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 August 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 Number: 0-29776
PLANET ENTERTAINMENT CORPORATION
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(Name of Small Business Issuer in its Charter)
Florida 33-0471728
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
222 Highway 35, P.O. Box 4085, Middletown, New Jersey 07748
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(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (732) 530-8819
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Securities Registered under Section 12(b) of the Exchange Act
Title of Each Class Name of Each Exchange on Which Registered
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None
Securities Registered under Section 12(g) of the Exchange Act
Shares of Common Stock, Par Value $.001 Per Share
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(Title of Class)
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(Title of Class)
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 [ ]
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Check if 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. [ ]
State issuer's revenues for its most recent fiscal year $43,790,554.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant at November 30, 1999 was approximately
$6,632,553 based upon the last sale price ($1.156 per share) as reported by the
NASD Bulletin Board on that date.
ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
The number of shares outstanding of the issuer's classes of common equity, as of
November 30, 1999, was 12,147,803 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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TABLE OF CONTENTS
PART I........................................................................4
ITEM 1: BUSINESS.............................................................4
ITEM 2: PROPERTIES..........................................................15
ITEM 3: LEGAL PROCEEDINGS...................................................16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS..................17
PART II......................................................................17
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS............17
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...........19
ITEM 7: FINANCIAL STATEMENTS................................................26
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............................26
PART III.....................................................................26
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.................26
ITEM 10: EXECUTIVE COMPENSATION.............................................29
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....33
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................35
ITEM 13: EXHIBITS, LIST AND REPORTS ON FORM 8-K.............................36
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PART I
THIS DOCUMENT INCLUDES STATEMENTS THAT MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1955. THE COMPANY WOULD LIKE TO CAUTION READERS
REGARDING CERTAIN FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT AND IN ALL OF ITS
COMMUNICATIONS TO SHAREHOLDERS AND OTHERS, PRESS RELEASES, SECURITIES FILINGS,
AND ALL OTHER COMMUNICATIONS. STATEMENTS THAT ARE BASED ON MANAGEMENT'S
PROJECTIONS, ESTIMATES AND ASSUMPTIONS ARE FORWARD-LOOKING STATEMENTS. THE WORDS
"BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," AND SIMILAR EXPRESSIONS GENERALLY
IDENTIFY FORWARD-LOOKING STATEMENTS. WHILE THE COMPANY BELIEVES IN THE VERACITY
OF ALL STATEMENTS MADE HEREIN, FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED
UPON A NUMBER OF ESTIMATES AND ASSUMPTIONS THAT, WHILE CONSIDERED REASONABLE BY
THE COMPANY, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES AND KNOWN AND UNKNOWN RISKS. MANY OF
THE UNCERTAINTIES AND CONTINGENCIES CAN AFFECT EVENTS AND THE COMPANY'S ACTUAL
RESULTS AND COULD CAUSE ITS ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE
COMPANY. PLEASE SEE THE "RISK FACTORS" IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION FOR A DESCRIPTION OF SOME, BUT NOT ALL,
RISKS, UNCERTAINTIES AND CONTINGENCIES.
ITEM 1: BUSINESS
INTRODUCTION.
Planet Entertainment Corporation was incorporated under the laws of the
State of Delaware in May 1996. On October 9, 1996, all of the outstanding
capital stock of the Company was acquired in a reverse merger stock exchange
transaction by Ampro International Golf Tour, Inc. ("Ampro"), a Florida
corporation, which, as the surviving corporation, changed its name to Planet
Entertainment Corporation. During the past three (3) years, the Company has made
several acquisitions, as described below in "Development of Business" in this
Item 1. In October 1998, subsequent to its acquisition of Northeast One Stop,
Inc. ("NEOS"), the Company changed its fiscal year end to August 31.
BUSINESS SUMMARY.
The Company is currently involved in various areas of the recorded
music industry. The Company's principal business, primarily through its
wholly-owned subsidiary, NEOS, is the wholesale distribution of pre-recorded
music in the form of compact diskettes ("CDs"), cassette tapes, and other
entertainment related products such as video tapes, Digital Video Diskettes
("DVDs") 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.
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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, the Company has exclusive
rights to approximately 5,000 or thirty-three (33%) percent, and the Company has
non-exclusive rights to the remaining approximately 10,000 or sixty-seven (67%)
percent. The exclusive 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
exclusive rights to such master recordings means that only the Company is
entitled to exploit the particular master recording. Non-exclusive rights to
master recordings allow the Company as well as other persons who demonstrate the
right to exploit such master recordings to exploit the particular master
recordings.
The Company also records new artists. These master recordings are
typically stored on Digital Audio Tape ("DAT"). The Company, at its 48-track
recording studio and mastering facility in Chester, Pennsylvania, and its
24-track studio in Jackson, New Jersey, re-digitizes existing master recordings,
enhances these master recordings by removing certain impure sounds which exist
due to aging, and re-compiles these recordings along with its recordings of new
artists on "glass master" CDs for mass production and distribution to its
customers through traditional and non-traditional distribution channels. A
"glass master" CD is a CD created for a particular artist's recording which is
created and used as the master for mass duplication purposes.
With respect to its collection of master recordings, 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. (See
"Development Of Business" below in this Item 1.)
In September 1998, the Company acquired all of the issued and
outstanding capital stock of NEOS, which is principally engaged in the
distribution of records and compact diskettes as a "one-stop" and "rack-jobber."
"One-stops" are centralized order fulfillment centers for small to medium sized
retail stores, typically record stores, that obtain a wide-variety of recorded
music in various formats from several independent producers at a stated price,
or mark-up. "Rack-jobbers" typically purchase and distribute recorded music
through racks and kiosks in retail stores, and encompass a narrower range of
selection, typically from proprietary sources for a stated percentage of sales,
and often with the full right of return. The Company's strategy is to permit the
sale of its products and other "front line" titles over the Company's business
to business Internet site and to serve as its own fulfillment center and
distribute compilation CDs created from its own music catalogue through NEOS.
Currently, NEOS purchases the pre-recorded music from certain major record
companies (including, but not limited to SONY Music Entertainment, Inc.,
Universal Music and Video Distribution, Polygram Group Distribution, EMI Music
Distribution, Warner/Electra/Atlantic Corporation and BMG Distribution), and
other distributors for sale at approximately eighty-two (82%) percent of its
resale price to its customers. The Company, similar to other wholesale
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distributors of pre-recorded music, does not have any written contracts with
these major record companies and as a result such relationships may be
terminated at any time. Although NEOS has been distributing pre-recorded music
for such major record companies for a number of years, no assurances can be
given that any such person would not terminate its relationship with NEOS. The
termination of one or more of such relationships could have a material adverse
effect on the Company. The Company expects to also supply compilation CDs to
NEOS from the Company's catalogue of existing master recordings, at a lower
cost.
CORPORATE STRATEGY.
The Company's goal is to continue to grow its entertainment wholesale
division, Northeast One Stop, by leveraging the new fulfillment and distribution
systems currently in place and striving to provide customers with a superior
level of service. The Company believes it differentiates itself from competitors
by offering competitive pricing along with reliable and accurate fulfillment. We
plan to continue to expand our customer service and Internet capabilities, make
further system enhancements and increase product selection/depth to become a
more valuable supplier to entertainment retailers. We intend to leverage our
investment in fulfillment and distribution systems by seeking a larger facility
during fiscal year 2000 to improve our productivity. We will pursue further
growth through internal growth and possible acquisitions.
NXTREND TECHNOLOGY "NXTREND"
During 1998, NEOS began to explore a new software and hardware
platform, additional warehouse automation equipment, and an Internet technology
platform that, once integrated with our software/hardware, would allow the
Company to be more efficient, globally competitive and technologically advanced.
In early 1999 NEOS selected NxTrend Technology, Inc. ("NxTrend") to develop and
install a custom hardware and distribution software solution. Generally, the
NxTrend solution allows NEOS to simplify and expedite operations, reduce
inventory, expand performance reporting, including product margin/cost analysis,
improve customer service levels and integrate the Internet into daily
operations. The NxTrend package was installed at a cost of approximately
$600,000 and became operational in October 1999.
PROPOSED WAREHOUSE EXPANSION/AUTOMATION.
NEOS is presently negotiating a lease for the first quarter of calendar
year 2000, which will increase NEOS's corporate headquarters/warehouse from the
current 41,000 square feet to approximately 88,000 square feet. There is no
assurance that the Company will obtain this space or other suitable space or the
terms of any such lease. If leased, the larger warehouse space would also allow
us to further increase our Stock Keeping Unit ("SKU") count from approximately
140,000 to more than 200,000, which should make us more attractive to customers.
A new facility should also allow for additional expansion in future years. NEOS
continues to make significant investments in additional automation equipment
that would be moved to a new facility. To date, the Company has spent
approximately $250,000 on expanding the carousel system and related software.
The Company believes this equipment will allow it to increase volume and carry
additional SKUs. The Company also has ordered new sortation equipment from
Dorner Manufacturing Corporation ("Dorner") that will sort, scan, and label 200
pieces per minute. The sortation equipment should allow
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for greater dollar volume with less payroll per unit shipped, while at the same
time allowing us to maintain our current low error rate status.
INTERNET FULFILLMENT.
With the growth of the Internet, warehousing and fulfillment have
become major issues to all E-commerce companies including those traditional
brick and mortar retailers that now, in an effort to expand their own potential
sales base, are adopting what is becoming known as a "click and brick" strategy.
NEOS expanded its current systems to more adequately service and grow with our
music retailers. We configured and upgraded hardware, software, and
sorting/shipping equipment in such a way to be able to utilize our facilities to
provide third party warehousing, fulfillment and distribution services for
Internet retailers covering a diverse array of products.
During 1999 NEOS began servicing several Internet retailers such as
Amazon.com, EveryCD.com, Tower mailorder, Internet Shopping Network (ISN), and
CDUniverse.com. During fiscal year 2000 we hope to fulfill customer orders for
additional Internet retailers by shipping product directly to the individual
customer. These retailers tend to sell mostly very deep catalog and require
conformance to their own specific EDI (electronic data interchange)
requirements. We believe our new software platform and our deeper catalog allow
us to pursue customers that we were unable to pursue in the past. We plan to
focus a substantial portion of our resources on this business segment over the
next 12 months.
WEBSITES.
The Company has two distinct websites. Planet's wholesale site is
devoted to NEOS's current customers (www.neoneb2b.com). The website is meant as
an order entry tool for wholesale business customers and affiliated
Internet-based customers, thus the reference "b2b" (business to business). The
Corporate site (www.planetentertainment.com), which will undergo a
reconstruction during the first half of calendar year 2000, will be designed to
focus on the music catalog and compilation albums as well as provide general
corporate information regarding Planet Entertainment Corp. (PNEC).
To date, the Company has spent approximately $200,000 in connection
with developing its websites. Such costs include payments to its developer and
other technical support providers. Although no assurances can be given, the
Company expects its business to business Website to be online during December
1999 and fully integrated with the Company's new hardware/software platform
during the first quarter of calendar year 2000. The redesigned PNEC website is
expected to be fully integrated during the first half of calendar year 2000.
Neos Business to Business Website. At the heart of the NEOS b2b website
is a MUZE database, a searchable database that uses a Verity Information Server
- - a powerful search engine tool that quickly returns information on a massive
catalog of Pop, Rock, Jazz, Country and all other genres of music. The MUZE
database contains many tables consisting of hundreds of thousands of artist
names and album titles as well as millions of song titles. There are also a
number of music related video titles,
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which will be available via the music searches, as well as MUZE album art. The
database will search by Title, Artist, Song Listing, Catalog number, Genre and
Label. The MUZE database is widely recognized as the premier source of online
music information. The website also includes a full line of DVD and music
videos.
The NEOS business to business website is designed with the customer in
mind. Flexible "fuzzy logic" searches allow users to input partial, or even
incorrect information and still get their desired result. Album artwork
accompanies search results to let the user know for sure that they have found
the right title. Price information and purchase options are listed with search
results, making ordering product simple and quick. A search engine based on
NEOS's own accessory database features the same functionality as the main search
engine allowing customers to search for accessories (headphones, recordable CDs,
blank video/audio tapes, and others) by manufacturer, product category, or item.
Planet's Corporate Website. As mentioned above, the Company's corporate
website will be reconstructed during the first half of calendar year 2000. The
Company expects the website to feature the following capabilities; however, the
website has yet to be redesigned and there is no assurance as to the features of
the website until completion. The website is expected to: include a complete
listing of the Company's music catalog; search the Company's 15,000+ database of
songs (for custom licensing, premium incentive and special product business
customers); be organized according to musical genre; feature approximately 100
PNEC compilation albums and photographs of the album cover, sound bites and a
written review of the CD; be linked to the NEOS b2b site and numerous other
music and Internet retailers; offer weekly music and video specials to retail
consumers, websites, wholesalers and distributors; feature a "shopping cart"
that will process all major credit card transactions, with product fulfillment
handled by NEOS; contain financial information, press releases and investor
information on PNEC; and feature PNEC Records, Renaissance Records and Planet
Nashville's proprietary lines of 100, 128, and 14 compilation albums,
respectively. During calendar year 2000, these companies hope to introduce
approximately 100 new albums for traditional and Internet retailing. PNEC's
website will be designed to provide an additional outlet for independent labels
and artists that are currently without representation and that have a CD or
cassette tape for sale.
EXPAND EXISTING ACCOUNT BASE.
NEOS's catalog previously was not deep enough to supply all the needs
of retailers. We believe our greater catalog depth of 140,000 SKUs now enables
us to be the primary supplier for a much greater percentage of our account base
which we believe results in more sales to those customers. We intend to attempt
to continue to grow market share, both through deeper penetration with existing
customers and by entering new markets. We believe our investment in our systems,
including NxTrend and carousel automation, as well as the years we have spent
developing and refining them provide us a competitive advantage. Because we are
currently a full-service provider, we have been able to attract many new retail
customers who were previously unavailable to us. With our new software platform
and EDI and ASN (advanced shipping notice) capability we believe we will be able
to solicit large specialty music retailers as well as mass merchants.
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NEW CUSTOMERS.
As a full line entertainment retailer, with new systems in place, the
Company intends to concentrate on specific target groups of potential new
customers including large mass merchants, and export customers. Due to the rapid
growth of the DVD market as a format for movies and music videos, the Company
carries many DVD products. In addition to music and video retailers, the Company
may market music and video products to a variety of stores, including those
offering book and gift items. Additionally, NEOS has plans during the year 2000
to open two additional satellite sales offices.
CHAIN BUSINESS.
In our current facilities, with our current depth of catalog and our
new computer system, we have the ability to offer EDI or ASN to customers. We
believe this is particularly important for large mass merchant and
multiple-outlet customers. Long-term relationships already exist between
executives of the Company and those at a number of nationwide music retailers.
EXPORT.
We believe there exists a significant opportunity in exporting,
particularly in deep catalogue, DVD, and accessory items. It is our intention to
become involved in this aspect of the industry. The sales office scheduled to
open soon in Florida will focus on developing this business. Our intention is to
limit this business to no more than 20% of our overall volume.
EXPLOIT THE SALES POTENTIAL OF DVD.
In early 1999, NEOS expanded our SKU base to include DVD. While our
sales of this product line are not yet fully maximized, industry publications
are reporting hardware sales for this format that are substantially higher than
projected and it is expected that sales to consumers will follow. We expect 2000
to be a breakthrough year for DVD sales and believe that we will participate in
that growth.
ACQUISITION OF MASTER RECORDINGS; SALES OF MASTER RECORDINGS
In July 1996, as a result of the Company's acquisition of Maestro
Holding Corporation ("Maestro"), the Company acquired certain exclusive rights
associated with the exploitation of approximately 5,000 master recordings, and
in November 1996, through its agreements with J. Jake, Inc. ("J. Jake") and Gulf
Coast Music, LLC ("Gulf Coast"), the Company acquired certain exclusive and
non-exclusive rights associated with the exploitation of approximately 10,000
additional master recordings. The Company has not recorded the 5,000 master
recordings purchased from Maestro on its books because predecessor costs could
not be determined but has recorded on its financial statements its rights to
10,000 additional master recordings purchased from J. Jake, Inc. and Gulf Coast
as having a value of approximately $6,625,000 (less accumulated amortization of
$58,963).
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As of November 26, 1999, the Company has sold copies of non-exclusive
master recordings in two separate transactions. In one transaction, the Company
sold a copy of 2,500 master recordings and in another transaction the Company
sold a copy of 5,000 of its master recordings. All copies of master recordings
are sold without third party rights. In such sales, the Company receives
restricted shares of common stock from the purchasers.
The Company's current inventory of master recordings includes a
broad range of musical genres including adult contemporary, classical, gospel,
blues, rap, reggae, jazz, instrumental, easy listening, big band, swing,
Christmas, country, pop, rock and roll, and rhythm and blues, and a partial
listing of artists included in the Company's non-exclusive master catalogue
include Louis Armstrong, Tony Bennett, George Benson, Glen Campbell, Nat King
Cole, Bing Crosby, Sammy Davis, Jr., Fats Domino, Duke Ellington, Ella
Fitzgerald, Marvin Gaye, George Gershwin, Dizzy Gillespie, Bill Haley's Comets,
Billie Holliday, John Lee Hooker, Lena Horne, The Ink Spots, Jackson Five, Al
Jolson, Quincy Jones, Frankie Lane, Glenn Miller, Willie Nelson, Charlie Parker,
Dolly Parton, Neil Sedaka, Pete Seeger, Sisters Sledge, Steely Dan, Ike & Tina
Turner, The Tokens, The Crystals, The Tramps and Randy & the Rainbows.
Documents supporting the chain of title to each master recording owned
by or licensed to the Company on an exclusive or non-exclusive basis are
maintained by the Company. Possession of the master recordings permits the
Company to reproduce and distribute them under the Company's own label, or
sub-license these rights to others in exchange for royalties. No assurances can
be given that the Company's right to use any and or all of its master recordings
will not be subject to dispute, which may result in the delay or the inability
to use or exploit any particular master recording or require that the Company
pay royalties which may not be available or affordable by the Company. However,
the Company as of the date hereof has not created any reserve, should any master
recording purchased by the Company be determined to be the property of others,
principally because the Company has made only limited product sales of these
recordings. The Company, however, has determined that at such time as it
generates $100,000 of net product sales from its master recordings, it will
create a reserve and place into escrow an amount equal to five (5%) percent of
net product sales resulting from its master recordings. The Company intends on a
periodic basis to review whether such five (5%) percent reserve is sufficient
and may based upon such periodic reviews increase or decrease such amount. As of
November 1999, the Company had neither generated a minimum of $100,000 of net
product sales from its master recordings nor placed any funds into escrow.
PRODUCTION.
The Company owns and operates a twenty-four track studio in Jackson,
New Jersey and a full service forty-eight track digital studio in Chester,
Pennsylvania. The Company currently has a number of artists under contract
including Nino Rossano (an Italian opera and classical singer), the Crystals,
the Tramps, the Tokens, and Dakota McLeod. The continued representation of these
artists and the production of their compositions are subject to popularity
trends, and the continued appeal of these artists and these compositions.
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COMPOSITIONS AND ENHANCEMENTS.
In addition to the 130,000 front end titles distributed by its NEOS
subsidiary, the Company markets either from its existing catalog of recordings
or repackages compilations of previously recorded music by utilizing its library
of master recordings. Through the Company's studios in New Jersey and
Pennsylvania, the Company composes musical CDs containing the original and
re-recorded music of various artists arranged according to musical genre, and
designed to be mass marketed by the Company through its distribution channels.
The Company employs experienced engineers and owns certain multi-media equipment
that permits the Company to transform and edit its previously published and
unpublished master recordings from their original state to a higher quality
state using certain sound purification techniques and by converting older
recordings produced under the analogue format into a digital format.
By combining these compositions with visual graphics and video
clips, the Company can produce an entirely new product by re-mastering the
Company's recordings in compositions expected to appeal to the public's tastes.
Moreover, by combining these compositions, with outstanding visual effects, the
Company has the technology to produce video enhanced Compact Diskettes. In
connection with the transformation, editing, re-composition, and republishing of
the Company's master recordings, the Company produces its own art work, posters,
CD inserts, informational materials and brochures. The Company's associated
labels include PNEC Records and several affiliated labels including Planet
Records, Planet Nashville ("Backtracks"), Higher Grounds Records and Planet
Africa.
MANUFACTURING.
The Company manufactures "glass masters" and prototype CDs for use
as samples, together with all artwork and CD inserts, but it employs and is
dependent upon others to press and mass produce the Company's compact diskette
recordings for resale. Currently, the Company's products are mass produced or
pressed by Denon Interactive Media, a division of Nippon Columbia, Ltd. and
other CD pressing facilities.
DISTRIBUTION.
At present, all of the Company's products are sold through
distributors. The Company's strategy is to produce digitally enhanced and
re-arranged master recordings, from its existing catalogue, and from its
catalogue of new artists, and to enter into joint ventures with other parties
under which such other parties would license, mass produce and market these
products through traditional retail distribution channels, in exchange for
royalties. To date, the Company has entered into one license agreement (the "NCL
License Agreement"), with Nippon Columbia Co. Ltd. ("NCL"), pursuant to which
the Company granted the exclusive rights to NCL and Denon Corporation, USA, a
wholly-owned subsidiary of NCL, to press, duplicate, distribute, sell and market
music CDs and video rights in various regions of Asia. In addition, the Company
is actively engaged in negotiations with other persons for similar license
arrangements. No assurances can be given, however, that the NCL License
Agreement will produce any material revenues to the Company, or that the Company
in the future will be able to enter into any other similar arrangements. In May
1998 the Company entered into a joint venture agreement with New Millennium
Communications concerning the licensing and distribution of the Company's
products in Europe and in February 1999 the Company entered into a joint venture
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with Shandel Music Company, a South African limited liability company concerning
the distribution of products in Africa, Australia, New Zealand and Israel. No
assurances can be given that any revenues or income will be generated as a
result of such arrangements.
The Company intends to continue to develop the distribution of its
products through traditional and non-traditional distribution channels including
promotional and premium licensing, specialty marketing, and through the use of
the Internet. As previously discussed in "Corporate Strategy," the websites of
the Company and NEOS should be operational by the first half of calendar year
2000 and December 1999, respectively.
In September 1998, the Company acquired all of the issued and
outstanding capital stock of NEOS. NEOS was formed in 1983 by Louis J.
DelSignore, who, prior to the Company's acquisition of NEOS in September 1998,
was its sole shareholder. NEOS is principally engaged in the wholesale
distribution of pre-recorded music which NEOS purchases from certain major
record companies and other distributors. Approximately $28,346,000 (67%) percent
of NEOS's net sales are derived from its "one-stop" division, and approximately
$13,873,000 (33%) percent of its net sales are derived from its "rack-job"
division. However, NEOS lost its primary rack-job division customer, Meijer,
which stopped ordering products from the Company in January 1999. Although the
Company believes the loss of Meijer as a customer 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 the loss of
Meijer as a customer. There can be no assurance that the Company will be able to
either replace or offset sales losses from Meijer. Through its "one-stop"
division, NEOS offers and sells approximately 130,000 front end titles or SKUs
of popular recorded music to approximately 1,000 customers, many of which are
independent music stores or retailers. Through its "rack-job" division, Summit
Entertainment, NEOS offers for sale approximately 130,000 front end titles of
popular recorded music through racks or kiosks located in certain mass
merchandise retailers and fifty college campuses nationwide.
DEVELOPMENT OF BUSINESS.
In July 1996 the Company acquired from Maestro title to 5,000 master
recordings, publishing rights to over 300 songs, and all equipment and fixtures
contained in a twenty-four track studio located in Jackson, New Jersey.
In September 1996, the Company entered into a production and
distribution agreement with Multi-Media Industries Corporation ("MMIC"), under
the label Century Records, concerning the production and distribution of
enhanced multi-media CDs, playable on computers with compact diskette drives. In
accordance with the terms of the agreement, since September 1996 the Company has
produced ten compilation CDs, including six visually enhanced CDs, and through
Koch International Corporation, the Company has shipped approximately 35,000
units. One of the Company's executive officers and directors, Joseph Venneri, is
a shareholder of MMIC and, Richard Bluestine, the Company's Chief Financial
Officer and a former director of the Company, is a shareholder of MMIC and, from
June 1995 through May 1997, was an officer and director of MMIC. In 1997, the
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Company recorded approximately $204,362 in revenues from MMIC, of which amount
$180,615 remains uncollected as of August 1999. (See "Item 12. Certain
Relationships and Related Transactions.")
On October 9, 1996, all the outstanding capital stock of the Company
was acquired by Ampro. In connection with this transaction, each share of Planet
common stock issued and outstanding was exchanged for one share of Ampro, with
Ampro as the surviving corporation, which changed its name to Planet
Entertainment Corporation.
Pursuant to a September 1996 agreement and subsequent amendments,
the Company acquired unencumbered title to 10,000 master recordings from Music
Marketeers and J. Jake in exchange for 1,500,000 shares of the Company's common
stock and the assumption of three promissory notes totaling $1,250,000 payable
over five (5) years (the "Promissory Notes"). In 1997, Music Marketeers' rights
and obligations under this agreement with the Company were assigned to Gulf
Coast. It was subsequently agreed that J. Jake and Gulf Coast would return to
the Company an aggregate of 1,400,000 shares of the Company's Common Stock and
forgive the outstanding principal on the $1,250,000 Promissory Notes together
with accrued interest in exchange for approximately $175,000 in cash and short
term notes totaling approximately $2,850,000 (the "Gulf Coast Note"). The
Company failed to pay the remaining balance on the Gulf Coast Note ($2,550,000)
by December 15, 1998 and, according to the terms of the agreement, the Company
lost its right to acquire 694,000 of the 1,400,000 shares, and is bound by the
original terms of the Promissory Notes under which there remains outstanding
$500,000 in principal, with interest and principal due and payable over the next
two (2) years. Pursuant to an agreement dated August 26, 1999 between the
Company and Gulf Coast, the Company will remove the restrictive legend on the
694,000 shares and the net proceeds to Gulf Coast from sale of such shares of
stock will reduce the remaining balance on the Promissory Notes. In addition, if
the sum of any payments made by the Company on the Promissory Notes plus the net
proceeds from the sale of such shares aggregates $1,800,000 on or before June 1,
2000, then the Promissory Notes will be deemed paid in full and any remaining
shares held by Gulf Coast will be returned to the Company.
In March 1997, the Company acquired all the issued and outstanding
capital stock of Al Alberts On Stage, Ltd. in exchange for 100,000 shares of the
Company's common stock valued at $214,000, under the "purchase" method of
accounting. The assets of Al Alberts On Stage, Ltd. consisted primarily of
furniture, fixtures and equipment contained in a forty-eight track studio
located in Chester, Pennsylvania. The Company also entered into a lease with the
former shareholders of Al Alberts On Stage, Ltd. to lease a 13,400 square foot
building together with improvements in Chester, Pennsylvania where the Company's
studio is located.
On April 22, 1997, the Company entered into a non-exclusive
licensing agreement with Sun Entertainment Corporation of Nashville, Tennessee
pursuant to which the Company obtained non-exclusive rights to 7,500 master
recordings, including "Whole Lotta Shakin Going On" by Jerry Lee Lewis, "I Walk
The Line" by Johnny Cash, "Blue Suede Shoes" by Carl Perkins, "Chapel of Love"
by the Dixie Cups, "The Boy From New York City" by the Ad Libs, and "Harper
Valley PTA" by Jeannie C. Riley, in consideration for advance payments against
future royalties that will accrue on all tapes and CDs that are sold by the
Company. It is unknown to the Company if any other entity or entities have been
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granted non-exclusive rights to these recordings, and upon what terms, if any,
such non-exclusive rights might be available. To date, the Company has not
attempted to exploit these master recordings, has not received any royalties,
has not recognized any revenue as a result of this agreement, and is unable to
predict if and when the Company will earn revenue as a result of this agreement.
In July 1997, the Company entered into a joint venture agreement
with MMIC regarding the production of 20 compilation CDs per year by the
Company. According to the terms of the agreement, all net income from the
production, development and distribution of the releases are to be divided
equally on a 50%-50% basis between the Company and MMIC. No revenues have been
earned under this agreement. One of the Company's executive officers and
directors, Joseph Venneri, is a shareholder of MMIC, and Richard Bluestine, the
Company's Chief Financial Officer and the former Chief Financial Officer and a
director of MMIC, is a shareholder of MMIC and, from June 1995 through May 1997,
was an officer and director of MMIC.
In May 1998, the Company authorized and issued 500 shares of 7% Series
A Convertible Preferred Stock (the "Preferred Stock") to JNC Opportunity Fund
Ltd. ("JNC") at a stated value of $10,000 per share for a total of $5,000,000.
Each share of the Preferred Stock initially was convertible into the Company's
Common Stock at the lesser of (a) $8.885 per share (the "Initial Conversion
Price"), or (b) seventy-eight (78%) percent (the "Discount Rate") multiplied by
the average of the five lowest per share market prices of the Company's common
stock during ten trading days immediately preceding the notice of conversion.
Because the Company did not satisfy certain express obligations to JNC set forth
in the Company's Amended and Restated Articles of Incorporation governing the
Preferred Stock (the "Terms"), the Discount Rate was reduced from its initial
rate to fifty-eight (58%) percent. In connection with this transaction, the
Company agreed to indemnify JNC against certain liabilities and damages, and
issued warrants (the "Warrants") to purchase 75,000 shares of the Company's
Common Stock to JNC at a price of $9.625 per share exercisable over a term of
five (5) years, and the Company also issued warrants to purchase 150,000 shares
of the Company's Common Stock to CDC Consulting, Inc. ("CDC"). As a result of
this transaction, the Company received net proceeds of approximately $4,475,000.
JNC received certain registration rights with respect to the Common Stock
underlying its Preferred Stock and Warrants and CDC received certain
registration rights with respect to the Common Stock underlying its Warrants.
The Company filed a registration statement on Form SB-2 covering an aggregate of
2,750,000 shares of Common Stock issuable upon conversion of the Preferred Stock
and exercise of the Warrants. To date JNC has converted 35 shares of Preferred
Stock into 171,748 shares of Common Stock, resulting in JNC owning as of the
date hereof 465 shares of Preferred Stock.
Pursuant to the Terms, JNC is prohibited from converting the Preferred
Stock (or receiving shares of Common Stock as payment of dividends thereunder),
to the extent that such conversion would result in JNC owning more than 4.999%
of the outstanding Common Stock of the Company following such conversion. Such
restriction is waivable by JNC upon not less than seventy-five (75) days' notice
to the Company.
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Effective in September 1998, the Company purchased all of the issued
and outstanding capital stock of NEOS from the stockholder of NEOS, in
consideration for $2,250,000 in cash, a non-interest bearing Promissory Note in
the amount of $750,000 (all of which was paid), options to purchase 250,000
shares of the Company's Common Stock valued at $814,000, and options issued to
two stockholders of the Company to purchase a total of 250,000 shares of the
Company's Common Stock valued at $1,147,750.
COMPETITION.
In all lines of its business the Company faces intense competition
ranging from small regional businesses to large international companies. The
Company's ability to succeed in the future and to meet future competition in the
pursuit of satisfying the public's tastes will depend on its ability to attract
talented new artists or persons or companies who control existing valuable
libraries of master recordings as well as the appeal of compositions in its
existing library. There can be no assurance that the Company will be able to
compete successfully against current and future competitors. New technologies
and the expansion of existing technologies may also increase the competitive
pressures on the Company.
The creation and distribution of music compositions is highly
competitive and the Company has a substantial number of direct competitors,
including large companies with substantially greater financial and marketing
resources. Although the Company believes that its enhanced compositions are new
and unique, no assurance can be given that competitors possessing greater
financial resources and established distribution facilities will not be able to
develop products which directly compete with the Company's products and at
substantially lower prices than those available from the Company.
The "one stop" record distribution business is also highly price
sensitive with a limited number of larger companies such as Valley Media, Inc.,
AEC One-Stop Group and Universal, accounting for a large percentage of the
industry's annual sales. These companies are significantly larger, have greater
financial resources and have larger technical and creative staffs than the
Company.
EMPLOYEES
As of November 30, 1999, the Company and its subsidiaries, including
NEOS, had a total of approximately 120 employees, all of whom were full-time
employees. The Company has no collective bargaining agreement with its employees
and no union represents them. There have been no interruptions or curtailments
of operations due to labor disputes and the Company believes that relations with
its employees are good.
ITEM 2: PROPERTIES
The Company's principal office, located at 222 Route 35 South,
Middletown, New Jersey 07748, is leased from the brother-in-law of Wallace
Giakas, an officer, director, and one of the Company's principal shareholders in
consideration for the sum of $1,000 per month for a term of three (3) years. The
Company also rents a 1,500 square foot facility in Jackson, New Jersey, for the
sum of one dollar per month for a term of five (5) years from Joseph Venneri, an
officer, director, and principal shareholder of the Company, where the Company
operates a full service, 24-track recording studio. (See Item 12. "Certain
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Relationships and Related Transactions"). No assurances can be made that these
shareholders or their relatives may not in the future demand increased rent from
the Company in consideration for the use of these properties, or that the
Company will not relocate its operations at substantial cost to the Company, if
necessary, which may adversely affect the Company's financial condition and
results of operations.
Currently, the Company is also party to a five (5) year lease
agreement relating to approximately a 13,400 sq. ft. facility located on 15 East
8th Street, Chester, Pennsylvania from Albert N. Albertini, Albert V. Albertini,
Christopher M. Albertini, and Al Alberts On Stage, Ltd. These premises are
leased for a term of five (5) years from March 1, 1997 through February 28,
2002, and which may be renewed at the election of the Company for an additional
five (5) years. Rent during the initial term is equal to debt service on the
mortgage and the real estate taxes imposed on the premises of approximately
$24,000 per year. At the end of the first term, the Company has the option to
acquire the premises for $10, with the assumption of certain liabilities
principally consisting of an outstanding mortgage in the approximate amount of
$125,748. These studios are utilized by the Company to produce enhanced musical
compositions and new master recordings to be distributed by the Company and
others.
Through its NEOS subsidiary, the Company is a party to a one year
lease, relating to approximately 1,000 sq. ft. in Philadelphia, Pennsylvania at
the rate of $655 per month, is a party to a one-year lease expiring November
1999 in Reisterstown, Maryland relating to approximately 850 square feet at the
rate of $600 per month and is party to a five (5) year lease in Latham, New York
relating to approximately 41,000 sq. ft. at the rate of $15,000 per month. With
the exception of the Latham facility, these leases are with unrelated parties.
The Latham facility is owned by a corporation owned and controlled by Louis J.
DelSignore, an officer and director of the Company, and former sole stockholder
of NEOS. (SEE Item 12. "Certain Relationships and Related Transactions.")
NEW FACILITY. As the Company integrates the NxTrend system, sortation
equipment and Business to Business website, NEOS will require additional
warehouse space to handle the potential increase in fulfillment business. The
Company is currently attempting to secure an 84,000 square foot facility. No
assurance can be given when, or if, the Company will acquire or lease such
property, or the terms of any such transaction.
ITEM 3: LEGAL PROCEEDINGS
There are currently no threatened or pending material legal proceedings
against the Company. From time to time, the Company has received notices from a
limited number of third parties claiming an ownership interest in certain master
recordings published by the Company and sold through its distributors,
demanding, among other things, that the Company immediately cease distributing
these master recordings, or in the alternative, demanding that the Company pay
them royalties. The Company has responded by providing these entities with
information regarding the Company's chain of title to these recordings, and in
two instances the Company has suspended the future release of the recordings
until the matters are resolved. There can be no assurances that either of these
matters will be resolved to the Company's satisfaction or that additional claims
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will not be brought against the Company in the future by other third parties, or
that any such claims will not be successful. If such a claim were successful,
the Company's business could be materially adversely affected.
In July 1999, the Company initiated a lawsuit against a former major
customer, Meijer, Inc. ("Meijer"), and Summit United Service, LLC ("Summit
United"). In this lawsuit, the Company alleges that Meijer and Summit United are
liable to the Company for certain display rack fixtures that were supplied to
Meijer in order to merchandise and sell music and music related products. The
net book value of the display rack fixtures at issue in the lawsuit is
approximately $200,000. In addition, the Company is suing for reasonable rental
value of the display rack fixtures, advertising credits in the amount of
$67,379, a new store allowance credit in the amount of $171,041 and improper
deductions for return product in the amount of $300,644. As of August 31, 1999,
no counterclaim or other claims have been asserted or threatened against the
Company arising out of these transactions. Management of the Company is
vigorously prosecuting this lawsuit which is in the discovery process.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
During the fourth quarter of the fiscal year covered by this Report, no
matters were submitted to a vote of securityholders.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED MATTERS
(a) Market Information
The Company's Common Stock is currently traded on the National
Association of Securities Dealers, Inc. Automated Quotation System's Bulletin
Board (OTC:BB) under the symbol "PNEC." There is only a limited public trading
market for the Common Stock. There can be no assurance that an active public
market will develop or, if developed, be maintained for the Common Stock. The
high and low prices for the Company's Common Stock during the calendar quarter
preceding the dates below, and the closing bid price on each such date, are as
follows:
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High Low Close
---- --- -----
1997
----
December 31, 1997 $6.00 $2.75 $2.87
1998
----
March 31, 1998 $4.87 $1.87 $3.00
June 30, 1998 $11.43 $2.75 $6.00
September 30, 1998 $5.50 $5.25 $5.43
December 31, 1998 $4.75 $4.62 $4.62
1999
----
March 31, 1999 $7.32 $3.68 $4.00
June 30, 1999 $3.93 $3.78 $3.93
September 30, 1999 $2.56 $2.44 $2.44
- -------------------
* Source: National Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ"), OTC Bulletin Board. Such over-the-counter market quotations
reflect interdealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
The Company believes that the OTC: BB is the principal market for its
Common Stock.
(b) Holders. The Common Stock was held by approximately 254 holders of
record as of November 30, 1999. The Company believes that it has a substantial
number of beneficial holders of its Common Stock.
(c) Dividends. The Company has not paid dividends to date on its shares of
Common Stock. The payment of dividends, if any, in the future is within the
discretion of the Board of Directors. The payment of dividends, if any, in the
future will depend upon the Company's earnings, capital requirements and
financial conditions and other relevant factors.
The Company's Board of Directors does not presently intend to declare
any dividends in the foreseeable future but instead intends to retain all
earnings, if any, for use in the Company's business operations.
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ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS DOCUMENT INCLUDES STATEMENTS THAT MAY CONSTITUTE FORWARD-LOOKING
STATEMENTS MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1955. THE COMPANY WOULD LIKE TO CAUTION READERS
REGARDING CERTAIN FORWARD-LOOKING STATEMENTS IN THIS DOCUMENT AND IN ALL OF ITS
COMMUNICATIONS TO SHAREHOLDERS AND OTHERS, PRESS RELEASES, SECURITIES FILINGS,
AND ALL OTHER COMMUNICATIONS. STATEMENTS THAT ARE BASED ON MANAGEMENT'S
PROJECTIONS, ESTIMATES AND ASSUMPTIONS ARE FORWARD-LOOKING STATEMENTS. THE WORDS
"BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," AND SIMILAR EXPRESSIONS GENERALLY
IDENTIFY FORWARD-LOOKING STATEMENTS. WHILE THE COMPANY BELIEVES IN THE VERACITY
OF ALL STATEMENTS MADE HEREIN, FORWARD-LOOKING STATEMENTS ARE NECESSARILY BASED
UPON A NUMBER OF ESTIMATES AND ASSUMPTIONS THAT, WHILE CONSIDERED REASONABLE BY
THE COMPANY, ARE INHERENTLY SUBJECT TO SIGNIFICANT BUSINESS, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES AND KNOWN AND UNKNOWN RISKS. MANY OF
THE UNCERTAINTIES AND CONTINGENCIES CAN AFFECT EVENTS AND THE COMPANY'S ACTUAL
RESULTS AND COULD CAUSE ITS ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY, OR ON BEHALF OF, THE
COMPANY. PLEASE SEE THE "RISK FACTORS" IN THE COMPANY'S FILINGS WITH THE
SECURITIES AND EXCHANGE COMMISSION FOR A DESCRIPTION OF SOME, BUT NOT ALL,
RISKS, UNCERTAINTIES AND CONTINGENCIES.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THERETO WHICH ARE INCLUDED
ELSEWHERE HEREIN.
GENERAL
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 July 1996, the Company
acquired from Messrs. Arnone, Giakas and Venneri, the three controlling
shareholders, directors and officers of the Company, for shares of Common Stock
in the Company, all of the issued and outstanding common stock of Maestro.
Maestro owned exclusive rights to approximately 5,000 master recordings, and
subsequently acquired exclusive and non-exclusive rights to an additional 10,000
master records.
As indicated elsewhere herein, effective as of September 1, 1998, the
Company acquired NEOS. For the years ended August 31, 1999 and 1998, NEOS had
net revenues of $42,219,378 and $34,793,341 respectively, which constituted
approximately 96% (on an actual basis) and 99% (on a pro forma basis),
respectively, of the Company's net revenues for such periods. Prior to the
September 1, 1998 NEOS acquisition, the Company had limited revenues and income.
As a result, the results of operations of the Company commencing as of September
1, 1998 reflect in large part the operations of NEOS. 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 Company's Common Stock. Accordingly, to
assist the reader in a clearer understanding of this Report, the Company will
compare its results for the twelve month period ended August 31, 1999, which
reflects the Company's consolidated results of operations, to its pro forma
results of operations for the comparable period in the Company's fiscal year
1998 which ended August 29, 1998 ("Fiscal 1998"), which assumes the NEOS
Acquisition occurred effective as of September 1, 1997.
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The Company has five offices. Planet has its corporate headquarters in
Middletown, New Jersey and a recording studio in Chester, PA. NEOS has
administrative headquarters and warehouse in Latham, New York, and two sales
offices located in Philadelphia, Pennsylvania and Baltimore, Maryland. In
addition, a Florida office is scheduled to open soon. NEOS's primary business is
selling pre-recorded music, videos and accessories to retailers throughout the
United States. NEOS acquires most of its products from the major music labels
and the balance from small private labels.
NEOS's operations can be grouped into two distinct segments - "rack
jobbing" and its One Stop division. 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
("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.
According to the Record Industry Association of America's Recording
Industry Releases 1998 Manufacturers' Shipment and Value Report, CD album unit
shipments rose 12.5% from 753.1 million in 1997 to 847.0 million in 1998.
Cassette unit shipments continued to drop from 172.6 million in 1997 to 158.5
million in 1998 (down 8.2%). These trends have held consistent in the statistics
available for the first six months of calendar year 1999. DVD saw the largest
growth percentage from approximately 154,000 units in the six months ended June
30, 1998 to approximately 800,000 units in the six months ended June 30, 1999, a
520% increase. CD albums accounted for 83% of total value and 75% of total unit
shipments in 1998. For NEOS, in the eight months ended August 31, 1999, CD album
sales rose to approximately 84% of net sales while cassettes declined to 14% of
net sales.
NEOS recognizes sales for its One Stop Business and Rack Job 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 revenues by calculating actual returns. NEOS's
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.
As of November 26, 1999, the Company has sold copies of non-exclusive
master recordings in two separate transactions. In one transaction, the Company
sold a copy of 2,500 master recordings and in another transaction the Company
sold a copy of 5,000 of its master recordings. All copies of master recordings
are sold without third party rights. In such sales, the Company receives
restricted shares of common stock from the purchasers.
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CAPITAL INVESTMENT STRATEGY
During fiscal 1999, NEOS expended $995,149 on capital assets. The two
major investments were the NxTrend system and new carousel software and
hardware.
As mentioned in the "Corporate Strategy" section of this Item 1, during
October 1999 NEOS successfully converted from their previous software/hardware
package to a state-of-the-art custom hardware and distribution software
solution. Also, we have recently upgraded our automated state-of-the-art
integrated carousel and pick to light system which allows more rapid and
virtually error free fulfillment to the customer base. Our warehousing and
computer systems (the result of many years of ongoing research and development)
have positioned us to capitalize on the many new growth opportunities that are
beginning to present themselves.
RECENT DEVELOPMENTS
In January 1999, Meijer informed the Company that it would no longer
purchase the Company's products. Meijer accounted for approximately 40% of the
net revenues of NEOS during its fiscal year ended August 29, 1998 and
approximately 22% of the net revenues of NEOS for the fiscal year ended August
28, 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
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 TWELVE MONTH PERIOD ENDED AUGUST 31,
1999 AS COMPARED TO THE PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY FOR THE
TWELVE MONTH PERIOD ENDED AUGUST 29, 1998
NET REVENUES. For the twelve months ended August 31, 1999 net revenues
were approximately $43,791,000 as compared to pro forma net revenues of
approximately $35,152,000 for fiscal 1998, which represented an increase in net
revenues of $8,639,000 or 25%. Net revenues from the One Stop Business for the
twelve months ended August 28, 1999 versus the prior year, respectively, were
approximately $28,346,000 as compared to approximately $20,434,000, an increase
of 39%. This increase was due to an expanded customer base and greater SKU depth
as well as general improvement in music industry revenues. Net revenues from the
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Rack Business for the twelve months ended August 28, 1999 were approximately
$13,873,000 as compared to approximately $14,359,000 in the prior year, a
decrease of 3%. This decrease was primarily due to the loss of the Meijer
account. In the twelve months ended August 31, 1999, Meijer accounted for net
revenues of approximately $9,460,000 or 22% of net revenues for the Company. As
discussed elsewhere in this Report, Meijer stopped ordering products from the
Company in January 1999. Net revenues from Planet Operations for the twelve
months ended August 31, 1999 versus the prior year, respectively, were
approximately $1,571,000 as compared to approximately $359,000, an increase of
338%. This increase was primarily due to the $1,500,000 sale of limited rights
to certain masters.
COST OF SALES. For the twelve months ended August 31, 1999, cost of
sales was approximately $35,737,000 or 82% of net revenues as compared to pro
forma cost of sales for fiscal 1998 of approximately $29,171,000 or 83% of net
revenues. This decrease as a percentage of revenues is primarily due to the
incremental revenue from the sale of masters discussed above.
OPERATING EXPENSES. For the twelve months ended August 31, 1999,
selling, general and administrative expenses ("SG&A") were approximately
$6,770,000 or 16% of net revenues compared to pro forma SG&A of approximately
$5,220,000 or 15% of net revenues in fiscal 1998. Such increase in SG&A resulted
from the higher level of NEOS's payroll ($940,000) in fiscal 1999 resulting from
additional locations being serviced, and the increased professional and
consulting fees ($515,000) primarily related to the NEOS Acquisition and in
connection with the filing of the Company's registration statement on Form 10-SB
and its registration on Form SB-2 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 twelve months ended August 31, 1999, interest
expense was approximately $534,000 or 1.2% of net revenues versus pro forma
interest expense of approximately $585,000 or 1.7% of net revenues in fiscal
1998. This decrease was primarily caused by less accrued interest ($41,000) on
outstanding notes to related parties.
NET INCOME (LOSS). For the twelve months ended August 31, 1999, net
income was approximately $278,000 or 0.6% of net revenues, as compared to a net
loss of approximately ($234,000) or (0.7%) of net revenues for the pro forma
results for the fiscal year ended August 29, 1998. Pre-tax net income from NEOS
for the twelve months ended August 28, 1999 versus the prior year, respectively,
was approximately $564,000 as compared to approximately $751,000, a decrease of
25%. This decrease was primarily due to the loss of the Meijer account. Pre-tax
net loss from Planet and its subsidiaries other than NEOS for the twelve months
ended August 31, 1999 was approximately ($320,000) as compared to approximately
($985,000) in the prior year, a 68% improvement. The current year net loss is
primarily due to the costs of the NEOS Acquisition and expenses related to the
registration of the Common Stock underlying the Preferred Stock. The loss was
partially offset by the incremental revenue from the sale of non-exclusive
rights to the masters discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for payments for NEOS's
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's sources of cash include normal operations and its revolving credit line
with Congress Financial Corporation ("CFC").
Cash and cash equivalents as of August 31, 1999 were $620,975 as
compared to the pre-NEOS Acquisition August 29, 1998 cash balance of $3,850,162,
or a reduction of $3,229,187. This reduction was the result of the paydown of
accounts payable ($368,401), the costs and purchase price of the NEOS
Acquisition ($1,627,416), the purchase of equipment ($995,149) and payments on
related party debt ($500,000).
Net cash flow used by operating activities for the twelve month period
ended August 31, 1999 was $831,003. The primary uses of cash were to paydown
accounts payable ($368,401) and increase the inventory ($316,505) as well as a
drop in deferred revenue ($151,356). Inflows in accounts receivable ($223,477)
were offset by non-cash items (i.e., marketable securities, depreciation,
accrued expenses, etc).
As of August 31, 1999, outstanding accounts receivable totaled
$5,242,898. This amount is net of an allowance for bad debts of $617,143. By
comparison, the pro forma consolidated accounts receivable balance as of August
31, 1998 was $5,856,805, net of an allowance of $182,488. The accounts
receivable balance at August 31, 1999 includes $368,138 due from a major
customer, Meijer, which has stopped purchasing from the Company. A lawsuit has
been initiated against this customer (see Note 20 of Notes to Financial
Statements - Litigation). However, the Company believes that this receivable
balance is collectible and, furthermore, that the bad debt allowance discussed
above will be sufficient to satisfy any amounts that are not paid.
At August 31, 1999, inventory was $7,165,072 versus a pro forma balance
as of August 31, 1998 of $6,848,567. The Company believes this increase is
normal due to increased sales volume. NEOS accounts for its inventory on a
first-in-first-out basis.
At August 31, 1999, the Company's accounts payable and accrued expense
balance was $7,760,473 versus the pro forma balance as of August 31, 1998 of
$8,509,717, primarily due to the timing of vendor payments.
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
23
<PAGE>
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 August 28, 1999 were $5,181,296 and $1,222,990,
respectively. As of August 28, 1999, NEOS had an aggregate of $5,435,035
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 used by investing activities for the twelve month period
ended August 31, 1999 was $2,795,803. 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 $995,149 were acquired during the period.
Net cash flow from financing activities for the twelve month period
ended August 31, 1999 was $397,619. The primary source of cash was the CFC line
of credit ($1,264,639). Cash outlays included the repayment of advances to
employees and stockholders of $145,000, principal payments of $500,000 on the
Gulf Coast Note (the remaining principal and interest balance on this note as of
August 31, 1999 was $679,094 to be paid in two equal annual payments of
$380,000), payments on capital lease obligations ($166,959) and preferred stock
issuance costs of $130,294.
As of August 31, 1999, the Company had outstanding an aggregate of
$2,863,212 in notes (including accrued interest of $239,312), and accrued
salaries. Such amounts consist of a note to the former stockholder of NEOS for
$375,000 due in September 1999 (paid September 1, 1999), $679,094 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, two
notes due to a private lender the first a $150,000 principal amount 10% demand
note and the second a $400,000 principal amount 9% note due September 1, 2000, 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
$539,859 and $69,157 in notes due to finance various assets purchased by the
Company.
NEOS has several capital leases in the aggregate amount of $67,122 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,
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<PAGE>
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.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year
in the date field, with the result that data referring to the year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of the Company, or its suppliers and customers, and not
corrected, this problem could cause computer applications to fail or create
erroneous results. This could cause a disruption in operations and have a
short-term adverse effect on the Company's business and results of operations.
Using internal staff and outside consultants, the Company is actively addressing
this situation and anticipates that it will not experience a material adverse
impact to its operations, liquidity or financial condition related to systems
under its control. Specifically, the Company converted its mainframe inventory
and financial accounting computer software to Nxtrend's "Trend" system software
package, replaced the majority of its computer hardware, and installed a new LAN
network. These system upgrades and conversions were made primarily to improve
productivity, efficiency, and competitiveness, but they have an ancillary
benefit of achieving Year 2000 compliance. The aggregate cost of these upgrades
and conversions is approximately $650,000, the majority of which has already
been expended (primarily in the third fiscal quarter of 1999). The Company is
not able to separately quantify expenditures for Year 2000 compliance.
The Company is taking the necessary steps to provide itself with
reasonable assurance that its service providers, suppliers, customers and
financial institutions are Year 2000 compliant. The Company estimates that it is
approximately 90% complete in its verification of compliance by such service
providers, suppliers, customers, and financial institutions. In addition, the
Company is developing contingency plans to identify and mitigate potential
problems and disruptions to the Company's operations arising from the Year 2000
issue.
The Company expects to complete its Year 2000 compliance efforts by
December 15, 1999. While the Company believes that its own internal assessment
and planning efforts with respect to its external service providers, suppliers,
customers and financial institutions are and will be adequate to address its
Year 2000 concerns, there can be no assurance that these efforts will be
successful or will not have a material adverse effect on the Company's
operations.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING Activities. This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires the recognition of all derivatives as either assets or liabilities in
the statement of financial position and measurement of those instrument at fair
value. The accounting for changes in the fair value of a derivative is dependent
upon the intended use of the derivative. SFAS No. 133 will be effective in the
Company's first quarter of the fiscal year ending August 31, 2001 and
retroactive application is not permitted. Management does not believe that this
Statement will have a significant impact on the Company.
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<PAGE>
In April 1998, the American Institute of Certified Public Accountants'
("AICPA") Accounting Standards Executive Committee Issued Statement of Position
No. 98-5 ("SOP 98-5"), REPORTING ON THE COSTS OF START-UP ACTIVITIES. SOP 98-5
requires that costs of start-up activities, including organization costs, be
expensed as incurred. SOP 98-5 will be effective in the Company's first quarter
of the fiscal year ending August 31, 2000. Management does not believe that this
Statement will have a significant impact on the Company.
ITEM 7: FINANCIAL STATEMENTS
See the Financial Statements annexed to this Report.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
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 and their ages as
of this date are set forth below. None of the directors and executive officers
are related to one another.
Name Age Position(s) Held
---- --- ----------------
Wallace M. Giakas 44 Chairman of the Board, Secretary
John S. Arnone 42 President, Chief Executive Officer,
Director
Joseph Venneri 63 Executive Vice President, Director
Richard Bluestine 57 Executive Vice President, Chief
Financial Officer, and Chairman of Audit
Committee
Louis J. DelSignore 61 Director, Planet Entertainment
Corporation, Chairman, Northeast One
Stop, Inc.
Ronald J. Nicks 46 Director, Planet Entertainment
Corporation, President, Chief Executive
Officer, Northeast One Stop, Inc.
Robert G. Thomas 56 Director
Donald F. Maggi 40 Director
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The By-laws of the Company currently provide for a minimum of two (2)
directors. All directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
The Company's officers are appointed by the Board of Directors. A copy of the
Company's Bylaws is available upon request.
WALLACE M. GIAKAS has been the Chairman of the Board of the Company
since October 1996 and Secretary since June 1997. From October 1992 until June
1995, Mr. Giakas was president of Chapman, Spira & Carson, Inc., an investment
and merchant banking firm located in New York, New York. From April 1994 through
March 1996, Mr. Giakas, served as executive vice president of Emerald City
Capital Corp., and from June 1995 through the present, Mr. Giakas serves as
president of Hamilton Wallace Group, Inc., a private investment and venture
capital firm located in Middletown, New Jersey. Mr. Giakas devotes most of his
professional time to the business of the Company.
JOHN S. ARNONE is President, Chief Executive Officer and a Director of
the Company, which positions he has held since June 1998. From October 1996
through June 1998, Mr. Arnone served as a Director and the Secretary of the
Company. From July 1992 through August, 1993, Mr. Arnone was president of
Lancaster Leeds & Co., a private investment and merchant banking firm located in
New York, New York. From August, 1993 through April, 1994, Mr. Arnone was a
managing director of Chapman, Spira & Carson, Inc., a private investment and
merchant banking firm located in New York, New York. From April 1994 through
March, 1996, Mr. Arnone was president of J.W. Cabott & Co., Inc., a private
investment firm, and from April 1994 through March 1996, Mr. Arnone also served
as president of Emerald City Capital Corp., a private investment firm. From
March 1996 through January 1998, Mr. Arnone served as President of Whelan
Securities, Inc., an NASD registered general securities broker dealer. Since
January 1998 and continuing through the present, Mr. Arnone devotes most of his
professional time to the business of the Company.
JOSEPH VENNERI is Executive Vice President and a Director of the
Company. Prior to June 1998, Mr. Venneri was President and Chief Executive
Officer of the Company. Mr. Venneri has been self-employed as a recording
engineer and producer operating from the recording studio purchased by the
Company in Jackson, New Jersey since 1994. Mr. Venneri has 38 years experience
in the entertainment industry, beginning as an artist and has been the President
and owner of several recording studios and was an original member of The Tokens.
Mr. Venneri also has experience in production, where he produced more than 100
gold records over the last 25 years. Mr. Venneri has worked for EMI, RCA, MGM,
Atlantic Records, Warner Brothers Records, Mercury Records, Plantation Records,
and Sun Records. He is highly regarded by producers, engineers and restoration
experts in the music industry, and has recorded and re-recorded such stars as
Bob Marley, Sammy Davis, Jr., Jethro Tull, The Grateful Dead, REM, Cher, Michael
Bolton, Kenny Rogers, Willie Nelson, Luciano Pavarotti, and hundreds more. Mr.
Venneri devotes his full professional time to the business of the Company.
RICHARD C. BLUESTINE, C.P.A. is Executive Vice-President and Chief
Financial Officer of the Company. Mr. Bluestine is a Certified Public Accountant
with experience in the record and film industry. Mr. Bluestine is currently a
partner at the accounting firm of Brinster & Bergman, L.L.P., and has been since
January 1990. In addition, during that same time, Mr. Bluestine has been Vice
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<PAGE>
President of SBR Industries, Inc., a manufacturer and distributor in the apparel
industry. From June 1995 through May 1997, Mr. Bluestine was an officer,
director, and stockholder of Multi-Media Industries Corporation ("MMIC"). (See
Item 12. "Certain Relationships and Related Transactions"). From 1971 through
1990, Mr. Bluestine served as a Certified Public Accountant with various firms
including KMG Main Hurdman. He has served as a pension trustee for the New York
City Fire Department, as a member of the Mayor's Investment Fiscal Policy
Committee for the City of New York. He received his accounting degree from New
York University and has served on various AICPA and NYSSCPA committees. Mr.
Bluestine devotes part of his professional time to the business of the Company.
Because Mr. Bluestine has indicated that he is not available on a full time
basis, the Company has not offered Mr. Bluestine an employment contract. The
Company may seek to hire a new chief financial officer if it believes it needs a
full time individual in that capacity. The Company believes, if necessary, that
it could readily hire a new chief financial officer.
LOUIS J. DELSIGNORE is a Director of the Company and Chairman of the
Company's subsidiary, Northeast One Stop, Inc. From 1983 through September 1998,
Mr. DelSignore served as president of NEOS and currently is employed by the
Company to assist in running NEOS. From August 1973 through January 1983, Mr.
DelSignore was vice president of finance and a member of the Board of Directors
of Trans World Music Corporation. Mr. DelSignore has substantial experience in
the wholesale distribution of recorded music and other entertainment related
products. Mr. DelSignore has a Bachelor of Science degree from the State
University of New York at Albany.
RONALD J. NICKS is a Director of the Company and is President and Chief
Executive Officer of the Company's subsidiary, NEOS. Mr. Nicks has been
affiliated with NEOS since November 1997 and has served as its President since
October 1998. From July 1996 through September 1998, Mr. Nicks was Senior Vice
President of Alliance Entertainment Corporation ("Alliance"), and from January
1994 through July 1996 was Chief Executive Officer of Alliance's One Stop Group.
From November 1990 through January 1994, Mr. Nicks was Vice President and
General Manager of CD One Stop, where he oversaw all operations including sales
and purchasing. From November 1988 through November 1990, Mr. Nicks was director
of purchasing for CD One Stop, and from October 1974 through November 1988, was
associated with Western Merchandisers, Inc. Mr. Nicks has significant experience
in the wholesale distribution of recorded music. Mr. Nicks devotes his full
professional time to the business of the Company.
ROBERT G. THOMAS has been a Director of the Company since June 1999. He
has been General Counsel and Compliance Officer at the Norinchukin Bank since
March 1999 and he also has operated his own private practice of law since 1992.
Prior thereto, Mr. Thomas was a co-owner, counsel, and financial officer of
Whelan Management Corp. (April 1993 to April 1997) and Whelan Securities Inc.
(April 1993 to July 1996), an investment advisory firm and a securities
broker-dealer, respectively. From January 1992 to September 1993, he was a Vice
President and Portfolio Manager of New Amsterdam Partners, L.P., a registered
investment adviser. Mr. Thomas was engaged in the private practice of law from
1976 to 1991. He has been a member of the Board of Directors and Executive
Committee and Chairman of the Audit Committee of Tokyo Trust Company of New York
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<PAGE>
since 1986 and has been a director of the Norinchukin Foundation since 1993. Mr.
Thomas earned a B.A. degree from Washington & Lee University in 1965 and an
LL.B. degree from Columbia University School of Law in 1965.
DONALD F. MAGGI has been a Director of the Company since June 1999. He
has been President and owner of Intertainment, Inc., an interactive
entertainment service company, since 1998. Prior thereto Mr. Maggi was a Vice
President of Left Bank Management (1995 to 1997), in charge of all New Media for
recording artists, and McGhee Entertainment (1993 to 1995), engaged in personal
artist management. He also has been a Director of NorthEast for Promotion and
Marketing of Interscope Records (1991 to 1992), Director of Promotion and
Marketing of Geffen Records (1987 to 1991), Marketing Manager for New England of
Atlantic Records (1986 to 1987), and Director of Special Projects of
Monarch/Metropolitan Entertainment (1981 to 1986). Mr. Maggi attended Seton Hall
University from 1978 to 1981.
Based on its non-receipt of any copies of Forms 3, 4, and 5 during the
fiscal year ended August 31, 1999, the Company believes that no person who
during such fiscal year was a director, officer, or beneficial owner of more
than 10 percent of its Common Stock filed any reports on Forms 3, 4, and 5
during the fiscal year ended August 31, 1999. To the Company's knowledge, none
of such persons has filed Form 3 and, owing to the absence of any filings of
Forms 4 and 5, the Company is not aware of any transactions that should have
been reported.
ITEM 10: EXECUTIVE COMPENSATION
The following table sets forth the cash and accrued compensation, and
warrants issued by the Company to each executive officer of the Company for the
year ended December 31, 1997, for the eight months ended August 31, 1998, and
for the year ended August 31, 1999.
<TABLE>
<CAPTION>
Name of Principal Other Long Term Total
Individual Position Year Salary Compensation Compensation Compensation
- ---------- -------- ---- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John S. Arnone President, Chief 1997 $ 31,250 $3,359,493 -0- $3,390,743
Executive
Officer, Director
1998 $ 20,833 $ -0- -0- $ 20,833
1999 $125,000 $ 573,875(1) -0- $ 698,875
Wallace M. Giakas Chairman of the 1997 $ 31,250 $3,359,493 -0- $3,390,743
Board, Secretary
1998 $ 20,833 $ -0- -0- $ 20,833
1999 $125,000 $ 573,875(1) -0- $ 698,875
Joseph Venneri Executive Vice 1997 $ 36,200 $3,359,493 -0- $3,395,693
President,
Director
1998 $ 20,833 -0- -0- $ 20,833
1999 $125,000 -0- -0- $ 125,000
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Name of Principal Other Long Term Total
Individual Position Year Salary Compensation Compensation Compensation
- ---------- -------- ---- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Richard Bluestine Executive Vice 1997 $ 18,750 $537,519 -0- $ 556,269
President,
Chief Financial
Officer, Chair-
man of Audit
Committee
1998 $ 12,500 -0- -0- $ 12,500
1999 $ 41,667 $ -0- -0- $ 41,667
Louis J. DelSignore Director 1998 $ N/A N/A N/A $ N/A
1999 $145,000 $ -0-(2) -0- $ 145,000(3)
Ron Nicks Director 1998 $ N/A N/A N/A $ N/A
1999 $125,000 $ 25,000(3) -0- $ 150,000(4)
</TABLE>
- -----------------
(1) Includes options to purchase 125,000 shares of the Company's Common Stock
exercisable at $5.25 per share over a period of five (5) years granted to
Messrs. Arnone and Giakas as compensation in connection with the acquisition of
Northeast One Stop, Inc. At the time these options were granted, the price of
the Company's Common Stock was $5.25 per share.
(2) Does not include options to purchase 250,000 shares of the Company's Common
Stock exercisable at the lesser of $5.25 per share or the closing bid price for
the Company's Common Stock at the time of Closing over a period of two (2) years
as granted to Mr. DelSignore in connection with the acquisition of Northeast One
Stop, Inc. At the time these options were granted, the price of the Company's
Common Stock was $5.25 per share.
(3) Does not include options to purchase 150,000 shares of the Company's Common
Stock exercisable at $5.25 per share over a period of three (3) years from
September 17, 1998 granted to Mr. Nicks, of which 75,000 vested upon execution
of their executive compensation agreements with the Company on September 17,
1998, with the remaining options to vest over the term of the agreement. At the
time these options were granted, the price of the Company's Common Stock was
$5.25 per share.
EMPLOYMENT AGREEMENTS.
Of the compensation set forth above, only a portion was paid in cash
and the balance was accrued by the Company. As of August 31, 1999, the Company
had accrued officers' salaries in the aggregate amount of $539,859.
On January 29, 1997, the Board of Directors approved the employment
agreements, effective January 1, 1997, for Wallace Giakas, Joseph Venneri, John
Arnone and Richard Bluestine. However, on March 24, 1998, the individual
officers and directors of the Company agreed to waive, except with respect to
the accrued amounts shown above, all other amounts due or owing pursuant to
these employment agreements effective March 31, 1998. The Board did however
30
<PAGE>
retain certain incentive based compensation for the Board of Directors of the
Company in the form of warrants which are convertible into 10 shares of
Company's Common Stock at the price of $2.00 per share over a term of ten (10)
years.
On August 14, 1998 the Company entered into an employment agreement
with Mr. Giakas. This agreement is for the term of ten (10) years, and provides
for compensation in the amount of $125,000 (for the first year with annual
increases of at least 10%) to Mr. Giakas together with annual incentive based
bonuses in the form of 2.5% of all pre-tax profits recorded by the Company in
accordance with Generally Accepted Accounting Principles ("GAAP"), and the
greater of two (2%) percent of the value of any acquisition made by the Company,
as computed by the purchase price plus the value of any additional consideration
paid by the Company in connection with any such acquisition, or two (2%) percent
of the revenue reported by any such acquisition in the preceding fiscal year by
the acquiree. In the case that any portion of such consideration shall consist
of publicly held securities, the market price of these securities shall be used
to determine value, and the value related to any option, warrant or right to
purchase these securities shall be determined by Black-Scholes Model. In
addition, Mr. Giakas is entitled to 2.5% of any capital raised for the Company.
At the option of Mr. Giakas, any compensation due under this provision may be
converted into the Company's Common Stock at a conversion price equal to the
average closing bid price for the Company's Common Stock 30 days prior to any
such acquisition or capital funding. In connection with the acquisition of
Northeast One Stop, Inc., Mr. Giakas has waived all incentive based compensation
due under the terms of his agreement and to accept options to acquire 125,000
shares of the Company's Common Stock at a price of $5.25 exercisable over a
period of five (5) years from the date of Closing. This agreement also provides
that in the event of a change in control of the Company, Mr. Giakas may resign
and all amounts due and owing for the term of his agreement shall become due and
payable.
On August 14, 1998 the Company entered into an employment agreement
with Mr. Arnone. This agreement is for the term of ten (10) years, and provides
for compensation in the amount of $125,000 (for the first year with annual
increases of at least 10%) to Mr. Arnone together with annual incentive based
bonuses in the form of 2.5% of all pre-tax profits recorded by the Company in
accordance with GAAP, and the greater of two (2%) percent of the value of any
acquisition made by the Company, as computed by the purchase price plus the
value of any additional consideration paid by the Company in connection with any
such acquisition, or two (2%) percent of the revenue reported by any such
acquisition in the preceding fiscal year by the acquiree. In the case that any
portion of such consideration shall consist of publicly held securities, the
market price of these securities shall be used to determine value, and the value
related to any option, warrant or right to purchase these securities shall be
determined by the Black-Scholes Model. In addition, Mr. Arnone is entitled to
2.5% of any capital raised for the Company. At the option of Mr. Arnone, any
compensation due under this provision may be converted into the Company's Common
Stock at a conversion price equal to the average closing bid price for the
Company's Common Stock thirty (30) days prior to any such acquisition or capital
funding. In connection with the acquisition of Northeast One Stop, Inc., Mr.
Arnone has waived all incentive based compensation due under the terms of his
agreement and to accept options to acquire 125,000 shares of the Company's
Common Stock at a price of $5.25 exercisable over a period of five (5) years
31
<PAGE>
from the date of Closing. This agreement also provides that in the event of a
change in control of the Company, Mr. Arnone may resign and all amounts due and
owing for the term of his agreement shall become due and payable.
On August 14, 1998 the Company entered into an employment agreement
with Mr. Venneri. This agreement is for the term of ten (10) years, and provides
for annual compensation in the amount of $125,000 (for the first year with
annual increases of at least 10%) to Mr. Venneri together with annual incentive
based bonuses in the form of 2.5% of all pre-tax profits recorded by the Company
in accordance with GAAP from the Company's Entertainment Division.
In connection with the Company's acquisition of Northeast One Stop,
Inc., the Company secured the continued employment of Louis J. DelSignore, the
former sole shareholder of Northeast One Stop, Inc., for a one (1) year term
ended August 31, 1999 at the rate of $145,000. Mr. DelSignore's agreement has
been extended for a six month period at an annualized salary of $52,000. In
addition, the Company has secured an employment and executive compensation
agreement with Mr. Nicks for a term of three (3) years at the rate of $125,000
per year and options to acquire 150,000 shares of the Company's Common Stock at
a price of $5.25 per share. These options would vest over a period of three (3)
years with 75,000 options vesting on September 21, 1998, and with the remaining
75,000 options to vest in equal installments of 25,000, each year for the
remaining three (3) years.
COMPENSATION OF DIRECTORS
The Company's directors do not receive compensation for their services
as directors; however, directors are compensated for their attendance at regular
and special meetings of the Board and for attendance at meetings of committees
of the Board in the amount of $500 for each such meeting. Directors are
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with their duties to the Company.
LIMITATION ON LIABILITY OF DIRECTORS
Effective July 1999, the Company has obtained directors and officers
insurance in the amount of $1,000,000 per occurrence. The Articles of
Incorporation and the Bylaws provide that the Company shall indemnify and hold
harmless each officer and director of the Company (and each officer and director
of another entity serving at the request of the Company) who is a party to, or
is threatened to be made a party to, any threatened, pending or contemplated
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, against expenses (including attorney's fees), judgment, fines,
and amounts paid in settlement, actually and reasonably incurred in connection
with such action, suit or proceeding. They further provide that the Company
shall indemnify each such officer and director in any derivative action, suit or
proceeding, if he acted in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Company or its shareholders;
32
<PAGE>
except that no indemnification shall be made with respect to any such derivative
action, suit or proceeding as to which he shall have been adjudged to be liable
for gross negligence or misconduct in the performance of his duties to the
Company (unless and only to the extent that the court in which such action or
suit was brought shall determine, upon application, that, despite the
adjudication or liability, but in view of all of the circumstances of the case,
he is fairly and reasonably entitled to indemnity for such expenses which such
court shall deem proper). The Articles of Incorporation and the Bylaws also
provide that costs in defending any action, suit or proceeding referred to above
may be paid by the Company in advance of the final disposition thereof under
certain circumstances. The Company has been advised that it is the position of
the Commission that, insofar as the foregoing provision may be invoked to
disclaim liability for damages arising under the Securities Act, that provision
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
STOCK OPTION PLAN
On October 1, 1996, the Company adopted a plan known as the Planet
Entertainment Corporation Stock Plan (the "Plan") pursuant to which the Board of
Directors shall issue awards, options and grants. Pursuant to the Plan,
1,000,000 shares of the Company's common stock have been reserved for issuance
as awards. As of August 31, 1999 no awards, options, or grants have been issued.
OTHER COMPENSATION
The Company provides basic health, major medical and life insurance for
its employees, including its executive offices. In May 1999, the Company
established a 401(k) profit sharing plan ("401(k) Plan") which covers all
eligible employees. Under the terms of the 401(k) Plan, all employees who have
attained the age of 21 years and have completed 1,000 hours of service are
eligible to contribute to the Plan at the next entry date. The 401(k) Plan
provides for a matching contribution of 50% of the first 4% of the employee
contribution. The Company's matching contribution for the year ended August 31,
1999 was $12,011. No other retirement, pension or similar program has been
adopted by the Company. These and other benefits may be adopted by the Company
for its employees or the employees of its subsidiaries in the future.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 30, 1999, information
regarding ownership of the Company's Common Stock, by each person known by the
Company to be the beneficial owner of more than five (5%) percent of the
Company's outstanding Common Stock, by each director, by certain related
shareholders, and by all executive officers and directors of the Company as a
group. All persons named below have sole voting and investment power over their
shares except as otherwise noted.
Name of Beneficial Owner Number of Percent of
or Identity of Group (1) Shares Owned of Class (2)
- ------------------------ ------------ ------------
Wallace M. Giakas 3,892,000 (1)(2)(3)* 29.3%
4 Tall Oaks Court
Farmingdale, N.J. 07727
33
<PAGE>
Name of Beneficial Owner Number of Percent of
or Identity of Group (1) Shares Owned of Class (2)
- ------------------------ ------------ ------------
Joseph Venneri 3,060,000 (1)(2)* 23.3%
336 East Pleasant Grove Rd.
Jackson, N.J. 08527
John S. Arnone 3,867,000 (1)(2)(3)* 29.1%
30 Penbrook Court
Shrewsbury, N.J. 07702
Gulf Coast Music, Inc. 694,000 5.3%
c/o Jeffrey Kranzdorf
757 St. Charles Avenue
New Orleans, LA 70130
Richard Bluestine 527,300 (1)(2)* 4.3%
100 Merrick Road
Rockville Centre, N.Y. 11570
Louis J. DelSignore 250,000 (4)* 2.0%
7 Northway Lane
Latham, New York 10201
Ronald J. Nicks 100,000 (5)* 0.4%
7 Northway Lane
Latham, New York 10201
All executive officers
and directors as a
Group (8 persons) 11,696,300 (1)(2)(3) 73.5%
(4)(5)
- ----------------
* Officers and/or Directors of the Company.
(1) Includes shares beneficially owned by that person, including that person's
spouse, children, parents, siblings, mothers and fathers-in-law, sons and
daughters-in-law, and brothers and sisters-in-law. Messrs. Giakas, Venneri,
Arnone, and Bluestine disclaim beneficial ownership of 603,000, 200,000,
653,000, and 70,000 shares, respectively, owned by such related parties. Also
includes all shares which may be acquired within 60 days through the exercise of
outstanding options or warrants. See table under "Management" for offices and
directorships held by the persons listed above.
34
<PAGE>
(2) Also includes 100,000 warrants, each to purchase ten (10) shares of Common
Stock issued by the Company to Wallace M. Giakas, John S. Arnone, and Joseph
Venneri, and 16,000 warrants to purchase ten (10) shares of Common Stock issued
to Richard Bluestine, which are exercisable for a period of ten (10) years from
the date of issuance, or until January 29, 2007, at $20.00 per warrant, or the
equivalent of $2.00 per share.
(3) Includes options to purchase 125,000 shares of the Company's Common Stock
exercisable at $5.25 per share over a period of five (5) years granted to
Messrs. Arnone and Giakas as compensation in connection with the acquisition of
Northeast One Stop, Inc. At the time these options were granted, the price of
the Company's Common Stock was $5.25 per share.
(4) Includes options to purchase 250,000 shares of the Company's Common Stock,
exercisable at $5.25 per share over a period of two (2) years, issued in
connection with the acquisition of NEOS. At the time these options were issued,
the price of the Company's Common Stock was $5.25 per share.
(5) Includes options to purchase 100,000 shares of the Company's Common Stock,
exercisable at $5.25 per share over a period of three (3) years.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since June 1996, the Company has been granted the use of certain office
and production space located in Jackson, New Jersey from Joseph Venneri, one of
its officers, directors and principal shareholders for a term of five (5) years
for the sum of one dollar per month. In addition, the Company has entered into a
lease agreement with the brother-in-law of Wallace Giakas, one of the Company's
principal shareholders, officers and directors, for the rent of office space in
Middletown, New Jersey in the amount of $1,000 per month for a term of three (3)
years. The Company, through its NEOS subsidiary, also leases approximately
41,000 sq. ft. from a company owned and controlled by Louis J. DelSignore, an
officer and director of the Company for a term of five (5) years at the rate of
$15,000 per month.
Since the Company's inception, the Company has been highly dependent on
loans from its principal shareholders, Messrs. Arnone and Giakas, and from
others. As of August 31, 1999, the Company owed to Messrs. Arnone and Giakas in
the aggregate $265,920 (which includes accrued interest of $35,036) representing
the balance of funds owed to such persons (collectively, the "Insider Loans").
The Insider Loans are evidenced by nine (9%) percent demand promissory notes
issued to Walextin, Inc. ("Walextin"), a privately-held corporation owned and
controlled by Messrs. Arnone and Giakas. In January 1998, the Company borrowed
in the aggregate an additional $16,150 from Walextin and Whelan Inc. ("Whelan"),
also a privately-held corporation owned and controlled by Messrs. Arnone and
Giakas. Such loans are also payable on demand and bear interest at nine (9%)
percent per annum. The Company also owes to Messrs. Arnone, Giakas, Venneri and
Bluestine an aggregate of $539,859 of accrued salaries. Because of the
relationship between officers and directors of the Company and former officers,
directors and beneficial owners of Walextin and Whelan, these transactions with
Walextin and Whelan present a conflict of interest to the Company's officers and
directors.
35
<PAGE>
In September 1996, the Company entered into a production and
distribution agreement with MMIC, to distribute the recordings and compilations
under the label Century Records, and pursuant to which the Company was to
receive compensation in the form of ten (10%) percent of the cash receipts, net
of returns, of the production and distribution of ten compact diskettes,
including six enhanced multi-media compact diskettes. Pursuant to the terms of
the agreement, MMIC was required to pay directly or reimburse the Company for
all production costs. One of the Company's officers, directors and principal
shareholders, Joseph Venneri, is also a shareholder of MMIC, and Richard
Bluestine, the Company's Chief Financial Officer and a former director of the
Company, is also a shareholder of MMIC and, from June 1995 through May 1997, was
an officer and director of MMIC. In 1997, the Company recorded approximately
$204,362 in revenues from MMIC, of which amount $180,615 remains uncollected as
of August 31, 1999.
In 1997, the Company entered into a joint venture agreement with MMIC.
The agreement provides for the production of a minimum of 20 new releases per
year, contingent upon MMIC advancing to the Company, $10,000 per album, plus
production and distribution costs. All net revenue from the production,
development and distribution of releases under the agreement will be split fifty
(50%) percent to the Company and fifty (50%) percent to MMIC. Under the
agreement, the Company is entitled to a distribution royalty for foreign and
domestic distribution of the produced compact diskettes. No revenues have been
earned under this agreement. Because of the relationship between officers and
directors of the Company and former officers, directors and beneficial owners of
MMIC, these transactions with MMIC may present a conflict of interest to the
Company. To resolve any apparent conflict of interest, in the past Messrs.
Bluestine and Venneri have not voted on any matter involving MMIC before the
Company's Board of Directors. Mr. Venneri has agreed to continue to abstain from
voting on any such matter.
There are no other material agreements and/or arrangements between the
Company, its officers, directors or shareholders, and the Company believes that
the terms of its agreements with related parties are no less favorable to the
Company than those that would be available from unrelated third parties.
ITEM 13: EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
3 a. Articles of Incorporation*
b. By-Laws of Incorporation*
10 Material Contracts
a. Sun Entertainment Agreement*
b. Atlantic Coast Digital Concepts, Inc. Agreement*
c. New Millennium Communications, Ltd. Agreement*
d. Nippon Columbia Agreement*
36
<PAGE>
e. Multi-Media Industries Corporation Joint
Venture Agreement*
f. Multi-Media Industries Corporation
Production Agreement*
g. JNC Opportunity Fund Ltd. Convertible Preferred
Stock Purchase Agreement*
h. Lease Agreement with Al Alberts On Stage, Ltd.*
i. Executive Compensation Agreement with
Wallace M. Giakas*
j. Executive Compensation Agreement with
John S. Arnone*
k. Executive Compensation Agreement with
Joseph Venneri*
l. Purchase and Sale Agreement with Northeast
One Stop, Inc.*
m. Ronald J. Nicks Executive Compensation Agreement**
n. Gulf Coast Master Recording Purchase Agreement**
o. Gulf Coast Addendum to Master Recording Agreement**
p. NEOS Lease from L & P Feed**
q. NEOS Financing Agreement with Congress
Financial Corporation**
r. NEOS Amendment to Financing Agreement dated
July, 1995**
s. NEOS Amendment to Financing Agreement dated
August 1997**
t. NEOS Amendment to Financing Agreement dated
September 1998**
u. NEOS Guarantee**
v. NEOS Waiver of Line of Credit Covenant**
11 Statement regarding Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended August 31, 1999 the Company filed a Current
Report on Form 8-K dated August 13, 1999 to request the dismissal of its
previous independent accounting firm, AJ. Robbins, P.C., and the engagement of
its current independent accounting firm, Lazar Levine & Felix, LLP.
- ----------------
* Filed as Exhibits to Form 10-SB, File Number 000-22549, dated September
23, 1998 and are hereby incorporated by reference.
** Filed as Exhibits to Amendment No. 5 to Form 10-SB, File Number
000-29776, dated May 21, 1999 and are hereby incorporated by reference.
37
<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.
PLANET ENTERTAINMENT CORPORATION
Date: December 10, 1999 By: /s/ John S. Arnone
------------------------------
Name: John S. Arnone
Title: President
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:
Signature Name and Title Date
- --------- -------------- ----
/s/ Wallace M. Giakas Wallace M. Giakas, 12/10/99
Chairman of the Board
/s/ John S. Arnone John S. Arnone, 12/10/99
President, Chief Executive Officer,
Director
- -------------------------- Joseph Venneri,
Director
/s/ Richard Bluestine Richard Bluestine, 12/10/99
Chief Financial Officer
/s/ Louis J. DelSignore Louis J. DelSignore, 12/10/99
Director
/s/ Ronald J. Nicks Ronald J. Nicks, 12/10/99
Director
- -------------------------- Robert G. Thomas,
Director
- -------------------------- Donald F. Maggi,
Director
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Page(s)
-------
Financial Statements:
Independent Auditors' Report F-2
Independent Auditors' Report - Prior Auditors F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Comprehensive Income (Loss) F-7
Consolidated Statements of Stockholders' Equity F-8
Consolidated Statements of Cash Flows F-10
Notes to Consolidated Financial Statements F-12
Proforma financial statements:
Proforma Explanatory Headnote F-33
Unaudited Proforma Consolidated Statement of Operations F-34
Notes to Unaudited Proforma Consolidated Statements F-35
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Planet Entertainment Corporation
We have audited the accompanying consolidated balance sheet of Planet
Entertainment Corporation and subsidiaries as of August 31, 1999 and the related
consolidated statement of operations, comprehensive income (loss), stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Planet
Entertainment Corporation and subsidiaries as of August 31, 1999, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ LAZAR LEVINE & FELIX LLP
------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
October 12, 1999
F-2
<PAGE>
AJ. ROBBINS, PC
CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS
3033 EAST 1ST AVENUE
SUITE 201
DENVER, COLORADO 80206
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS
PLANET ENTERTAINMENT CORPORATION
MIDDLETOWN, NEW JERSEY
We have audited the accompanying consolidated balance sheet of Planet
Entertainment Corporation and subsidiaries, as of August 31, 1998, and the
related consolidated statements of operations, comprehensive loss, stockholders'
equity, and cash flows for the eight months ended August 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides 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 Planet Entertainment
Corporation and subsidiaries as of August 31, 1998, and the results of its
operations and stockholders' equity and its cash flows for the eight months
ended August 31, 1998 in conformity with generally accepted accounting
principles.
AJ. ROBBINS, PC
CERTIFIED PUBLIC ACCOUNTANTS
AND CONSULTANTS
DENVER, COLORADO
OCTOBER 30, 1998
F-3
<PAGE>
<TABLE>
<CAPTION>
PAGE 1 OF 2
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS (NOTE 8)
AUGUST 31, AUGUST 31,
1999 1998
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 620,975 $ 3,850,162
Accounts receivable, net of allowance for doubtful accounts
of $617,143 and $105,000 for 1999 and 1998,
respectively (Notes 8 and 14) 5,062,283 17,959
Accounts receivable, net - related party (Note 3) 180,615 192,042
Inventories (Notes 8 and14) 7,165,072 --
Marketable securities - available for sale 1,274,272 --
Prepaid expenses and other current assets 200,767 246,863
Escrow deposit -- 225,000
Note receivable - related party (Note 4) 100,000 --
Deferred income taxes (Note 13) 244,000 --
----------- -----------
TOTAL CURRENT ASSETS 14,847,984 4,532,026
----------- -----------
PROPERTY AND EQUIPMENT - NET (NOTES 5 AND 10) 1,420,786 172,410
----------- -----------
OTHER ASSETS:
Record masters - net (Note 6) 6,566,037 6,500,000
Goodwill - net 4,541,899 70,839
Investment in joint ventures (Notes 2 and 17a) 9,000 --
Organization costs - net 27,500 42,495
Security deposits and other assets 124,513 880
----------- -----------
11,268,949 6,614,214
----------- -----------
$27,537,719 $11,318,650
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
PAGE 2 OF 2
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
AUGUST 31, AUGUST 31,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable (Note 14) $ 7,418,370 $ 124,197
Accrued expenses and other current liabilities 342,103 63,444
Accrued interest expense - related parties 239,312 275,618
Deferred revenue (Note 7) 211,544 123,524
Due to stockholders (Note 17) 230,884 270,884
Note payable - related party (Note 11) 150,000 150,000
Current portion of long-term debt - related parties (Note 12) 719,000 250,000
Accrued officers' salaries 539,859 141,467
Current portion of capital lease obligations (Note 10) 58,072 --
Current portion of notes payable (Note 9) 19,456 --
------------ ------------
TOTAL CURRENT LIABILITIES 9,928,600 1,399,134
------------ ------------
LONG-TERM LIABILITIES:
Note payable - line of credit (Note 8) 5,435,035 --
Note payable - related party - net of current portion (Note 11) 400,000 --
Long-term debt - net of current portion - related parties (Note 12) 500,000 750,000
Notes payable - net of current portion (Note 9) 49,701 --
Capital lease obligations - net of current portion (Note 10) 9,050 --
Deferred income taxes (Note 13) 144,000 --
------------ ------------
TOTAL LONG-TERM LIABILITIES 6,537,786 750,000
------------ ------------
TOTAL LIABILITIES 16,466,386 2,149,134
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTES 14, 15 AND 20)
STOCKHOLDERS' EQUITY (NOTES 16 AND 18):
Convertible preferred stock, stated value $10,000 per share; 10,000,000
shares authorized; 465 and 500 shares issued and outstanding at
August 31, 1999 and 1998, respectively 4,650,000 5,000,000
Common stock, $.001 par value; 50,000,000 shares
authorized; 12,147,803 and 11,976,055 shares issued and outstanding
at August 31, 1999 and 1998, respectively (Notes 12 and 19) 12,148 11,976
Additional paid-in capital 11,513,499 9,286,053
Accumulated deficit (4,878,586) (5,128,513)
Other comprehensive income (loss) (225,728) --
------------ ------------
11,071,333 9,169,516
------------ ------------
$ 27,537,719 $ 11,318,650
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR FOR THE EIGHT
ENDED MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998 (NOTE 19)
------------ ------------
<S> <C> <C>
REVENUES:
Net sales (Note 14) $ 43,719,376 $ 51,002
Royalties 5,288 23,042
Studio rental 65,890 35,451
------------ ------------
TOTAL REVENUES 43,790,554 109,495
------------ ------------
COSTS AND EXPENSES:
Cost of sales (Note 14) 35,736,723 11,139
Selling, general and administrative costs 6,769,942 659,348
Depreciation and amortization 527,845 33,758
Interest expense 421,311 --
Interest expense, related party 112,670 98,135
Bad debt expense 19,661 --
------------ ------------
TOTAL COSTS AND EXPENSES 43,588,152 802,380
------------ ------------
INCOME (LOSS) FROM OPERATIONS 202,402 (692,885)
OTHER INCOME:
Interest and dividend income 41,942 47,421
------------ ------------
INCOME (LOSS) BEFORE PROVISION (CREDIT)
FOR INCOME TAXES 244,344 (645,464)
Provision (credit) for income taxes (Note 13) (34,118) --
------------ ------------
NET INCOME (LOSS) $ 278,462 $ (645,464)
============ ============
LOSS PER SHARE:
NET INCOME (LOSS) $ 278,462 $ (645,464)
Less preferred stock dividends (353,199) (87,500)
Less preferred stock dividend return of capital -- (3,620,690)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS (NOTE 18) $ (74,737) $ (4,353,654)
============ ============
WEIGHTED AVERAGE SHARES 11,996,114 11,827,308
============ ============
LOSS PER SHARE BASIC AND DILUTED $ (.01) $ (.37)
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE EIGHT
ENDED MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998
---------------- -----------------
<S> <C> <C>
NET INCOME (LOSS) $ 278,462 $ (645,464)
Unrealized loss in investment in securities
available for sale (225,728) --
---------------- -----------------
COMPREHENSIVE NET INCOME (LOSS) $ 52,734 $ (645,464)
================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
PAGE 1 OF 2
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Other
Additional Comprehensive
Preferred Stock Common Stock Paid-In Accumulated Income
Shares Amount Shares Amount Capital Deficit (Loss) Total
------- ---------- ---------- ------- ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1997 -- $ -- 11,421,966 $11,422 $5,942,570 $ (862,359) $ -- $5,091,633
Issuance of common stock for
services rendered -- -- 554,089 554 247,793 -- -- 248,347
Offering costs from sale of
convertible preferred
stock for cash -- -- -- -- (525,000) -- -- (525,000)
Issuance of convertible
preferred stock 500 1,379,310 -- -- 3,620,690 -- -- 5,000,000
Preferred stock dividend,
return of capital -- 3,620,690 -- -- -- (3,620,690) -- --
Net loss for the period -- -- -- -- -- (645,464) -- (645,464)
------- ---------- ---------- ------- ---------- ----------- ------ ----------
BALANCES, AUGUST 31, 1998 500 $5,000,000 11,976,055 $11,976 $9,286,053 $(5,128,513) $ -- $9,169,516
======= ========== ========== ======= ========== =========== ====== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
<TABLE>
<CAPTION>
PAGE 2 OF 2
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Other
Additional Comprehensive
Preferred Stock Common Stock Paid-In Accumulated Income
Shares Amount Shares Amount Capital Deficit (Loss) Total
------- ---------- ---------- ------- ---------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, AUGUST 31, 1998 500 $5,000,000 11,976,055 $11,976 $9,286,053 $(5,128,513) $ -- $9,169,516
Options granted to the former
owner of NEOS in connection
with acquisition -- -- -- -- 814,000 -- -- 814,000
Options granted for services
rendered in connection with
the acquisition of NEOS -- -- -- -- 1,147,750 -- -- 1,147,750
Excess cash received from sale
of common stock in litigation
settlement -- -- -- -- 17,627 -- -- 17,627
Offering costs from sale of stock -- -- -- -- (130,294) -- -- (130,294)
Conversion of 35 preferred
shares to common (35) (350,000) 158,768 159 349,841 -- -- --
Dividend on 35 preferred shares -- -- 12,980 13 28,522 (28,535) -- --
Change in unrealized loss on
investment in securities
available for sale -- -- -- -- -- -- (225,728) (225,728)
Net income for the period -- -- -- -- -- 278,462 -- 278,462
------- ---------- ---------- ------- ----------- ----------- ---------- -----------
BALANCES, AUGUST 31, 1999 465 $4,650,000 12,147,803 $12,148 $11,513,499 $(4,878,586) $ (225,728) $11,071,333
======= ========== ========== ======= =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
<TABLE>
<CAPTION>
PAGE 1 OF 2
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE EIGHT
ENDED MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 278,462 $ (645,464)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Bad debt expense 19,661 --
Depreciation and amortization 527,845 33,758
Stock issued for services -- 248,347
Deferred income taxes (74,600) --
Marketable securities received for sale
of non-exclusive rights to masters (1,500,000) --
Changes in:
Accounts receivable 223,477 3,067
Accounts receivable, related party 95,843 (8,358)
Prepaid expenses and other current assets 72,485 (127,790)
Inventory (316,505) --
Accounts payable and accrued expenses (368,401) 80,948
Accrued interest expense, related party (36,306) 98,134
Deferred revenue (151,356) (22,701)
Accrued officers' salary 398,392 29,467
----------- -----------
Cash Flows (Used) by Operating Activities (831,003) (310,592)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of NEOS net of cash acquired (1,627,416) --
Purchase of fixed assets (995,149) --
Repayments on note receivable (58,776) --
Investment in joint venture (9,000) --
Escrow deposit -- (225,000)
Deposit on leased equipment (105,462) --
----------- -----------
Cash Flows (Used) by Investing Activities (2,795,803) (225,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments to employees (75,000) --
Advances (repayments) from (to) stockholders (70,000) 7,084
Proceeds from note payable 32,606 --
Proceeds from note payable, related party 25,000 150,000
Proceeds from issuance of preferred/common stock 17,627 5,000,000
Stock issuance costs (130,294) (525,000)
Proceeds from note payable - line of credit 1,264,639 --
Repayment of long-term debt, related party (500,000) (250,000)
Payment of capitalized lease obligations (166,959) --
----------- -----------
Cash Flows From Financing Activities 397,619 4,382,084
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,229,187) 3,846,492
CASH AND CASH EQUIVALENTS, beginning of year/period 3,850,162 3,670
----------- -----------
CASH AND CASH EQUIVALENTS, end of year/period $ 620,975 $ 3,850,162
=========== ===========
CASH PAID FOR INTEREST EXPENSE $ 421,311 $ --
=========== ===========
CASH PAID FOR INCOME TAXES $ 263,163 $ --
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
F-10
<PAGE>
PAGE 2 OF 2
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS FOR NONCASH INVESTING AND
FINANCING ACTIVITIES:
For the year ended August 31, 1999:
In connection with the acquisition of NEOS, the Company executed notes payable
to the former owner of NEOS for $750,000, granted options to purchase 250,000
shares of the Company's common stock valued at $814,000 (pursuant to SFAS 123),
assumed liabilities of $13,576,804, granted options to purchase a total of
250,000 shares of the Company's common stock valued at $1,147,750 to two
stockholders of the Company in consideration for advisory services rendered in
connection with the acquisition pursuant to their employment agreements
(pursuant to SFAS 123) and paid cash of $2,250,000 in exchange for assets
totaling $18,538,554 ( see Note 19).
The holder of the preferred stock converted 35 shares (valued at $350,000) plus
unpaid dividends aggregating $28,535 into 171,748 shares of the Company's common
stock.
For the eight months ended August 31, 1998:
The Company issued 554,089 shares of common stock for services.
F-11
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
HISTORY AND ACTIVITY
Planet Entertainment Corporation (the "Company" or "Planet") was incorporated
under the laws of Delaware on May 17, 1996 and in October 1996 was acquired by
Ampro International Golf Tour, Inc. which changed its name to Planet. The
Company was organized for the purpose of acquiring existing libraries of master
recordings of various types of music and to enhance, market and produce new
recordings to be licensed or marketed domestically, internationally and on the
internet.
ACQUISITION OF MASTERS
a) In July 1996, the Company issued 3,060,000 shares of common stock to
acquire 5,000 exclusive rights to master recordings, publishing rights to
300 songs and a recording studio located in New Jersey from a related
party. The master recordings acquired have not been recorded in the
financial statements since the predecessor's costs could not be determined.
b) In December 1995, an unrelated third party company, Gulf Coast Music, LLC
("Gulf Coast") agreed to acquire 7,500 music master recordings from a group
of companies in a Chapter 11 bankruptcy proceeding for future
consideration. This transaction was subject to confirmation of a plan of
reorganization.
In September 1996, Planet agreed to acquire the 7,500 master recordings
from Gulf Coast for 694,000 shares of its common stock and notes totaling
$1,250,000.
Also in September 1996, another company J. Jake, Inc. ("J. Jake")
controlled by the same individual who controlled Gulf Coast, sold another
2,500 master recordings to Planet for 806,000 shares of Planet common
stock.
In November 1996, both the Gulf Coast and J. Jake Inc. agreements were
amended. The new agreement included a combined sale of non-exclusive rights
to 10,000 master recordings for 1,500,000 shares of Planet common stock and
a note payable for $1,250,000. 7,500 of these master recordings were still
subject to approval of sale by the bankruptcy court. The Company has the
right to manufacture, distribute, advertise, sell and promote, in all
configurations, the performances contained on the masters.
In November of 1997, the bankruptcy court approved the plan of
reorganization so that the sale of the final 7,500 recordings was approved.
The Company recorded the September 1996 purchase of the 2,500 master
recordings for $2,821,000 or $3.50 per share for the 806,000 shares
transferred, based upon the trading price of the common stock issued. Also,
the Company recorded the purchase of the 7,500 master recordings for
$3,804,000, representing the $1,250,000 notes, additional costs of $125,000
and 694,000 shares of Planet common stock valued at $3.50 per share, the
then current trading price (See Note 12).
ACQUISITION OF NORTHEAST ONE STOP, INC.
On September 1, 1998 the Company acquired all of the issued and outstanding
capital stock of Northeast One Stop, Inc. ("NEOS") a record and entertainment
products distribution company (See Note19). Upon acquisition of NEOS, the
Company now derives the majority of its revenues' from the wholesale
distribution of music products and accessories.
F-12
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
CHANGE OF FISCAL YEAR
The Company changed its fiscal year end from December 31 to August 31 ( to
coincide with NEOS) for the period ending August 31, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries; Higher Ground Records, Maestro Holding
Corporation, Al Alberts On Stage, Ltd. and Northeast One Stop, Inc. All
significant intercompany balances and transactions have been eliminated.
FISCAL YEAR END
The NEOS subsidiary's fiscal year ends on the Saturday closest to August 31,
which results in a 52 or 53 week year.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
In preparing financial statements, in accordance with generally accepted
accounting principles, management makes certain estimates and assumptions, where
applicable, that affect the reported amounts of assets, liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as reported amounts of revenues and expenses during the
reported period. While actual results could differ from those estimates,
management does not expect such variances, if any, to have a material effect on
the financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
DEPRECIATION
Depreciation is provided using the straight-line method as follows:
Recording studio equipment 10 years
Computer and other equipment 5-7 years
Warehouse and office equipment 5-7 years
Furniture and fixtures 5-7 years
Rack jobbing fixtures 5-7 years
Vehicles 5 years
F-13
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
DEPRECIATION (CONTINUED)
Leasehold improvements are amortized over the term of the lease. Maintenance and
repairs are charged to operations and major improvements are capitalized. Upon
retirement, sale or other disposition, the associated cost and accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is
included in operations.
REVENUE RECOGNITION
Royalties derived from the licensing of recording masters are recognized upon
notification of retail sales by the distributor. Studio revenue is recognized
when the services are performed. Sales of recordings are recognized when the
compact disk, cassette or record is shipped. An allowance is recorded, when
material, for sales returns from customers that are not in turn returnable to
the Company's distributors. No right of return exists for Higher Ground record
sales which aggregated $16,207 for the year ended August 31, 1999. Deferred
revenue represents advances received in connection with production and
distribution agreements, and deferred advertising revenues for advances received
from NEOS's suppliers.
RESERVE FOR POTENTIAL DISPUTES CONCERNING RECORD MASTERS
Upon attaining $100,000 in product sales from the exploitation of record
masters, management has decided that a reserve will be placed in escrow equal to
5% of the net sales from all such exploitation. The level of reserve will be
subject to periodic review by management of the Company. This reserve is
established to provide for potential costs associated with the settlement of
potential disputes. There is no balance in the reserve account at August 31,
1999.
PUBLISHING RIGHTS
Publishing rights, which were acquired in July 1996 along with 5,000 master
recordings (see above), consist of rights to 300 songs and are stated at
predecessor cost.
Amortization of publishing rights is computed based on the ratio that current
years' revenues will bear to anticipated total gross revenues over the estimated
life of the publishing right (generally 5-10 years). No amortization expense has
been recorded for the year ended August 31, 1999 and the eight months ended
August 31, 1998.
RECORD MASTERS
Record masters consist of recordings of various types of music used to enhance,
market and produce new recordings to be licensed and marketed by the Company.
Amortization of record masters is computed based on the ratio that current
years' revenues will bear to anticipated total gross revenues over the estimated
life of the record master (generally 5-10 years). Amortization expense charged
to operations for the year ended August 31, 1999 and the eight months ended
August 31, 1998 and accumulated amortization at August 31, 1999 and 1998
amounted to $58,963 and $0, respectively.
F-14
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
INVENTORIES
Inventories, which consist primarily of goods held for resale, are stated at the
lower of cost (first in, first out basis) or market. NEOS has a full right of
return for most products it distributes and as such, titles which experience a
decline in popularity are generally returned to distributors and removed from
its catalogs. NEOS's business requires that they maintain one or two copies of
less popular titles so that they can function as a one-stop distributor for its
customers. The carrying values of these copies are reduced accordingly
IMPAIRMENT OF LONG LIVED ASSETS
The Company evaluates its long lived assets (including Goodwill, see below) by
measuring the carrying amount of the asset against the estimated undiscounted
future cash flows associated with them in accordance with SFAS No.121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF." At the time such evaluations indicate that the future
undiscounted cash flows of certain long lived assets are not sufficient to
recover the carrying value of such assets, the assets are adjusted to their fair
values.
Factors considered in determining the recoverability of the record masters
relative to impairment include existing signed contracts for exploitation of the
record masters, numerous existing distribution channels, industry popularity
trends, potential rights disputes by others and potential conflicts concerning
record masters for which non-exclusive exploitation rights have been granted.
No adjustment to the carrying value of the assets has been made for the year
ended August 31, 1999 and the eight months ended August 31, 1998.
ORGANIZATION COSTS
Amortization of organization costs is calculated using the straight-line method
over five years.
The Accounting Standards Committee has issued Statement of Position (SOP) 98-5,
Reporting on the Costs of Start-up Activities. For years beginning after
December 15, 1998, all start up costs are required to be expensed as incurred.
Amortization expense for the year ended August 31, 1999 and the eight months
ended August 31, 1998 was $15,000, and $ 10,000, respectively.
Accumulated amortization at August 31, 1999 and 1998 aggregated $47,500 and
$32,500, respectively.
GOODWILL
Costs in excess of net assets acquired (see Note 19) are being amortized on a
straight-line basis over ten to forty years. Amortization expense for the year
ended August 31, 1999 and the eight months ended August 31, 1998 was $123,359
and $7,078, respectively. As of August 31, 1999 and 1998, accumulated
amortization of goodwill aggregated $137,525 and $14,166, respectively.
F-15
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
INCOME TAXES
The Company has adopted SFAS 109, "ACCOUNTING FOR INCOME TAXES" which requires
use of the asset and liability approach of providing for income taxes. This
statement requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method deferred tax liabilities
and assets are determined based on the differences between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At August 31, 1999 and 1998, the carrying value of cash, accounts receivable,
accounts payable, accrued expenses and due to stockholders, approximate fair
value because of the short maturity of these items.
The carrying amount of long-term debt also approximates fair value since the
interest rates on these loans approximate market interest rates.
EARNINGS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "EARNINGS PER SHARE" (SFAS
No. 128) was issued in February 1997 (effective for financial statements issued
for periods ending after December 15, 1997). SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition, the
Statement requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures.
At August 31,1999 and 1998, 465 and 500 shares of convertible preferred stock,
respectively, which were convertible into 1,621,328 and 253,962 common shares
respectively, were outstanding. All of these potential common shares were
excluded from the computation of EPS because their inclusion would have had an
antidilutive effect on EPS. Also various exercisable stock options were excluded
from the diluted EPS because the options exercise prices were greater than the
average market price of the common shares.
AMORTIZATION OF OTHER INTANGIBLE ASSETS
Deferred financing costs, which are included in other assets and which are
comprised of commitment fees and other expenses associated with obtaining
financing, are being amortized on a straight-line basis over the respective
terms of the notes. Amortization expense for the year ended August 31, 1999, and
accumulated amortization at August 31, 1999, aggregated $6,370.
F-16
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable.
The Company maintains, at times, deposits in federally insured financial
institutions in excess of federally insured limits. Management attempts to
monitor the soundness of the financial institutions and believes the Company's
risk is negligible.
Concentrations with regard to accounts receivable are limited due to the
Company's large customer base.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform to the current
year's reporting presentation.
STOCK-BASED COMPENSATION
SFAS No. 123 "ACCOUNTING FOR STOCK BASED COMPENSATION", effective January 1,
1996, requires the Company to either record compensation expense or to provide
additional disclosures with respect to stock awards and stock option grants made
after December 31, 1994. The accompanying Notes to Consolidated Financial
Statements include the disclosures required by SFAS No. 123 (see Note 16). No
compensation expense is recognized pursuant to the Company's stock option plans
under SFAS No. 123, which is consistent with prior treatment under APB No. 25.
ADVERTISING AND PROMOTION COSTS
Advertising and promotion costs, which are included in general and
administrative expenses, are expensed as incurred. For the year ended August 31,
1999 and for the eight months ended August 31, 1998, such costs aggregated
$685,132 and $8,298, respectively.
MARKETABLE SECURITIES
At August 31, 1999, marketable securities have been categorized as available for
sale and, as a result, are stated at fair value in accordance with Statement of
Financial Standards No. 115, "ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES". Unrealized gains and losses are included in shareholders'
equity as other comprehensive income (loss).
COMPREHENSIVE INCOME
In 1997, the Company adopted Statement of Financial Accounting Standards No.
130, "REPORTING COMPREHENSIVE INCOME" ("SFAS 130"), which establishes new rules
for the reporting and display of comprehensive income and its components. As
such, SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities to be included in other comprehensive income.
F-17
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In 1998, the Company adopted Financial Accounting Standards Board Statement No.
131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION",
which establishes standards for reporting on operating segments (see Note 21).
NOTE 2 - PRODUCTION AND DISTRIBUTION AGREEMENTS:
SUN ENTERTAINMENT
On April 22, 1997, the Company entered into a licensing agreement with Sun
Entertainment Corporation, pursuant to which the Company obtained non-exclusive
rights to various master recordings in consideration for advance payments
against future royalties that will accrue on all tapes and compact disks that
are sold by the Company. To date the Company has not attempted to exploit these
master recordings, and has not received royalties, recognized revenue or income
as a result of this agreement.
NEW MILLENNIUM COMMUNICATIONS, LTD.
On May 18, 1998, the Company entered into an agreement with New Millennium
Communications, Ltd. to form a joint venture operating under the name Planet
Entertainment Europe, Ltd. concerning the licensing and distribution of master
recordings owned by the Company. According to the terms of the agreement, Planet
Entertainment Europe, Ltd. has the non-exclusive right to market, reproduce and
distribute all subject master recordings for a term of 99 years, with each party
to the joint venture to recover their respective costs and to distribute any
resultant profits on an equal basis. As of August 1999, the Company has
contributed 64 compilations of its master recordings to the joint venture, and
distribution is expected to begin immediately. To date, however, the Company has
received no royalties, and has recorded no revenue or income as a result of this
agreement.
SHANDEL MUSIC
In February 1999, the Company entered into an agreement with Shandel Music to
form a limited liability company in South Africa under the label Planet Africa,
to distribute the Company's products throughout Africa, Australia, New Zealand
and Israel ("the territory"). According to the agreement, all catalogue sales,
after costs, will be divided equally. The Company has granted exclusive rights
to distribute the releases in the territory to Planet Africa. To date, the
Company has received no royalties and has recognized no revenue or income in
connection with this agreement.
F-18
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 2 - PRODUCTION AND DISTRIBUTION AGREEMENTS (CONTINUED):
RENAISSANCE RECORDS INC.
In March 1999, the Company entered into an agreement with Renaissance Records,
Inc. to form a joint venture operating under the name Planet Nashville, LLC
("Planet Nashville"). Planet Nashville, which is owned equally by both parties,
is authorized to distribute and sell recordings derived from the Company's
masters. All revenue and expenses of the joint venture will be shared equally by
both parties. For the year ended August 31, 1999, the Company has not recorded
any income in connection with this agreement.
The Company is a party to several other joint venture agreements which at August
31, 1999 are deemed to be immaterial.
NOTE 3 - ACCOUNTS RECEIVABLE - RELATED PARTY:
Accounts receivable - related party represents amounts due from Multi-Media
Industries Corporation ("MMIC"). Two of the Company's officer's and shareholders
are also shareholders of MMIC. In 1996, the Company entered into a production
and distribution agreement as well as a related joint venture with MMIC. In
1997, the Company recorded $204,362 in revenues from MMIC, of which $180,615
remains uncollected as of August 31, 1999. (See Notes 11, 12 and 17) for
additional related party disclosures).
NOTE 4 - NOTE RECEIVABLE - RELATED PARTY:
Installment note receivable from a related party, Renaissance Records, Inc.,
aggregates $100,000 at August 31, 1999 with interest at 6% per annum from
inception through August 1, 1999 and 12% per annum thereafter. This note is
secured by accounts receivable of Renaissance Records Inc. (See also Note 2.)
NOTE 5 - PROPERTY AND EQUIPMENT:
Property and equipment which is reflected at cost, consists of the following:
AUGUST 31, AUGUST 31,
1999 1998
---------- ----------
Recording studio equipment $ 204,537 $ 200,000
Computer and other equipment 1,480,982 10,094
Leasehold improvements 29,778 --
Warehouse and office equipment 1,197,785 --
Furniture and fixtures 126,296 --
Rack jobbing fixtures 143,603 --
Vehicles (Note 9) 142,097 --
---------- ----------
3,325,078 210,094
Less: accumulated depreciation and amortization 1,904,292 37,684
---------- ----------
$1,420,786 $ 172,410
========== ==========
F-19
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 6 - RECORD MASTERS:
Record Masters at August 31, 1999 and 1998 consist of the following:
1999 1998
---------- ----------
Cost $6,625,000 $6,500,000
Less: accumulated amortization 58,963 --
---------- ----------
$6,566,037 $6,500,000
========== ==========
See also Note 1
NOTE 7 - DEFERRED REVENUE:
On July 8, 1997, the Company entered into an agreement granting Nippon Columbia
Company, Ltd. ("NCC") and its subsidiaries, the right to produce and distribute
music CD's and video tapes in Japan, Hong Kong, Taiwan and Singapore. The
agreement is for a term of one year and four months, commencing September 1,
1997, and was extended on a quarterly basis by the Company provided NCC makes
certain minimum payments and purchases during the term of the agreement. The
Company recognizes royalty revenue of $1 per sale of each compact disc licensed
to NCC.
The Company received a $150,000 advance under the agreement which was recorded
as deferred revenue. For the year ended August 31, 1999 and the eight months
ended August 31, 1998, $5,288 and $22,701, respectively, were earned under the
agreement. At August 31, 1999, the balance of deferred revenues aggregates
$118,226.
In addition to the above, at August 31, 1999, the balance of deferred
advertising revenues for advances received from NEOS's suppliers aggregated
$93,307.
NOTE 8 - NOTES PAYABLE AND LINE OF CREDIT:
In April 1999, NEOS entered into a new working capital line of credit and an
equipment line of credit with a financial institution, which provides for
maximum borrowings of $8,500,000 and $1,500,000, respectively. The two lines of
credit are payable in April 2002. Both lines of credit bear interest at prime
plus 1% per annum and are secured by all the assets of NEOS and the guaranty of
Planet. Direct borrowings under the working capital line, which is based on
eligible accounts receivable and inventory as defined in the agreement, was
$5,435,035 at August 31, 1999. Both lines also contain various financial
covenants. There was no borrowing under the equipment line of credit at August
31, 1999.
NOTE 9 - NOTES PAYABLE:
AT AUGUST 31,
1999
-------------
Two auto loans payable in monthly installments aggregating $1,999,
including interest at 7.25% and 7.75% per annum, secured by
autos and maturing in November 2003 $69,157
Less current maturities 19,456
-------
$49,701
=======
F-20
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 9 - NOTES PAYABLE (CONTINUED):
At August 31, 1999, the annual scheduled principal payments of these loans are
$19,456, $20,982, $14,446, $11,313 and $2,960 for each of the next five years,
respectively.
NOTE 10 - CAPITALIZED LEASE OBLIGATIONS:
The Company leases various equipment under capitalized leases expiring in
various years through 2001. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the assets. The assets are depreciated over their estimated useful
lives. Depreciation expense of assets under capital leases is included in
depreciation expense for the year ended August 31, 1999 and amounted to $68,831.
At August 31, 1999 assets under capital leases are as follows:
Computer and other equipment $103,609
Warehouse and office equipment 139,366
Furniture and fixtures 23,896
Rack jobbing fixtures 66,923
--------
333,794
Less: accumulated depreciation 118,491
--------
$215,303
========
Minimum annual future lease payments under the capital leases as of August 31,
1999 and for each of the next two years and in the aggregate are:
Fiscal year ending August 2000 $ 61,712
Fiscal year ending August 2001 9,118
--------
Total minimum lease payments 70,830
Less amount representing interest (3,708)
--------
Present value of net minimum lease payments
with interest at approximately 11%-26% 67,122
Less current portion 58,072
--------
Long-term portion $ 9,050
========
F-21
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 11 - NOTES PAYABLE - RELATED PARTY:
On January 27, 1997, the Company borrowed $100,000 at 10% interest due January
27, 1998 from an investment company. In December 1997, the Company converted the
$100,000 note and $10,000 of accrued interest to 1,100,000 shares of the
Company's common stock.
On January 19, 1998, the Company borrowed an additional $150,000 from this
investment company/shareholder. The unsecured note is due on demand, with
interest payable on January 19, 1999 at 10% per annum. The note holder waived
this interest payment but interest continues to accrue.
On August 25, 1999, the Company borrowed an additional $400,000 from the same
shareholder. This unsecured note is due September 1, 2000, with interest payable
quarterly beginning on December 1, 1999 at 9% per annum.
NOTE 12 - LONG-TERM DEBT - RELATED PARTIES:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Unsecured note payable to Gulf Coast Music, LLC, a
stockholder of the Company, due September 2001, with interest
at 9.75% per annum. Payments of $250,000 principal plus
interest are due annually beginning September 1997 (i). $ 500,000 $ 1,000,000
Note payable to former stockholder of NEOS in the original
amount of $750,000, as partial payment for the acquisition of
NEOS on September 1, 1998. This note, which is secured by
common stock of the Company, is payable $375,000 on February
28, 1999 and August 31, 1999. On September 1, 1999,
subsequent to this balance sheet date, this note was fully
paid (see Note 19). 375,000 --
Unsecured demand note payable to former stockholder of NEOS
with interest at 9% per annum. 344,000 --
----------- -----------
Total 1,219,000 1,000,000
Less current portion 719,000 250,000
----------- -----------
Long-term portion $ 500,000 $ 750,000
=========== ===========
</TABLE>
F-22
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 12 - LONG-TERM DEBT - RELATED PARTIES (CONTINUED):
(i) Prior to December 1998, the Company had not made all of the required
payments due under the terms of the note with Gulf Coast Music, LLC since Gulf
Coast had not completed its obligation to deliver unencumbered title to certain
of the master recordings. In December 1998, all disputes had been resolved, and
the Company obtained unencumbered title to the master recordings (See Notes 1
and 20).
At August 31, 1999, the annual scheduled principal payments of long-term debt
are $719,000, $250,000 and $250,000 for each of the next three years,
respectively.
NOTE 13 - INCOME TAXES:
The composition of deferred tax assets and (liabilities) are as follows:
FOR THE FOR THE EIGHT
YEAR ENDED MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998
---------- -------------
Total deferred tax assets $ 620,000 $ 460,000
Total valuation allowance (376,000) (460,000)
--------- ---------
Net total deferred tax assets $ 244,000 $ --
========= =========
Total deferred tax liabilities $ 144,000 $ --
========= =========
The tax effects of temporary differences and carry forwards that give rise to
deferred tax assets and liabilities are as follows:
FOR THE FOR THE EIGHT
YEAR ENDED MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998
---------- -------------
Deferred tax assets:
Accrued interest $ 96,000 $ 36,000
Accrued officers' salary 216,000 --
Inventory capitalization 36,000 --
Allowance for doubtful accounts 57,000 --
Other 4,000 11,000
Net operating loss carry forwards 211,000 413,000
--------- ---------
Gross deferred tax assets 620,000 460,000
Valuation allowance (376,000) (460,000)
--------- ---------
Total deferred tax assets $ 244,000 $ --
========= ---------
Deferred tax liabilities:
Goodwill $ 77,000 $ --
Property and equipment 67,000 --
--------- ---------
Total deferred tax liabilities $ 144,000 $ --
========= =========
F-23
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 13 - INCOME TAXES (CONTINUED):
No provision for income taxes was recorded for the eight months ended August,
1998 as the Company incurred losses during that period. The Company has net
operating loss carryovers of approximately $527,000 which expire during 2012 and
2013. The Company is providing a valuation allowance in connection with deferred
tax assets based upon an estimate of the assets considered realizable in future
periods. This allowance will be evaluated at the end of each year considering
both positive and negative evidence concerning the realizability of the assets,
and will be increased or decreased accordingly.
The provision (benefit) for income taxes is comprised of the following:
FOR THE FOR THE EIGHT
YEAR ENDED MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998
---------- -------------
CURRENT:
Federal $ -- $ --
State 40,482 --
-------- ------
Total current provision 40,482 --
-------- ------
DEFERRED:
Federal (65,275) --
State (9,325) --
-------- ------
Total deferred income taxes (benefit) (74,600) --
-------- ------
Total provision (benefit) for income taxes $(34,118) $ --
======== ======
The following is a reconciliation of the maximum statutory federal tax rate to
the Company's effective tax rate:
FOR THE FOR THE EIGHT
YEAR ENDED MONTHS ENDED
AUGUST 31, AUGUST 31,
1999 1998
---------- -------------
Statutory rate 35% --
State and local taxes 5% --
Tax benefit of timing differences (54%) --
-------- ------
Effective tax rate (14%) --
======== ======
F-24
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 14 - ECONOMIC DEPENDENCY:
For the year ended August 31, 1999, sales to one customer were in excess of 10%
of net sales and amounted to approximately $9,460,000. At August 31, 1999, the
amount due from this customer aggregated approximately $368,000. There were no
sales to any one customer in excess of 10% of net sales for the eight months
ended August 31, 1998.
Effective January 15, 1999, the Company no longer serviced the above referenced
customer. Sales to this customer (Meijer) by NEOS, for the years ended August
31, 1999 and August 31, 1998 aggregated approximately 22% and approximately 40%
of sales, respectively. The Company has taken legal action against this customer
regarding the receivables outstanding at that date, as well as certain rack
equipment still in use in the customer's store locations (See Note 20 -
Litigation).
For the year ended August 31, 1999, purchases from four vendors were in excess
of 10% of net purchases and amounted to approximately $10,494,000, $6,033,000,
$6,030,000 and $5,577,000, respectively. At August 31, 1999, accounts payable to
these vendors aggregated approximately $2,294,000, $1,065,000, $1,030,000 and
$1,364,000, respectively. Certain vendors payables are secured by their specific
inventories.
There were no purchases from any one vendor in excess of 10% of net purchases
for the eight months ended August 31, 1998.
NOTE 15 - PROFIT SHARING PLAN:
In May 1999, the Company established a 401(k) profit sharing plan, ("401(k)
Plan") which covers all eligible employees. Under the terms of the 401(k) Plan,
all employees who have attained the age of 21 years and have completed 1,000
hours of service are eligible to contribute to the Plan at the next entry date.
The 401(k) Plan provides for a matching contribution of 50% of the first 4% of
the employee contribution. The Company's matching contribution for the year
ended August 31, 1999 was $12,011.
NOTE 16 - STOCK OPTIONS AND WARRANTS:
On October 1, 1996, the Company adopted a plan known as the Planet Entertainment
Corporation Stock Plan (the "Plan") pursuant to which the Board of Directors
shall issue awards, options and grants. Pursuant to the Plan, 1,000,000 shares
of the Company's common stock have been reserved for issuance as awards. As of
August 31, 1999 no awards, options or grants have been issued.
In September 1998, the Company granted options (not part of the Plan) to an
employee to purchase 150,000 shares of the Company's common stock. Each option
is exercisable at $5.25 per share. The options were issued at the fair market
value of the stock at the date of grant. 75,000 options are exercisable
immediately for a period of 3 years. The remaining options vest at a rate of
25,000 shares per year and are exercisable for 3 years from the date of grant.
As of August 31, 1999 no options have been exercised.
On January 29, 1997, 316,000 warrants were issued to certain officers and
directors to purchase 3,160,000 shares of common stock. Each warrant is
exercisable at $20 per warrant to purchase 10 shares (effectively $2 per share).
The warrants were issued at the fair value of the stock on the date of the
grant. The warrants are exercisable immediately and for a period of 10 years
beginning January 29, 1997. As of August 31, 1999, no warrants have been
exercised.
F-25
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 16 - STOCK OPTIONS AND WARRANTS (CONTINUED):
As a result of the acquisition of NEOS, the Company issued to two officers of
the Company, options (not part of the plan) to purchase an aggregate of 250,000
shares of the Company's common stock, exercisable at $5.25 per share over a
period of five years. These officers waived all incentive based compensation due
under the terms of their agreements and accepted these options. In addition, the
Company issued to the seller of NEOS (See Note 19), options to purchase 250,000
shares of the Company's common stock exercisable at $5.25 per share over a
period of two years.
In September 1998 and March 1999, the Company granted options (not part of the
Plan) to purchase 25,000 shares of the Company's common stock each to one
employee and two employees, respectively. These options are exercisable at $5.25
per share over a period of three years.
The Company applies APB 25 and related interpretations in the accounting for the
Plan. Accordingly, no compensation cost has been recognized for option grants.
Had compensation cost for the Plan been determined using the fair value based
method, as defined in SFAS 123, the Company's net earnings (loss) and earnings
(loss) per share would have been adjusted to the proforma amounts indicated
below:
FOR THE YEAR ENDED FOR THE EIGHT MONTHS
AUGUST 31, 1999 AUGUST 31, 1998
------------------ --------------------
Net earnings (loss):
As reported $ 278,462 $(645,464)
Proforma (965,908) (645,464)
Basic and diluted loss per share:
As reported (.01) (.37)
Proforma (.11) (.37)
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighed average
assumptions: expected volatility of 100 %; risk free interest rate of 5.38%; and
expected lives of 1 to 3 years.
NOTE 17 - RELATED PARTY TRANSACTIONS:
In addition to transactions with related parties discussed throughout the notes
to the financial statements, the following related party transactions have also
occurred:
DUE TO STOCKHOLDERS:
Due to stockholders represents 9% interest bearing, working capital advances,
made by two stockholders. The advances are due upon demand.
F-26
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 17 - RELATED PARTY TRANSACTIONS (CONTINUED):
AGREEMENTS WITH MULTI-MEDIA INDUSTRIES CORPORATION (MMIC):
(A) JOINT VENTURE AGREEMENT:
On July 22, 1997, the Company entered into a joint venture agreement with MMIC,
an entity whose stockholders are also stockholders of the Company. The agreement
requires the production of a minimum of 20 new music releases per year,
contingent upon attaining a specified level of funding. All net revenue from the
production, development and distribution of releases under the agreement will be
split 50% to the Company and 50% to MMIC. Under the agreement, the Company is
entitled to a distribution royalty for foreign and domestic distribution of the
produced compact disks. No revenues have been earned under this agreement to
date.
(B) PRODUCTION:
In September 1996, the Company entered into a production and distribution
agreement with MMIC under the label Century Records, which calls for Planet to
receive compensation of 10% of the cash receipts, net of returns, of the
production and distribution of 10 enhanced multi-media compact disks. MMIC is
required to pay directly or reimburse the Company for all production costs
incurred by the Company. Compensation earned for the year ended August 31, 1999
and the eight months ended August 31, 1998 was $0 and $3,069, respectively.
NOTE 18 - STOCKHOLDERS' EQUITY:
PREFERRED STOCK:
On May 31, 1998, the Company sold $5,000,000 (500 shares) of 7% non-voting,
convertible preferred stock to a private investment fund. The Company also
issued warrants to the fund to purchase 75,000 shares of common stock,
exercisable at $9.625 for 5 years. The preferred stock pays a cumulative 7%
annual dividend on a quarterly basis in cash or shares of common stock and is
convertible to common stock at 58% (as amended) of the average of the 5 lowest
of the prior 10 days trading prices of the common stock at the issue date. The
preferred stock automatically converts to common stock on such basis at the end
of two years. The Company has the right to redeem the preferred stock on the
same terms as the conversion. At August 31, 1999 and 1998 the amount of
dividends in arrears on the preferred stock were $414,108 and $87,500,
respectively.
Based upon an amendment to the original agreement, the Company agreed to
indemnify the private investment fund against any losses, claims, damages or
liabilities that may arise from any action or claim brought under Section 16(b)
of the Securities Exchange Act of 1934 and based upon or resulting from the
lowering of the discount rate pursuant to this transaction. During August 1998,
the Company recorded a dividend as a return of capital to the preferred
stockholders for the 42% beneficial discount given with respect to the
conversion price, in accordance with Emerging Issues Task Force Topic No. D-60,
which indicates that "a discount resulting from an allocation of proceeds to the
beneficial conversion feature is analogous to a dividend and should be
recognized as a return to the preferred shareholders over the minimum period in
which the preferred shareholders can realize the return." As the stock is
convertible upon issuance, the dividend has been reflected accordingly.
F-27
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 18 - STOCKHOLDERS' EQUITY (CONTINUED):
These dividends have reduced income available to common shareholders and
accordingly, earnings per share.
The agent for the transaction was paid a 10% ($500,000) fee and received
warrants to purchase 150,000 shares of common stock exercisable at $9.625 for 5
years. In addition, the Company paid $25,000 of direct expenses for the
transaction.
During the year ended August 31, 1999, the holder of the preferred stock
converted 35 shares plus unpaid dividends aggregating $28,535 into 171,748
shares of the Company's common stock.
COMMON STOCK:
During the period ended August 31, 1998, the Company issued 554,089 shares to
various consultants for services rendered.
NOTE 19 - ACQUISITION OF NORTHEAST ONE STOP, INC.:
On September 1, 1998, the Company acquired all of the issued and outstanding
capital stock of Northeast One Stop, Inc. ("NEOS"), a record and entertainment
products distribution company. The purchase price was $4,961,750 comprised of
(a) $2,250,000 in cash of which $100,000 was placed in escrow as of August 31,
1998, (b) a $750,000 promissory note, of which $375,000 was paid within six
months from the date of closing and $375,000 which was paid on September 1,
1999, (c) options to purchase a total of 250,000 shares of the Company's common
stock valued at $1,147,750., and (d) options to purchase a total of 250,000
shares of the Company's common stock valued at $814,000. The options in (c)
above were issued to two stockholders of the Company, in consideration for
advisory services rendered in connection with the acquisition pursuant to the
their employment agreements (see Note 20). The options in (d) above were issued
to the seller of NEOS at a price of $5.25 per share for a term of two years from
the date of closing. The options were valued pursuant to the provisions of SFAS
123. The promissory note is secured by the Company's common stock.
For financial statement purposes the acquisition was accounted for as a purchase
since Planet exchanged cash and notes payable aggregating $3,000,000 in exchange
for all of the outstanding common stock of Northeast One Stop, Inc.
F-28
<PAGE>
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 19 - ACQUISITION OF NORTHEAST ONE STOP, INC. (CONTINUED):
<S> <C>
The purchase price for NEOS is allocated as follows:
Cash $ 522,584
Inventory 6,848,567
Accounts receivable 5,646,804
Property and equipment 784,376
Other assets 141,799
Accounts payable and accrued expenses (8,180,609)
Notes payable (4,655,947)
Capitalized lease obligations (234,081)
Other liabilities (506,167)
Goodwill 4,594,424
-----------
Total purchase price (including acquisition costs of $1,147,750) 4,961,750
Less:
Cash paid at signing of letter of intent (100,000)
Notes payable (750,000)
Options granted to seller of NEOS (814,000)
Options granted, acquisition costs - additional paid-in capital (1,147,750)
-----------
Cash paid at closing $ 2,150,000
===========
</TABLE>
Prior to the acquisition, the Company had a fiscal year end of December 31. The
Company's results of operations have been restated to conform with the Northeast
One Stop, Inc. year end of August 29, 1998. The following summarized unaudited
proforma financial information assumes the acquisition had occurred on September
1, 1997:
UNAUDITED PROFORMA
YEAR ENDED
AUGUST 31, 1998
------------------
Net revenues $35,152,348
Net loss $ (233,672)
Net loss attributable to common stockholders
after giving affect to preferred stock
dividends $(4,204,362)
Net loss per common share $ (.37)
The proforma results do not necessarily represent results which would have
occurred if the acquisition had taken place on the basis assumed above, nor are
they indicative of the results of future combined operations.
NOTE 20 - COMMITMENTS AND CONTINGENCIES:
INSURANCE
The Company does not maintain insurance to cover damages from fire, flood or
other casualty losses to its music master libraries. Costs resulting from
uninsured property losses will be charged against income upon occurrence. No
uninsured casualty property losses were incurred or charged to operations for
the year ended August 31, 1999, or the eight months ended August 31, 1998.
F-29
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 20 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
RECORDING AGREEMENTS
Higher Ground Records has entered into several artist recording contracts. The
contracts are for an initial period of one year with options to renew for one to
two years. Recording costs are to be paid by Higher Ground Records and recouped
from future royalties due the artist. In accordance with the terms of the
contracts, all masters, records and reproductions are the property of Higher
Ground Records.
EMPLOYMENT AGREEMENTS/COVENANT NOT TO COMPETE - NEOS
In conjunction with the acquisition of NEOS, the Company secured the continued
employment of the former sole stockholder of NEOS for a one-year period, which
provides for annual compensation of $145,000. This agreement has been amended
and extended for an additional six month period. It allows the individual to
work part-time at an annualized salary of $52,000. In addition, as part of the
acquisition agreement, the former sole shareholder of NEOS has agreed for a
period of 5 years from the date of acquisition and within 1,500 miles from any
facility from which the Company currently conducts business not to directly or
indirectly engage in any activity and/or business which competes directly or
indirectly with the Company without the express permission of the Board of
Directors.
The Company has secured an employment and executive compensation agreement with
an employee of NEOS for a term of three years at an annual rate of $125,000. The
agreement includes an incentive bonus based on NEOS's profitability. There are
also options to purchase 150,000 shares of the Company's Common Stock at a price
of $5.25 per share. These options vest over a period of three years with 75,000
options vesting on the agreement date (September 21, 1998) and the remaining
75,000 options vesting in equal annual installments of 25,000 on each subsequent
anniversary date of this agreement (See Note 16).
OTHER EMPLOYMENT AGREEMENTS
On August 14, 1998, the Company entered into employment agreements with three of
its executive officers. The agreements are for a term of ten years and provide
for first year compensation of $125,000 per officer with annual increases of at
least 10% per annum each year as well as an incentive bonus based upon the
Company's profitability and acquisition activities.
LEASE AGREEMENT
The Company leases land and a building which house a recording studio under an
agreement with the former shareholders of Al Alberts On Stage, Ltd, a
subsidiary. The initial term is for a period of five years commencing March 1,
1997, with lease payments of approximately $24,000 per year. At the end of the
first term, the Company has the option to acquire the premises for $10, with the
assumption of certain liabilities principally consisting of the outstanding
mortgage balance at that time. The Company also rents office space in Maryland
and Pennsylvania under operating leases aggregating monthly rentals of
approximately $1,255 per month. These leases expire in November 1999 and April
2000, respectively.
In connection with the acquisition of NEOS (see Note 19), NEOS entered into a
new lease for an office and operating facility with an entity controlled by the
former stockholder and now director of the Company. The term of the lease is for
five years commencing October 1, 1998 with annual payments of $144,000 for the
first year and $180,000 for each year thereafter. In addition to the base rent,
NEOS is subject to 50% of real estate and other taxes.
F-30
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 20 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
The Company was also granted an option to purchase the leased facility at fair
market value less 10% within five years from the date of acquisition of NEOS.
The following is a schedule of future minimum lease payments under operating
leases for the years shown:
RELATED PARTY OTHER TOTAL
------------- -------- ---------
2000 $ 177,000 31,043 $ 208,043
2001 180,000 24,000 204,000
2002 180,000 12,000 192,000
2003 180,000 -- 180,000
2004 15,000 -- 15,000
--------- -------- ---------
$ 732,000 $ 67,043 $ 799,043
========= ======== =========
Rent expenses was $189,306 and $18,373 for the year ended August 31, 1999 and
the eight months ended August 31, 1998, respectively.
LITIGATION
There are currently no threatened or pending legal proceedings against the
Company. From time to time, the Company has received notices from a limited
number of third parties claiming an ownership interest in certain master
recordings published by the Company and sold through its distributors,
demanding, among other things, that the Company immediately cease distributing
these master recordings, or in the alternative, demanding that the Company pay
them royalties. The Company has responded by providing these entities with
information regarding the Company's chain of title to these recordings, and in
two instances the Company has suspended the future release of the recordings
until the matters are resolved. There can be no assurances that either of these
matters will be resolved to the Company's satisfaction or that additional claims
will not be brought against the Company in the future by other third parties, or
that any such claims will not be successful. If such a claim were successful,
the Company's business could be materially adversely affected.
In July 1999, the Company initiated a lawsuit against a former major customer
Meijer, Inc. ("Meijer") (See Note 14) and Summit United Service, LLC ("Summit
United"). In this lawsuit, the Company alleges that Meijer and Summit United are
liable to the Company for certain display rack fixtures that were supplied to
Meijer in order to merchandise and sell music and music related products. The
net book value of the display rack fixtures at issue in the lawsuit is
approximately $200,000. In addition, the Company is suing for reasonable rental
value of the display rack fixtures, advertising credits in the amount of
$67,379, a new store allowance credit in the amount of $171,041 and improper
deductions for returned product in the amount of $300,644. As of August 31,
1999, no counter claim or other claims have been asserted or threatened against
the Company arising out of these transactions. Management of the Company is
vigorously prosecuting this lawsuit which is in the discovery process.
F-31
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1999 AND THE EIGHT MONTH PERIOD
ENDED AUGUST 31, 1998
NOTE 20 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
Management of the Company believes that the outcome of all pending legal
proceedings, in the aggregate, will not have a material adverse effect on the
Company's financial condition or the results of operations.
AGREEMENT - GULF COAST MUSIC, LLC
In connection with the acquisition of Masters from Gulf Coast (See Note 1), the
Company was indebted to Gulf Coast in the amount of $500,000 plus accrued
interest as of August 31, 1999 (see Note 12).
On August 26, 1999, the Company agreed to periodically remove the restrictive
legend from the 694,000 shares of Company stock owned by Gulf Coast which were
also part of the purchase price. Gulf Coast will make reasonable efforts to sell
this stock on the open market in minimum and maximum amounts of 1,000 to 2,000
shares per day. As unrestricted shares are sold, the Company will remove the
restrictive legend from additional shares until the restrictions on all 694,000
shares are removed. On June 1, 2000, the Company will remove the restrictive
legend on all remaining shares held by Gulf Coast. This date will be extended
one day for every day after September 7, 1999, that it takes Gulf Coast to
present its certificate to have the restrictions removed and open a discount
brokerage account.
If by June 1, 2000, any combination of cash payments on the promissory note and
interest made by the Company, and proceeds actually received from sales of
Company stock by Gulf Coast, totals $1,800,000, the remaining promissory note
shall be considered paid in full and any remaining stock held by Gulf Coast
shall be returned to the Company.
NOTE 21 - 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>
DEPRECIATION
OPERATING AND TOTAL CAPITAL
1999 REVENUES EARNINGS (LOSS) AMORTIZATION ASSETS EXPENDITURES
---- ------------ --------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Rack distribution sales $ 13,873,397 $ (447,400) $ 144,821 $ 6,227,475 $ 326,903
One-Stop distribution sales 28,345,979 858,546 294,032 12,643,661 663,710
Music record master
production 1,505,288 61,229 58,963 8,436,604 --
Music studio operations 49,683 (197,947) 30,029 217,751 4,536
Record label productions 16,207 (72,026) -- 12,228 --
------------ ------------ ------------ ------------ ------------
$ 43,790,554 $ 202,402 $ 527,845 $ 27,537,719 $ 995,149
============ ============ ============ ============ ============
1998 (8 months)
----
Music record master
production $ 23,042 $ (631,538) $ 10,000 $ 6,954,370 $ --
Music studio operations 35,451 (71,363) 23,758 222,126 --
Record label productions 51,002 10,016 -- 71,207 --
------------ ------------ ------------ ------------ ------------
$ 109,495 $ (692,885) $ 33,758 $ 7,247,703(i)$ --
============ ============ ============ ============ ============
</TABLE>
(i) Does not include corporate cash and restricted cash assets aggregating
$4,070,947.
F-32
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
PROFORMA EXPLANATORY HEADNOTE
YEAR ENDED AUGUST 31, 1998
The following unaudited proforma consolidated financial statements give effect
to the acquisition by Planet Entertainment Corporation (the "Company") of
Northeast One Stop, Inc. ("NEOS") and are based on the estimates and assumptions
set forth herein and in the notes to such statements. This proforma information
has been prepared utilizing the historical financial statements of the Company
and notes thereto, and the historical financial statements of NEOS and notes
thereto. The proforma financial data does not purport to be indicative of the
results which actually would have been obtained had the acquisitions been
effected on the dates indicated or the results which may be obtained in the
future.
The proforma consolidated statements of operations for the year ended August 31,
1998 include the operating results of the Company and NEOS for such period.
Effective September 1, 1998, the Company acquired all of the issued and
outstanding common stock of NEOS. The purchase price for NEOS was $4,961,750
comprised of $2,250,000 in cash and $750,000 in notes, which has been paid in
full, options to purchase 250,000 shares of the Company's common stock valued at
$1,147,750, issued to two shareholders of the Company for acquisition services
rendered and additionally, options granted to the stockholder of NEOS to
purchase 250,000 shares of the Company's common stock, exercisable at a price of
$5.25 per share, exercisable for a term of two years from the date of closing,
valued at $814,000. The cash paid at closing was obtained by the Company through
its sale of 500 shares of the Company's 7% non-voting, convertible preferred
stock (for net proceeds of $4,475,000) on May 31, 1998.
<TABLE>
<CAPTION>
<S> <C>
The purchase price of NEOS is allocated as follows:
Cash $ 522,584
Inventory 6,848,567
Accounts receivable 5,646,804
Property and equipment 784,376
Other assets 141,799
Accounts payable and accrued expenses (8,180,609)
Notes payable (4,655,947)
Capitalized lease obligations (234,081)
Other liabilities (506,167)
Goodwill 4,594,424
-----------
Total purchase price (including acquisition costs of $1,147,750) 4,961,750
Less:
Cash paid at signing of letter of intent (100,000)
Notes payable (750,000)
Options granted to seller of NEOS (814,000)
Options granted, acquisition costs - additional paid-in capital (1,147,750)
-----------
Cash paid at closing $ 2,150,000
===========
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
Planet
Entertainment
Corporation and Northeast
Subsidiaries One Stop, Inc.
For the Twelve For the Year
Months Ended Ended Proforma Consolidated
August 31, 1998 August 29, 1998 Adjustments Proforma
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Sales, net $ 44,035 $34,793,341 $ -- $ 34,837,376
Royalty 26,817 -- -- 26,817
Studio 288,155 -- -- 288,155
----------- ----------- ---------- ------------
Total revenues 359,007 34,793,341 -- 35,152,348
----------- ----------- ---------- ------------
COSTS AND EXPENSES:
Cost of sales 18,247 29,152,959 -- 29,171,206
Selling, general and administrative 1,058,523 4,161,426 -- 5,219,949
Depreciation and amortization 47,149 238,165 113,123 398,437
Interest expense -- 430,687 -- 430,687
Interest expense - related party 154,098 -- -- 154,098
Bad debt expense -- 38,106 -- 38,106
Amortization of loan costs -- 28,526 -- 28,526
----------- ----------- ---------- ------------
Total costs and expenses 1,278,017 34,049,869 113,123 35,441,009
----------- ----------- ---------- ------------
INCOME (LOSS) FROM OPERATIONS (919,010) 743,472 (113,123) (288,661)
----------- ----------- ---------- ------------
OTHER INCOME:
Dividend income 47,421 -- -- 47,421
Interest income -- 2,289 -- 2,289
Other -- 5,279 -- 5,279
----------- ----------- ---------- ------------
Total other income 47,421 7,568 -- 54,989
----------- ----------- ---------- ------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (871,589) 751,040 (113,123) (233,672)
PROVISION FOR INCOME TAXES -- (275,107) 275,107 --
----------- ----------- ---------- ------------
NET INCOME (LOSS) $ (871,589) $ 475,933 $ 161,984 $ (233,672)
=========== =========== ========== ============
NET INCOME (LOSS) (871,589) $ 475,933 $ 161,984 $ (233,672)
Less preferred stock dividends (87,500) -- (262,500) (350,000)
Less preferred stock dividend
return of capital (3,620,690) -- -- (3,620,690)
----------- ----------- ---------- ------------
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON STOCKHOLDERS $(4,579,779) $ 475,933 $ (100,516) $ (4,204,362)
=========== =========== ========== ============
NET (LOSS) PER COMMON SHARE BASIC $ (.37)
============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 11,436,595
============
See accompanying notes to unaudited proforma consolidated
financial statements and explanatory headnote.
</TABLE>
F-34
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
NOTE 1 - PROFORMA ADJUSTMENTS
The adjustments relating to the unaudited proforma consolidated statement of
operations are computed assuming the acquisition of Northeast One Stop, Inc.
("NEOS") was consummated at the beginning of the applicable period presented.
NOTE 2 - ADDITIONAL AMORTIZATION
The unaudited proforma consolidated statement of operations for the twelve
months ended August 31, 1998 reflect amortization of goodwill using the
straight-line method over 40 years. Goodwill consists of the excess of the
purchase price of NEOS over the estimated fair values of the assets acquired and
liabilities assumed, including the issuance to two stockholders of the Company,
options to purchase 250,000 shares of the Company's common stock valued at
$1,147,750, in consideration for advisory services rendered in connection with
the acquisition and also the issuance to the seller of NEOS options to purchase
250,000 shares of the Company's common stock valued at $814,000.
NOTE 3 - PLANET ENTERTAINMENT CORPORATION - CHANGE IN YEAR END
Planet Entertainment Corporation changed its fiscal year from December 31 to
August 31. For proforma purposes, the period from September 1 to December 31,
1997 has been added to the eight months ended August 31, 1998 to reflect a full
twelve months as follows:
September 1, January 1,
to to
December 31, August 31,
1997 1998 Proforma
----------- ----------- -----------
Revenues $ 249,512 $ 109,495 $ 359,007
Costs and expenses 475,637 802,380 1,278,017
----------- ----------- -----------
Loss from operations (226,125) (692,885) (919,010)
Other income -- 47,421 47,421
----------- ----------- -----------
Loss before provision for income taxes (226,125) (645,464) (871,589)
Provision for income taxes -- -- --
----------- ----------- -----------
Net loss $ (226,125) $ (645,464) $ (871,589)
=========== =========== ===========
NOTE 4 - PROVISION FOR INCOME TAXES
The unaudited proforma consolidated statement of operations include an
adjustment to eliminate the provision for income taxes of NEOS, recognizing the
benefit from utilization of Planet Entertainment Corporation's net loss.
F-35
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
FOR THE YEAR ENDED FOR THE EIGHT MONTHS
BASIC AND DILUTED EARNINGS: AUGUST 31, 1999 AUGUST 31, 1998
------------------ --------------------
<S> <C> <C>
Net income (Loss) $ 278,462 $ (645,464)
Less: preferred stock dividends (353,199) (87,500)
Less: preferred stock dividend
return of capital -- (3,620,690)
------------ ------------
Net loss attributed to common stockholders $ (74,737) $ (4,353,654)
============ ============
SHARES:
Weighted average number of common
shares outstanding 11,996,114 11,827,308
Conversion of convertible preferred
stock -- --
Exercise of stock options -- --
TOTAL: 11,996,114 11,827,308
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (.01) $ (.37)
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001038284
<NAME> PLANET ENTERTAINMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> AUG-31-1999
<EXCHANGE-RATE> 1
<CASH> 620,975
<SECURITIES> 1,274,272
<RECEIVABLES> 5,860,041
<ALLOWANCES> 617,143
<INVENTORY> 7,165,072
<CURRENT-ASSETS> 14,847,984
<PP&E> 3,325,078
<DEPRECIATION> 1,904,292
<TOTAL-ASSETS> 27,537,719
<CURRENT-LIABILITIES> 9,928,600
<BONDS> 6,537,786
12,148
4,650,000
<COMMON> 0
<OTHER-SE> 6,409,185
<TOTAL-LIABILITY-AND-EQUITY> 27,537,719
<SALES> 43,719,376
<TOTAL-REVENUES> 43,790,554
<CGS> 35,736,723
<TOTAL-COSTS> 35,736,723
<OTHER-EXPENSES> 7,297,787
<LOSS-PROVISION> 19,661
<INTEREST-EXPENSE> 533,981
<INCOME-PRETAX> 244,344
<INCOME-TAX> (34,118)
<INCOME-CONTINUING> 278,462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278,462
<EPS-BASIC> (.01)
<EPS-DILUTED> (.01)
</TABLE>
