WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
---------------------------------
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: May 31, 1999
[ ] 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
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(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
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(Address of principal executive offices)
(732) 530-8819
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(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. Yes. [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 31, 1999: 11,976,055
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<PAGE>
PLANET ENTERTAINMENT CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at May 31, 1999 and
August 31, 1998................................. F-1
Consolidated Statements of Operations
for the Three and Nine Months Ended
May 31, 1999 and 1998........................... F-3
Consolidated Statements of Cash Flows
for the Nine Months Ended
May 31, 1999 and 1998........................... F-4
Notes to Consolidated Financial Statements............... F-5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations... 1
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 7
SIGNATURES
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
AUGUST 31, MAY 31,
1998 1999
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 3,850,162 $ 572,754
Accounts receivable, net 17,959 5,000,272
Accounts receivable, net - related party 192,042 187,042
Inventory -- 6,754,850
Prepaid expenses and other current assets 246,863 418,441
Escrow deposit 225,000 125,000
Current maturities of note receivable -- 6,512
Deferred income taxes -- 56,000
----------- -----------
Total Current Assets 4,532,026 13,120,871
----------- -----------
PROPERTY AND EQUIPMENT, at cost, net 172,410 1,393,119
----------- -----------
OTHER ASSETS:
Record masters 6,500,000 6,500,000
Goodwill, net 70,839 2,975,263
Publishing rights, net 880 880
Organization costs, net 42,495 31,250
Note receivable less current maturities -- 28,385
----------- -----------
Total Other Assets 6,614,214 9,535,778
----------- -----------
$11,318,650 $24,049,768
=========== ===========
F-1
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<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1998 1999
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 187,641 $ 7,541,825
Accrued interest expense, related parties 275,618 343,776
Deferred revenue 123,524 308,713
Due to stockholders 270,884 230,884
Note payable, related party 150,000 150,000
Current portion, of long-term debt, related parties 250,000 625,000
Accrued officer's salary 141,467 447,458
Due to customers -- 563,762
Capital lease obligations, current portions -- 93,274
Notes payable, current portion -- 31,488
Note payable - former stockholder of NEOS -- 344,000
------------ ------------
Total Current Liabilities 1,399,134 10,680,180
------------ ------------
LONG-TERM LIABILITIES:
Note payable - line of credit -- 4,045,425
Long-term debt, less current portion, related parties 750,000 500,000
Notes payable - non-current portion -- 57,704
Capital lease obligations, non-current portion -- 19,908
Deferred income taxes -- 30,600
------------ ------------
Total Long-Term liabilities 750,000 4,653,637
------------ ------------
Total Liabilities 2,149,134 15,333,817
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, 10,000,000 shares
authorized, $.0001 par value -0-, 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) (5,901,830)
------------ ------------
Total Stockholders' Equity 9,169,516 8,715,951
------------ ------------
$ 11,318,650 $ 24,049,768
============ ============
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Royalty $ 311 $ 1,614 $ 5,049 $ 4,066
Sales 27,810 7,365,590 93,929 33,740,294
Studio 3,876 48,954 214,953 59,658
------------ ------------ ------------ ------------
Total Revenues 31,997 7,416,158 313,931 33,804,018
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 1,920 6,687,762 44,080 28,463,108
Selling, general and administrative 117,916 1,447,417 524,075 5,439,122
Depreciation and amortization 9,752 114,768 33,989 315,013
Interest expense -- 117,655 -- 311,846
Interest expense, related party 36,107 29,712 117,212 85,772
Bad debt expense -- 1,380 -- 1,597
------------ ------------ ------------ ------------
Total Costs and Expenses 165,695 8,398,694 719,356 34,616,458
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (133,698) (982,536) (405,425) (812,440)
OTHER INCOME:
Interest and dividend income -- 3,626 -- 39,123
------------ ------------ ------------ ------------
NET LOSS BEFORE (PROVISION) BENEFIT
BENEFIT FOR INCOME TAXES (133,698) (978,910) (405,425) (773,317)
(PROVISION) BENEFIT FOR INCOME TAXES -- -- -- --
------------ ------------ ------------ ------------
NET LOSS $ (133,698) $ (978,910) $ (405,425) $ (773,317)
============ ============ ============ ============
NET LOSS $ (133,698) $ (978,910) $ (405,425) $ (773,317)
LESS PREFERRED STOCK DIVIDEND -- (87,500) -- (262,500)
------------ ------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ (133,698) $ (1,066,410) $ (405,425) $ (1,035,817)
============ ============ ============ ============
NET LOSS PER COMMON SHARE BASIC $ (.01) $ (.09) $ (.04) $ (.09)
============ ============ ============ ============
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 11,925,955 11,976,055 10,985,996 11,976,055
============ ============ ============ ============
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED
--------------------------
MAY 31, MAY 31,
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net loss $ (405,425) $ (773,317)
Adjustments to reconcile net loss to net cash used by operations:
Bad debt expense -- 1,597
Depreciation and amortization 33,989 309,891
Stock issued for services 570,314 --
Changes in:
Due to customers -- 88,195
Accounts receivable (39,417) 567,051
Accounts receivable, related party (180,615) 100,843
Prepaid expenses and other current assets (164,578) (135,174)
Inventory (4,895) 93,717
Accounts payable and accrued expenses (46,645) (587,049)
Accrued interest expense, related party 105,461 68,158
Deferred revenue (4,708) (54,187)
Accrued officers' salary 66,875 305,991
----------- -----------
Cash Flows From (To) Operating Activities (69,644) (14,284)
----------- -----------
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) (672,979)
Repayments on note receivable -- 6,327
Deposit on leased equipment -- 8,171
----------- -----------
Cash Flows From (To) Investing Activities (10,094) (2,285,897)
----------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Repayment of advances from employees -- (75,000)
Repayment of advances from stockholders -- (70,000)
Advances from stockholders 136,649 --
Proceeds from note payable 50,000 82,030
Proceeds (payments) from (to) note payable, related party 150,000 (375,000)
Proceeds from issuance of common stock -- 17,627
Repayment of note payable - line of credit -- (124,971)
Repayment of note payable -- (29,389)
Preferred stock issuance costs -- (31,625)
Repayment of long-term debt, related party (250,000) (250,000)
Repayment of capitalized lease obligations -- (120,899)
----------- -----------
Cash Flows From (To) Financing Activities 86,649 (977,227)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 6,911 (3,277,408)
CASH AND CASH EQUIVALENTS, beginning of period 6,216 3,850,162
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 13,127 $ 572,754
=========== ===========
CASH PAID FOR INTEREST EXPENSE $ -- $ 311,846
=========== ===========
CASH PAID FOR INCOME TAXES $ -- $ 262,982
=========== ===========
</TABLE>
F-4
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements 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 and nine months ended May 31, 1999 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(LOSS) DEPRECIATION ASSETS EXPENDITURES
----------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Three months ended May 31, 1998;
Music record master
production $ 311 $ (101,017) $ 417 $ 7,014,516 $ --
Music studio operations 16,996 (29,636) 1,500 268,926 --
Record label productions 14,690 (3,045) -- 32,886 --
----------- ----------- ----------- ----------- -----------
$ 31,997 $ (133,698) $ 1,917 $ 7,316,328 $ --
=========== =========== =========== =========== ===========
Three months ended May 31, 1999;
Rack distribution sales $ 687,439 $ (459,648) $ 11,859 $ 6,485,277 $ 135,000
One-Stop distribution sales 6,694,360 (101,676) 71,388 10,143,639 244,817
Music record master
production 1,613 (302,487) -- 7,173,273 --
Music studio operations 32,746 (112,364) 5,513 225,389 4,536
Record label productions -- (6,361) -- 22,190 --
----------- ----------- ----------- ----------- -----------
$ 7,416,158 $ (982,536) $ 88,760 $24,049,768 $ 384,353
=========== =========== =========== =========== ===========
</TABLE>
F-5
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE CAPITAL
REVENUES EARNINGS DEPRECIATION ASSETS EXPENDITURES
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Nine months ended May 31, 1998;
Music record master
production $ 5,049 $ (356,348) $ 4,167 $ 7,014,516 $ --
Music studio operations 228,073 (58,220) 10,237 268,926 10,094
Record label productions 80,809 9,143 -- 32,886 --
------------ ------------ ------------ ------------ ------------
$ 313,931 $ (405,425) $ 14,404 $ 7,316,328 $ 10,094
============ ============ ============ ============ ============
Nine months ended May 31, 1999;
Rack distribution sales $ 13,052,377 $ (277,499) $ 86,045 $ 6,485,277 $ 260,693
One-Stop distribution sales 20,687,918 832,017 134,584 10,143,639 407,750
Music record master
production 4,065 (1,173,000) -- 7,173,273 --
Music studio operations 43,450 (165,349) 16,017 225,389 4,536
Record label productions 16,208 (28,609) -- 22,190 --
------------ ------------ ------------ ------------ ------------
$ 33,804,018 $ (812,440) $ 236,646 $ 24,049,768 $ 672,979
============ ============ ============ ============ ============
</TABLE>
Corporate assets include $697,754 of cash and cash equivalents at May 31, 1999.
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 constituted approximately 29% of the net sales
of the Company for the nine months ended May 31, 1999. The Company anticipates
that the accounts receivable from the customer is collectible and that returns
from sales to this customer will not be material.
NOTE 4 - SUBSEQUENT EVENT
On June 28, 1999 the Company announced it had signed a letter of intent to
acquire Renaissance Records, located in Nashville, Tennessee. The acquisition
will be treated as a purchase and is not material in the consolidated results of
the Company.
F-6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Planet Entertainment Corporation (the "Company") was 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 M. Giakas and
Joseph Venneri, the 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 sole 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 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 nine
months ended May 31, 1999, NEOS had net sales of $33,740,295, which constituted
approximately 99% (on a pro forma basis) and 99% (on an 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
August 31, 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 this Report, the
Company will compare its results for the three month and the nine month periods
ended May 31, 1999, which reflect the Company's unaudited consolidated results
of operations for such periods, to its 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, primarily 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,
instrumental, rock & roll, jazz, pop rock, classical, easy listening, big band,
rhythm & blues, and various ethnic folk music recordings.
1
<PAGE>
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 (also, 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 highly
seasonal 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
In January 1999, Meijer, Inc. ("Meijer") informed the Company that it
would no longer purchase the Company's products. Meijer accounted for
approximately 40% of the net sales of NEOS during its fiscal year ended August
29, 1998 and approximately 29% of the net sales of NEOS for the nine months
ended May 31, 1999. Meijer is a department store chain with approximately 118
store locations, of which NEOS serviced 46 locations. Sales to Meijer were from
the Rack Business. The Company anticipates that its accounts receivable from
Meijer are collectible. 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 Business may
partially offset the loss of Meijer as a customer. Additionally, the Company is
aggressively seeking to increase its sales by soliciting prospective new One
Stop Business and Rack Business customers, seeking to generate increased sales
from existing customers (including increases in the number of locations
2
<PAGE>
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 future results of operations.
RESULTS OF OPERATIONS FOR THE COMPANY'S NINE MONTH PERIOD ENDED MAY 31, 1999 AS
COMPARED TO THE PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY FOR THE NINE
MONTH PERIOD ENDED MAY 31, 1998
NET SALES. For the nine months ended May 31, 1999 net sales were
approximately $33,804,000 as compared to pro forma net sales of approximately
$24,881,000 for the comparable period in fiscal 1998, which represented an
increase in net sales of $8,923,000 or 36%. Net sales from the One Stop Business
for the nine months ended May 31, 1999 versus the comparable period in the prior
year, respectively, were $20,688,000 as compared to $14,050,000, an increase of
47%. 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
nine months ended May 31, 1999 were $13,052,000 as compared to $10,517,000 in
the comparable period of the prior year, an increase of 24%. 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. In
the nine months ended May 31, 1999, Meijer accounted for net sales of $9,682,000
or 29% of net sales for the Company. As discussed elsewhere in this Report,
however, Meijer stopped ordering products from the Company in January 1999.
COST OF SALES. For the nine months ended May 31, 1999, cost of sales
was $28,463,000 or 84% of net sales as compared to pro forma cost of sales for
the comparable period in fiscal 1998 of $20,730,000 or 83% of net sales. This
increase as a percentage of sales is primarily due to lost margin from the Rack
Business resulting from the loss of Meijer.
OPERATING EXPENSES. For the nine months ended May 31, 1999, selling,
general and administrative expenses ("SG&A") were $5,439,000 or 16% of net sales
compared to pro forma SG&A of $3,439,000 or 14% of net sales in the comparable
period in fiscal 1998. Such increase in SG&A resulted from the higher level of
NEOS' payroll ($1,002,000) in the period ended May 31, 1999, resulting from
additional locations being serviced, and the increased professional and
consulting fees ($455,000) primarily related to the NEOS Acquisition and in
connection with the registration of shares of 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 nine months ended May 31, 1999, interest
expense was $398,000 or 1.2% of net sales versus pro forma interest expenses of
$432,000 or 1.7% of net sales in the comparable period of fiscal 1998. An
increase in NEOS' interest expense ($17,000) caused by additional borrowing on
its line of credit was more than offset by less accrued interest ($51,000) on
outstanding notes to related parties.
NET INCOME (LOSS). For the nine months ended May 31, 1999, net loss was
$773,317 or 2.3% of net sales, as compared to a net loss of $9,296 or 0.04% of
net sales for the pro forma results for the nine months ended May 31, 1998. The
current year-to-date net loss is primarily due to the costs of the NEOS
Acquisition, expenses related to the registration of the Common Stock underlying
the Preferred Stock, and reduced profit margins caused by higher than normal
Rack Business product returns. In addition, the fiscal third quarter for the
Company typically results in an operating loss due to the seasonal drop in
revenue after the "holiday season."
3
<PAGE>
RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE MONTHS ENDED MAY 31, 1999 AS
COMPARED TO THE PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE
MONTHS ENDED MAY 31, 1998
NET SALES. For the three month period ended May 31, 1999 net sales were
approximately $7,416,000 as compared to pro forma net sales of approximately
$7,195,000 for the comparable period in fiscal 1998, which represented an
increase in net sales of $221,000 or 3%. Net sales from the One Stop Business
for the three months ended May 31, 1999 versus the comparable period in the
prior year, respectively, were $6,694,000 as compared to $5,023,000, an increase
of 33%. 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 month period ended May 31, 1999 were $687,000 as compared to $2,141,000 in
the comparable period of the prior year, a decrease of 68%. This decrease was
primarily due to the loss of Meijer, the Company's primary Rack Business
customer.
COST OF SALES. For the three months ended May 31, 1999, cost of sales
was $6,688,000 or 90% of net sales as compared to pro forma cost of sales for
the comparable period in fiscal 1998 of $6,141,000 or 85% of net sales. This
increase, as a percentage of net sales, is due to the proportionately greater
sales from the lower margin One Stop Business and lost margin from the Rack
Business, both as a result of the loss of Meijer as a Rack Business customer.
OPERATING EXPENSES. For the three months ended May 31, 1999, SG&A was
$1,447,000 or 20% of net sales compared to pro forma SG&A of $1,126,000 or 16%
of net sales in the comparable period in fiscal 1998. Such increase in SG&A
resulted from the higher level of NEOS' payroll ($133,000) in the three months
ended May 31, 1999, resulting from additional sales volume, and the increased
professional and consulting fees ($121,000) primarily related to the NEOS
Acquisition and in connection with the registration of Common Stock underlying
the Preferred Stock.
INTEREST EXPENSE. For the three months ended May 31, 1999, interest
expense was $147,000 or 2.0% of net sales versus pro forma interest expenses of
$156,000 or 2.2% of net sales in the comparable period of fiscal 1998. This
decrease was primarily due to less accrued interest ($7,000) on outstanding
notes to related parties.
NET INCOME (LOSS). For the three months ended May 31, 1999, net loss
was $978,910 or 13.2% of net sales, as compared to a net loss of $324,340 or
4.5% of net sales for the pro forma results for the three months ended May 31,
1998. The fiscal third quarter for the Company typically results in an operating
loss due to the seasonal drop in revenue after the "holiday season." The results
for the three months ended May 31, 1999 were further negatively impacted by
higher than normal returns due to the loss of Meijer as a Rack Business
customer, as well as continued legal and accounting expenses related to the
registration of the Common Stock underlying the Preferred Stock and compliance
with certain reporting requirements under the Securities Exchange Act of 1934,
as amended.
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 proceeds from 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 May 31, 1999 were $572,754 as compared
to the pre-NEOS Acquisition August 31, 1998 cash balance of $3,850,162, or a
reduction of $3,277,408. This reduction was the result of the paydown of
accounts payable ($587,049), the costs and purchase price of the NEOS
Acquisition ($1,627,416), the purchase of equipment ($672,979) and payment on a
promissory note to a related party ($375,000).
4
<PAGE>
Net cash flow to operating activities for the nine month period ended
May 31, 1999 was $14,284. The primary uses of cash were to fund the net loss of
$773,317, the paydown of accounts payable ($587,049) as well as an increase in
prepaid expenses ($135,174) and a drop in deferred revenue ($54,187). These
outflows were only partially offset by inflows in accounts receivable ($667,894)
and rebates to customers ($88,195) as well as other non-cash items (i.e.,
depreciation, accrued expenses).
As of May 31, 1999, outstanding accounts receivable totaled $5,187,314.
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 accounts receivable
balance at May 31, 1999 includes $1,071,354 due from a major customer, Meijer,
which has stopped purchasing from the Company. The Company believes that, based
upon payment activity since May 31, 1999, this receivable balance is collectible
and, furthermore, that the amount of future returns from sales to this customer
will not be material.
At May 31, 1999, inventory was $6,754,850 versus a pro forma balance as
of August 31, 1998 of $6,848,567. The Company believes this decrease is normal
due to seasonal fluctuations in sales volume. NEOS accounts for its inventory on
a first-in-first-out basis.
At May 31, 1999, the Company's accounts payable balance was $7,541,825
versus the pro forma balance as of August 31, 1998 and as of November 30, 1998,
of $8,509,717 and $15,934,732. The Company believes this decrease is the result
of the normal seasonal fluctuations in purchasing activity.
NEOS has a revolving credit agreement (the "CFC Credit Agreement") with
CFC. The maximum line of credit available under the CFC Credit Agreement was
recently increased to $8,500,000 with a separate $1,500,000 line for equipment
purchases. 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 May 31, 1999 were $3,896,547 and $1,265,483,
respectively. As of May 31, 1999, NEOS had an aggregate of $4,045,425
outstanding under the CFC Credit Agreement. NEOS pays interest to CFC at the
rate of prime plus 1.0% 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 nine month period ended
May 31, 1999 was $2,285,897. The primary cash outflow for the Company 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 outlay in the current period of approximately $1,627,000.
In addition, fixed assets (including new telephone and computer systems at NEOS)
totaling $672,979 were acquired during the period.
5
<PAGE>
Net cash flow to financing activities for the nine month period ended
May 31, 1999 was $977,227. The primary use of cash was the payment on a $375,000
promissory note due to the former stockholder of NEOS. In addition, cash outlays
included the repayment of advances to employees and stockholders of $145,000, a
principal payment of $250,000 on the Gulf Coast Note (the remaining principal
and interest balance on this note as of May 31, 1999 was $1,042,843 to be paid
in three equal annual payments of $380,000), payments on the CFC line of credit
($124,971) and payments on capital lease obligations ($120,899).
As of May 31, 1999, the Company had outstanding an aggregate of
$2,745,310 in notes (including accrued interest of $343,776), and accrued
salaries. Such amounts consist of a note to the former stockholder of NEOS for
$375,000 due in August 1999, $1,042,843 on the Gulf Coast Note, a $344,000
principal amount 9% demand note to the former owner of NEOS issued prior to the
NEOS Acquisition, 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 to Whelan, Inc., also a privately held corporation owned by Messrs.
Arnone and Giakas, accrued officers' salaries of $447,458 and $89,192 in notes
due to finance various assets purchased by the Company.
NEOS has several capital leases in the aggregate amount of $113,182
that are secured by the related equipment and fixtures.
The Company recently signed a letter of intent with a broker/dealer
pursuant to which the broker/dealer agreed to act as placement agent in
connection with a $14,000,000 maximum, $10,000,000 minimum equity private
placement. No assurances can be given when, if ever, the private placement will
be completed or as to the terms of such private placement.
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.
6
<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
7
<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: July 15, 1999
8
<TABLE>
<CAPTION>
EXHIBIT 11
COMPUTATION OF LOSS PER COMMON SHARE
FOR THE NINE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MAY 31, MAY 31,
1998 1999 1998 1999
-------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Basic:
Net income (loss) attributable
to common stockholders $ (405,425) $ (1,035,817) $ (133,698) $ (1,066,410)
============== ============== ============== ============
Weighted Average number
of common shares outstanding 10,985,996 11,976,055 11,925,955 11,976,055
============== ============== ============== ============
Income (loss) per common share $ (.04) $ (.09) $ (.01) $ (.09)
============== ============== ============== ============
Diluted:
Net income (loss) attributable
to common stockholders -- -- -- --
============== ============== ============== ============
Weighted Average number
of common shares outstanding -- -- -- --
============== ============== ============== ============
Income (loss) per common share -- -- -- --
============== ============== ============== ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001038284
<NAME> PLANET ENTERTAINMENT CORP.
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1999
<PERIOD-END> MAY-31-1999
<EXCHANGE-RATE> 1
<CASH> 572,754
<SECURITIES> 0
<RECEIVABLES> 5,187,314
<ALLOWANCES> 0
<INVENTORY> 6,754,850
<CURRENT-ASSETS> 13,120,871
<PP&E> 1,393,119
<DEPRECIATION> 0
<TOTAL-ASSETS> 24,049,768
<CURRENT-LIABILITIES> 10,680,180
<BONDS> 0
0
5,000,000
<COMMON> 11,976
<OTHER-SE> 3,703,975
<TOTAL-LIABILITY-AND-EQUITY> 24,049,768
<SALES> 33,740,294
<TOTAL-REVENUES> 33,804,018
<CGS> 28,463,108
<TOTAL-COSTS> 34,616,458
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 397,618
<INCOME-PRETAX> (773,317)
<INCOME-TAX> 0
<INCOME-CONTINUING> (773,317)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (773,317)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
