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, 1997
[ ] 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
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, 1997 were $4,099,600.
On March 16, 1998, 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 $5,848,600 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 31,335 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 16, 1998, there were 2,282,368 shares of Common Stock, $.01
par value, issued and outstanding (exclusive of 31,335 shares of voting Series D
Preferred Stock convertible into 31,335 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, the ability of the Company to sustain consumer demand
for the Company's principal Sierra Club card line, and the ability of the
Company to successfully market its newly acquired line of handcrafted sculptures
and figurines. 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.
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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, 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. The Company
does not view its foreign licensing activity to be significant to its business.
See "Business - General Business Developments During Most Recent Fiscal Year".
On December 11, 1997, the Company acquired certain assets of Corlett
Collectables, Inc., a privately owned company which specialized in the design,
manufacture and sale of a line of handcrafted sculptures, figurines and
collectibles of domestic and wild animals made from a customized marble blend.
This acquisition commences the effort of the Company to expand its basic product
offering beyond its traditional card lines. The newly acquired Healthy Planet
Collectables line consists of approximately 700 animal and wildlife sculptures,
and was introduced by the Company in the first quarter of 1998.
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 600 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 70.5% of the Company's net sales for the
year ended December 31, 1997 and for approximately 82.2% of the Company's net
sales for the year ended December 31, 1996.
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 and the Company's Sea Dreams and Nature Baby 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 and multiple use 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 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) 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 contributed a portion of its wholesale proceeds from Healthy Planet
product lines to scientific, research, environmental and other charitable
institutions. During fiscal year 1997, the Company contributed approximately
$13,000 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
Additional Equity Capital
On September 29, 1997, the Company completed a transaction with John V.
Winfield and InterGroup Corporation, an affiliate of Mr. Winfield in which the
Company sold 150,000 shares of its Common Stock to Mr. Winfield for an aggregate
of $487,500 and sold 150,000 shares of its Common Stock to InterGroup
Corporation for an aggregate of $487,500. As part of the transaction, Mr.
Winfield and InterGroup Corporation were each issued warrants to purchase
150,000 shares of the Company's Common Stock, of which one-third of such
warrants are exercisable at $4.00 per share, one-third at $4.25 per share, and
one-third at $4.50 per share. The warrants are exercisable commencing September
29, 1997 and may be exercised through September 29, 2002. Mr. Winfield and
InterGroup Corporation were each accorded certain demand and piggyback
registration rights. In connection with the transaction, Mr. Winfield was
elected a Class 3 Director and the Company agreed to use its best efforts to
cause Mr. Winfield to be elected as a Director through September 29, 2000.
License for Commonwealth of Independent States (formerly Russia)
On August 4, 1997, the Company entered into a license agreement with
ZPR International, Inc. for the use of the Healthy Planet Products name and
images on products in the territory comprising the Commonwealth of Independent
States. This license agreement, for a term expiring September 30, 2000, provides
for the payment of a royalty to the Company of 7% of adjusted gross invoice
price of licensed products sold by the licensee.
Acquisition of Assets of Corlett Collectables, Inc.
On December 11, 1997, the Company completed the acquisition of certain
assets of Corlett Collectables, Inc., a privately owned company which
specialized in the design, manufacture and sale of a line of handcrafted
sculptures, figurines and collectibles of domestic and wild animals made from a
customized marble blend. The purchase price for the assets acquired was
$360,000, of which approximately $88,000 was paid at closing, and the balance is
to be paid in monthly installments of $10,000 following the closing.
License from Rainforest Action Network
On November 1, 1997, the Company entered into an agreement with
Rainforest Action Network, a California non-profit corporation, pursuant to
which the Company was granted a license to use the "Rainforest Action Network"
name, "RAN" mark, and related logos in connection with the manufacture,
advertising, sale and distribution of cold cast sculpted figurines and magnets
in the United States and Canada. The license is for a term commencing November
1, 1997 to December 31, 1999 and renewable for one year thereafter provided the
Company makes royalty payments of not less than $20,000 during the original term
of the license. Under the agreement, the Company is obligated to pay a royalty
on licensed products
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in an amount equal to 5% of the net sales price with a minimum royalty of
$10,000 for the period November 1, 1997 though December 31, 1999. All licensed
products are subject to prior approval of the licensor.
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.
The Company's new collectible line of figurines are designed and hand
sculpted by independent artists and craftsmen who generally receive a one time
fee of $400 or a royalty of 4%. Master molds are designed and created in
California, and final product is cast and hand painted by a non-affiliated
manufacturer located in the Far East.
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 70.5% and 82.2% of the Company's sales for the
years ended December 31, 1997 and 1996, respectively. The Sierra Club card line
is comprised of over 270 everyday designs and over 30 holiday designs, all of
which are printed on recycled or chlorine free 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 1997, with an annual guaranteed
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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 an additional $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 most license years have exceeded the
base levels on which the guaranteed minimum is to be paid. For the year ended
December 31, 1997, the Company paid aggregate royalties of $343,470 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.
The Company's Sierra Club line is predominantly comprised of 5x7 blank
note cards which utilize over 300 images and retail for $1.95 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 also markets Sierra Club
stationery and envelopes available in 12 different designs and packaged 25
sheets or envelopes to a package with a suggested retail price of $4.50 and
$4.75, respectively. The remainder of the Sierra Club line consists of journals,
writing tablets and magnets.
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, 1997, sales of this line represented
approximately 7.7% of the Company's net sales. The Company does not anticipate
that it will seek to renew this license.
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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 was initially 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 was for an initial
three year term through June 31, 1997 with the right to extend for one
additional three year period. The Agreement has been extended through the year
2000 on a non-exclusive basis. 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, 1997 sales of this line
represented approximately 2.0% of the Company's net sales.
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 is for a current extended term through
December 31, 1999. 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,
1997 and 1996, sales of this line represented approximately 6.6% and 5.5%,
respectively, of the Company's net sales.
E. 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.
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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. 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,
Australia and the Commonwealth of Independent States (formerly Russia). The
Company may license the rights to others to use its Healthy Planet trademarks
for certain product categories.
With the acquisition of the assets of Corlett Collectables, Inc., the
Company, in the first quarter of 1998, launched its line of handcrafted
sculptures, figurines and collectibles of wild and domestic animals under the
Healthy Planet Collectibles(R) trademark.
The collectibles are marketed under the Healthy Planet Collectibles
trademark including separate series' of sculptures and figurines which comprise
the Nature Baby Hatchers(R) Garden Diggers(R) and Crystal Gallery(R) lines.
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 13.9% of the
Company's net sales for the year ended December 31, 1997, no single customer of
the Company accounted for 6.7% or more of the Company's net sales. As of
September 1997 Barnes & Noble Superstores no longer carry the Companys everyday
card line due do to a change in vendors.
The Company utilizes approximately 130 independent sales
representatives who also represent the products of other companies. Independent
sales representatives accounted for approximately 63% of Company sales for the
year ended December 31, 1997 (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
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year ended December 31, 1997, a total of $501,134 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.
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 1997, seasonal effects on the Company's business
resulted in approximately 58% of the Company's sales being made in the third and
fourth quarters. During fiscal year 1997, approximately 22% 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 53% of the cost of manufacturing inventory was incurred in the
second and third quarters of the 1997 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
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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.
Employees
The Company currently has 25 full-time employees, including its four
executive officers, 8 in administrative, managerial, and sales positions, and 13
warehouse persons. In peak seasons, the Company may employ up to 12 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 registered 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.
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The Company is in the process of registering the names and logos
"Healthy Planet Collectibles", "Nature Baby Hatchers", and "Crystal Gallery",
which are used in connection with its figurine lines.
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 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
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 for the periods indicated:
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
Year High Low
---- ---- ---
1997
1st Quarter 4 1/2 3 3/4
2nd Quarter 4 1/2 3 7/16
3rd Quarter 4 1/16 3 3/8
4th Quarter 4 3/8 3 1/2
13
<PAGE>
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 16, 1998 was 128. 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.
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:
Relationship to Total Revenues
------------------------------
Fiscal Year Ended
-----------------
December 3l,
------------
1995 1996 1997
---- ---- ----
Net Sales 100% 100% 100%
Operating Expenses:
Cost of Goods 38.8% 42.4% 60.6%
Selling, General and Administrative 43.8% 55.0% 66.3%
Income (Loss) From Operations 17.4% 2.6% (26.9%)
Interest and Other Income (Expense) 2.3% 6.3% 4.7%
Income (Loss) Before Income Taxes 19.7% 8.9% (22.2%)
Net Income (Loss) 36.4% 5.3% (45.0%)
14
<PAGE>
Year End Results - Applicability of FAS 109
At December 31, 1997, the Company had available net operating loss
carryforwards of approximately $6,230,500 to be applied against future federal
taxable income. Due to a change in ownership during 1988, $2,638,000 of these
amounts are subject to a limitation under Section 382 of the Internal Revenue
Code of $476,950 per year. If the Company does not generate sufficient income to
use the maximum limitation, remaining amounts accumulate for use in future
periods until the operating loss expires. Federal net operating losses expire as
follows:
Year Ending December 31,
------------------------
2002 $2,638,600
2003 1,222,000
2004 1,299,100
2005 383,300
2006 31,700
2012 655,800
----------
$6,230,500
==========
The Company has available approximately $326,000 of California net
operating losses which can be carried forward and offset against future taxable
income. These loss carryforwards expire in 2002.
The Company has available approximately $15,600 of federal investment
tax credits which can be carried forward and offset against future income taxes.
The Company also has approximately $25,500 of federal Alternative Minimum Tax
credits to reduce future regular income taxes over an indefinite period.
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
carryforwards. Temporary differences and carryforwards which give rise to
deferred assets at December 31, 1997 are as follows:
Benefits from net operating loss carryforwards $2,147,200
Inventory reserves 141,200
Accounts receivable allowances 138,400
Depreciation and amortization 21,100
Other 2,800
Valuation allowance on deferred tax assets (1,500,000)
----------
Net deferred income taxes 950,700
Deferred income taxes expected to be utilized in 1998 264,900
----------
Deferred income taxes $685,800
==========
Management of the Company has decided to record a valuation allowance
of $1,500,000 against deferred tax assets, due in part to the current year loss
before income taxes of $910,700. Management believes that it is more likely than
not that the tax benefits of the net operating loss carryforwards, net of
valuation allowance, will be realized. Management's belief is based on expected
sales of the new Healthy Planet Collectibles line, new sales and marketing
strategies for existing card lines, and profitability of the card business in
four of the last five years. In order to utilize the full benefit of the
deferred income tax asset, the Company needs to realize aggregate taxable income
of approximately $1,965,000, which it expects to generate during the years 1998
through 2007. In calculating the benefit from the loss carryforwards, the
Company has taken into account the provisions of Section 382 of the Internal
Revenue Code and anticipated expiration of loss carryforwards due to time
limitations. The Company has not contemplated the use of any new tax planning
strategies in calculating the deferred income tax asset.
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 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 tax asset. Such conditions include general
economic conditions, competition generally and specifically relating to greeting
cards having an environmental and wildlife theme and collectible figurines, the
ability of the Company to continue to renew its principal Sierra Club License
Agreement which presently expires on December 31, 2005, continuity of present
management, and the ability of the Company to market its new Healthy Planet
Collectible line.
15
<PAGE>
1997 Compared to 1996
Sales for the year ended December 31, 1997 were $4,099,600 reflecting a
decrease versus the prior year level of $4,632,400 of $532,800 or 11.5%.
Everyday product sales finished the year even with prior year results. Seasonal
sales declined 32.2% to result in the overall sales decline of 11.5%. Included
in the year end results was a provision for future returns of seasonal product
of approximately $192,000. The seasonal return provision recognizes and provides
for the return of unsold seasonal product from customers who have qualified for
a return privilege.
During 1997, sales of the Company's largest product line, The Sierra
Club, accounted for 70.5% of total revenues and showed a year to year decline of
24.2%. The Company's Nature Baby line, launched in January 1997, accounted for
10.9% of total 1997 revenues. The balance of 1997 revenues were comprised of the
Company's other product lines utilizing the names of The Humane Society of the
United States, The Marine Mammal Center, The Wilderness Society and others.
The successful launch of the Company's Nature Baby line offset in part
declines in the Company's other everyday and seasonal product lines during 1997.
Increased competition in chain accounts and a continuing down trend in boxed
holiday cards at retail could impact future revenues negatively.
The Company reported an operating loss of $1,103,600 or $.58 per share.
Gross margin declined from the prior year level of $2,666,900 by $1,051,900 or
39.4%. A shortfall in revenues, one time costs associated with the Nature Baby
product launch, the under absorption of minimum royalties and fixed overhead on
lower revenues, and a provision for the write off of obsolete inventories
resulted in the year to year decline.
Cost of sales amounted to $2,484,600 for the year ended December 31,
1997 representing 60.6% of sales. This rate compares unfavorably to the prior
year rate of 42.4% due to the
16
<PAGE>
impact of one time costs associated with the Nature Baby product launch, fixed
royalty and overhead costs on lower revenues, and an increased provision to
write off obsolete inventory.
Selling, shipping and marketing expenses of $1,050,200 were higher than
the previous years level of $898,700 by $151,500. Increased advertising and
travel expenses associated with the Nature Baby product launch accounted for the
year to year increase.
General and administrative expenses amounted to $1,668,400 for 1997
reflecting a marginal increase of $20,000 versus the prior year level of
$1,648,400. Lower payroll costs were offset in part by higher professional fees
and insurance to result in the year to year marginal gain.
The Company's net loss for the year ended December 31, 1997 was
$1,843,800 or $.97 per share. This level compares unfavorably to the prior years
profit of $252,100 or $.13 per share. The decline of gross margin and the impact
of establishing a valuation allowance on the Company's deferred tax asset
resulted in the net loss. A valuation allowance of $1,500,000 reduced the
deferred tax asset by $932,300 for the year ended December 31, 1997 representing
$.49 of the total loss of $.97 per share. The Company recognizes the potential
for continued near term losses while it repositions itself for growth and
profitability.
Total assets at December 31, 1997 amounted to $8,036,000 which
reflected a decrease versus the prior year level of $8,773,900 by $737,900 or
8.4%. A decline in deferred tax assets, receivables and cash and marketable
securities were offset in part by an increase in inventory and fixed assets to
result in the year to year decline. The increase in fixed assets was a result of
the acquisition of Corlett Collectables in November 1997. The acquisition of
Corlett Collectables provides the Company an entree into new markets and product
categories while providing a three dimensional product execution of the
Company's wildlife imagery.
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. Included 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 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
17
<PAGE>
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.
Liquidity and Capital Resources
At December 31, 1997, the Company's working capital was $5,406,000.
This compared to the 1996 working capital of $5,841,700 for a year to year
decline of $435,700. The year to year decline was due to lower cash and
marketable securities, receivables and deferred income taxes offset in part by
higher inventory to result in the year to year decline.
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. In addition, in September 1997, the
Company sold Common Stock and Common Stock Purchase Warrants to an unaffiliated
investor for an aggregate of $975,000. The Company has a secured line of credit
in the amount of $500,000 from Westamerica Bank. During the year ended December
31, 1997, the Company did not draw under this line of credit, and as of
18
<PAGE>
December 31, 1997, 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 46 Chairman, President, Chief Executive,
Chief Operating and Chief Financial
Officer
Robert Fagenson 49 Director
John V. Winfield 51 Director
M. Scott Foster 46 Director and Vice President - Sales
and Marketing
Rick Williams 41 Vice President - Operations
Joseph F. Furlong III 49 Director
Daniel R. Coleman 41 Director
The Company's Certificate of Incorporation provides for a staggered
Board of Directors. The following persons are Directors of the Company for the
classes and terms as follows:
Director Class Term Expires
-------- ----- ------------
Bruce A. Wilson 1 1998
M. Scott Foster 1 1998
Robert Fagenson 2 2000
Daniel R. Coleman 2 2000
Joseph F. Furlong III 3 1999
John V. Winfield 3 1999
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
20
<PAGE>
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.
John V. Winfield was elected a Class 3 Director in September, 1997 in
connection with a private transaction in which he and a company with which he is
affiliated purchased an aggregate of 300,000 shares of the Company's Common
Stock and 300,000 Common Stock Purchase Warrants for an aggregate of $975,000.
In connection with this transaction, the Company has agreed to use its best
efforts to cause Mr. Winfield to be elected as a Director through the year 2000.
Mr. Winfield is the Chairman of the Board, President and Chief Executive Officer
of the InterGroup Corporation, having first been appointed as such in 1987.
InterGroup is a public company traded on the NASDAQ Stock Market (INTG). He was
a Director of Geotek Communications, Inc. (GEO), an international digital
wireless communications company from June 1992 through June 1994 as well as a
Director of Pacific Gateway Properties ("PGP"), a holding company with real
estate investments in the San Francisco Bay area, from 1995 to 1997. Mr.
Winfield also presently serves as Chairman and Chief Executive Officer of Santa
Fe Financial Corporation (SFEF) and Portsmouth Square, Inc. (PRSI), both public
companies, and as Director of Orckit Communications Ltd. (ORCTF), an advanced
communications company headquartered in Israel.
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.
21
<PAGE>
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, 1997, was a
director, officer or beneficial owner of more than ten percent of the Company's
Common Stock (which is the 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
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, 1997, 1996 and 1995 to the Chief Executive Officer and each of the named
executive officers of the Company.
22
<PAGE>
<TABLE>
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>
Bruce A. Wilson 1997 $150,000 - $23,526(2) $14,500(3) -
President, Chief Exec- 1996 $150,000 $19,867 $23,720(2) $15,000(3) -
utive, Chief Operating 1995 $125,000 $43,707 $35,010(2) $34,000(3) -
and Chief Financial
Officer
Ricky Williams 1997 $90,000 - $9,670(4) - -
Vice President of 1996 $88,600 $9,000 $5,642(4) - -
Operations 1995 $80,500 $12,500 $5,575(4) - -
M. Scott Foster 1997 $100,000 - $24,825(5) - -
Vice-President of 1996 $100,000 $11,411 $24,825(5) - -
Sales and Marketing 1995 $80,000 $57,595 $24,825(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 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 1997, an automobile allowance of $12,000 and the
payment of premiums on a term life insurance policy of $2,826 and the
payment of taxes on 4,000 shares of restricted Common Stock which
vested on December 31, 1997 of $8,700; (ii) for 1996, an automobile
allowance of $12,000, 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; and (iii) for
1995, 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, 1995 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,
1997, an aggregate of 28,000 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, 1997, the aggregate restricted
stock
23
<PAGE>
holdings of Mr. Wilson consisted of 52,000 shares valued at $188,500,
the market value of these shares as of December 31, 1997, without
giving effect to the diminution in value attributable to the
restriction of such stock.
(4) Includes: (i) for 1997, an automobile allowance of $9,000 and the
payment of premiums on a term life insurance policy of $670; (ii) for
1996, an automobile allowance of $5,040 and the payment of premiums on
a term life insurance policy of $601; and (iii) for 1995, an automobile
allowance of $5,040 and payment of premiums on a term life insurance
policy of $535.
(5) Includes: (i) for 1997, an expense allowance of $24,000 and the payment
of premiums on a term life insurance policy of $825; (ii) for 1996, an
expense allowance of $24,000 and the payment of premiums on a term life
insurance policy of $825; and (iii) for 1995, an expense allowance of
$24,000 and the payment of premiums on a term life insurance policy of
$825.
</FN>
</TABLE>
STOCK OPTIONS/SAR GRANTS
No stock option grants or Stock Appreciation Rights ("SARs") were made
during the year ended December 31, 1997 to any of the named executive officers
of the Company.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
The following table contains information with respect to the named
executive officers concerning options held as of the year ended December 31,
1997.
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs In-the-Money
Acquired on Value as of Options/SARs at
Name Exercise (#) Realized($) December 31, 1997 December 31, 1997(1)
- --------------------- ------------ ----------- ------------------------------ --------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <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, 1997 ($3.625 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
24
<PAGE>
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 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
25
<PAGE>
recognize his past performance and incentivize his continued efforts to maximize
the value of the Company for all stockholders. As of December 31, 1997, an
aggregate of 28,000 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 (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.
26
<PAGE>
On September 8, 1997, 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, 2000. During the extended
term, Mr. Williams' base salary of $90,000 is increased by $5,000 in each year
of the extended term provided that the Company has achieved a net pre-tax profit
for the immediately preceding year. 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, 2000. 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, 2000, and vesting in equal increments on December 31st of
each year of the term of his Agreement, as extended, commencing December 31,
1994.
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 465,000 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 465,000 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.
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<PAGE>
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 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
28
<PAGE>
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 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
29
<PAGE>
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.
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
30
<PAGE>
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 16, 1998, there were outstanding options to purchase 60,000
shares under the Director Plan, at exercise prices ranging from $3.69 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 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 16, 1998
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:
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Name and Address of Amount of and Nature Percentage
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- --------
Bruce A. Wilson 155,600(1)(2) 6.5%
1700 Corporate Circle
Petaluma, CA 94954
John V. Winfield 709,600(3) 27.2%
2121 Avenue of the Stars
Los Angeles, CA 90067
The InterGroup Corporation 374,400(4) 15.4%
2121 Avenue of the Stars
Los Angeles, CA 90067
Robert Fagenson 33,125(5) 1.4%
19 Rector Street
New York, NY 10006
Starr Securities,Inc. 131,048(6) 5.6%
19 Rector Street
New York, NY 10006
Paul Bluhdorn 181,256(7) 7.9%
P.O. Box 7854
Burbank, CA 91510
Mark S. Siegel 70,062(8) 3.0%
P.O. Box 7854
Burbank, CA 91510
Yvette Bluhdorn 71,738(8)(9) 3.1%
P.O. Box 7854
Burbank, CA 91510
Estate of Ludwig Jesselson 182,071(10)(11) 7.9%
1301 Avenue of the Americas
New York, NY 10019
Michael Jesselson 92,062(10)(11)(12) 4.0%
1301 Avenue of the Americas
New York, NY 10019
Ricky Williams 55,000(13) 2.3%
1700 Corporate Circle
Petaluma, CA 94954
M. Scott Foster 102,500(14) 4.3%
1700 Corporate Circle
Petaluma, CA 94954
Joseph F. Furlong III 10,000(15) *
One Maritime Plaza
San Francisco, CA 94111
Daniel R. Coleman 10,000(15) *
500 108th Avenue, NE
Bellevue, WA 98004
All Officers and Directors
as a Group (6 persons in
number)(1)(2)(3)(4)(13)(14)(15) 1,065,825 36.8%
- -----------------
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* Less than 1%.
(1) Includes 102,500 vested and presently exercisable options.
(2) Includes 32,000 restricted shares subject to vesting at the rate of 4,000
shares per year on December 31st in each year.
(3) Based upon information contained in an Amendment No. 1 to a Schedule 13D
dated December 19, 1997 filed on behalf of John V. Winfield, The InterGroup
Corporation and Santa Fe Financial Corporation (the "Winfield 13D").
Includes (i) 167,600 shares of Common Stock and Common Stock Purchase
Warrants to purchase 150,000 shares of Common Stock owned by John V.
Winfield, (ii) 224,400 shares of Common stock and Common Stock Purchase
Warrants to purchase 150,000 shares of Common Stock owned by The InterGroup
Corporation and as to which Mr. Winfield has shared voting and dispositive
power, and (iii) 12,600 shares of Common Stock owned by Santa Fe Financial
Corporation and as to which Mr. Winfield has shared voting and dispositive
power. Also includes options to purchase 5,000 shares of Common Stock
granted to Mr. Winfield upon his election to the Board of Directors
pursuant to the Company's Non-Employee Director Plan.
(4) Based upon information contained in the Winfield 13D, and includes 224,400
shares of Common Stock and 150,000 Common Stock Purchase Warrants owned by
The InterGroup Corporation.
(5) Includes vested options to purchase 30,000 shares of the Company's Common
Stock.
(6) 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.
(7) 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
issued in February, 1998 upon conversion of 150,006 shares of Series D
Preferred Stock owned by Mr. Bluhdorn. Does not include shares of Common
Stock owned by Ms. Bluhdorn or Mr. Siegel, as to which shares of Common
Stock Mr. Bluhdorn disclaims beneficial ownership.
(8) Based on information contained in the Bluhdorn 13D and the corporate
records of the Company.
(9) 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.
(10) 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.
(11) 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 175,480
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
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<PAGE>
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.
(12) 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.
(13) Includes 55,000 vested and presently exercisable options.
(14) Includes 102,500 vested and presently exercisable options.
(15) Includes 10,000 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 September 29, 1997, the Company completed a transaction with John
Winfield and InterGroup Corporation, an affiliate of Mr. Winfield. Pursuant to
the transaction, the Company sold 150,000 shares of its Common Stock to Mr.
Winfield for an aggregate of $487,500 and sold 150,000 shares of its Common
Stock to InterGroup Corporation for an aggregate of $487,500. As part of the
transaction, Mr. Winfield and InterGroup Corporation were each issued warrants
to purchase 150,000 shares each of the Company's Common Stock, of which
one-third of such warrants are exercisable at $4.00 per share, one-third at
$4.25 per share, and one-third at $4.50 per share. The warrants are exercisable
commencing September 29, 1997 and may be exercised through September 29, 2002.
Mr. Winfield and InterGroup Corporation were each accorded certain demand and
piggyback registration rights. In connection with the transaction, Mr. Winfield
was elected a Class 3 Director and the Company agreed to use its best efforts to
cause Mr. Winfield to be elected as a Director through September 29, 2000.
Item 13. Exhibits, List and
Reports on Form 8-K
(A) 1. Financial Statements
See Index to Financial Statements Attached hereto.
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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.
(B) Reports on Form 8-K
During the last quarter of the period covered by this Report, the
following reports on Form 8-K were filed by the Registrant:
Date of Report Item Reported Description of Item
- -------------- ------------- -------------------
October 14, 1997 Item 5. Other Events Transaction relating to
the sale of Common Stock
and issuance of Warrants
to John V. Winfield and
InterGroup Corporation
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
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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 , 1998
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 , 1998
- ----------------------------------
Bruce A. Wilson
Chairman of the Board, President,
Chief Executive, Chief Operating
and Chief Financial Officer
\s\ Robert Fagenson March , 1998
- ----------------------------------
Robert Fagenson
Director
\s\ John V. Winfield March , 1998
- ----------------------------------
John V. Winfield
Director
\s\ M. Scott Foster March , 1998
- ----------------------------------
M. Scott Foster
Director, Vice President-Sales
\s\ Joseph F. Furlong III March , 1998
- ----------------------------------
Joseph F. Furlong III
Director
\s\ Daniel R. Coleman March , 1998
- ----------------------------------
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* 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 Marine Mammal
Center dated July 28, 1994 [Exhibit 10.10 to Form 10-KSB for
year ended December 31, 1995]
10.9* Lease for premises 1694-1736 Corporate Circle, Petaluma,
California 94954 [Exhibit 10.1 to Current Report on Form 8-K
dated February 15, 1996]
10.10* 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]
10.11* 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 6, 1998
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
Page
Independent Auditor's Report F-
Balance Sheets - December 31, 1996 and 1997 F-
Statements of Income -
Years ended December 31, 1996 and 1997 F-
Statements of Shareholders' Equity -
Years ended December 31, 1996 and 1997 F-
Statements of Cash Flows -
Years ended December 31, 1996 and 1997 F-
Notes to Financial Statements F-
<PAGE>
- --------------------------------------------------------------------------------
HEALTHY PLANET PRODUCTS, INC.
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT...............................................F - 1
FINANCIAL STATEMENTS
Balance sheets - December 31, 1997 and 1996...........................F - 2
Statements of Operations -
Years ended December 31, 1997 and 1996............................F - 4
Statements of Shareholders' Equity -
Years ended December 31, 1997 and 1996............................F - 5
Statements of Cash Flows -
Years ended December 31, 1997 and 1996............................F - 6
Notes to Financial Statements.........................................F - 7
- --------------------------------------------------------------------------------
<PAGE>
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, 1997 and 1996, and the related statements of
operations, 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, 1997 and 1996, 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 6, 1998
Page F-1
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
BALANCE SHEETS
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
ASSETS
1997 1996
---------- ----------
CURRENT ASSETS
Cash and cash equivalents $3,286,100 $1,650,600
Marketable securities 250,000 1,989,300
Accounts receivable 754,300 1,003,400
Inventories 1,541,000 1,418,000
Prepaid expenses 115,700 125,200
Deferred income taxes 264,900 377,000
---------- ----------
Total current assets 6,212,000 6,563,500
---------- ----------
PROPERTY AND EQUIPMENT 851,400 454,800
---------- ----------
OTHER ASSETS
Deferred income taxes 685,800 1,506,000
Publishing rights 137,800 83,600
Other 149,000 166,000
---------- ----------
972,600 1,755,600
---------- ----------
Total assets $8,036,000 $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)
December 31, 1997 and 1996
- ---------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 376,000 $ 394,800
Royalties payable 4,600 7,400
Commissions payable 94,200 118,000
Income taxes payable 800 21,000
Series B preferred stock redemption and dividends payable 161,500 61,500
Accrued wages, bonuses and payroll taxes 47,000 70,600
Accrued liabilities 20,300 48,500
Current portion of long-term debt 101,600 --
------------ ------------
Total current liabilities 806,000 721,800
------------ ------------
OTHER LIABILITIES
Long-term debt, net of current portion 142,800 --
Accrued rent payable 85,600 40,500
------------ ------------
228,400 40,500
------------ ------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 12,000,000 shares
authorized, 2,132,362 and 1,827,362 shares
issued and outstanding, respectively 21,300 18,300
Preferred stock, with aggregate liquidation
preference totaling $926,700 18,100 18,700
Additional paid-in capital 13,127,100 12,308,200
Accumulated deficit (6,164,900) (4,333,600)
------------ ------------
Total shareholders' equity 7,001,600 8,011,600
------------ ------------
Total liabilities and shareholders' equity $ 8,036,000 $ 8,773,900
============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
- ---------------------------------------------------------------------------------------------
Page F-3
</TABLE>
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
- --------------------------------------------------------------------------------
1997 1996
----------- -----------
NET SALES $ 4,099,600 $ 4,632,400
COST OF GOODS SOLD 2,484,600 1,965,500
----------- -----------
GROSS PROFIT 1,615,000 2,666,900
----------- -----------
OPERATING EXPENSES
Selling, shipping and marketing 1,050,200 898,700
General and administrative 1,668,400 1,648,400
----------- -----------
2,718,600 2,547,100
----------- -----------
OPERATING INCOME (LOSS) (1,103,600) 119,800
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 144,500 158,400
Other income 48,400 134,900
----------- -----------
192,900 293,300
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (910,700) 413,100
PROVISION FOR INCOME TAXES 933,100 161,000
----------- -----------
NET INCOME (LOSS) (1,843,800) 252,100
DIVIDENDS PAID AND ACCUMULATED
ON PREFERRED STOCK -- (9,000)
----------- -----------
INCOME (LOSS) APPLICABLE TO COMMON STOCK $(1,843,800) $ 243,100
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE $ (0.97) $ 0.13
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE-
ASSUMING DILUTION $ (0.97) $ 0.12
=========== ===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
Page F-4
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
December 31, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------
COMMON STOCK SERIES B SERIES D
--------------------- -----------------------------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,744,028 $ 17,400 834 $ 100 254,675 $ 25,500
Net income for the year ended
December 31, 1996 -- -- -- -- -- --
Net unrealized loss on marketable
securities -- -- -- -- -- --
Conversion of Series D Preferred
stock to common stock 68,334 700 -- -- (68,334) (6,900)
Vesting of 4,000 restricted shares
of common stock -- -- -- -- -- --
Exercise of employee stock
options 15,000 200 -- -- -- --
Dividends payable on Series B
Preferred stock -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 1,827,362 18,300 834 100 186,341 18,600
Net loss for the year ended
December 31, 1997 -- -- -- -- -- --
Net unrealized gain on marketable
securities -- -- -- -- -- --
Redemption of Series B Preferred
stock -- -- (834) (100) -- --
Conversion of Series D Preferred
stock to common stock 5,000 -- -- -- (5,000) (500)
Vesting of 4,000 restricted shares
of common stock -- -- -- -- -- --
Sale of common stock
net of $76,000 issuance costs 300,000 3,000 -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 2,132,362 $ 21,300 -- $ -- 181,341 $ 18,100
========= ========= ========= ========= ========= =========
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT
------------ -------------
Balance, December 31, 1995 $ 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)
Conversion of Series D Preferred
stock to common stock 6,200 --
Vesting of 4,000 restricted shares
of common stock 22,500 --
Exercise of employee stock
options 89,900 --
Dividends payable on Series B
Preferred stock -- (61,500)
------------ ------------
Balance, December 31, 1996 12,308,200 (4,333,600)
Net loss for the year ended
December 31, 1997 -- (1,843,800)
Net unrealized gain on marketable
securities -- 12,500
Redemption of Series B Preferred
stock (99,900) --
Conversion of Series D Preferred
stock to common stock 500 --
Vesting of 4,000 restricted shares
of common stock 22,300 --
Sale of common stock
net of $76,000 issuance costs 896,000 --
------------ ------------
Balance, December 31, 1997 $ 13,127,100 $ (6,164,900)
============ ============
<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
Years Ended December 31, 1997 and 1996
- ---------------------------------------------------------------------------------------
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,843,800) $ 252,100
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 202,300 188,100
Vesting of restricted shares 22,500 22,500
Deferred income taxes 932,300 140,000
Net change in unrealized gains on cash equivalents and
marketable securities 12,500 --
Change in allowance for doubtful accounts and returns (71,500) (112,400)
Loss on disposal of fixed assets -- 12,500
Changes in:
Accounts receivable 320,600 (154,500)
Inventories (123,000) (512,700)
Prepaid expenses 9,500 (92,000)
Accounts payable (18,800) 100,900
Royalties payable (2,800) (1,200)
Commissions payable (23,800) (38,000)
Income taxes payable (20,200) 11,400
Accrued wages, bonuses and payroll taxes (23,800) (60,900)
Accrued liabilities (28,200) 30,600
Accrued rent payable 45,100 (49,900)
----------- -----------
Net cash used by operating activities (611,100) (263,500)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of marketable securities 1,989,300 --
Other 17,000 (150,800)
Purchases of property and equipment (271,400) (137,700)
Purchases of marketable securities (250,000) (1,991,300)
Purchase of publishing rights (127,300) (38,200)
----------- -----------
Net cash provided (used) by investing activities 1,357,600 (2,318,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sale of common stock 899,000 --
Principal repayments on note payable (10,000) --
Proceeds from exercise of employee stock options -- 90,000
----------- -----------
Net cash provided by financing activities 889,000 90,000
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,635,500 (2,491,500)
CASH AND CASH EQUIVALENTS
Beginning of year 1,650,600 4,142,100
----------- -----------
End of year $ 3,286,100 $ 1,650,600
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
- ---------------------------------------------------------------------------------------
Page F-6
</TABLE>
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of operations - Healthy Planet Products, Inc., 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 maturities at the time of acquisition of three months or less
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. Cash equivalents and marketable
securities are stated at estimated fair value based upon market quotes and
consist of CD's, money funds, and 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 consists of unprinted paper, unbatched and batched
greeting cards, stationary, and other gift items and 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
Molds 5 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.
Publishing rights - 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.
- --------------------------------------------------------------------------------
Page F-7
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS 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, money funds,
and United States government and Federal agency securities held 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, 1997 and 1996 were $42,300 and
$75,500, respectively. All other advertising costs are expensed as incurred.
Advertising expense totaled $130,700 and $24,800 for the years ended December
31, 1997 and 1996, respectively.
Fair value of financial instruments - The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
Cash, CD's, and money funds: The carrying amount approximates fair value because
of the short maturities of these instruments.
United States government and Federal agency securities: The fair value is
estimated based on quoted market prices.
Long-term debt: Based on the borrowing rates currently available to the Company
for loans with similar terms and average maturities, the fair value of long-term
debt approximates cost.
Earnings (loss) per share - In 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". In February 1998,
the Securities and Exchange Commission ("SEC") staff released Staff Accounting
Bulletin ("SAB") No. 98, "Computations of Earnings per Share". SAB No. 98
revises prior SEC guidance concerning presentation of earnings per share
information for companies going public, and requires all companies to present
earnings per share for all periods for which income statement information is
presented in accordance with SFAS No. 128. Earnings (loss) per common share were
computed using the weighted average number of common shares outstanding.
Earnings per common share assuming dilution were computed using the weighted
average number of common shares and the common equivalent shares that would have
been outstanding if the Company's dilutive potential shares had been issued. The
treasury stock method was used to calculate the potential number of dilutive
shares associated with the Company's outstanding stock options and warrants.
New accounting pronouncements - In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income", which establishes standards for reporting
comprehensive income and its components (revenues, expenses, gains and losses)
in financial statements. SFAS No. 130 requires classification of other
comprehensive income in a financial statement, and the display of the
accumulated balance of other comprehensive income separately form retained
earnings and additional paid-in capital. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company believes this pronouncement
will not have a material effect on its financial statements.
- --------------------------------------------------------------------------------
Page F-8
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 2 - SHORT-TERM INVESTMENTS
Following is a summary of short-term investments included in cash equivalents
and marketable securities:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized Estimated
Holding Holding Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
December 31, 1997:
Federal agency securities $ 3,113,300 $ 10,500 $ -- $ 3,123,800
=========== =========== ===========
Less short-term investments included
in cash equivalents (2,873,800)
-----------
Marketable securities $ 250,000
===========
December 31, 1996:
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>
There were no short-term investments considered cash equivalents at December 31,
1996.
All short-term investments mature within one year of December 31, 1997.
NOTE 3 - ACCOUNTS RECEIVABLE
1997 1996
----------- -----------
Accounts receivable $ 1,004,800 $ 1,375,600
Officer receivable 43,000 --
Accrued interest 29,600 17,400
Income tax refund receivable -- 5,000
Less allowances for doubtful accounts and returns (323,100) (394,600)
----------- -----------
$ 754,300 $ 1,003,400
=========== ===========
- --------------------------------------------------------------------------------
Page F-9
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 4 - INVENTORIES
1997 1996
---------- ----------
Raw Materials $ 24,600 $ 85,300
Work-in-process 1,270,600 999,500
Finished goods 245,800 333,200
---------- ----------
$1,541,000 $1,418,000
========== ==========
NOTE 5 - PROPERTY AND EQUIPMENT
1997 1996
----------- -----------
Machinery, equipment and leasehold improvements $ 718,400 $ 647,200
Molds 376,200 --
Color separations 284,900 206,500
Furniture and fixtures 72,700 72,700
Computer software 38,200 38,200
----------- -----------
1,490,400 964,600
Less accumulated depreciation and amortization (639,000) (509,800)
----------- -----------
$ 851,400 $ 454,800
=========== ===========
NOTE 6 - PUBLISHING RIGHTS
1997 1996
----------- -----------
Publishing rights $ 542,300 $ 415,000
Less accumulated amortization (404,500) (331,400)
----------- -----------
$ 137,800 $ 83,600
=========== ===========
- --------------------------------------------------------------------------------
Page F-10
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 7 - PROVISION FOR INCOME TAXES
1997 1996
---------- ----------
Provision for income taxes
Federal -- --
State 800 21,000
---------- ----------
800 21,000
---------- ----------
Deferred
Current 112,100 363,000
Non-current 820,200 (223,000)
---------- ----------
932,300 140,000
---------- ----------
$ 933,100 $ 161,000
========== ==========
The difference between the actual income tax provision and the tax provision
computed by applying the statutory federal income tax rate to earnings before
taxes is attributable to the following:
1997 1996
---------- ----------
Income tax provision (benefit) (34.0%) 34.0%
State taxes (benefit) (4.4) 9.3
Change in deferred tax asset valuation allowance 128.4 -
Change in inventory reserve 13.8 (4.1)
Change in allowance for doubtful accounts and returns (2.4) (11.8)
Non-deductible expenses 0.4 3.9
Other 0.6 7.9
---------- ----------
102.4% 39.2%
========== ==========
- --------------------------------------------------------------------------------
Page F-11
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 7 - PROVISION FOR INCOME TAXES (Continued)
At December 31, 1997, the Company had available net operating loss carryovers of
approximately $6,230,500 to be applied against future federal taxable income.
Due to a change in ownership during 1988, $2,638,000 of these amounts are
subject to a Section 382 limitation of a maximum of $476,950 per year. If the
Company does not generate sufficient income to use the maximum limitation,
remaining amounts accumulate for use in future periods until the operating loss
expires. The remaining net operating loss carryovers generated after 1988 are
available to be used without yearly limitation. For federal tax purposes, net
operating losses expire as follows:
Year Ending December 31,
------------------------
2002 $ 2,638,600
2003 1,222,000
2004 1,299,100
2005 383,300
2006 31,700
2012 655,800
--------------------
$ 6,230,500
====================
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.
The Company has available approximately $326,000 of California net operating
losses which can be carried forward and offset against future taxable income.
These loss carryforwards expire in 2002.
Temporary differences and carryforwards which give rise to deferred tax assets
at December 31, are as follows:
1997 1996
----------- -----------
Accounts receivable allowances $ 138,400 $ 170,800
Inventory reserve 141,200 16,100
Benefits from net operating loss carryforward -- 187,400
Other (14,700) 2,700
----------- -----------
Current deferred tax asset $ 264,900 $ 377,000
=========== ===========
Depreciation and amortization $ 21,100 $ 23,500
Benefits from net operating loss carryforward 2,147,200 1,458,400
Valuation allowance (1,500,000) --
Other 17,500 24,100
----------- -----------
Non current deferred tax asset $ 685,800 $ 1,506,000
=========== ===========
- --------------------------------------------------------------------------------
Page F-12
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 7 - PROVISION FOR INCOME TAXES (Continued)
Management of the Company believes it is more likely than not that a portion of
the federal net operating loss carryforwards will be utilized prior to
expiration. A valuation allowance has been established against remaining federal
net operating loss carryforwards.
NOTE 8 - LINE OF CREDIT
The Company has available an unsecured revolving line of credit for up to
$500,000 with interest at the bank's Index Rate plus .75%. This line matures May
31, 1998, and requires that the Company meet restrictions relating to key
financial ratios. At December 31, 1997, the Company had no outstanding draws
under this line-of-credit agreement.
NOTE 9 - LONG-TERM DEBT
Long-term debt consists of an unsecured, non-interest bearing note payable to an
officer due in monthly payments of $10,000, including imputed interest at an
effective interest rate of 9.25%, for the purchase of molds used in the
manufacture of hand crafted animal figurines. Principal maturities for
succeeding years are as follows:
Year Ending December 31,
-----------------------
1998 $ 101,600
1999 111,400
2000 31,400
-------------
$ 244,400
=============
- --------------------------------------------------------------------------------
Page F-13
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 10 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------
Per-Share
Loss Shares Amount
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net loss $ (1,843,800)
================
Basic loss per share:
Loss available to common shareholders $ (1,843,800) 1,902,779 $ (0.97)
=================
Effect of dilutive securities - -
---------------- -----------------
Diluted loss per share:
Loss available to common shareholders
plus assumed conversions $ (1,843,800) 1,902,779 $ (0.97)
================ ================= =================
</TABLE>
Warrants to purchase 368,117 shares of common stock at a weighted average price
per share of $4.45 and options to purchase 325,000 shares of common stock at a
weighted average price per share of $6.19 were outstanding at December 31, 1997,
but were not included in the computation of diluted earnings per share as the
exercise prices were greater than the average market price of the common shares.
Preferred stock convertible into 181,341 shares of common stock were outstanding
at December 31, 1997, but were not included in the computation of diluted
earnings per share as the effect would be anti-dilutive.
- --------------------------------------------------------------------------------
Page F-14
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 10 - EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
--------------------------------------------------------
Per-Share
Income Shares Amount
----------------- -------------------- --------------
<S> <C> <C> <C>
Net income $ 252,100
Less: Preferred stock dividends (9,000)
----------------
Basic earnings per share:
Income available to common shareholders 243,100 1,823,612 0.13
============
Effect of dilutive securities:
Options - 31,125
Convertible preferred stock 9,000 190,011
---------------- ----------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ 252,100 2,044,748 $ 0.12
================ ================ ============
</TABLE>
Warrants to purchase 68,117 shares of common stock at a weighted average price
per share of $5.31 and options to purchase 45,000 shares of common stock at a
weighted average price per share of $7.60 were outstanding at December 31, 1996,
but were not included in the computation of diluted earnings per share as the
exercise prices were greater than the average market price of the common shares.
- --------------------------------------------------------------------------------
Page F-15
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS
Leases - The Company leases office and warehouse space under an operating lease
expiring April 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,
-----------------------
1998 $ 336,500
1999 451,700
2000 548,100
2001 548,100
2002 602,900
Thereafter 1,959,500
-----------------
$ 4,446,800
=================
Rent expense totaled $385,600 and $330,700 for the years ended December 31, 1997
and 1996, respectively.
Employment Agreements - The Company entered into employment agreements expiring
through December 31, 2001, with four key employees. Compensation related to
these agreements amount to $400,000 for the year ending December 31, 1997.
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, The Humane Society of the United States and the Rainforest
Action Network, 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 $3,708,800, over the life of these
agreements. All agreements are cancelable with 30 to 60 days notice, as defined
in the 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 70% and
82% of total sales for the years ended December 31, 1997 and 1996, respectively.
NOTE 12 - MAJOR SUPPLIERS
During the year ended December 31, 1997, the Company made 31.8%, 20% and 13.2%
of its purchases from three suppliers. Amounts due to suppliers included in
accounts payable and accrued liabilities totaled $148,000 at December 31, 1997.
- --------------------------------------------------------------------------------
Page F-16
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 13 - CAPITAL STOCK
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Series B, $.10 par value, with aggregate liquidation preference of
$100,000, 14,250 shares authorized, 834 shares
issued and outstanding at December 31, 1996 $ -- 100
Series D, $.10 par value, with aggregate liquidation preference of
$926,700, 371,009 shares authorized, 181,341 and 186,341
shares issued and outstanding, respectively 18,100 18,600
------------ ------------
$ 18,100 $ 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. 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.
During 1997, the Company exercised its right to redeem all outstanding shares
and suspended the accumulation of dividends. At December 31, 1997, redemption
and cumulative dividends payable totaled $161,500.
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 1997, 5,000 shares
of Series D Preferred stock were converted to common stock.
NOTE 14 - 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 1997, 15,000 options were granted,
no options were exercised, and no options were forfeited. At December 31, 1997,
310,000 common stock options were exercisable at a weighted-average exercise
price of $6.31. In addition, 15,000 options become exercisable in 1998. The
exercise prices of the options range from $3.69 to $10.50. Options have a
remaining life of one to five years.
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.
- --------------------------------------------------------------------------------
Page F-17
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 14 - STOCK OPTIONS AND WARRANTS (Continued)
The Company has issued common stock warrants which entitle the holder to
purchase up to 8,117 shares of common stock 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.
In September 1997, the Company issued 300,000 common stock warrants exercisable
as follows: 100,000 warrants at $4.00 per share, 100,000 warrants at $4.25 per
share, and 100,000 warrants at $4.50 per share.
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 1997 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 1997 and 1996 consistent with the provisions of SFAS No. 123, the
Company's net earnings (loss) and earnings (loss) per share would have changed
to the pro forma amounts indicated below:
1997 1996
------------- ------------
Net earnings (loss) - as reported $ (1,843,800) $ 243,100
Net earnings (loss)- pro forma $ (2,107,400) $ 184,100
Earnings (loss) per share - as reported $ (0.97) $ 0.13
Earnings (loss) per share - pro forma $ (1.11) $ 0.10
Diluted earnings (loss) per share - as reported $ (0.97) $ 0.12
Diluted earnings (loss) per share - pro forma $ (1.11) $ 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:
1997 1996
------------- ------------
Dividends None None
Expected volatility 39.98% 41.24%
Risk free interest rate 5.99% 6.64%
Expected life 4-5 years 4 years
Options issued during 1997 and 1996 have an estimated weighted average fair
value of $1.68 and $2.38, respectively. Warrants issued during 1997 and 1996
have an estimated fair value of $1.31 and $2.09, respectively.
- --------------------------------------------------------------------------------
Page F-18
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 14 - 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 Exercise Under Exercise Restricted
Warrants Price Options Price Shares
-------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
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
Granted 300,000 4.25 15,000 3.69 -
Exercised - - -
Forfeited - - -
Vested - (4,000)
-------------- -------------- ------------
Balance, December 31, 1997 368,117 $ 4.45 325,000 $ 6.19 32,000
============== ============== ============
</TABLE>
NOTE 15 - STATEMENTS OF CASH FLOWS
1997 1996
------------- -------------
Cash paid during the year for:
Interest $ - $ -
Income taxes - 21,900
Non-cash investing and financing activities for the year ended December 31,
1997, consisted of converting 5,000 shares of Series D Preferred stock to 5,000
shares of common stock, redemption of 834 shares of Series B Preferred stock for
$100,000, which had not been paid as of December 31, 1997, and seller financed
purchase of assets of $244,400. See note 9.
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-19
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 16 - MAJOR CUSTOMER
Sales to a major customer was approximately $568,500 during the year ended
December 31, 1997, representing 13.9% of total sales. At December 31, 1997,
amounts due from this customer included in accounts receivable was $79,800.
NOTE 17 - EMPLOYEE BENEFIT PLAN
The Company has a 401(k) profit sharing plan covering all employees meeting
minimum service requirements. Plan contributions are discretionary. There were
no employer contributions for the years ended December 31, 1997 and 1996.
- --------------------------------------------------------------------------------
Page F-20
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 6, 1998, on our audits of the consolidated financial statements
and financial statement schedules of Healthy Planet Products, Inc. as of
December 31, 1997 and 1996, and for each of the two fiscal years in the period
ended December 31, 1997, which report is included in this Annual Report on Form
10-KSB.
/s/ Moss Adams LLP
Santa Rosa, California
_______________, 1998
