SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: November 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ________________.
Commission File No. 333-64395
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PLANET ENTERTAINMENT CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 33-0471728
- --------------------------------------------- ------------------
(State or other jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
222 Highway 35, P.O. Box 4085, Middletown, New Jersey 07748
-----------------------------------------------------------
(Address of principal executive offices)
(732) 530-8819
--------------
(Issuer's telephone number, including area code)
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 (since November 22,
1998). Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of November 30, 1998: 11,976,055
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PLANET ENTERTAINMENT CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at
November 30, 1998 and
August 31, 1998...................................F-1
Consolidated Statements of Operations
for the Three Months Ended
November 30, 1998 and 1997........................F-3
` Consolidated Statements of Cash Flows
for the Three Months Ended
November 30, 1998 and 1997........................F-4
Notes to Consolidated Financial Statements.................F-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................... 3
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................ 8
SIGNATURES .................................................................. 9
2
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<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
ASSETS
AUGUST 31, NOVEMBER 30,
1998 1998
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,850,162 $ 1,403,949
Accounts receivable, net 17,959 9,360,749
Accounts receivable, net - related party 192,042 274,530
Prepaid expenses and other current assets 246,863 390,183
Inventory -- 11,783,163
Escrow deposit 225,000 125,000
Current maturities of note receivable -- 8,666
Deferred income taxes -- 56,000
-------------- --------------
Total Current Assets 4,532,026 23,402,240
-------------- --------------
PROPERTY AND EQUIPMENT, at cost, net 172,410 1,052,430
-------------- --------------
OTHER ASSETS:
Record masters 6,500,000 6,500,000
Goodwill, net 70,839 3,016,593
Publishing rights, net 880 880
Organization costs, net 42,495 38,750
Note receivable less current maturities -- 30,118
Financing costs, net -- 2,941
Security deposits -- 2,766
-------------- --------------
Total Other Assets 6,614,214 9,592,048
-------------- --------------
$ 11,318,650 $ 34,046,718
============== ==============
</TABLE>
F-1
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<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
AUGUST 31, NOVEMBER 30,
1998 1998
--------------- ---------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 187,641 $ 15,934,732
Accrued interest expense, related parties 275,618 303,504
Deferred revenue 123,524 499,124
Due to stockholders 270,884 230,884
Note payable, related party 150,000 150,000
Current portion, of long-term debt, related parties 250,000 1,000,000
Accrued officer's salary 141,467 235,217
Due to customer -- 382,643
Capital lease obligations, current portions -- 151,431
Notes payable, current portion -- 28,609
Note payable - former stockholder of NEOS -- 374,000
--------------- ---------------
Total Current Liabilities 1,399,134 19,290,144
--------------- ---------------
LONG-TERM LIABILITIES:
Due to employee -- 75,000
Capital lease obligations, non-current portion -- 17,733
Note payable - line of credit -- 4,124,499
Notes payable - non-current portion -- 50,391
Long-term debt, less current portion, related parties 750,000 500,000
Deferred income taxes -- 30,600
--------------- ---------------
Total long-term liabilities 750,000 4,798,223
--------------- ---------------
Total Liabilities 2,149,134 24,088,367
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, 10,000,000 shares
authorized, $.0001 par value, 500 and 500
shares issued and outstanding 5,000,000 5,000,000
Common stock, $.001 par value; 50,000,000
shares authorized; 11,976,055 and
11,976,055 shares issued and outstanding 11,976 11,976
Additional paid-in capital 9,286,053 9,605,805
Accumulated deficit (5,128,513) (4,659,430)
--------------- ---------------
Total Stockholders' Equity 9,169,516 9,958,351
--------------- ---------------
$ 11,318,650 $ 34,046,718
=============== ===============
</TABLE>
F-2
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1997 1998
------------ ------------
REVENUES:
Royalty $ -- $ 753
Sales 29,803 14,978,644
Studio 193,031 2,959
------------ ------------
Total Revenues 222,834 14,982,356
------------ ------------
COSTS AND EXPENSES:
Cost of sales -- 12,188,019
Selling, general and administrative 229,694 2,137,554
Depreciation and amortization 9,928 84,160
Interest expense -- 92,729
Interest expense, related party 33,774 35,625
Bad debt expense -- --
------------ ------------
Total Costs and Expenses 273,396 14,538,087
------------ ------------
INCOME (LOSS) FROM OPERATIONS (50,562) 444,269
------------ ------------
OTHER INCOME:
Interest and dividend income -- 24,814
------------ ------------
Total Other Income -- 24,814
------------ ------------
NET INCOME (LOSS) BEFORE (PROVISION) BENEFIT
BENEFIT FOR INCOME TAXES (50,562) 469,083
(PROVISION) BENEFIT FOR INCOME TAXES -- --
------------ ------------
NET INCOME (LOSS) $ (50,562) $ 469,083
============ ============
NET INCOME (LOSS) $ (50,562) $ 469,083
LESS PREFERRED STOCK DIVIDEND -- (87,500)
LESS PREFERRED STOCK DIVIDEND RETURN OF CAPITAL -- --
------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (50,562) $ 381,583
============ ============
NET INCOME (LOSS) PER COMMON SHARE BASIC $ * $ .03
============ ============
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 10,068,956 11,976,055
============ ============
NET INCOME PER COMMON SHARE DILUTED $ .03
============
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 13,895,319
============
*LESS THEN $(.01) PER SHARE
F-3
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<TABLE>
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1997 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss) $ (50,562) $ 469,083
Adjustments to reconcile net loss to net cash used by
operations:
Bad debt expense -- --
Depreciation and amortization 9,928 82,395
Stock issued for services 54,000 --
Changes in:
Due to customer -- (92,924)
Accounts receivable (21,635) (3,791,828)
Accounts receivable, related party (204,362) 13,355
Prepaid expenses and other current assets 21,615 (109,857)
Inventory -- (4,934,596)
Accounts payable and accrued expenses 47,440 7,805,857
Accrued interest expense, related party 25,074 27,886
Deferred revenue -- 136,224
Accrued officers' salary 20,312 93,750
-------------- --------------
Cash Flows From (To) Operating Activities (98,190) (300,655)
-------------- --------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of NEOS -- (2,150,000)
Cash acquired in the purchase of NEOS -- 522,584
Purchase of equipment (10,094) (153,624)
Escrow deposit -- --
Repayments on note receivable -- 2,440
Deposit on leased equipment -- 5,405
-------------- --------------
Cash Flows From (To) Investing Activities (10,094) (1,773,195)
-------------- --------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Repayment of advances from stockholders -- (40,000)
Advances from stockholders 111,644 --
Proceeds from note payable -- 50,000
Proceeds from note payable, related party -- --
Proceeds from issuance of common stock -- 17,627
Proceeds from issuance of preferred stock -- --
Repayment of note payable - line of credit -- (45,897)
Repayment of note payable -- (7,551)
Preferred stock issuance costs -- (31,625)
Repayment of long-term debt, related party -- (250,000)
Repayment of capitalized lease obligations -- (64,917)
-------------- --------------
Cash Flows From (To) Financing Activities 111,644 (372,363)
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,360 (2,446,213)
CASH AND CASH EQUIVALENTS, beginning of period 6,217 3,850,162
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period $ 9,577 $ 1,403,949
============== ==============
CASH PAID FOR INTEREST EXPENSE $ -- $ 125,471
============== ==============
CASH PAID FOR INCOME TAXES $ -- $ 134,029
============== ==============
</TABLE>
F-4
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated, unaudited financial statements which include the
accounts of Planet Entertainment Corporation and its wholly-owned subsidiaries;
Higher Ground Records, Maestro Holding corporation, Al Alberto On Stage, Ltd.
and Northeast One Stop, Inc. ("NEOS") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with the instructions for Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, the financial statements contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations, and cash flows of
the Company for the interim periods presented.
The results for the three months ended November 30, 1998 are not necessarily
indicative of the results of operations for the full year. These financial
statements and related footnotes should be read in conjunction with the
financial statements and footnotes thereto included in the Company's Form 10-SB
filed with the Securities and Exchange Commission.
NOTE 2 - SEGMENT INFORMATION
The Company operates in five business segments: music record masters production,
music studio operations, record label production, rack distribution sales, and
one-stop distribution sales. All operations and revenues are conducted and
earned in the United States. The following table presents sales and other
financial information by business segment:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE CAPITAL
REVENUES EARNINGS DEPRECIATION ASSETS EXPENDITURES
-------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
November 30, 1997:
Music record master
production $ -- $ (56,466) $ -- $ 6,652,908 $ --
Music studio production 193,031 (15,468) 4,053 477,173 10,094
Record label production 29,803 21,372 -- 21,635 --
-------------- -------------- ------------- -------------- -------------
$ 222,834 $ (50,562) $ 4,053 $ 7,151,716 $ 10,094
============== ============== ============= ============== =============
November 30, 1998:
Rack distribution sales $ 8,094,628 $ 533,178 $ 28,473 $ 13,848,459 $ 52,792
One-Stop distribution
sales 6,871,488 430,253 24,255 11,796,836 100,832
Music record master
production 753 (490,891) -- 6,817,044 --
Music studio production 2,959 (22,650) 5,252 421,131 --
Record label production 12,528 (5,621) -- 78,747 --
-------------- -------------- ------------- -------------- -------------
$ 14,982,356 $ 444,269 $ 57,980 $ 32,962,217 $ 153,624
============== ============== ============= ============== =============
Corporate assets include $1,084,501 of cash and cash equivalents at November 30,
1998.
</TABLE>
NOTE 3 - LOSS OF MAJOR CUSTOMER
The Company recently lost a major customer which accounted for approximately 40%
of the net sales of its NEOS subsidiary, during its fiscal year ended August 31,
1998. The customer informed the Company in January 1999 that it would no longer
purchase any of the Company's products. Sales to the customer were from the
Company's rack-job division, and totaled $6,584,000 (81% of net sales of such
division and approximately 44% of net sales to the Company) for the three months
ended November 30, 1998. The Company anticipates that its accounts receivable
from the customer is collectible and that returns from sales to this customer
will not be material.
F-5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Planet Entertainment Corporation (the "Company") was initially
incorporated under the laws of the State of Delaware in May 1996 to raise
capital and acquire, own, integrate and operate seasoned privately-held
companies in the music business. In June 1996, the Company acquired from John S.
Arnone, Wallace N. Giakas and Joseph Venneri, three controlling shareholders,
directors and officers of the Company, for shares of common stock, par value
$.001 per share (the "Common Stock"), of the Company, all of the issued and
outstanding common stock of Maestro Holding Corporation ("Maestro"). Maestro
owned exclusive rights to approximately 5,000 master recordings, and
subsequently acquired non-exclusive rights to an additional 10,000 master
records, which rights are now owned by the Company.
Effective as of September 1, 1998, the Company acquired (the "NEOS
Acquisition") all of the issued and outstanding common stock of Northeast One
Stop, Inc. ("NEOS"), from the stockholder of NEOS for approximately $3,000,000,
of which $750,000 was in the form of a promissory note (of which $375,000 has
been paid and the remaining $375,000 is payable by August 31, 1999), and stock
options to purchase 250,000 shares of the Common Stock. As a result, the results
of operations of the Company commencing as of September 1, 1998, reflect in
large part the operations of NEOS. Furthermore, following the NEOS Acquisition
the Company changed its fiscal year end to August 31. For the year ended August
29, 1998, NEOS had net sales of $34,793,341 and for the three months ended
November 30, 1998, NEOS had net sales of $14,966,116 which constitutes
approximately 99% (on a pro forma basis) and 99% (on a actual basis),
respectively, of the Company's total net sales for such periods.
Prior to the Company's NEOS Acquisition, the Company had limited
revenues and income. In addition, all financial data of the Company prior to
September 1, 1998 is to a large extent non-material, other than certain losses
resulting from general and administrative expenses incurred in connection with
entering into the various production and distribution agreements, as well as
professional fees incurred related to the registration of the Common Stock.
Accordingly, to assist the reader in a clearer understanding of the MD&A section
of this Report, the Company will compare its results for the three month period
ended November 30, 1998 which reflect the Company's unaudited consolidated
results of operations for such periods, to the Company's unaudited pro forma
results of operations for the comparable periods in the Company's fiscal year
1998 which ended August 29, 1998 ("Fiscal 1998"), which assume the NEOS
Acquisition occurred effective as of September 1, 1997.
GENERAL
The Company is currently involved in various areas of the recorded
music industry. The Company's principal business, primary through NEOS, is the
wholesale distribution of pre-recorded music in the form of compact diskettes
("CD's"), cassette tapes, and other entertainment related products such as video
tapes, Digital Video Diskettes ("DVD's"), and to a much lesser extent music or
entertainment related apparel, such as T-shirts. The Company's business
activities also include the acquisition, licensing, production, marketing and
distribution of high quality recorded music. Through NEOS, the Company
distributes approximately 130,000 front end titles of pre-recorded music to
independent record stores, college bookstores and mass merchants. Generally,
front end titles are popular, current, pre-recorded music titles. In addition,
through its recording studio, the Company produces such types of music as
gospel, adult contemporary, reggae, top 40, blues, country, rap, rock,
3
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instrumental, rock & roll, jazz, pop rock, classical, easy listening, big band,
rhythm & blues, and various ethnic folk music recordings.
The Company owns certain exclusive and non-exclusive rights associated
with approximately 15,000 music master recordings from existing music catalogues
of recorded music. A "master recording" is the original, final, then-recorded
version of a song recorded in the studio. Of such 15,000 master recordings that
the Company has the right to exploit, approximately 33% (5,000) the Company has
exclusive rights to, and the remaining approximately 67% (10,000) the Company
has non-exclusive rights to. These amounts are estimates based upon one officer
and director of the Company having indicated that he recorded such masters, and
representations contained in the contracts for such masters. The Company's
strategy has been to produce compilation CDs containing enhanced or re-digitized
master recordings from its existing library, to market them directly through
NEOS or other distributors, to contribute these compilation CDs to joint
ventures in which the Company is a party, and to license these compilation CDs
to third parties for marketing and sale by unaffiliated distributors. To date,
however, prior to the Company's acquisition of NEOS, substantially all the
Company's revenues had been derived from studio rental sales and licensing
royalties and not from the licensing and sale of the Company's compilation CDs.
In 1995, NEOS commenced its "rack jobbing" operations (the "Rack
Business"). In "rack jobbing," the vendor assumes full responsibility for the
customer's display, stocking the display at the customer's location and making
the day-to-day decisions as to which inventory to deliver, return and present in
the displays. A rack jobber owns the display material or fixtures and is
responsible for the proper presentation of goods within the display. Prior to
1995, NEOS was principally a wholesaler of pre-recorded music and entertainment
products through its one stop division (the "One Stop Business"). The One Stop
Business primarily operates as a centralized order fulfillment center for the
small to medium sized retail stores, typically record stores, that obtain a
variety of recorded music and video. This aspect of the business supplies
merchandise based on the orders placed by its customers. The customers in this
segment of the business are responsible for the selection of titles and the
decisions regarding the return of merchandise.
NEOS recognizes sales for its One Stop Business and Rack Business at
the time of shipment of products to its customers. All of the NEOS products are
sold with a limited right of return by the customer. Generally, in the music
distribution industry, wholesalers, such as NEOS, have a limited right of return
to the manufacturers. Accordingly, NEOS does not accrue returns and allowances.
NEOS, however, reduces net sales by calculating actual returns. NEOS' business,
similar to other businesses in the music distribution industry, is a highly
seasonal business where a high proportion of sales occur in the Christmas season
but a high amount of returns occur in the months of January through March.
RECENT DEVELOPMENTS
The Company recently lost a major customer which accounted for
approximately 40% of the net sales of NEOS during its fiscal year ended August
29, 1998. This customer, Meijer, Inc. ("Meijer"), is a department store chain
with approximately 118 store locations, of which NEOS serviced 46 locations.
Meijer informed the Company in January 1999 that it would no longer purchase any
of the Company's products. The Company was not given a reason for Meijer's
decision. Sales to Meijer were from the Company's rack-job division totaled
$6,584,000, constituting approximately 81% of the net sales of such division and
approximately 44% of the net sales of the Company for the three months ended
November 30, 1998. The Company anticipates that its accounts receivable from
Meijer is collectible and that returns from sales to this customer will not be
material. Although the Company believes the loss of Meijer may have a material
adverse effect on the Company's future results of operations, the Company
believes that increased sales from its one-stop division may partially offset
4
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the loss of Meijer as a customer. Additionally, the Company is aggressively
seeking to increase its sales by soliciting prospective new one-stop and rack
business customers, seeking to generate increased sales from existing customers
(including increases in the number of locations serviced), and promoting its
Internet customer service capabilities to third party companies. No assurances
can be given, however, that the Company will be able to replace or offset sales
losses from Meijer. The inability of the Company to replace or offset such lost
sales will have a material adverse effect on the Company's results of
operations.
RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE MONTHS ENDED NOVEMBER 30,
1999 AS COMPARED TO THE PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY FOR THE
THREE MONTHS ENDED NOVEMBER 30, 1998
NET SALES. For the three months ended November 30, 1998 net sales were
approximately $14,982,000 as compared to pro forma net sales of approximately
$8,732,000 for the comparable period in 1997, which represented an increase in
net sales of $6,250,000 or 72%. Net sales from the One Stop Business for the
three months ended November 30, 1998 versus the comparable period in the prior
year, respectively, were $6,871,488 as compared to $4,169,531, an increase of
65%. This increase was due to an expanded customer base as well as general
improvement in music industry revenues. Net sales from the Rack Business for the
three months ended November 30, 1998 were $8,094,628 as compared to $4,339,887
in the comparable period of the prior year, an increase of 86%. This increase
was primarily due to the additional block of Meijer store locations
(approximately 20) added to the Company's service area in the first quarter of
fiscal 1999. For the three months ended November 30, 1998, Meijer accounted for
net sales of $6,584,000 or 44% of net sales for the Company. As discussed
elsewhere in this Report, however, Meijer informed the Company in January 1999
that it would stop ordering products from the Company. The inability of the
Company to replace or offset such lost sales would have a material adverse
effect on the Company's future results of operations.
COST OF SALES. For the three months ended November 30, 1998, cost of
sales was $12,188,019 or 81% of net sales as compared to pro forma costs of
sales for the comparable quarter in 1997 of $6,998,748 or 80% of net sales. The
1% increase in cost of sales as a percentage of net sales primarily resulted
from a shift in the business focus of the Company's studio/production facilities
away from generating rental revenue by being open to the public. The Company
started using such resources to ramp up the production of the catalog masters
for distribution through NEOS and other channels.
OPERATING EXPENSES. For the three months ended November 30, 1998,
selling, general and administrative expenses (SG&A) were $2,137,554 or 14% of
net sales compared to pro forma SG&A of $1,104,192 or 13% of net sales in the
comparable period in 1997. Such increase in SG&A resulted from the higher level
of NEOS' payroll ($610,681) for the three months ended November 30, 1998,
resulting from additional Rack Business locations being serviced, and the
increased professional and consulting fees ($210,565) primarily related to the
NEOS Acquisition and incurred in connection with the registration of the Common
Stock underlying the Company's 7% Series A Convertible Preferred Stock, stated
value $10,000 per share (the "Preferred Stock"), of which 500 shares were sold
to one investor in May 1998.
INTEREST EXPENSE. For the three months ended November 30, 1998,
interest expense was $128,354, or 0.9% of net sales versus pro forma interest
expenses of $120,725 or 1.4% of net sales in the comparable period of 1997.
Although total interest expense did not rise significantly, an increase in NEOS'
interest expense ($13,400) caused by additional borrowing on its line of credit
was partially offset by less interest ($8,000) due on payments made on
outstanding notes to related parties. There is no tax provision for either
period due to the Company's net operating loss carry-forward.
5
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NET INCOME. For the three months ended November 30, 1998, net income
was $469,083 or 3.1% of net sales, as compared to net income of $412,961 or 4.7%
of net sales for the pro forma results for the three months ended November 30,
1997. Excluding the one-time costs related to the NEOS Acquisition and incurred
in connection with the Common Stock underlying the Preferred Stock, net income
as a percentage of net sales for the period ended November 30, 1998 would have
been approximately the same as the pro forma results in the comparable quarter
for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for payments for NEOS'
products and operating expenses, as well as various notes, including to related
parties. Prior to the NEOS Acquisition, the Company's primary source of cash was
loans from its principal shareholders, Messrs. Arnone and Giakas, and other
related parties, as well as the sale of the Preferred Stock. NEOS' sources of
cash include normal operations and its revolving credit line with Congress
Financial Corporation ("CFC").
Cash and cash equivalents as of November 30, 1998 were $1,403,949 as
compared to the pre-NEOS August 31, 1998 cash balance of $3,850,162, or a
reduction of $2,446,213. This reduction was primarily the result of the costs
and purchase price of the NEOS Acquisition ($1,627,416), and seasonal increases
in accounts receivable ($3,778,473) and inventory ($4,934,596). These increases
were partially offset by the seasonal increase of approximately $7,806,000 in
the Company's accounts payable.
Net cash flow to operating activities for the quarter ended November
30, 1998 was $300,655. The first fiscal quarter of the year (September through
November) is traditionally the time when inventory levels and accounts
receivable balances build for the holiday season. For the three months ended
November 30, 1998 the combined cash flow needed to fund inventory and accounts
receivable was $8,713,069. This outflow was only partially offset by the
seasonal increase in accounts payable ($7,805,857) as well as other non-cash
items (i.e. depreciation, accrued expenses).
As of November 30, 1998, outstanding accounts receivables totaled
$9,635,297. This amount is net of an allowance for returns of $182,488. By
comparison, the pro forma consolidated accounts receivable balance as of August
31, 1998 was $5,856,805, net of an identical allowance of $182,488. The November
1998 increase of accounts receivable was seasonal due to heavy holiday sales
volume. However, in January 1999, a major customer, Meijer, informed the Company
that it would stop purchasing from the Company. (SEE "RECENT DEVELOPMENTS.") The
Company's outstanding accounts receivable as of February 28, 1999 totaled
$5,772,285, which amount is net of an allowance for returns of $182,488. The
accounts receivable balance as of February 28, 1999 includes $1,613,072 due from
Meijer. The Company believes that, based upon payment activity and nominal
returns since March 1999, the portion of the receivable balance representing
sales to Meijer is collectible and, furthermore, that the amount of returns from
sales to this customer will not be material.
At November 30, 1998 inventory was $11,783,163 versus a pro forma
balance as of August 31, 1998 of $6,848,567. This increase is normal due to the
holiday inventory build-up. NEOS accounts for its inventory on a
first-in-first-out basis.
At November 30, 1998 the Company's accounts payable balance was
$15,934,732. By comparison, the pro forma accounts payable balance as of August
31, 1998 was $8,509,717. The Company believes this increase is normal, is due to
increased sales activity during the 1998 holiday season, and also tracks an
increase in accounts receivable resulting from the same sales increase for the
holiday season.
6
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NEOS has a revolving credit agreement (the "CFC Credit Agreement") with
CFC. The maximum line of credit available under the CFC Credit Agreement is
$6,000,000. Advances under the CFC Credit Agreement are made on the basis of
eligible accounts receivable and inventory as defined in the agreement. CFC
requires NEOS to maintain working capital of no less than $2,500,000 excluding
its borrowings from CFC. In addition, NEOS must maintain an adjusted net worth
of no less than $600,000. The adjustment to the net worth calculation allows
NEOS to add the balance of any subordinated debt due to the former shareholder
of NEOS to the net worth calculation to meet the required level. Working capital
and adjusted net worth as of November 30, 1998 were $4,696,239 and $1,693,107,
respectively. As of November 30, 1998, NEOS had an aggregate of $4,124,499
outstanding under the CFC Credit Agreement. NEOS pays interest to CFC at the
rate of prime plus 1.5% on all outstanding amounts under the CFC Credit
Agreement. All obligations of NEOS under the CFC Credit Agreement are guaranteed
by the Company.
Net cash flow to investing activities for the three months ended
November 30, 1998 was approximately $1,773,195. The primary cash outflow for the
Company in the quarter ended November 30, 1998 was the cash needed for the NEOS
Acquisition. Although the cash outlay for the purchase was $2,250,000 with the
balance in stock options and notes payable, the amount of cash on hand at NEOS
as of the purchase date approximated $523,000, and $100,000 had already been
paid out to escrow in a prior fiscal quarter. This resulted in a net cash
expenditure in the current quarter of approximately $1,627,000. In addition,
fixed assets (including a new telephone system at NEOS) totaling $153,625 were
acquired during the period.
Net cash flow to financing activities for the three months ended
November 30, 1998 was $372,363. This cash was used to finance a principal
payment of $250,000 on the Gulf Coast Note (the remaining principal and interest
balance on this note as of November 30, 1998 was $1,006,281 to be paid in three
equal annual payments of $380,000), the payment of various other obligations
including capital leases, repayments of advances from related parties and a net
paydown on the CFC Credit Agreement totaling approximately $45,897.
As of November 30, 1998, the Company had outstanding an aggregate of
$2,637,388 in notes (including accrued interest of $303,504 ), and accrued
salaries. Such amounts consist of an aggregate of $750,000 in the form of two
notes to the former owner of NEOS for $375,000, of which one was since paid in
full in March 1999 and the other note becomes due in August 1999, $1,006,281 on
the Gulf Coast Note, a $374,000 principal amount 9% demand note to the former
owner of NEOS issued prior to the NEOS Acquisition (of which $30,000 was repaid
in December 1998), a $230,884 principal amount 9% demand note due to privately
held corporations owned by Messrs. Giakas and Arnone representing working
capital advances made by such entities to the Company, a $150,000 principal
amount 10% demand note due to one private lender, a $15,000 principal amount 9%
demand note due to Whelan, Inc., also a privately held corporation owned by
Messrs. Arnone and Giakas, accrued officers' salaries of $235,217 and $79,000 in
notes due to finance various assets purchased by the Company.
NEOS has several capital leases in the aggregate amount $169,164 that
are secured by the related equipment and fixtures.
The Company believes that its current cash, cash from operations and
loans under the CFC Credit Agreement will be sufficient to fund the Company's
working capital requirements for the foreseeable future. No assurances can be
given, however, that due to any number of events and/or circumstances including,
but not limited to, a downturn in the pre-recorded music industry or in the
economy in general, the Company will not need additional working capital.
Furthermore, no assurances can be given that the Company will be able to obtain
such additional working capital when and if needed or on terms acceptable to the
Company.
7
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings (Loss) Per Share
27. Financial Data Schedule
8
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
PLANET ENTERTAINMENT CORPORATION
(Registrant)
/s/ John Arnone
------------------------------------------
John Arnone
President and Chief Executive Officer
Date: As of January 11, 1999
9
EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
1997 1998
------------ ------------
<S> <C> <C>
Basic:
Net income (loss) attributable
to common stockholders $ (50,562) $ 351,583
============ ============
Weighted Average number
of common shares outstanding 10,068,956 11,976,055
============ ============
Income (loss) per common share $ * $ .03
============ ============
Diluted:
Net income (loss) attributable
to common stockholders -- $ 381,583
============ ============
Weighted Average number
of common shares outstanding -- $ 13,895,319
============ ============
Income (loss) per common share -- $ .03
============ ============
</TABLE>
- ----------
* Less than $(.01)/$ .01 per share
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0001038284
<NAME> PLANET ENTERTAINMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> NOV-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,403,949
<SECURITIES> 0
<RECEIVABLES> 9,643,945
<ALLOWANCES> 0
<INVENTORY> 11,783,163
<CURRENT-ASSETS> 23,402,240
<PP&E> 1,052,430
<DEPRECIATION> 0
<TOTAL-ASSETS> 34,046,718
<CURRENT-LIABILITIES> 19,290,144
<BONDS> 0
0
5,000,000
<COMMON> 11,976
<OTHER-SE> 4,946,375
<TOTAL-LIABILITY-AND-EQUITY> 34,046,718
<SALES> 14,978,644
<TOTAL-REVENUES> 14,982,356
<CGS> 12,188,019
<TOTAL-COSTS> 14,538,087
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 128,354
<INCOME-PRETAX> 469,083
<INCOME-TAX> 0
<INCOME-CONTINUING> 469,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 469,083
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
