CAPTION>
PREFERRED STOCK
-----------------------------
COMMON STOCK SERIES B
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 1,522,216 $ 15,200 1,251 $ 100
Net income for the year ended
December 31, 1995 -- -- -- --
Conversion of Series D Preferred
stock to common stock 110,500 1,100 -- --
Conversion of Series B Preferred
stock to common stock 8,334 100 (417) --
Vesting of 4,000 restricted shares
of common stock -- -- -- --
Exercise of employee stock
options 60,000 600 -- --
Exercise of warrants 42,978 400 -- --
Cost of registration of warrants -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 1995 1,744,028 17,400 834 100
Net income for the year ended
December 31, 1996 -- -- -- --
Net unrealized loss on marketable
securities -- -- -- --
Dividends payable on Series B
Preferred stock -- -- -- --
Conversion of Series D Preferred
stock to common stock 68,334 700 -- --
Vesting of 4,000 restricted shares
of common stock -- -- -- --
Exercise of employee stock
options 15,000 200 -- --
------------ ------------ ------------ ------------
Balance, December 31, 1996 1,827,362 $ 18,300 834 $ 100
============ ============ ============ ============
</TABLE>
<TABLE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
December 31, 1995 and 1996
<CAPTION>
PREFERRED STOCK
-----------------------------
SERIES D ADDITIONAL
---------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT
------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 365,175 $ 36,500 $ 11,665,400 $ (6,667,100)
Net income for the year ended
December 31, 1995 -- -- -- 2,144,900
Conversion of Series D Preferred
stock to common stock (110,500) (11,000) 9,900 --
Conversion of Series B Preferred
stock to common stock -- -- (100) --
Vesting of 4,000 restricted shares
of common stock -- -- 22,500 --
Exercise of employee stock
options -- -- 295,600 --
Exercise of warrants -- -- 245,300 --
Cost of registration of warrants -- -- (49,000) --
------------ ------------ ------------ ------------
Balance, December 31, 1995 254,675 25,500 12,189,600 (4,522,200)
Net income for the year ended
December 31, 1996 -- -- -- 252,100
Net unrealized loss on marketable
securities -- -- -- (2,000)
Dividends payable on Series B
Preferred stock -- -- -- (61,500)
Conversion of Series D Preferred
stock to common stock (68,334) (6,900) 6,200 --
Vesting of 4,000 restricted shares
of common stock -- -- 22,500 --
Exercise of employee stock
options -- -- 89,900 --
------------ ------------ ------------ ------------
Balance, December 31, 1996 186,341 $ 18,600 $ 12,308,200 $ (4,333,600)
============ ============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
</FN>
</TABLE>
Page F - 5
<PAGE>
<TABLE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
- -----------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,144,900 $ 252,100
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 145,900 188,100
Change in allowance for doubtful accounts and returns 302,800 (112,400)
Vesting of restricted shares 22,500 22,500
Deferred income taxes (1,013,000) 140,000
Loss on disposal of fixed assets -- 12,500
Changes in:
Accounts receivable (29,500) (154,500)
Inventories (210,600) (512,700)
Prepaid expenses (7,200) (92,000)
Accounts payable 67,700 100,900
Royalties payable (71,600) (1,200)
Commissions payable 32,100 (38,000)
Income taxes payable 9,600 11,400
Accrued wages, bonuses and payroll taxes 5,200 (60,900)
Accrued liabilities (13,000) 30,600
Accrued rent payable 3,500 (49,900)
----------- -----------
Net cash provided (used) by operating activities 1,389,300 (263,500)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities -- (1,991,300)
Purchases of property and equipment (306,500) (137,700)
Increase in publishing rights (67,500) (38,200)
Other 86,400 (150,800)
----------- -----------
Net cash used by investing activities (287,600) (2,318,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Costs of registration of warrants (49,000) --
Proceeds from exercise of warrants 245,700 --
Proceeds from exercise of employee stock options 296,200 90,000
----------- -----------
Net cash provided by financing activities 492,900 90,000
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,594,600 (2,491,500)
CASH AND CASH EQUIVALENTS
Beginning of year 2,547,500 4,142,100
----------- -----------
End of year $ 4,142,100 $ 1,650,600
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
</FN>
</TABLE>
Page F - 6
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business - Healthy Planet Products designs, publishes, markets and
distributes greeting cards, stationery and other gift items throughout the
United States and Canada. The Company's products are marketed to over 4,900
retail sales outlets. A small portion of Company sales are the result of direct
response catalog sales. The majority of the Company's sales are in the Sierra
Club's line of blank notes and holiday greeting cards.
Cash and cash equivalents and marketable securities - The Company considers all
investments with an original maturity of three months or less on their
acquisition date to be cash equivalents. Marketable securities are classified as
available-for-sale and are available to support current operations or to take
advantage of other investment opportunities. These securities are stated at
estimated fair value based upon market quotes and consist of United States
government and Federal agency securities. Unrealized gains and losses are
computed on the basis of specific identification and are included in retained
earnings. Realized gains and losses are included in other income. Interest
earned is included in interest income.
Inventory - Inventory is stated at the lower of cost (first-in, first-out
method) or market.
Property and equipment - Property and equipment are stated at cost and are
depreciated and amortized using the straight-line method over the estimated
useful lives of the assets or over the period of the lease. Additions or
improvements to property and equipment are capitalized at cost, while
maintenance and repair expenditures are charged to operations. Estimated useful
lives are as follows:
Machinery, equipment and leasehold improvements 3 - 10 years
Color separations 3 years
Furniture and fixtures 5 years
Computer software 5 years
Royalties- The Company pays royalties to licensers and artists for use of their
names, logos and card designs based on actual volume of cards sold.
Income taxes - The provision for income taxes is based on pre-tax earnings
reported in the financial statements, adjusted for requirements of current tax
law, plus the change in deferred taxes. Deferred tax assets and liabilities are
recognized using enacted tax rates and reflect the expected future tax
consequences of temporary differences between the recorded amounts of assets and
liabilities for financial reporting purposes and tax basis of such assets and
liabilities and future benefits from net operating loss carryforwards and other
expenses previously recorded for financial reporting purposes. Income taxes are
described further in Note 7.
Other assets - Publishing rights consist of costs incurred to obtain images for
use on the Company's products. Such costs are capitalized and amortized over
three years.
Earnings per share - Earnings per share have been computed by dividing net
earnings, after reduction for paid and accumulated preferred stock dividends, by
the weighted average number of common shares and equivalents outstanding. Common
share equivalents included in the computation represent shares issuable upon the
assumed conversion of convertible preferred stock and exercise of stock options
and warrants which would have a dilutive effect on earnings. Net earnings were
reduced for preferred stock dividends paid and/or accumulated in 1996 and 1995,
by $9,000.
Page F - 7
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Concentrations of risk - Financial instruments potentially subjecting the
Company to concentrations of credit risk consist primarily of bank demand
deposits in excess of FDIC insurance thresholds and trade receivable balances of
the Company's largest customers. Cash equivalents consist of CD's and money
funds at various financial institutions. The CD's are within FDIC insurance
thresholds. Receivables are not collateralized, but the Company conducts
frequent credit checks on customers with material balances.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities. The amounts
estimated could differ from actual results.
Advertising - Costs associated with the production of catalogs are capitalized
and amortized over the expected life of the catalog of 1-2 years. Total
capitalized catalog costs at December 31, 1996 and 1995 were $75,500 and $0,
respectively. All other advertising costs are expensed as incurred. Advertising
expense totaled $41,800 and $24,800 for the years ended December 31, 1996 and
1995, respectively.
NOTE 2 - MARKETABLE SECURITIES
<TABLE>
Following is a summary of marketable securities:
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Holding Holding Fair
Cost Gains Losses Value
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
U. S. Treasury securities $ 1,241,200 $ 1,300 $ (2,500) $ 1,240,000
Federal agency securities 750,100 - (800) 749,300
----------------- ----------------- ----------------- -----------------
$ 1,991,300 $ 1,300 $ (3,300) $ 1,989,300
================= ================= ================= =================
</TABLE>
Maturities of marketable securities at December 31, 1996, were as follows:
Cost Fair Value
------------------- -------------------
Due within one year $ 997,700 $ 997,700
Due after one year through two years 993,600 991,600
------------------- -------------------
$ 1,991,300 $ 1,989,300
=================== ===================
There were no sales of marketable securities during 1996.
Page F - 8
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 3 - ACCOUNTS RECEIVABLE
1995 1996
----------- ------------
Accounts receivable $ 1,243,500 $ 1,375,600
Accrued interest -- 17,400
Income tax refund receivable -- 5,000
Less allowances for doubtful accounts and returns (507,000) (394,600)
----------- -----------
$ 736,500 $ 1,003,400
=========== ===========
NOTE 4 - INVENTORIES
1995 1996
----------- -----------
Raw materials $ 36,800 $ 85,300
Work-in-process 539,200 999,500
Finished goods 329,300 333,200
----------- -----------
$ 905,300 $ 1,418,000
=========== ===========
NOTE 5 - PROPERTY AND EQUIPMENT
1995 1996
----------- -----------
Machinery, equipment and leasehold improvements $ 748,900 $ 647,200
Color separations 317,400 206,500
Furniture and fixtures 72,700 72,700
Computer software 38,200 38,200
----------- -----------
1,177,200 964,600
Less accumulated depreciation and amortization (732,300) (509,800)
----------- -----------
$ 444,900 $ 454,800
=========== ===========
Page F - 9
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 6 - INTANGIBLE ASSETS
1995 1996
----------- -----------
Publishing rights $ 376,800 $ 415,000
Less accumulated amortization (259,900) (331,400)
----------- -----------
$ 116,900 $ 83,600
=========== ===========
NOTE 7 - INCOME TAXES
1995 1996
----------- -----------
Current
Federal $ 29,000 $ --
State 800 21,000
----------- -----------
29,800 21,000
----------- -----------
Deferred
Current (290,000) 363,000
Non-current (723,000) (223,000)
----------- -----------
(1,013,000) 140,000
----------- -----------
$ (983,200) $ 161,000
=========== ===========
The difference between the actual income tax provision (benefit) and the tax
provision (benefit) computed by applying the statutory federal income tax rate
to earnings before taxes is attributable to the following:
1995 1996
---- ----
Income tax provision 34.0% 34.0%
State taxes 9.3 9.3
Change in deferred tax asset valuation allowance (139.0) --
Change in allowance for doubtful accounts and returns 11.0 (11.8)
Non-deductible expenses -- 3.9
Other (0.3) 3.8
----- ----
(85.0%) 39.2%
===== ====
Page F - 10
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 7 - INCOME TAXES (Continued)
At December 31, 1996, the Company had available net operating loss carryovers of
approximately $4,664,000 to be applied against future federal taxable income.
Due to a change in ownership during 1988, $2,862,000 of these amounts are
subject to a Section 382 limitation of a maximum of $476,950 per year. The
remaining amount is available to be used without yearly limitation. For federal
tax purposes, net operating losses expire as follows:
Year ending December 31,
-------------------------
2000 $ 201,000
2001 742,000
2002 1,919,000
2003 88,000
2004 1,300,000
2005 383,000
2006 31,000
------------
$ 4,664,000
============
The Company has available approximately $25,500 of federal Alternative Minimum
Tax credits which can be carried forward indefinitely and offset against future
income taxes.
Temporary differences and carryforwards which give rise to deferred tax assets
at December 31, are as follows:
1995 1996
----------- -----------
Accounts receivable allowances $ 219,500 $ 170,800
Inventory reserve 32,900 16,100
Benefits from net operating loss carryforward 497,300 187,400
Other (9,700) 2,700
----------- -----------
Current deferred tax asset $ 740,000 $ 377,000
=========== ===========
Depreciation and amortization $ 25,300 $ 23,500
Benefits from net operating loss carryforward 1,233,100 1,458,400
Other 24,600 24,100
----------- -----------
Non current deferred tax asset $ 1,283,000 $ 1,506,000
=========== ===========
Management of the Company believes it is more likely than not that all net
operating loss carryforwards will be utilized prior to expiration. Accordingly,
the valuation allowance was eliminated in the third quarter of 1995.
Page F - 11
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 8 - LINE OF CREDIT
The Company has available a revolving line of credit for up to $500,000 with
interest at the bank's Index Rate plus .75%, collateralized by receivables,
inventory, contract rights, equipment, and intangibles. This line matures May
31, 1997, and requires that the Company meet restrictions relating to key
financial ratios. At December 31, 1996, the Company had no outstanding draws
under this line-of-credit agreement.
NOTE 9 - COMMITMENTS
Leases - The Company leases office and warehouse space under an operating lease
expiring May 2006, which includes scheduled base rent increases over the term of
the lease. The total amount of the base rent payments is being charged to
expense on the straight-line method over the term of the lease. Since the
inception of the lease, the Company has recorded a deferred credit to reflect
excess of rent expense over cash payments. Future minimum lease payments are as
follows:
Year ending December 31,
------------------------
1997 $ 331,900
1998 336,500
1999 451,700
2000 548,100
2001 548,100
Thereafter 2,562,400
-------------
$ 4,778,700
=============
Rent expense totaled $330,700 and $205,800 for the years ended December 31, 1996
and 1995, respectively.
Employment Agreements - The Company entered into employment agreements expiring
through December 31, 1999, with three key employees. Compensation related to
these agreements amount to $338,600 for the year ending December 31, 1996.
License Agreements - The Company has entered into licensing agreements with the
Sierra Club, The Wilderness Society, The Marine Mammal Center, The Zoological
Society of San Diego, and The Humane Society of the United States, expiring
through December 31, 2005. The agreements call for royalty payments of 2% - 10%
of net sales, as defined in the agreements, subject to minimum cumulative
royalties of $4,029,700, over the life of these agreements. Management estimates
that actual royalties on future sales will equal or exceed minimum royalties.
Options exist to extend the terms of certain agreements. Sales under the Sierra
Club agreement accounted for 82% and 85% of total sales for the years ended
December 31, 1996 and 1995, respectively.
Page F - 12
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 10 - MAJOR SUPPLIERS
During the year ended December 31, 1996, the Company made 41.1%, 19.9% and 8.2%
of its purchases from three suppliers. Amounts due to suppliers included in
accounts payable and accrued liabilities totaled $308,400 at December 31, 1996.
<TABLE>
NOTE 11 - CAPITAL STOCK
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Series B, $.10 par value, with aggregate liquidation preference of
$100,000, 14,250 shares authorized, 834 and 834 shares
shares issued and outstanding $ 100 $ 100
Series D, $.10 par value, with aggregate liquidation preference of
$952,200, 371,009 shares authorized, 254,675 and 186,341
shares issued and outstanding, respectively 25,500 18,600
------- -------
$25,600 $18,700
======= =======
</TABLE>
Series B Preferred stock is non-voting and convertible into common stock at the
rate of 4.40 shares of common stock for each share of preferred stock. It has a
liquidating preference of $120 per share plus any cumulative but unpaid
dividends over the holders of common stock. The stock carries a cumulative
annual dividend of $10.80 per share, which is declared semi-annually. The
Company may redeem stock upon 60 days' notice, plus cumulative but unpaid
dividends, subject to the right of the stockholders to convert prior to the
fixed date of redemption at $120 per share. At December 31, 1996, cumulative
dividends totaled $61,500.
Series D Preferred stock has full voting rights at the rate of one vote per
share and is convertible into common stock at the rate of one share of common
stock for each share of preferred. The preferred stock has a liquidating
preference of $5.11 per share and carries no dividend. During 1996, 68,334
shares of Series D Preferred stock were converted to common stock.
NOTE 12 - STOCK OPTIONS AND WARRANTS
The Company has a stock option plan which provides for the granting of qualified
and non-qualified stock options, incentive stock rights, stock appreciation
rights and restricted shares to officers, key employees and its public relations
firm to purchase up to an aggregate of 465,000 shares of common stock. No
options shall be granted under the Plan after 2001. The Company also has a stock
option plan which provides for the granting of stock options to non-employee
directors and members of any advisory boards, as defined in the agreement, to
purchase up to an aggregate of 75,000 shares of common stock. No options shall
be granted under the plan after 2005. During 1996, 20,000 options were granted,
15,000 options were exercised, and 35,000 options were forfeited. At December
31, 1996, 290,000 common stock options were exercisable at a weighted-average
exercise price of $6.45. In addition, 20,000 options become exercisable in 1997.
The exercise prices of the options range from $4.75 to $10.50. Options have a
remaining life of one to five years.
Page F - 13
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTIONS AND WARRANTS (Continued)
In 1991, 60,000 shares of restricted shares were issued to an officer, vesting
at 4,000 shares per year. Each year a cash bonus of 60% of the fair-market value
of the vested shares is paid to the officer for his income tax liability related
to the income attributable to vesting of shares.
The Company has issued common stock warrants which entitle the holder to
purchase up to 51,095 shares of common stock as follows: 12,500 shares
exercisable at $5.20 per share through 1997; 6,920 shares exercisable at $1.60
per share through 1995; and 31,675 shares exercisable at $7.20 per share through
1998.
In September 1996, the Company issued 60,000 common stock warrants exercisable
at $5.0625 per share through 2001. The warrants become exercisable in 20,000
increments in September 1996, 1997 and 1998.
The Company has adopted the disclosure only provision of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation expense has been recognized for stock options and
warrants issued during 1995 and 1996. Had compensation cost for the Company's
options and warrants been determined based on the fair value at the grant date
for awards in 1995 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net earnings and earnings per share would have reduced to the pro
forma amounts indicated below:
1995 1996
------------- -----------
Net earnings - as reported $ 2,135,900 $ 243,100
Net earnings - pro forma $ 2,107,000 $ 184,100
Earnings per share - as reported $ 1.05 $ 0.12
Earnings per share - pro forma $ 1.03 $ 0.09
The fair value of each option and warrant is estimated on date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in:
1995 1996
-------------------- --------------------
Dividends None None
Expected volatility 41.24% 41.24%
Risk free interest rate 7.03% 6.64%
Expected life 4 years 4 years
Options issued during 1995 and 1996 have an estimated weighted average fair
value of $4.38 and $2.38, respectively. Warrants issued during 1996 have an
estimated fair value of $2.09.
Page F - 14
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 12 - STOCK OPTIONS AND WARRANTS (Continued)
<TABLE>
The activity of the stock option plan and warrants is as follows:
<CAPTION>
Weighted- Weighted-
Shares Average Shares Average
Under Excise Under Excise Restricted
Warrants Price Options Price Shares
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994 51,095 390,000 44,000
Granted -- 10,000 --
Exercised (42,978) (60,000) --
Forfeited -- -- --
Vested -- -- (4,000)
-------------- ------------ ----------
Balance, December 31, 1995 8,117 $ 7.20 340,000 $6.36 40,000
Granted 60,000 5.06 20,000 5.84 --
Exercised -- (15,000) 4.75 --
Forfeited -- (35,000) 6.25 --
Vested -- -- (4,000)
-------------- ------------ ----------
Balance, December 31, 1996 68,117 $ 5.31 310,000 $6.41 36,000
============== ============== ============
</TABLE>
NOTE 13 - STATEMENTS OF CASH FLOWS
1995 1996
------------------ ----------------
Cash paid during the year for:
Interest $ -- $ --
Income taxes 20,200 21,900
Non-cash investing and financing activities for the year ended December 31, 1996
consisted of converting 68,334 shares of Series D Preferred stock to 68,334
shares of common stock, and recording of $61,500 of dividends payable on Series
B Preferred Stock.
Page F - 15
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 14 - MAJOR CUSTOMER
Sales to a major customer was approximately $559,000 during the year ended
December 31, 1996, representing 12.1% of total sales. At December 31, 1996,
amounts due from this customer included in accounts receivable was $101,800.
NOTE 15 - EMPLOYEE BENEFIT PLAN
During the year the Company adopted a 401(k) profit sharing plan covering all
employees meeting minimum service requirements. Plan contributions are
discretionary. There were no employer contributions for the year.
Page F - 16
<TABLE>
HEALTHY PLANET PRODUCTS, INC.
COMPUTATION OF EARNINGS PER SHARE
December 31, 1996 and 1995
Exhibit 11
- --------------------------------------------------------------------------------
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Primary earnings per share
Net income $ 2,144,900 $ 252,100
Cumulative dividends on preferred stock (9,000) (9,000)
----------- -----------
Income applicable to common stock $ 2,135,900 $ 243,100
=========== ===========
Shares
Weighted average number of common shares outstanding $ 1,645,005 $ 1,823,612
Add dilutive effect of conversion of preferred stock and
outstanding options and warrants (as determined by the
application of the treasury stock method) 396,640 190,011
----------- -----------
$ 2,041,645 $ 2,013,623
=========== ===========
Primary earnings per share (1) $ 1.05 $ 0.12
=========== ===========
<FN>
(1) Fully diluted earnings per share does not differ from primary earnings per
share, because the effect would be antidilutive.
</FN>
</TABLE>
Page F - 17
MOSS ADAMS LLP
- -------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS 438 First Street, Suite 320
Santa Rosa, CA 95401-6339
Phone 707-527-0800
Fax 707-575-1712
Offices in Principal Cities of
Washington, Oregon and California
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders of
Healthy Planet Products, Inc.
We consent to the incorporation by reference in the registration statement of
Healthy Planet Products, Inc. on Form S-8 (File No. 33-84740) of our report
dated February 7, 1997, on our audits of the financial statements and financial
statement schedules of Healthy Planet Products, Inc. as of December 31, 1996 and
1995, and for each of the two fiscal years in the period ended December 31,
1996, which report is included in this Annual Report on Form 10-KSB.
/s/ Moss Adams LLP
Santa Rosa, California
March 24, 1997
A member of
Moores Rowland
INTERNATIONAL
An association of independent
accounting firms throughout the world.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,650,600
<SECURITIES> 1,989,300
<RECEIVABLES> 1,398,000
<ALLOWANCES> 394,600
<INVENTORY> 1,418,000
<CURRENT-ASSETS> 6,563,500
<PP&E> 964,600
<DEPRECIATION> 509,800
<TOTAL-ASSETS> 8,773,900
<CURRENT-LIABILITIES> 721,800
<BONDS> 0
<COMMON> 18,300
0
18,700
<OTHER-SE> 7,974,600
<TOTAL-LIABILITY-AND-EQUITY> 8,773,900
<SALES> 4,632,400
<TOTAL-REVENUES> 4,925,700
<CGS> 1,965,500
<TOTAL-COSTS> 4,512,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 413,100
<INCOME-TAX> 161,000
<INCOME-CONTINUING> 252,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252,100
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.00
</TABLE>
