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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.
For the fiscal year ended December 31, 1998
OR
/_/ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to _________
Commission file number 1-13048
HEALTHY PLANET PRODUCTS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 94-2601764
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1700 Corporate Circle, Petaluma, California 94954
(Address of Principal Executive Offices) (Zip Code)
(707) 778-2280
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, $.01 par value American Stock Exchange
(Title of Each Class) (Name of Each Exchange on Which Registered)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
-------------------------
(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 the past 90 days.
Yes /x/ No /_/
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, 1998 were $3,633,900.
On March 25, 1999, the aggregate market value of the voting stock of
Healthy Planet Products, Inc. (consisting of common stock, $.01 par value (the
"Common Stock")) held by non-affiliates of the Registrant was approximately
$2,379,119 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 Registrant has, for
calculation purposes only, 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.
On March 25, 1999, there were 3,834,584 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 1. 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. The
Company's website is located at http://www.healthyplanet.com
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
greeting cards, note cards, holiday cards, gifts and stationery.
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 with a customized marble blend.
This acquisition commences the effort of the Company to expand its basic product
offering beyond its traditional card lines. The 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 or elementally chlorine free paper using
soy-based ink. The Company publishes and markets over 600 everyday, occasional
and seasonal cards, including over 275 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
5,200 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, journals, stationery,
tablets and magnets. The Sierra Club line has evolved to become the principal
line of the Company, accounting for approximately 65.5% of the Company's net
sales for the year ended December 31, 1998 and for approximately 70.5% of the
Company's net sales for the year ended December 31, 1997.
General Business Developments
During Most Recent Fiscal Year
In December 1998, the Company filed a rights offering Registration
Statement which was declared effective on February 16, 1999. The rights offering
was made to shareholders of record on January 11, 1999. Each shareholder on the
rights record date was issued two rights for each common share owned by such
shareholder. Each right entitled the shareholder to purchase one share of the
Company's Common Stock at
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$1.0625 per share. Shareholders were accorded certain oversubscription rights
conditioned upon their exercising their basic rights. The Chairman of the
Company and two companies controlled by him agreed to exercise all of their
respective basic rights resulting in their purchase of 927,000 shares of Common
Stock and, in addition, exercised over subscription rights to acquire 43,200
shares of Common Stock, resulting in their purchase of an aggregate of 970,200
shares of Common Stock, resulting in aggregate proceeds to the Company of
approximately $1,030,838. The rights offering expired on March 16, 1999. As a
result of the rights offering, the Company issued an aggregate of 1,552,216
shares of Common Stock and received an aggregate of approximately $1,649,230 in
gross proceeds from the rights offering.
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. These agreements 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 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, journals, tablets and magnets.
This license agreement has been extended through December 31, 2005. Sales of the
Sierra Club line represented approximately 65.5% and 70.5% of the Company's
sales for the years ended December 31, 1998 and 1997, respectively. 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
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received an annual minimum royalty of $367,513 for the calendar year 1998, with
an annual minimum royalty of $393,239 for each year thereafter during the
continuation of the agreement, increased by 7% per year for each year through
the year 2000, and 5% per year for each year through the year 2005. Based upon
actual sales for the years ended December 31, 1998, 1997 and 1996, the amount of
earned royalties was less than the minimum royalties which the Company paid to
the Sierra Club. No assurance may be given that actual earned royalties to the
Sierra Club in future years will equal or exceed the minimum royalty or that
the Sierra Club agreement will continue. The Company believes that the loss of
the Sierra Club line would have a material adverse effect upon the Company's
business unless and until such time as other lines having an established
substantial consumer acceptance and name recognition are developed.
B. 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. 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, 1998 sales of this line represented approximately 2.0% of the
Company's net sales.
C. 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, 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. All licensed products are subject to prior approval of the
licensor. For the year ended December 31, 1998, the Company paid a guaranteed
minimum royalty of $17,000. Sales of this line represented approximately 8.7% of
the Company's net sales for the year ended December 31, 1998.
D. 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
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Society of San Diego", "Center for Reproduction of Endangered Species" and
"CRES" in connection with the Company's Nature Baby(Registered) 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. For the year ended December 31, 1998 sales of this
line represented approximately 9.4% of the Company's net sales.
E. 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 in an amount equal to 5% of the net sales price with a
minimum royalty of $10,000 for the period November 1, 1997 through December 31,
1999. All licensed products are subject to prior approval of the licensor. For
the year ended December 31, 1998 sales of this line represented approximately
1.3% of the Company's net sales.
Manufacture of Product
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.
During the year ended December 31, 1998, the Company made 20.6%, 18.3%
and 12.3% of its purchases from three manufacturers or suppliers. Each of these
suppliers is unaffiliated with the Company. The Company does not have any short
or long term supply agreements or exclusive agreements with these suppliers. The
Company believes that the loss of any of these suppliers would not have a
material impact upon the Company's business, since it believes that multiple
alternate suppliers are available to the Company at competitive prices.
New Product Lines
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(Registered) trademark.
Marketing and Sales
The Company's products are marketed to over 5,200 retail sales outlets
which are comprised of card shops, stationery stores, gift and book stores,
notions and variety shops, drug stores, department stores, and miscellaneous and
multiple retail outlets. With the exception of Barnes & Noble Superstores, a
national chain of bookstores which accounted for approximately 10.3% of the
Company's net sales, for the year ended December 31, 1998, no other single
customer of the Company accounted for 10% or more of the
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Company's net sales. As of September 1997, Barnes & Noble Superstores no longer
carry the Company's 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 73.8% of Company sales for the
year ended December 31, 1998 (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 25% of sales. For the year ended December
31, 1998, a total of $502,687 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' commitment to the Company's product lines increase. The Company's
product line has been segmented and is targeted to specific markets. Sales
literature, point of sale advertising and catalogs/flyers 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.
Advertising and Sales Promotion
The Company uses various methods to promote its products. It shows at
certain trade and gift shows, and provides point of sale materials and a web
site presence. 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
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.
Competition
The greeting card, social stationery and gift industry is highly
competitive. The Company only marginally competes with major traditional card
companies, such as Hallmark Cards, Inc., American Greetings Corporation, and
Gibson Greetings, Inc. The major greeting card companies have greater financial
resources, market penetration and experience than the Company. The Company
primarily competes with the smaller alternative card companies, several of whom
have sales and resources greater than those of the Company; i.e., Recycled Paper
Products, Paramount and Sunrise Publications, among others.
The primary basis upon which the Company competes is the marketing of
its cause related card lines and associated nature and wildlife card lines,
which can only be obtained exclusively through the Company. This factor is a
positive aspect to the business of the Company so long as there continues to be
public awareness, support and identification with a particular cause or
environmental issues. Conversely, should a cause fall out of vogue with the
public, the attractiveness of a line may diminish. The Company does not view
itself as being a significant competitive factor in the greeting card industry,
though the Company does believe that growth and opportunity does present itself
within the niche of cause related and associated card and other product lines.
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Employees
The Company currently has 25 full-time employees, including its four
executive officers, 10 in administrative, managerial, and sales positions, and
11 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 and artists who create products for the
Company, although there are some photographers and artists 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(Registered) 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 and the European
Community.
The Company has also registered the "Sea Dreams", "Nature Baby" and
"Healthy Planet Collectibles" names, logos, and designs as trademarks used in
connection with its various product 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 8,600 square feet which will then comprise 79% of the entire
building. 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 building
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is occupied, and $36,307 per month for the remainder of the fourth year of the
lease term through the sixth year of the lease term, and $39,938 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 material pending legal proceedings,
other than ordinary routine litigation incidental to the business.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
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PART II
Item 5. Market for and Dividends on the Registrant's Common Equity and Related
Stockholder Matters
A. Principal Market
The American Stock Exchange is the principal market for the Company's
Common Stock, where its shares are traded under the symbol "HPP."
B. Market Information
American Stock Exchange
The following are the high and low closing prices for the Company's
Common Stock for the periods indicated:
Year High Low
---- ---- ---
1998
1st Quarter 3 3/4 2 7/16
2nd Quarter 2 7/16 1 5/16
3rd Quarter 1 1/2 3/4
4th Quarter 1 1/2
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
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 25, 1999 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 1,000 in number.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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"). 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
both net sales and gross margin as well as increases in general and
administrative expenses, net operating losses in each of the two most recent
fiscal years, 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 line of
handcrafted sculptures and figurines, the absence of long term supply contracts
which could make production costs unpredictable. 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.
Results of Operations
1998 Compared to 1997
Sales for the year ended December 31, 1999 were $3,633,900, reflecting
a decrease versus the prior year level of $4,099,600 of 11.3%. Everyday product
sales finished the year down 7.1% and seasonal sales finished the year down
22.9% to account for the overall decline. Sales of the Company's newly acquired
collectibles line amounted to $423,000, accounting for 10.3% of total sales,
were offset by declines in the Company's other product sales of 21.6% to result
in the overall decline. Included in the year end results was a provision for
future returns of approximately $363,000. This provision recognizes and provides
for the return of unsold seasonal product from customers who have qualified for
a return privilege.
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During 1998, sales of the Company's largest product line, the Sierra
Club line, accounted for 65.5% of total revenues compared to 70.4% for 1997 and
showed a year to year decline of revenues of 17.6%. A continuing decline in
holiday boxed card sales combined with a drop off of everyday card sales
resulted in the overall Sierra Club revenue decline. Sales of the Company's
other product lines excluding Sierra Club and collectibles finished the year
30.8% below prior year results. Excluding the impact of the Company's new
collectibles line all other Company revenues finished the year even with prior
year results.
The Company reported an operating loss of $2,905,500 or $1.28 per
share. Gross margin declined from the prior year level of $1,616,300 by
$1,357,200 or 84.0%. In addition to the gross margin decline, caused by the
revenue shortfall and an increased inventory reserve, an increase in operating
expenses of $444,700 resulted in the overall decline. Increased costs associated
with the launch of the Company's new collectibles line accounted for the
increased operating expenses and an increase in inventory reserves of $665,000
resulted in the overall operating result decline. Inventory reserves will be
evaluated quarterly based on actual and projected sales.
Cost of sales amounted to $3,374,800 for the year ended December 31,
1998 representing 92.9% of sales. This compares unfavorably to the prior year
rate of 60.6% due to the impact of increased inventory reserves taken to provide
for the write off of slow moving and obsolete inventory.
Selling, shipping and marketing expenses of $1,559,200 were $227,500 or
17.1% higher than the previous year due primarily to start up costs associated
with the Company's new collectibles line and increased advertising costs on all
the Company's product lines.
General and administrative expenses amounted to $1,605,400 reflecting
an increase versus the prior year level of $1,388,200 of $217,200 or 15.6%.
Increased personnel and facility costs associated with the Company's new
collectibles line accounted for the year to year increase.
The Company's net loss for the year ended December 31, 1998 was
$3,154,800 or $1.39 per share. This level compares unfavorably to the prior
years net loss of $1,843,800 or $.97 per share. The decline in gross margin, an
increase in operating expenses and the impact of establishing a valuation
allowance on the Company's deferred tax asset resulted in the net loss. A
valuation allowance of $2,974,300 reduced the deferred tax asset by $500,000 for
the year ended December 31, 1998 representing $.22 of the total loss of $1.39
per share.
Management of the Company has decided to record a valuation allowance
of $2,974,300 against deferred tax assets, due in part to the current year loss
before income taxes of $2,654,000. Management believes that it is more likely
than not that the tax benefits of the remaining net operating loss
carryforwards,
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net of valuation allowance, will be realized. Management's belief is based on
expected sales of the Healthy Planet Collectibles line and new sales and
marketing strategies for existing card lines. In order to utilize the full
benefit of the deferred income tax asset, the Company needs to realize aggregate
taxable income of approximately $934,000, which it expects to generate during
the years 1999 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.
Liquidity and Capital Resources
Total assets at December 31, 1998 amounted to $4,639,800 which
reflected a decrease versus the prior year level of $8,036,000 by $3,396,200 or
42.2%. A decline in cash and cash equivalents, marketable securities, inventory
and deferred tax assets resulted in the overall decline.
At December 31, 1998, the Company's working capital was $2,571,100.
This compared to the 1997 working capital of $5,406,000 for a year to year
decline of $2,834,900. The year to year decline was due to lower cash and
marketable securities, receivables, inventories, prepaid expenses and deferred
income taxes. The Company remains liquid with a current ratio of 4.9 to 1.
The primary source of the Company's liquidity is cash internally
generated from operations and cash and cash equivalents on hand. In addition, in
September 1997, the Company sold Common Stock and Common Stock Purchase Warrants
to an investor (and certain of his affiliates), who became a Director upon
making the investment for an aggregate of $975,000.
Subsequent to December 31, 1998, the rights offering Registration
Statement filed by the Company in December, 1998 was declared effective. As a
result of the rights offering, the Company issued an aggregate of 1,552,216
shares of Common Stock and received an aggregate of approximately $1,649,230 in
gross proceeds.
Net cash used in operations during 1998 amounted to $1,143,800.
Operating losses required $1,537,400 in cash offset in part by $393,600 provided
by changes in the net receivables, inventory, other assets and liabilities. Cash
provided from investing activities amounted to $125,800 comprised principally of
the maturation of marketable securities during 1998. Financing activities
consisted of $105,500 in cash being used to repay Corlett Collectables' note.
The Company believes and anticipates that the primary source of its
liquidity and capital resources for its coming fiscal year will primarily be
from cash on hand and from cash internally generated from sales; all of which
the Company believes will be adequate and sufficient for its operations for
1999. Longer term, the Company's source of liquidity and capital resources are
expected to be primarily internally generated cash from sales and the possible
exercise of existing Common Stock Purchase Warrants, which the Company believes
should be adequate for its operations for the forseeable future. Although the
loss of Barnes & Noble as a customer is likely to result in lower revenues for
the Company in 1999 and possibly beyond, the Company expects that the impact on
liquidity can be offset by the use of the current asset to satisfy working
capital requirements. The Company believes that its cash on hand is sufficient
to sustain operations at current sales levels for at least two years. The
Company is hopeful that sales of its new Collectibles line will help offset the
declines in sales of greeting cards. The Company will also continue to explore
the acquisition
11
<PAGE>
of new product lines as a means of augmenting sales. There is no assurance,
however, that sales from the Collectibles product line or from any new product
line which may be acquired will be sufficient to satisfy the Company's long term
cash requirements. If they do not, the Company would seek equity and/or debt
financing in order to obtain the additional capital that would be needed.
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.
Year 2000
The Company has substantially completed a comprehensive review of its products,
internal systems and procedures to ensure Year 2000 compliance. The Company's
Year 2000 status is as follows:
o The Company has established a plan, including a Year 2000 committee
comprised of senior management of the Company, to assess the Year 2000
impact on its internal systems, infrastructure, facilities, suppliers and
vendors, as well as products and services, in order to minimize any
interruption of the Company's operations or its ability to serve its
customers. The assessment phase has been substantially completed.
o The Company believes that its current systems will be Year 2000 compliant
and that no additional material expenditures will be required to address
Year 2000 compliance of the Company's internal computer systems. The
Company has established a timetable targeting September 1, 1999 as the
completion date for any necessary remediation efforts based upon the
results of its assessment.
Based upon currently available information, management has no reason to believe
that the Company will not meet its compliance goals and does not anticipate that
the cost of effecting Year 2000 compliance will have a material impact on the
Company's financial condition, results of operations or liquidity. Nevertheless,
achieving Year 2000 compliance is dependent upon many factors, some of which are
not completely within the Company's control. Should the Company's internal
systems, or the internal systems of one or more of its vendors, customers or
other entities with which the Company transacts business, fail to achieve Year
2000 compliance, the Company's business, financial condition and results of
operations could be adversely affected.
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]
12
<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 47 President, Chief Executive, Chief
Operating and Chief Financial
Officer
M. Scott Foster 47 Vice President - Sales and Marketing
Ricky Williams 42 Vice President - Operations
John V. Winfield 52 Chairman of the Board of Directors
William J. Nance 55 Treasurer, Director
Michael G. Zybala 46 Secretary, Director
Daniel R. Coleman 42 Director
Robert W. Sweitzer 54 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 2001
William J. Nance 1 2001
Michael G. Zybala 2 2000
Daniel R. Coleman 2 2000
John V. Winfield 3 1999
Robert W. Sweitzer 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 assumed the added position of Chief Executive
Officer. Mr. Wilson served as Chairman from 1987 through 1998. 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.
13
<PAGE>
M. Scott Foster joined the Company as Vice-President of Sales and
Marketing in 1993. He is currently employed by the Company on an at will basis.
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.
Ricky 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.
John V. Winfield, elected Chairman of the Board on August 5, 1998, was
first elected a Class 3 Director on September 29, 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). 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.
William J. Nance was elected as a Class I Director in August, 1998. Mr.
Nance is Founder and has been, for the past five years, President of Century
Plaza Printers, Inc. He is a certified public accountant and private consultant.
Mr. Nance is also Treasurer and Director of The InterGroup Corporation and a
Director of Santa Fe Financial Corporation and Portsmouth Square, Inc, each of
which is a public company.
Michael G. Zybala, Esq. was elected as a Class 2 Director in June 1998.
Since 1993, Mr. Zybala has been General Counsel for Santa Fe Financial
Corporation and Portsmouth Square, Inc. He has also served as Vice President and
Secretary of those entities since February 1998.
Daniel R. Coleman was first elected as a Director of the Company on
August 29, 1996. He 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.
Robert W. Sweitzer, Ph.D. was elected a Class 3 Director on August 5,
1998. He has, for the last five years, been on the faculty of the Peter F.
Drucker Graduate Management Center at the Claremont Graduate School. In
addition, he has served as a consultant to business and industry in the areas of
strategic planning, marketing and franchise distribution.
Certain Reports; Compliance with Section 16(a) of the Exchange Act
No person who, during the fiscal year ended December 31, 1998, 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.
14
<PAGE>
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, 1998, 1997 and 1996, to the Chief Executive Officer and each of the named
executive Officers of the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards
--------------------------------------------------------------------
No. of Securities
Restricted Underlying
Name and Principal Other Annual Stock Options/SARs
Position Year Salary Bonus Comp. Award(s) Granted
- - --------------------------------------- ---------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Bruce A. Wilson 1998 $150,000 $ - $17,676(2) $ 2,750(3) -
President, Chief Executive, 1997 $150,000 - $23,526(2) $ 14,500(3) -
Chief Operating and 1996 $150,000 $ 19,867(1) $23,720(2) $ 15,000(3) -
Chief Financial Officer
Ricky Williams 1998 $90,000 $ - $9,738(4) - -
Vice President of 1997 $90,000 - $9,670(4) - -
Operations 1996 $88,600 $ 9,000 $5,642(4) - -
M. Scott Foster 1998 $100,000 $ - $24,825(5) - -
Vice-President of 1997 $100,000 - $24,825(5) - -
Sales and Marketing 1996 $100,000 $ 11,411 $24,825(5) - -
</TABLE>
- - ----------
(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.
(2) Includes: (i) for 1998, an automobile allowance of $12,000, the payment of
premiums on a term life insurance policy of $4,026 and the payment of taxes
on 4,000 shares of restricted Common Stock which vested on December 31,
1998 of $1,650; (ii) for 1997, an automobile allowance of $12,000, 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; and (iii) 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.
(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, 1998, an
aggregate of 32,000 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, 1998,
the aggregate restricted stock holdings of Mr. Wilson consisted of 52,000
shares valued at $35,750, the market value of these shares as of December
31, 1998, without giving effect to the diminution in value attributable to
the restriction of such stock.
(4) Includes: (i) for 1998, an automobile allowance of $9,000 and the payment
of premiums on a term life insurance policy of $738; (ii) for 1997, an
automobile allowance of $9,000 and the payment of premiums on a term life
insurance policy of $670; and (iii) for 1996, an automobile allowance of
$5,040 and payment of premiums on a term life insurance policy of $601.
15
<PAGE>
(5) Mr. Foster has served as Vice-President of Sales since 1993. He is
currently employed by the Company on an at will basis. The information set
forth above includes: (i) for 1998, an expense allowance of $24,000 and the
payment of premiums on a term life insurance policy of $825; (ii) for 1997,
an expense allowance of $24,000 and the payment of premiums on a term life
insurance policy of $825; and (iii) for 1996, an expense allowance of
$24,000 and the payment of premiums on a term life insurance policy of
$825.
STOCK OPTIONS/SAR GRANTS
No stock option grants or Stock Appreciation Rights ("SARs") were made
during the year ended December 31, 1998 to any of the named executive Officers
of the Company.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES
The following table contains information with respect to the named
executive Officers concerning options held as of the year ended December
31,1998.
<TABLE>
<CAPTION>
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-
Acquired on Value Options/SARs as of the-Money Options/SARs
Name Exercise (#) Realized ($) December 31, 1998 at December 31, 1998(1)
- - --------------------- ------------------ --------------- ----------------------------- -----------------------------
Exercisable/Unexercisable Exercisable/Unexercisable
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Bruce A. Wilson - $ - 102,500/ - $ - / -
Ricky Williams - $ - 55,000/ - $ - / -
M. Scott Foster - $ - 102,500/ - $ - / -
</TABLE>
- - ----------
(1) Based upon the average closing bid and asked prices of the Company's Common
Stock on December 31, 1998 ($.69 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.
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.
Mr. Wilson's Employment Agreement, as amended and restated, extends the
term of Mr. Wilson's employment through December 31, 1999. Mr. Wilson continues
to be employed as President, Chief Executive, Chief Operating and Chief
Financial Officer of the Company, and is to receive a base salary (the "Base
Salary") for the calendar year commencing January 1, 1995 of $125,000 per annum,
of which $20,000 is to be paid in a single lump sum on the 15th day of January,
1995 and the remainder of $105,000 is to be paid over the course of the year
pursuant to the Company's regular payroll periods; for the calendar years 1996
and 1997, the amount of Base Salary is increased to $150,000 per annum, of which
$30,000 is to be paid in a single lump sum on January 15th of each year and the
remainder of $120,000 is to be paid over the course of the year pursuant to the
Company's regular payroll periods; for the calendar years 1998 and 1999, the
amount of Base Salary is increased to $160,000 per annum, of which $40,000 is to
be paid in a single lump sum on January 15th of each year and the remainder of
$120,000 is to be paid over the course of the year pursuant to the Company's
regular payroll periods. Mr. Wilson is to further receive, for each year of the
term, an incentive bonus based upon the Company's net pre-tax profit before
interest expense for each calendar year, which incentive bonus ranges from 8% of
the first $100,000 of net pre-tax profit to 3% of the net pre-tax profit in
excess of $250,000. Mr. Wilson is to receive an automobile allowance of $ 1,000
per month, a policy of term life insurance in the amount of $500,000 payable to
a beneficiary designated by him,
16
<PAGE>
and long-term disability insurance. In the event Mr. Wilson is terminated
without cause, he is to receive a severance benefit of 24 months Base Salary if
terminated after December 31, 1997, or the remaining amount of Base Salary if
terminated prior to December 31,1997. In the event of a Change in Control in the
Company (as defined) and, following such Change in Control, there is a change in
the composition of a majority of the Directors comprising the entire Board of
Directors immediately prior to the Change in Control, Mr. Wilson may elect,
within six months following the change in the composition of the Board of
Directors following the Change in Control, to terminate his employment with the
Company and, in such case, he is to receive a special severance payment in the
form of the Company paying to Mr. Wilson, with respect to all options granted to
him prior to May 15, 1995, the differential between the strike price of Mr.
Wilson's options plus $3.20 and the average of the closing price of the
Company's Common Stock for the 10 days preceding the effective date of
termination.
In connection with the amendment and restatement of his Employment
Agreement, all options granted to Mr. Wilson prior to December 31, 1999 have
been re-designated as non-incentive stock options and, to the extent such
options become vested and are presently exercisable, may be exercised through
December 31, 1999. Options granted to Mr. Wilson in accordance with an option
grant dated November 4, 1993 continue to be subject to the vesting schedule
contained in the original grant, of which 24,000 options vested on December 31,
1996. Such vesting is subject to an acceleration of vesting in the event of a
Change in Control of the Company, as defined.
In April, 1991, Mr. Wilson was granted 60,000 restricted shares under
the Company's 1991 Senior Management Incentive Plan. These restricted shares are
to vest at the rate of 4,000 shares per year over a 15 year period, subject to
acceleration of vesting in certain circumstances. Except in the event of
acceleration, each year, upon the vesting of each 4,000 shares, the Company is
to pay to Mr. Wilson a cash bonus equal to 60% of the market value of the vested
shares, for the principal purpose of offsetting taxes attributable to the
vesting of the shares. The grant of restricted shares to Mr. Wilson was in
furtherance of the desire of the Board of Directors to have Mr. Wilson have a
significant stock interest in the Company which would recognize his past
performance and incentivize his continued efforts to maximize the value of
the Company for all stockholders. As of December 31, 1998, an aggregate of
32,000 restricted shares were vested. In the event of certain Change in Control
transactions, all then unvested restricted shares become immediately vested.
On December 31, 1998, the Company entered into a new at will employment
agreement with Mr. Foster, pursuant to which Mr. Foster's employment as
Vice-President of Sales and Marketing has been continued. During the
continuation of his employment he is to be compensated at the rate of $100,000
per annum. He is entitled to receive health insurance and life insurance
benefits, reimbursement for actual expenses and a 2,000 per month automobile
allowance. In addition to his Base Salary he is to receive an Incentive Bonus of
2% on net sales on initial orders to new accounts effected by him, a 5%
quarterly commission on personal net sales on orders to his existing personal
accounts on shipments in excess of $125,000, a 2% commission on net sales of the
Company's regional managers in excess of $120,000 annual sales or $30,000
quarterly sales and a 2% commission on net sales of the Company in excess of
110% of the Company's prior years net sales, paid quarterly and adjusted
annually.
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
17
<PAGE>
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 265,000
shares remain outstanding. In addition, 60,000 restricted shares have been
issued under the Plan, of which 32,000 restricted shares have vested.
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.
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.
18
<PAGE>
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 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.
19
<PAGE>
Upon expiration of the applicable restricted period and the
satisfaction of any other applicable conditions, all or part of the restricted
shares and any dividends or other distributions not distributed to the holder
(the "retained distributions") thereon will become vested. Any restricted shares
and any retained distributions thereon which do not so vest will be forfeited to
the Company. If prior to the expiration of the restricted period a holder is
terminated without cause or because of a total disability (in each case as
defined in the Management Plan), or dies, then, unless otherwise determined by
the Administrator at the time of the grant, the restricted period applicable to
each award of restricted shares will thereupon be deemed to have expired. Unless
the Administrator determines otherwise, if a holder's employment terminates
prior to the expiration of the applicable restricted period for any reason other
than as set forth above, all restricted shares and any retained distributions
thereon will be forfeited.
Accelerating of the vesting of the awards made under the provisions of
the Management Plan shall occur on the first day following the occurrence of any
of the following: (a) the approval by the stockholders of the Company of an
Approved Transaction; (b) a Control Purchase; or (c) a Board Change. An
"Approved Transaction" is defined as (A) any consolidation or merger of the
Company in which the Company is not the continuing or surviving corporation or
pursuant to which shares of Common Stock would be converted into cash,
securities or other property other than a merger of the Company in which the
holders of Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (B) any sale, lease, exchange, or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (C) the adoption of any plan or proposal for
the liquidation or dissolution of the Company.
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
20
<PAGE>
5,000 shares of the Company's Common Stock upon joining the Board of Directors
(or, for those persons who are Directors on the date of approval of the Director
Plan by the Stockholders, on such date), and options to purchase 3,000 shares on
each anniversary of the initial date of service or date of approval, as the case
may be.
Under the terms of the Director Plan, the sum of the number of shares
to be received upon any grant multiplied by the fair market value of each share
at the time of the grant may not exceed $75,000. All awards shall be reduced to
the extent that they exceed such amount. The exercise price for options granted
under the Director Plan shall be 100% of the fair market value of the Common
Stock on the date of grant (or if there is no closing price for such date of
grant, then the last preceding business day on which there was a closing price).
The "fair market value" shall mean (i) the closing price of a share of Common
Stock on the American Stock Exchange ("AMEX") or other national securities
exchange; or (ii) if the Company's Common Stock is not listed for trading on the
AMEX or other national securities exchange, then the closing bid price of a
share of Common Stock on the Nasdaq National Market System or Nasdaq SmallCap
Market (together referred to as "NASDAQ"); or (iii) in the event the Common
Stock is not traded on either the AMEX or the NASDAQ, the fair market value
shall be the price of the Common Stock as reported by the National Quotation
Bureau, Inc., or a market maker of the Company's Common Stock; or (iv) if the
Common Stock is not quoted by any of the above, by the Board of Directors acting
in good faith. Until otherwise provided in the Director Plan, the exercise price
of options granted under the Director Plan must be paid at the time of exercise,
either in cash, by delivery of shares of Common Stock of the Company or by a
combination of each. The term of each option is five (5) years from the date of
grant, unless terminated sooner as provided in the Director Plan. The Director
Plan is administered by a committee of the Board of Directors composed of not
fewer than two persons who are Officers of the Company (the "Committee"). The
Committee has no discretion to determine which non-employee Director will
receive options or the number of shares subject to the option, the term of the
option or the exercisability of the option. However, the Committee will make all
determinations of the interpretation of the Director Plan. Options granted under
the Director Plan do not qualify for incentive stock option treatment.
As of March 25, 1999, there were outstanding options to purchase 70,000
shares under the Director Plan, at exercise prices ranging from $1.31 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 25, 1999
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
21
<PAGE>
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:
Amount and Nature
Beneficial Ownership
and Percentage
------------------------------------------
Name and Address of Number of
Beneficial Owner Shares Percentage
- - ------------------------------- ------------ ---------------------
Bruce A. Wilson................ 155,600(1) 3.9%
1700 Corporate Circle
Petaluma, CA 94954
John V. Winfield............... 2,122,846(2) 46.9%
2121 Avenue of the Stars
Los Angeles, CA 90067
The InterGroup Corporation..... 1,305,073(3) 31.0%
2121 Avenue of the Stars
Los Angeles, CA 90067
Grace & White Inc.............. 238,700(4) 6.2%
515 Madison Avenue
New York, NY 10022
Starr Securities, Inc.......... 191,048(5) 4.9%
19 Rector Street
New York, NY 10006
Michael G. Jesselson........... 182,071(6) 4.7%
1301 Avenue of the Americas
New York, NY 10019
Erica Jesselson................ 182,071(6) 4.7%
1301 Avenue of the Americas
New York, NY 10019
Lucy Lang...................... 182,071(6) 4.7%
1301 Avenue of the Americas
New York, NY 10019
Benjamin J. Jesselson.......... 182,071(6) 4.7%
1301 Avenue of the Americas
New York, NY 10019
Paul Bluhdorn.................. 181,256(7) 4.7%
P.O. Box 7854
Burbank, CA 91510
Estate of Ludwig Jesselson..... 175,488(6) 4.6%
1301 Avenue of the Americas
New York, NY 10019
M. Scott Foster................ 102,500(8) 2.6%
1700 Corporate Circle
Petaluma, CA 94954
22
<PAGE>
Amount and Nature
Beneficial Ownership
and Percentage
------------------------------------------
Name and Address of Number of
Beneficial Owner Shares Percentage
- - ------------------------------- ------------ ---------------------
Yvette Bluhdorn................ 71,738(9) 1.9%
P.O. Box 7854
Burbank, CA 91510
Mark S. Siegel................. 70,062(10) 1.8%
P.O. Box 7854
Burbank, CA 91510
Ricky Williams................. 55,000(11) 1.4%
1700 Corporate Circle
Petaluma, CA 94954
Daniel R. Coleman.............. 15,000(12) *
500 108th Avenue, NE
Bellevue, WA 98004
Michael G. Zybala.............. 5,000(13) *
11315 Rancho Bernardo Road,
Suite 129
San Diego, CA 92127
William J. Nance............... 5,000(13) *
ABC Entertainment Center
2040 Avenue of the Stars
Los Angeles, CA 90067
Robert W. Sweitzer, Ph.D....... 5,000(13) *
The Claremont Graduate School
925 N. Dartmouth Avenue
Claremont, CA 91711
All Officers and Directors
as a Group (8 persons
in number).................. 2,465,946 50.7%
- - ----------
* Less than one percent (1%)
(1) Includes 102,500 vested and presently exercisable options and 53,100
restricted shares subject to vesting at the rate of 4,000 shares per year
on December 31st in each year.
(2) Based upon information contained in an amendment to a Schedule 13D dated
March 22, 1999 (the "Winfield 13D"), on behalf of Mr. Winfield, the
InterGroup Corporation ("InterGroup") and Santa Fe Financial Corporation
("Santa Fe"), and corporate records of the Company. Includes (i) 502,800
shares of Common Stock and warrants to purchase 304,972 shares of Common
Stock owned by Mr. Winfield; (ii) 841,800 shares of Common Stock and
warrants to purchase 363,225 shares of Common Stock owned by InterGroup and
as to which Mr. Winfield has shared voting and dispositive power; (iii)
89,100 shares of Common Stock and warrants to purchase 10,949 shares of
Common Stock owned by Santa Fe and as to which Mr. Winfield has shared
voting and dispositive power; and (iv) options to purchase 10,000 shares of
Common Stock granted to Mr. Winfield pursuant to the Company's Non-Employee
Director Plan. As of November 30, 1998, Mr. Winfield owned 44.0% of
InterGroup, per a proxy dated December 11, 1998. As of December 21, 1998,
InterGroup controls 51.7% of Santa Fe. Mr. Winfield is the Chairman and CEO
of both Santa Fe and InterGroup.
(3) Based upon information contained in the Winfield 13D and corporate records
of the Company. Includes (i) 841,800 shares of Common Stock and 363,225
warrants owned by InterGroup and (ii) 89,100 shares of Common Stock and
10,949 warrants owned by Santa Fe.
23
<PAGE>
(4) Based upon information contained in an amendment to a Schedule 13G dated
February 9, 1999, filed on behalf of Grace & White Inc. ("Grace").
According to the amended Schedule 13G, Grace is a registered investment
advisor with voting power and sole dispositive power over 12,900 and
238,700 shares, respectively.
(5) Based upon: (i) information contained in an amendment to a Schedule 13D
dated March 3, 1992 filed on behalf of Starr Securities, Inc. and its
stockholders 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. The beneficial ownership includes 131,048 shares of Common
Stock owned of record by Starr and 60,000 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.
(6) Ludwig Jesselson died on April 3, 1993. Michael G. Jesselson, Lucy Lang,
Erica Jesselson and Benjamin J. Jesselson are the four executors
(collectively, the "Executors") of the Estate of Mr. Jesselson (the
"Estate") and, as such, retain authority with regard to the disposition of
the shares. The information on the Executors' and the Estate's beneficial
ownership is based on information contained in an amendment to a Schedule
13G dated February 9, 1999 (the "Jesselson 13G"), filed on behalf of
Michael Jesselson, Lucy Lang, Erica Jesselson, Benjamin J. Jesselson, a
trust created under the will of Ludwig Jesselson f/b/o Erica Jesselson, and
the Estate of Ludwig Jesselson. It includes 175,488 shares of Common Stock
owned by the Estate of Ludwig Jesselson and 6,583 shares of the Common
Stock owned by a trust f/b/o Erica Jesselson created under the will of
Ludwig Jesselson. Each of the Executors is a trustee of the trust f/b/o
Erica Jesselson and, as such, are deemed to be the beneficial owners of the
6,583 shares.
(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. It 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. It 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) Includes 102,500 vested and presently exercisable options.
(9) Based on information contained in the Bluhdorn 13D and 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 Ms. Bluhdorn disclaims
beneficial ownership.
(10) Based on information contained in the Bluhdorn 13D and corporate records of
the Company.
(11) Includes 55,000 vested and presently exercisable options.
(12) Includes 15,000 vested and presently exercisable options.
(13) Includes 5,000 vested and presently exercisable options.
Item 12. Certain Relationships and Related Transactions
For information concerning the employment agreements of Bruce A.
Wilson, Ricky Williams and M. Scott Foster, see Item 10 "Executive
Compensation".
For information concerning the issuance of 60,000 restricted shares to
Mr. Bruce A. Wilson, see Item 10 "Executive Compensation".
On September 29, 1997, the Company completed a transaction with John
Winfield and InterGroup Corporation ("InterGroup"), 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 for an aggregate of $487,500. As part
of the transaction, Mr. Winfield and InterGroup 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, subject to adjustment under certain
24
<PAGE>
circumstances. The warrants are exercisable commencing September 29, 1997 and
may be exercised through September 29, 2002. Mr. Winfield and InterGroup 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. As of August 5, 1998, Mr. Winfield has
served as the Chairman of the Board of Directors of the Company.
On March 16, 1999, the Company completed a rights offering which
commenced on February 22, 1999. Mr. Winfield, InterGroup and Santa Fe Financial
Corporation ("Santa Fe"), a subsidiary of InterGroup, agreed to exercise all of
their respective basic rights in the rights offering. In exchange for this
commitment, the Company issued to Mr. Winfield, InterGroup and Santa Fe
additional warrants to purchase an aggregate of 250,000 shares of Common Stock
at an exercise price of $1.1875 per share, distributed pro rata according to
their ownership percentage before the rights offering, as follows:
90,399 to Mr. Winfield, 148,652 to InterGroup and 10,949 to Santa Fe. The
warrants are exercisable commencing February 22, 1999 and may be exercised
through February 22, 2004. Mr. Winfield, InterGroup and Santa Fe were each
accorded certain demand and piggyback registration rights. The Company did not
offer warrants to any other stockholders in connection with the rights offering.
Item 13. Exhibits, List and Reports on Form 8-K
(A) 1. Financial Statements
See Index to Financial Statements Attached hereto.
2. Financial Statement Schedules
See Index to Financial Statements attached hereto.
3. Exhibits:
Incorporated by reference to the Exhibit Index at the end of this
Report.
(B) Reports on Form 8-K
During the last quarter of the period covered by this Report, no
reports on Form 8-K were filed by the Registrant.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HEALTHY PLANET PRODUCTS, INC.
By: /s/ Bruce A. Wilson
------------------------------------
Bruce A. Wilson
President, Chief Executive, Chief
Operating and Chief Financial Officer
Dated: March 31, 1999
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 31, 1999
- - --------------------------------------
Bruce A. Wilson
President, Chief Executive, Chief
Operating and Chief Financial Officer
(Principal Executive, Financial
and Accounting Officer) and Director
/s/ William J. Nance
- - -------------------------------------- March 31, 1999
William J. Nance
Director
/s/ John V. Winfield
- - -------------------------------------- March 31, 1999
John V. Winfield
Chairman of the Board
/s/ Michael G. Zybala
- - -------------------------------------- March 31, 1999
Michael G. Zybala
Director
/s/ Daniel R. Coleman
- - -------------------------------------- March 31, 1999
Daniel R. Coleman
Director
/s/ Robert W. Sweitzer
- - -------------------------------------- March 31, 1999
Robert W. Sweitzer
Director
<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 Ricky Williams [Exhibit 10.1
to Current Report on Form 8-K dated September 24, 1993]
10.4* Modification to Employment Agreement of Bruce A. Wilson
[Exhibit 10 to Current Report on Form 8-K dated November 3,
1993]
10.5* 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]
10.6* 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]
10.7* 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]
31
<PAGE>
10.8* Lease for premises 1694-1736 Corporate Circle, Petaluma,
California 94954 [Exhibit 10.1 to Current Report on Form 8-K
dated February 15, 1996]
10.9* 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]
10.10* 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
23.1 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 12, 1999
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
32
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1998
<PAGE>
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT.............................................F - 1
FINANCIAL STATEMENTS
Balance sheet - December 31, 1998...................................F - 2
Statements of Operations -
Years ended December 31, 1998 and 1997..........................F - 4
Statements of Shareholders' Equity -
Years ended December 31, 1998 and 1997..........................F - 5
Statements of Cash Flows -
Years ended December 31, 1998 and 1997..........................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 sheet of Healthy Planet Products,
Inc., as of December 31, 1998, and the related statements of operations,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1998. 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, 1998, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
----------------------------------
/s/ Moss Adams LLP
Santa Rosa, California
February 12, 1999
Page F - 1
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
BALANCE SHEET
December 31, 1998
- - ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,162,600
Accounts receivable 626,800
Inventories 379,000
Prepaid expenses 58,400
-----------
Total current assets 3,226,800
-----------
PROPERTY AND EQUIPMENT 736,600
-----------
OTHER ASSETS
Deferred income taxes 450,700
Publishing rights 91,200
Other 134,500
----------
676,400
----------
Total assets $ 4,639,800
===========
The accompanying notes are an integral part of these financial statements.
- - ------------------------------------------------------------------------------
Page F - 2
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
BALANCE SHEET (Continued)
December 31, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 236,300
Royalties payable 10,900
Commissions payable 80,800
Series B preferred stock redemption and dividends payable 161,500
Accrued wages, bonuses and payroll taxes 48,900
Accrued liabilities 21,700
Note payable 95,600
------------
Total current liabilities 655,700
------------
ACCRUED RENT PAYABLE 125,400
------------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 12,000,000 shares
authorized; 2,282,368 shares
issued and outstanding 22,800
Series D preferred Stock, $.10 par value, with aggregate
liquidation preference of $160,100; 371,009
shares authorized; 31,335 shares
issued and outstanding 3,100
Additional paid-in capital 13,163,000
Accumulated deficit (9,330,200)
------------
Total shareholders' equity 3,858,700
------------
Total liabilities and shareholders' equity $ 4,639,800
============
The accompanying notes are an integral part of these financial statements.
- - ------------------------------------------------------------------------------
Page F - 3
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF OPERATIONS
Years Ended December 31, 1998 and 1997
-----------------------------------------------------------------------------
1998 1997
----------- -----------
NET SALES $ 3,633,900 $ 4,099,600
COST OF GOODS SOLD 3,374,800 2,483,300
----------- -----------
GROSS PROFIT 259,100 1,616,300
----------- -----------
OPERATING EXPENSES
Selling, shipping and marketing 1,559,200 1,331,700
General and administrative 1,605,400 1,388,200
----------- -----------
3,164,600 2,719,900
----------- -----------
OPERATING LOSS (2,905,500) (1,103,600)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 130,400 144,500
Other income 135,400 48,400
Interest expense (14,300) --
----------- -----------
251,500 192,900
----------- -----------
LOSS BEFORE INCOME TAXES (2,654,000) (910,700)
PROVISION FOR INCOME TAXES 500,800 933,100
----------- -----------
NET LOSS $(3,154,800) $(1,843,800)
=========== ===========
LOSS PER COMMON SHARE $ (1.39) $ (0.97)
=========== ===========
LOSS PER COMMON SHARE-
ASSUMING DILUTION $ (1.39) $ (0.97)
=========== ===========
The accompanying notes are an integral part of these financial statements.
- - ------------------------------------------------------------------------------
Page F - 4
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1998 and 1997
<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, 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 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
Net loss for the year ended
December 31, 1998 -- -- -- -- -- --
Net unrealized gain on marketable -- --
securities -- -- -- -- -- --
Conversion of Series D Preferred
stock to common stock 150,006 1,500 -- -- (150,006) (15,000)
Vesting of 4,000 restricted shares
of common stock -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1998 2,282,368 $ 22,800 -- -- 31,335 $ 3,100
========= ========= ========= ========= ========= =========
</TABLE>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT
----------------- -------------------
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 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)
Net loss for the year ended
December 31, 1998 - (3,154,800)
Net unrealized gain on marketable
securities - (10,500)
Conversion of Series D Preferred
stock to common stock 13,500 -
Vesting of 4,000 restricted shares
of common stock 22,400 -
----------------- -------------------
Balance, December 31, 1998 $ 13,163,000 $ (9,330,200)
================= ===================
The accompanying notes are an integral part of these financial statements.
- - ------------------------------------------------------------------------------
Page F - 5
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,154,800) $ (1,843,800)
Adjustments to reconcile net loss to net
cash used by operating activities:
Inventory reserve 665,000 292,900
Deferred income taxes 500,000 932,300
Depreciation and amortization 300,100 202,300
Change in allowance for doubtful accounts and returns 140,400 (71,500)
Vesting of restricted shares 22,400 22,500
Net change in unrealized gains on cash equivalents and
marketable securities (10,500) 12,500
Changes in:
Accounts receivable (56,200) 320,600
Inventories 497,000 (415,900)
Prepaid expenses 57,300 9,500
Accounts payable (139,700) (18,800)
Royalties payable 6,300 (2,800)
Commissions payable (13,400) (23,800)
Income taxes payable (800) (20,200)
Accrued wages, bonuses and payroll taxes 1,900 (23,800)
Accrued liabilities 1,400 (28,200)
Accrued rent payable 39,800 45,100
-------------------- -------------------
Net cash used by operating activities (1,143,800) (611,100)
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Maturity of marketable securities 250,000 1,989,300
Other 14,500 17,000
Purchases of property and equipment (107,500) (271,400)
Purchase of publishing rights (31,200) (127,300)
Purchases of marketable securities - (250,000)
-------------------- -------------------
Net cash provided by investing activities 125,800 1,357,600
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal repayments on note payable (105,500) (10,000)
Net proceeds from sale of common stock - 899,000
-------------------- -------------------
Net cash provided (used) by financing activities (105,500) 889,000
-------------------- -------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,123,500) 1,635,500
CASH AND CASH EQUIVALENTS
Beginning of year 3,286,100 1,650,600
-------------------- -------------------
End of year $ 2,162,600 $ 3,286,100
==================== ===================
</TABLE>
The accompanying notes are an integral part of these financial statements.
- - ------------------------------------------------------------------------------
Page F - 6
<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. The
Company's products are marketed to over 5,200 retail sales outlets. 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 were classified as
available-for-sale and were available to support current operations or to take
advantage of other investment opportunities. Marketable securities were stated
at estimated fair value based upon market quotes and consisted of United
States government and Federal agency securities. Unrealized gains and losses
were computed on the basis of specific identification and were 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.
- - ------------------------------------------------------------------------------
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)
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 6.
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.
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 money funds
and United States government and Federal agency securities. 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, 1998 were $22,500. All other
advertising costs are expensed as incurred. Advertising expense totaled
$68,300 and $130,700 for the years ended December 31, 1998 and 1997,
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, money funds, and United States government and Federal agency securities:
The carrying amount approximates fair value because of the short maturities of
these instruments.
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.
- - ------------------------------------------------------------------------------
Page F - 8
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - ------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Loss per share - Loss per common share was computed using the weighted average
number of common shares outstanding. Loss per common share assuming dilution
was computed using the weighted average number of common shares and the common
equivalent shares outstanding. Common stock equivalents associated with
warrants and stock options have been excluded from the weighted average shares
outstanding since the effect of these potentially dilutive securities would be
antidilutive.
New accounting pronouncements - The Financial Accounting Standards Board has
issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities." It requires companies to record derivatives on the balance sheet
as assets or liabilities, measured at fair market value. Gains or losses
resulting from changes in the value of those derivatives are accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving the offsetting changes in
fair value or cash flows. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management believes that the
adoption of SFAS No. 133 will have no material effect on its financial
statements.
Reclassifications - Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation.
- - ------------------------------------------------------------------------------
Page F - 9
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - ------------------------------------------------------------------------------
NOTE 2 - ACCOUNTS RECEIVABLE
Accounts receivable $ 1,090,300
Less allowances for doubtful accounts and returns (463,500)
-----------
$ 626,800
===========
NOTE 3 - INVENTORIES
Raw materials $ 14,400
Work-in-process 153,700
Finished goods 210,900
-----------
$ 379,000
===========
Management plans include discontinuing certain product lines and images and
reducing overall inventory levels in 1999 in an attempt to reduce costs and
increase sales. Management has reduced the inventory carrying value by
$995,000, at December 31, 1998, as a result of these plans. No estimate can be
made of any additional loss which might result should management's plans
change. The change in the inventory reserve increased cost of goods sold and
decreased gross profit by $665,000.
NOTE 4 - PROPERTY AND EQUIPMENT
Machinery, equipment and leasehold improvements $ 730,500
Molds 441,400
Color separations 315,100
Furniture and fixtures 72,700
Computer software 38,200
-----------
1,597,900
Less accumulated depreciation and amortization (861,300)
-----------
$ 736,600
===========
- - ------------------------------------------------------------------------------
Page F - 10
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - -----------------------------------------------------------------------------
NOTE 5 - PUBLISHING RIGHTS
Publishing rights $ 196,700
Less accumulated amortization (105,500)
---------
$ 91,200
=========
NOTE 6 - INCOME TAXES
1998 1997
--------- ---------
Provision for income taxes
Federal $ -- $ --
State 800 800
--------- ---------
800 800
--------- ---------
Deferred
Current 264,900 112,100
Non-current 235,100 820,200
--------- ---------
500,000 932,300
--------- ---------
$ 500,800 $ 933,100
========= =========
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:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
Income tax provision (benefit) (34.0)% (34.0)%
State taxes (benefit) (4.4) (4.4)
Change in deferred tax asset valuation allowance 43.9 128.4
Change in inventory reserve 10.7 13.8
Change in allowance for doubtful accounts and returns 2.3 (2.4)
Non-deductible expenses -- 0.4
Other 0.4 0.6
---- -----
18.9% 102.4%
==== =====
</TABLE>
- - ------------------------------------------------------------------------------
Page F - 11
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - ------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES (Continued)
At December 31, 1998, the Company had available net operating loss carryovers
of approximately $7,963,800 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 $ 2,638,500
2003 1,222,000
2004 1,299,100
2005 383,500
2006 31,700
2012 570,700
2018 1,818,300
------------
$ 7,963,800
============
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 $1,223,000 of California net operating
losses which can be carried forward and offset against future taxable income.
These loss carryforwards expire through 2003
- - ------------------------------------------------------------------------------
Page F - 12
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES (Continued)
Gross deferred tax assets and liabilities are $3.5 million and $83,000,
respectively.
The significant temporary differences and carryforwards that give rise to
deferred tax assets at December 31, 1998, are as follows:
Accounts receivable allowances $ 198,600
Inventory reserve 426,300
Other (35,900)
Valuation allowance (589,000)
----------
Current deferred tax asset $ -
==========
Depreciation and amortization $ 23,500
Benefits from net operating loss carryforward 2,815,300
Valuation allowance 2,385,300)
Other (2,800)
----------
Non current deferred tax asset $ 450,700
==========
The $1,474,300 increase in the valuation allowance is due to a reassessment of
the Company's ability to realize its deferred tax assets in the future.
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.
NOTE 7 - NOTE PAYABLE
The note payable is unsecured, non-interest bearing, and payable to an employee
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.
- - ------------------------------------------------------------------------------
Page F - 13
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
NOTE 8 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------------------
Per-Share
Loss Shares Amount
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Net loss $ (3,154,800)
====================
Basic loss per share:
Loss available to common shareholders $ (3,154,800) 2,269,868 $ (1.39)
====================
Effect of dilutive securities - -
-------------------- --------------------
Diluted loss per share:
Loss available to common shareholders
plus assumed conversions $ (3,154,800) 2,269,868 $ (1.39)
==================== ==================== ====================
</TABLE>
Warrants to purchase 360,000 shares of common stock at a weighted average
price per share of $4.39 and options to purchase 350,000 shares of common
stock at a weighted average price per share of $5.88 were outstanding at
December 31, 1998, 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 31,335 shares of common stock were
outstanding at December 31, 1998, but were not included in the computation of
diluted earnings per share as the effect would be anti-dilutive.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------------------------
Per-Share
Income Shares Amount
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Net loss $ (1,843,800)
====================
Basic earnings per share:
Income available to common shareholders $ (1,843,800) 1,902,779 $ (0.97)
====================
Effect of dilutive securities: - -
-------------------- --------------------
Diluted earnings per share:
Income available to common shareholders
plus assumed conversions $ (1,843,800) 1,902,779 $ (0.97)
==================== ==================== ====================
</TABLE>
- - ------------------------------------------------------------------------------
Page F - 14
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
NOTE 8 - EARNINGS PER SHARE (Continued)
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 antidilutive.
NOTE 9 - COMMITMENTS
Leases - The Company leases office and warehouse space under an operating
lease expiring December 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. Options exist to
extend the lease through December 2016. The Company is responsible for
substantially all costs associated with repairs, maintenance, taxes, and
insurance. Future minimum lease payments are as follows:
Year Ending December 31,
------------------------
1999 $ 365,000
2000 373,900
2001 373,900
2002 402,000
2003 479,300
Thereafter 1,118,300
------------
$ 3,112,400
============
Rent expense totaled $397,000 and $385,600 for the years ended December 31,
1998 and 1997, 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 ended December 31,
1998. Two of these employment agreements expire December 31, 1999.
- - ------------------------------------------------------------------------------
Page F - 15
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS (Continued)
License Agreements - The Company has entered into licensing agreements with
the Sierra Club, The Wilderness Society, The Marine Mammal Center, The
Zoological Society of San Diego and the 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 $3,314,300, over the life of these agreements. All agreements are
cancelable with 30 to 60 days notice, as defined in the agreements. Options
exist to extend the terms of certain agreements. Sales under the Sierra Club
agreement accounted for 66% and 70% of total sales for the years ended December
31, 1998 and 1997, respectively.
NOTE 10 - MAJOR SUPPLIERS
During the year ended December 31, 1998, the Company made 20.6%, 18.3% and
12.3% of its purchases from three suppliers. Amounts due to suppliers included
in accounts payable and accrued liabilities totaled $67,700 at December 31,
1998.
NOTE 11 - CAPITAL STOCK
Series B Preferred stock carried a cumulative annual dividend of $10.80 per
share and allowed the Company to redeem the stock upon 60 days notice, plus
cumulative but unpaid dividends. During 1997, the Company exercised its right
to redeem all outstanding shares and suspended the accumulation of dividends.
Redemption and cumulative dividends payable of $161,500 is accrued pending
location of the shareholder.
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 1998, 150,006
shares of Series D Preferred stock were converted to common stock.
Subsequent to year end, the Company granted its holders of common stock and
Series D Preferred stock two common stock purchase rights for each share of
stock held. Each right entitles the holder to purchase one share of common
stock at $1.0625 per share. Commitments existed at the time of offering for
certain shareholders to exercise 927,000 rights for approximately $985,000.
- - ------------------------------------------------------------------------------
Page F - 16
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - ------------------------------------------------------------------------------
NOTE 12 - STOCK OPTIONS AND WARRANTS
The Company has a stock option plan which provides for the granting of
qualified and non-qualified stock options, incentive stock rights, stock
appreciation rights and restricted shares to officers, key employees and its
public relations firm to purchase up to an aggregate of 465,000 shares of
common stock. No options shall be granted under the Plan after 2001. The
Company also has a stock option plan that 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
1998, 25,000 options were granted, no options were exercised, and no options
were forfeited. At December 31, 1998, 350,000 common stock options were
exercisable at a weighted-average exercise price of $5.88. The exercise prices
of the options range from $1.31 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.
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 applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
stock options and warrants. Accordingly, no compensation expense has been
recognized for stock options and warrants issued during 1998 and 1997. Had
compensation cost for the Company's options and warrants been determined based
on the fair value at the grant date for awards in 1998 and 1997 consistent
with the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss and loss per
share would have changed to the pro forma amounts indicated below:
1998 1997
-------------- --------------
Net loss - as reported $ (3,154,800) $ (1,843,800)
Net loss - pro forma $ (3,176,200) $ (2,107,400)
Loss per share - as reported $ (1.39) $ (0.97)
Loss per share - pro forma $ (1.40) $ (1.11)
Diluted loss per share - as reported $ (1.39) $ (0.97)
Diluted loss per share - pro forma $ (1.40) $ (1.11)
- - ------------------------------------------------------------------------------
Page F - 17
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - ------------------------------------------------------------------------------
NOTE 12 - STOCK OPTIONS AND WARRANTS (Continued)
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:
1998 1997
-------------------- -----------------
Dividends None None
Expected volatility 38.55%-64.42% 39.98%
Risk free interest rate 5.72%-6.68% 5.99%
Expected life 5 years 4-5 years
Options issued during 1998 and 1997 have an estimated weighted average fair
value of $0.85 and $1.68, respectively. Warrants issued during 1997 have
an estimated fair value of $1.31.
The activity of the stock option plan and warrants is as follows:
<TABLE>
<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, 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
Granted -- 25,000 1.85 --
Exercised -- -- --
Forfeited (8,117) 7.20 -- --
Vested -- -- (4,000)
-------- ----- --------
Balance, December 31, 1998 360,000 $ 4.39 350,000 $ 5.88 28,000
======== ======= ========
</TABLE>
- - ------------------------------------------------------------------------------
Page F - 18
<PAGE>
HEALTHY PLANET PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
- - -------------------------------------------------------------------------------
NOTE 13 - STATEMENTS OF CASH FLOWS
1998 1997
--------------- -------------
Cash paid during the year for:
Interest $ 14,300 -
Income taxes 800 -
Non-cash investing and financing activities for the year ended December 31,
1998, consisted of converting 150,006 shares of Series D Preferred stock to
150,006 shares of common stock and offsetting $43,300 of officer receivables
against the note payable to officer.
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, 1998, and
seller financed purchase of assets of $244,000.
NOTE 14 - MAJOR CUSTOMER
Sales to a major customer was approximately $376,000 during the year ended
December 31, 1998, representing 10.3% of total sales. At December 31, 1998,
amounts due from this customer included in accounts receivable was $182,700.
NOTE 15 - 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, 1998 and 1997.
- - ------------------------------------------------------------------------------
Page F - 19
<PAGE>
EXHIBIT 23.1
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 12, 1999, on our audits of the balance sheet of Healthy Planet
Products, Inc. as of December 31, 1998, and the related statements of
operations, shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1998, which report is included in this Annual Report
on Form 10-KSB.
/s/ Moss Adams LLP
Santa Rosa, California
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,162,600
<SECURITIES> 0
<RECEIVABLES> 1,090,300
<ALLOWANCES> (463,500)
<INVENTORY> 379,000
<CURRENT-ASSETS> 3,226,800
<PP&E> 1,597,900
<DEPRECIATION> (861,300)
<TOTAL-ASSETS> 4,639,800
<CURRENT-LIABILITIES> 655,700
<BONDS> 0
0
3,100
<COMMON> 22,800
<OTHER-SE> 3,832,800
<TOTAL-LIABILITY-AND-EQUITY> 4,639,800
<SALES> 3,663,900
<TOTAL-REVENUES> 3,899,700
<CGS> 3,374,800
<TOTAL-COSTS> 6,539,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,300
<INCOME-PRETAX> (2,654,000)
<INCOME-TAX> 500,800
<INCOME-CONTINUING> (3,154,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,154,800)
<EPS-PRIMARY> (1.39)
<EPS-DILUTED> (1.39)
</TABLE>