SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: February 28, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ________________.
Commission File No. 333-64395
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PLANET ENTERTAINMENT CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 33-0471728
- --------------------------------------------- ------------------
(State or other jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
222 Highway 35, P.O. Box 4085, Middletown, New Jersey 07748
-----------------------------------------------------------
(Address of principal executive offices)
(732) 530-8819
--------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of February 28, 1999: 11,976,055
----------
<PAGE>
PLANET ENTERTAINMENT CORPORATION
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at
February 28, 1999 and
August 31, 1998...................................F-1
Consolidated Statements of Operations
for the Three and Six Months Ended
February 28, 1999 and 1998........................F-3
Consolidated Statements of Cash Flows
for the Six Months Ended
February 28, 1999 and 1998........................F-4
Notes to Consolidated Financial Statements.................F-5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................... 3
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 9
SIGNATURES .................................................................. 10
2
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
ASSETS
------
AUGUST 31, FEBRUARY 28,
1998 1999
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,850,162 $ 1,162,920
Accounts receivable, net 17,959 5,517,598
Accounts receivable, net - related party 192,042 254,687
Prepaid expenses and other current assets 246,863 421,502
Inventory -- 7,703,619
Escrow deposit 225,000 125,000
Current maturities of note receivable -- 6,931
Deferred income taxes -- 56,000
-------------- --------------
Total Current Assets 4,532,026 15,248,257
-------------- --------------
PROPERTY AND EQUIPMENT, at cost, net 172,410 1,097,526
-------------- --------------
OTHER ASSETS:
Record masters 6,500,000 6,500,000
Goodwill, net 70,839 2,995,928
Publishing rights, net 880 880
Organization costs, net 42,495 35,000
Note receivable less current maturities -- 29,365
Financing costs, net -- 1,176
Security deposits -- 2,766
-------------- --------------
Total Other Assets 6,614,214 9,565,115
-------------- --------------
$ 11,318,650 $ 25,910,898
============== ==============
F-1
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
AUGUST 31, FEBRUARY 28,
1998 1999
-------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 187,641 $ 6,163,560
Accrued interest expense, related parties 275,618 323,568
Deferred revenue 123,524 449,165
Due to stockholders 270,884 230,884
Note payable, related party 150,000 150,000
Current portion, of long-term debt, related parties 250,000 1,000,000
Accrued officer's salary 141,467 339,383
Due to customer -- 563,762
Capital lease obligations, current portions -- 132,704
Notes payable, current portion -- 36,227
Note payable - former stockholder of NEOS -- 344,000
-------------- --------------
Total Current Liabilities 1,399,134 9,733,253
-------------- --------------
LONG-TERM LIABILITIES:
Capital lease obligations, non-current portion -- 29,517
Note payable - line of credit -- 5,857,054
Notes payable - non-current portion -- 65,613
Long-term debt, less current portion, related parties 750,000 500,000
Deferred income taxes -- 30,600
-------------- --------------
Total long-term liabilities 750,000 6,482,784
-------------- --------------
Total Liabilities 2,149,134 16,216,037
-------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, 10,000,000 shares
authorized, $.0001 par value, 500 and 500
shares issued and outstanding 5,000,000 5,000,000
Common stock, $.001 par value; 50,000,000
shares authorized; 11,976,055 and 11,976,055
shares issued and outstanding 11,976 11,976
Additional paid-in capital 9,286,053 9,605,805
Accumulated deficit (5,128,513) (4,922,920)
-------------- --------------
Total Stockholders' Equity 9,169,516 9,694,861
-------------- --------------
$ 11,318,650 $ 25,910,898
============== ==============
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(UNAUDITED)
FOR THE THREE FOR THE THREE FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
FEBRUARY 28, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1998 1999 1998 1999
----------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Royalty $ 4,738 $ 1,700 $ 4,738 $ 2,452
Sales 36,316 11,396,059 66,119 26,374,704
Studio 18,046 7,745 211,077 10,704
----------------- ---------------- --------------- ---------------
Total Revenues 59,100 11,405,504 281,934 26,387,860
----------------- ---------------- --------------- ---------------
COSTS AND EXPENSES:
Cost of sales 42,160 9,587,327 42,160 21,775,346
Selling, general and administrative 176,465 1,854,151 406,159 3,991,705
Depreciation and amortization 14,309 116,085 24,237 200,245
Interest expense -- 101,462 -- 194,191
Interest expense, related party 47,331 20,435 81,105 56,060
Bad debt expense -- 217 -- 217
----------------- ---------------- --------------- ---------------
Total Costs and Expenses 280,265 11,679,677 553,661 26,217,764
----------------- ---------------- --------------- ---------------
INCOME (LOSS) FROM OPERATIONS (221,165) (274,173) (271,727) 170,096
OTHER INCOME:
Interest and dividend income -- 10,683 -- 35,497
----------------- ---------------- --------------- ---------------
NET INCOME (LOSS) BEFORE (PROVISION)
BENEFIT FOR INCOME TAXES (221,165) (263,490) (271,727) 205,593
(PROVISION) BENEFIT FOR INCOME TAXES -- -- -- --
----------------- ---------------- --------------- ---------------
NET INCOME (LOSS) $ (221,165) $ (263,490) $ (271,727) $ 205,593
================= ================ =============== ===============
NET INCOME (LOSS) $ (221,165) $ (263,490) $ (271,727) 205,593
LESS PREFERRED STOCK DIVIDEND -- (87,500) -- (175,000)
LESS PREFERRED STOCK DIVIDEND RETURN
OF CAPITAL -- -- -- --
----------------- ---------------- --------------- --------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (221,165) $ (350,990) $ (271,727) $ 30,593
================= =============== =============== ==============
NET INCOME (LOSS) PER COMMON SHARE BASIC $ (.02) $ (.03) $ (.02) $ *
================= =============== =============== ==============
BASIC WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 11,421,966 11,976,055 10,995,630 11,976,055
================= =============== =============== ==============
NET INCOME PER COMMON SHARE DILUTED $ *
==============
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 13,910,952
==============
*LESS THEN $(.01) PER SHARE
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(UNAUDITED)
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (loss) $ (271,727) $ 205,593
Adjustments to reconcile net loss to net cash
used by operations:
Bad debt expense -- 217
Depreciation and amortization 24,237 196,716
Stock issued for services 501,315 --
Changes in:
Due to customer -- 88,195
Accounts receivable (33,294) 51,105
Accounts receivable, related party (180,615) 33,198
Prepaid expenses and other current assets (156,074) (139,411)
Inventory (4,895) (855,052)
Accounts payable and accrued expenses (21,216) (1,965,314)
Accrued interest expense, related party 69,354 47,950
Deferred revenue (4,397) 86,265
Accrued officers' salary 27,083 197,916
--------------- ---------------
Cash Flows From (To) Operating Activities (50,229) (2,052,622)
--------------- ---------------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of NEOS -- (2,150,000)
Cash acquired in the purchase of NEOS -- 522,584
Purchase of equipment (10,094) (288,626)
Escrow deposit -- --
Repayments on note receivable -- 4,928
Deposit on leased equipment -- 5,405
--------------- ---------------
Cash Flows From (To) Investing Activities (10,094) (1,905,709)
--------------- ---------------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Repayment of advances from employees -- (75,000)
Repayment of advances from stockholders -- (70,000)
Advances from stockholders 126,649 --
Proceeds from note payable 50,000 82,030
Proceeds from note payable, related party 150,000 --
Proceeds from issuance of common stock -- 17,627
Proceeds from issuance of preferred stock -- --
Repayment of note payable - line of credit -- 1,686,658
Repayment of note payable -- (8,941)
Preferred stock issuance costs -- (31,625)
Repayment of long-term debt, related party (250,000) (250,000)
Repayment of capitalized lease obligations -- (79,660)
--------------- ---------------
Cash Flows From (To) Financing Activities 76,649 1,271,089
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 16,326 (2,687,242)
CASH AND CASH EQUIVALENTS, beginning of period 6,216 3,850,162
--------------- ---------------
CASH AND CASH EQUIVALENTS,
end of period $ 22,542 $ 1,162,920
=============== ===============
CASH PAID FOR INTEREST EXPENSE $ -- $ 194,015
=============== ===============
CASH PAID FOR INCOME TAXES $ -- $ 259,609
=============== ===============
</TABLE>
F-4
<PAGE>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions for Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, the financial statements contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations, and cash flows of
the Company for the interim periods presented.
The results for the three and six months ended February 28, 1999 are not
necessarily indicative of the results of operations for the full year. These
financial statements and related footnotes should be read in conjunction with
the financial statements and footnotes thereto included in the Company's Form
10-SB filed with the Securities and Exchange Commission.
NOTE 2 - SEGMENT INFORMATION
The Company operates in five business segments: music record masters production,
music studio operations, record label production, rack distribution sales, and
one-stop distribution sales. All operations and revenues are conducted and
earned in the United States. The following table presents sales and other
financial information by business segment:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE CAPITAL
REVENUES EARNINGS DEPRECIATION ASSETS EXPENDITURES
-------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Three months ended
February 28, 1998:
Music record master
production $ 4,738 $ (198,865) $ 3,750 $ 7,020,427 $ --
Music studio operations 18,046 (13,116) 4,684 262,252 --
Record label productions 36,316 (9,184) -- 38,189 --
-------------- --------------- --------------- --------------- --------------
$ 59,100 $ (221,165) $ 8,434 $ 7,320,868 $ --
============== =============== =============== =============== ==============
Three months ended
February 28, 1999:
Rack distribution sales $ 4,270,310 $ (351,029) $ 45,713 $ 9,636,320 $ 72,901
One-Stop distribution
sales 7,122,070 503,440 38,941 8,208,717 62,101
Music record master
production 1,699 (379,622) -- 7,817,443 --
Music studio production 7,745 (30,335) 5,252 226,228 --
Record label production 3,680 (16,627) -- 22,190 --
-------------- --------------- --------------- --------------- --------------
$ 11,405,504 $ (274,173) $ 89,906 $ 25,910,898 $ 135,002
============== =============== =============== =============== ==============
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(UNAUDITED)
NOTE 2 - SEGMENT INFORMATION (CONTINUED)
NET OPERATING IDENTIFIABLE CAPITAL
REVENUES EARNINGS DEPRECIATION ASSETS EXPENDITURES
------------- --------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Six months
ended February 28, 1998:
Music record master
production $ 4,738 $ (255,331) $ 3,750 $ 7,020,427 $ --
Music studio production 211,077 (28,584) 8,737 262,252 10,094
Record label production 66,119 12,188 -- 38,189 --
------------- --------------- --------------- ---------------- -----------
$ 281,934 $ (271,727) $ 12,487 $ 7,320,868 $ 10,094
============= =============== =============== ================ ===========
Six months
ended February 28, 1999:
Rack distribution sales $ 12,364,938 $ 182,149 $ 74,186 $ 9,636,320 $ 125,693
One-Stop distribution
sales 13,993,558 933,693 63,196 8,208,717 162,933
Music record master
production 2,452 (870,513) -- 7,817,443 --
Music studio production 10,704 (52,985) 10,504 226,228 --
Record label production 16,208 (22,248) -- 22,190 --
------------- --------------- --------------- ---------------- -----------
$ 26,387,860 $ 170,096 $ 147,886 $ 25,910,898 $ 288,626
============= =============== =============== ================ ===========
Corporate assets include $1,287,920 of cash and cash equivalents at February 28, 1999.
</TABLE>
NOTE 3 - LOSS OF MAJOR CUSTOMER
The Company recently lost a major customer which accounted for approximately 40%
of the net sales of its NEOS subsidiary, during its fiscal year ended August 31,
1998. The customer informed the Company in January 1999 that it would no longer
purchase any of the Company's products. Sales to the customer were from the
Company's rack-job division and constitued approximately 37% of the net sales of
the Company for the six months ended February 28, 1999 (44% of the net sales of
the Company for the three months ended November 30, 1998). The Company
anticipates that the accounts receivable from the customer is collectible and
that returns from sales to this customer will not be material.
F-6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Planet Entertainment Corporation (the "Company") was incorporated under
the laws of the State of Delaware in May 1996 to raise capital and acquire, own,
integrate and operate seasoned privately-held companies in the music business.
In June 1996, the Company acquired from John S. Arnone, Wallace N. Giakas and
Joseph Venneri, three controlling shareholders, directors and officers of the
Company, for shares of common stock, par value $.001 per share (the "Common
Stock"), of the Company, all of the issued and outstanding common stock of
Maestro Holding Corporation ("Maestro"). Maestro owned exclusive rights to
approximately 5,000 master recordings, and subsequently acquired non-exclusive
rights to an additional 10,000 master records, which rights are now owned by the
Company.
Effective as of September 1, 1998, the Company acquired (the "NEOS
Acquisition") all of the issued and outstanding common stock of Northeast One
Stop, Inc. ("NEOS"), from the stockholder of NEOS for approximately $3,000,000,
of which $750,000 was in the form of a promissory note (of which $375,000 has
been paid and the remaining $375,000 is payable by August 31, 1999), and stock
options to purchase 250,000 shares of Common Stock. As a result, the results of
operations of the Company commencing as of September 1, 1998, reflect in large
part the operations of NEOS. Furthermore, following the NEOS Acquisition the
Company changed its fiscal year end to August 31. For the year ended August 29,
1998, NEOS had net sales of $34,793,341 and for the six months ended February
28, 1999, NEOS had net sales of $26,359,000, which constituted approximately 99%
(on a pro forma basis) and 99% (on an actual basis), respectively, of the
Company's total net sales for such periods.
Prior to the Company's NEOS Acquisition, the Company had limited
revenues and income. In addition, all financial data of the Company prior to
August 31, 1998 is to a large extent non-material, other than certain losses
resulting from general and administrative expenses incurred in connection with
entering into the various production and distribution agreements, as well as
professional fees incurred related to the registration of the Common Stock.
Accordingly, to assist the reader in a clearer understanding of this section of
this Report, the Company will compare its results for the three month and the
six month periods ended February 28, 1999, which reflect the Company's unaudited
consolidated results of operations for such periods, to its unaudited pro forma
results of operations for the comparable periods in the Company's fiscal year
1998 which ended August 29, 1998 ("Fiscal 1998"), which assume the NEOS
Acquisition occurred effective as of September 1, 1997.
GENERAL
The Company is currently involved in various areas of the recorded
music industry. The Company's principal business, primarily through NEOS, is the
wholesale distribution of pre-recorded music in the form of compact diskettes
("CD's"), cassette tapes, and other entertainment related products such as video
tapes, Digital Video Diskettes ("DVD's"), and to a much lesser extent music or
entertainment related apparel, such as T-shirts. The Company's business
activities also include the acquisition, licensing, production, marketing and
distribution of high quality recorded music. Through NEOS, the Company
distributes approximately 130,000 front-end titles of pre-recorded music to
independent record stores, college bookstores and mass merchants. Generally,
front-end titles are popular, current, pre-recorded music titles. In addition,
through its recording studio, the Company produces such types of music as
gospel, adult contemporary, reggae, top 40, blues, country, rap, rock,
3
<PAGE>
instrumental, rock & roll, jazz, pop rock, classical, easy listening, big band,
rhythm & blues, and various ethnic folk music recordings.
The Company owns certain exclusive and non-exclusive rights associated
with approximately 15,000 music master recordings from existing music catalogues
of recorded music. A "master recording" is the original, final, then-recorded
version of a song recorded in the studio. Of such 15,000 master recordings that
the Company has the right to exploit, approximately 33% (5,000) the Company has
exclusive rights to, and the remaining approximately 67% (10,000) the Company
has non-exclusive rights to. These amounts are estimates based upon one officer
and director of the Company having indicated that he recorded such masters, and
representations contained in the contracts for such masters. The Company's
strategy has been to produce compilation CDs containing enhanced or re-digitized
master recordings from its existing library, to market them directly through
NEOS or other distributors, to contribute these compilation CDs to joint
ventures in which the Company is a party, and to license these compilation CDs
to third parties for marketing and sale by unaffiliated distributors. To date,
however, prior to the Company's acquisition of NEOS, substantially all the
Company's revenues had been derived from studio rental sales and licensing
royalties and not from the licensing and sale of the Company's compilation CDs.
In 1995, NEOS commenced its "rack jobbing" operations (the "Rack
Business"). In "rack jobbing," the vendor assumes full responsibility for the
customer's display, stocking the display at the customer's location and making
the day-to-day decisions as to which inventory to deliver, return and present in
the displays. A rack jobber owns the display material or fixtures and is
responsible for the proper presentation of goods within the display. Prior to
1995, NEOS was principally a wholesaler of pre-recorded music and entertainment
products through its one stop division (also, the "One Stop Business"). The One
Stop Business primarily operates as a centralized order fulfillment center for
the small to medium sized retail stores, typically record stores, that obtain a
variety of recorded music and video. This aspect of the business supplies
merchandise based on the orders placed by its customers. The customers in this
segment of the business are responsible for the selection of titles and the
decisions regarding the return of merchandise.
NEOS recognizes sales for its One Stop Business and Rack Business at
the time of shipment of products to its customers. All of the NEOS products are
sold with a limited right of return by the customer. Generally, in the music
distribution industry, wholesalers, such as NEOS, have a limited right of return
to the manufacturers. Accordingly, NEOS does not accrue returns and allowances.
NEOS, however, reduces net sales by calculating actual returns. NEOS' business,
similar to other businesses in the music distribution industry, is highly
seasonal where a high proportion of sales occur in the Christmas season but a
high amount of returns occur in the months of January through March.
RECENT DEVELOPMENTS
The Company recently lost a major customer which accounted for
approximately 40% of the net sales of NEOS during its fiscal year ended August
29, 1998 and approximately 37% of the net sales of NEOS for the six months ended
February 28, 1999. This customer, Meijer, Inc. ("Meijer"), is a department store
chain with approximately 118 store locations, of which NEOS serviced 46
locations. Meijer informed the Company in January 1999 that it would no longer
purchase any of the Company's products. The Company was not given a reason for
Meijer's decision. Sales to Meijer were from the Company's rack-job division and
constituted approximately 78% of the net sales of such division and
approximately 37% of the net sales of the Company for the six-month period ended
February 28, 1999. However, for the three months ended February 28, 1999, sales
to Meijer were approximately $3,098,000 or about 73% of the net sales of the
rack-job division and approximately 27% of the Company's
4
<PAGE>
aggregate net sales. Net sales to Meijer as a percentage of total net sales of
the Company declined from approximately 44% ($6,584,000) for the three months
ended November 30, 1998 to approximately 27% ($3,098,000) for the three months
ended February 28, 1999. The Company anticipates that its accounts receivable
from Meijer is collectible and that returns from sales to this customer will not
be material. Although the Company believes the loss of Meijer may have a
material adverse effect on the Company's future results of operations, the
Company believes that increased sales from its one-stop division may partially
offset 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 SIX MONTH PERIOD ENDED FEBRUARY 28, 1999
AS COMPARED TO THE PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY FOR THE SIX
MONTH PERIOD ENDED FEBRUARY 28, 1998
NET SALES. For the six months ended February 28, 1999 net sales were
approximately $26,388,000 as compared to pro forma net sales of approximately
$17,685,000 for the comparable period in fiscal 1998, which represented an
increase in net sales of $8,703,000 or 49%. Net sales from the One Stop Business
for the six months ended February 28, 1999 versus the comparable period in the
prior year, respectively, were $13,994,000 as compared to $9,028,000, an
increase of 55%. This increase was due to an expanded customer base as well as
general improvement in music industry revenues. Net sales from the Rack Business
for the six months ended February 28, 1999 were $12,365,000 as compared to
$8,376,000 in the comparable period of the prior year, an increase of 48%. This
increase was primarily due to the additional block of Meijer store locations
(approximately 20) added to the Company's service area in the first quarter of
fiscal 1999. In the six months ended February 28, 1999, Meijer accounted for net
sales of $9,682,000 or 37% of net sales for the Company. As discussed elsewhere
in this Report, however, Meijer stopped ordering products from the Company in
January 1999. The inability of the Company to replace or offset such lost sales
would have a material adverse effect on the Company's future results of
operations.
COST OF SALES. For the six months ended February 28, 1999, cost of
sales was $21,775,000 or 82% of net sales as compared to pro forma costs of
sales for the comparable period in fiscal 1998 of $14,588,000 or 82% of net
sales.
OPERATING EXPENSES. For the six months ended February 28, 1999,
selling, general and administrative expenses (SG&A) were $3,992,000 or 15% of
net sales compared to pro forma SG&A of $2,312,000 or 13% of net sales in the
comparable period in fiscal 1998. Such increase in SG&A resulted from the higher
level of NEOS' payroll ($937,000) in the period ended February 28, 1999,
resulting from additional locations being serviced, and the increased
professional and consulting fees ($353,000) primarily related to the NEOS
Acquisition and incurred in connection with the registration of the Common Stock
underlying the Preferred Stock.
INTEREST EXPENSE. For the six months ended February 28, 1999, interest
expense was $250,000 or 0.9% of net sales versus pro forma interest expenses of
$276,000 or 1.6% of net sales in the comparable period of fiscal 1998. An
increase in NEOS' interest expense ($19,000) caused by additional borrowing on
its line of credit was more than offset by less accrued interest ($45,000) on
outstanding notes to related parties.
NET INCOME. For the six months ended February 28, 1999, net income was
$205,593 or 0.8% of net sales, as compared to net income of $315,044 or 1.8% of
net sales for the pro forma results for the six months ended February 28, 1998.
Excluding the one-time costs related to the NEOS Acquisition and incurred in
5
<PAGE>
connection with the registration of the Common Stock underlying the Preferred
Stock, net income as a percentage of net sales for the six months ended February
28, 1999 would have been approximately the same as the pro forma results in the
comparable period for the prior year.
RESULTS OF OPERATIONS OF THE COMPANY FOR THE THREE MONTHS ENDED FEBRUARY 28,
1999 AS COMPARED TO THE PRO FORMA RESULTS OF OPERATIONS OF THE COMPANY FOR THE
THREE MONTHS ENDED FEBRUARY 28, 1998
NET SALES. For the three month period ended February 28, 1999 net sales
were approximately $11,406,000 as compared to pro forma net sales of
approximately $8,953,000 for the comparable period in fiscal 1998, which
represented an increase in net sales of $2,453,000 or 27%. Net sales from the
One Stop Business for the three months ended February 28, 1999 versus the
comparable period in the prior year, respectively, were $7,122,000 as compared
to $4,858,000, an increase of 47%. This increase was due to an expanded customer
base as well as general improvement in music industry revenues. Net sales from
the Rack Business for the three-month period ended February 28, 1999 were
$4,270,000 as compared to $4,036,000 in the comparable period of the prior year,
an increase of 6%. This increase was primarily due to the additional block of
Meijer store locations (approximately 20) added to the Company's service area in
the first quarter of fiscal 1999. For the three months ended February 28, 1999,
Meijer accounted for net sales of $3,098,000, constituting approximately 27% of
net sales for the Company, and about 73% of the net sales of the Rack Business.
As discussed elsewhere in this Report, however, Meijer informed the Company in
January 1999 that it would stop ordering products from the Company. The
inability of the Company to replace or offset such lost sales would have a
material adverse effect on the Company's future results of operations.
COST OF SALES. For the three months ended February 28, 1999, cost of
sales was $9,587,000 or 84% of net sales as compared to pro forma cost of sales
for the comparable period in fiscal 1998 of $7,590,000 or 85% of net sales. This
reduction, as a percentage of net sales, is primarily due to lower product costs
in the One Stop Business.
OPERATING EXPENSES. For the three months ended February 28, 1999,
selling, general and administrative expenses (SG&A) were $1,854,000 or 16% of
net sales compared to pro forma SG&A of $1,208,000 or 14% of net sales in the
comparable period in fiscal 1998. Such increase in SG&A resulted from the higher
level of NEOS' payroll ($327,000) in the three months ended February 28, 1999,
resulting from additional sales volume, and the increased professional and
consulting fees ($117,000) primarily related to the NEOS Acquisition and in
connection with the registration of the Common Stock underlying the Company's 7%
Series A Convertible Preferred Stock, stated value $10,000 per share (the
"Preferred Stock"), of which 500 shares were sold to one investor in May 1998.
INTEREST EXPENSE. For the three months ended February 28, 1999,
interest expense was $122,000 or 1.1% of net sales versus pro forma interest
expenses of $155,000 or 1.7% of net sales in the comparable period of fiscal
1998. A slight increase in NEOS' interest expense ($4,000) caused by additional
borrowing on its line of credit was more than offset by less accrued interest
($37,000) on outstanding notes to related parties.
NET INCOME (LOSS). For the three months ended February 28, 1999, net
loss was $263,490 or 2.3% of net sales, as compared to a net loss of $97,917 or
1.1% of net sales for the pro forma results for the three months ended February
28, 1998. Excluding the one-time costs related to the NEOS Acquisition and
incurred in connection with the registration of the Common Stock underlying the
Preferred Stock, net loss as a percentage of net sales for the three months
ended February 28, 1999 would have been comparable to the pro forma results in
the comparable three month period for the prior year.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for payments for NEOS'
products and operating expenses, as well as various notes, including to related
parties. Prior to the NEOS Acquisition, the Company's primary source of cash was
loans from its principal shareholders, Messrs. Arnone and Giakas, and other
related parties, as well as proceeds from the sale of the Preferred Stock. NEOS'
sources of cash include normal operations and its revolving credit line with
Congress Financial Corporation ("CFC").
Cash and cash equivalents as of February 28, 1999 were $1,162,920 as
compared to the pre-NEOS Acquisition August 31, 1998 cash balance of $3,850,162,
or a reduction of $2,687,242. This reduction was primarily the result of the
paydown of accounts payable ($1,965,314), the costs and purchase price of the
NEOS Acquisition ($1,627,416), and an increase in inventory ($855,052). These
increases were partially offset by the amounts drawn from the CFC credit line
($1,686,658).
Net cash flow to operating activities for the six-month period ended
February 28, 1999 was $2,052,622. The primary uses of cash were for the paydown
of accounts payable balances after the holiday season ($1,965,314) as well as an
increase in inventory ($855,052). These outflows were only partially offset by
increases in deferred revenue and rebates to customers ($174,460) as well as
other non-cash items (i.e., depreciation, accrued expenses).
As of February 28, 1999, outstanding accounts receivable totaled
$5,772,285. This amount is net of an allowance for returns of $182,488. By
comparison, the pro forma consolidated accounts receivable balance as of August
31, 1998 was $5,856,805, net of an identical allowance of $182,488. The accounts
receivable balance at February 28, 1999 includes $1,613,072 due from a major
customer, Meijer, which has stopped purchasing from the Company. The Company
believes that, based upon payment activity and nominal returns since March 1999,
this receivable balance is collectible and, furthermore, that the amount of
returns from sales to this customer will not be material.
At February 28, 1999 inventory was $7,703,619 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 February 28, 1999, the Company's accounts payable balance was
$6,163,560 versus the pro forma balance as of August 31, 1998 and as of November
30, 1998, of $8,509,717 and $15,934,732. The Company believes this decrease is
the result of the normal paydown of accounts payable after the holiday season.
NEOS has a revolving credit agreement (the "CFC Credit Agreement") with
CFC. The maximum line of credit available under the CFC Credit Agreement is
$6,000,000. Advances under the CFC Credit Agreement are made on the basis of
eligible accounts receivable and inventory as defined in the agreement. CFC
requires NEOS to maintain working capital of no less than $2,500,000 excluding
its borrowings from CFC. In addition, NEOS must maintain an adjusted net worth
of no less than $600,000. The adjustment to the net worth calculation allows
NEOS to add the balance of any subordinated debt due to the former shareholder
of NEOS to the net worth calculation to meet the required level. Working capital
and adjusted net worth as of February 28, 1999 were $6,568,279 and $1,833,776,
respectively. As of February 28, 1999, NEOS had an aggregate of $5,857,054
7
<PAGE>
outstanding under the CFC Credit Agreement. NEOS pays interest to CFC at the
rate of prime plus 1.5% on all outstanding amounts under the CFC Credit
Agreement. All obligations of NEOS under the CFC Credit Agreement are guaranteed
by the Company.
Net cash flow to investing activities for the six-month period ended
February 28, 1999 was approximately $1,905,709. 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 a new telephone
system at NEOS) totaling $288,626 were acquired during the period.
Net cash flow from financing activities for the six-month period ended
February 28, 1999 was $1,271,089. The primary source of cash was advances on the
CFC line of credit of $1,686,658. This was partially offset by the repayment of
advances to employees and stockholders of $145,000 and a principal payment of
$250,000 on the Gulf Coast Note (the remaining principal and interest balance on
this note as of February 28, 1999 was $1,024,562 to be paid in three equal
annual payments of $380,000).
As of February 28, 1999, the Company had outstanding an aggregate of
$3,004,675 in notes (including accrued interest of $323,568), and accrued
salaries. Such amounts consist of an aggregate of $750,000 in the form of two
notes to the former owner of NEOS for $375,000, of which one was paid in full in
March 1999 and the other note becomes due in August 1999, $1,024,562 on the Gulf
Coast Note, a $344,000 principal amount 9% demand note to the former owner of
NEOS issued prior to the NEOS Acquisition, a $230,884 principal amount 9% demand
note due to privately held corporations owned by Messrs. Giakas and Arnone
representing working capital advances made by such entities to the Company, a
$150,000 principal amount 10% demand note due to one private lender, a $15,000
principal amount 9% demand note to Whelan, Inc., also a privately held
corporation owned by Messrs. Arnone and Giakas, accrued officers' salaries of
$339,383 and $101,840 in notes due to finance various assets purchased by the
Company.
NEOS has several capital leases in the aggregate amount $162,221 that
are secured by the related equipment and fixtures.
The Company believes that its current cash, cash from operations and
loans under the CFC Credit Agreement will be sufficient to fund the Company's
working capital requirements for the foreseeable future. No assurances can be
given, however, that due to any number of events and/or circumstances including,
but not limited to, a downturn in the pre-recorded music industry or in the
economy in general, the Company will not need additional working capital.
Furthermore, no assurances can be given that the Company will be able to obtain
such additional working capital when and if needed or on terms acceptable to the
Company.
8
<PAGE>
PART II
OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings (Loss) Per Share
27. Financial Data Schedule
9
<PAGE>
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
PLANET ENTERTAINMENT CORPORATION
(Registrant)
/s/ John Arnone
-----------------------------------------
John Arnone
President and Chief Executive Officer
Date: As of April 14, 1999
10
EXHIBIT 11
COMPUTATION OF LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic:
Net income (loss) attributable
to common stockholders $ (271,727) $ 30,593 $ (221,165) $ (350,990)
============ ============ ============ ============
Weighted Average number
of common shares outstanding 10,995,630 11,976,055 11,421,966 11,976,055
============ ============ ============ ============
Income (loss) per common share $ (.02) $ * $ (.02) $ (.03)
============ ============ ============ ============
Diluted:
Net income (loss) attributable
to common stockholders -- $ 30,593 -- --
============ ============ ============ ============
Weighted Average number
of common shares outstanding -- 13,910,952 -- --
============ ============ ============ ============
Income (loss) per common share -- $ * -- --
============ ============ ============ ============
</TABLE>
- ----------
* Less than $(.01)/$ .01 per share
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001038284
<NAME> PLANET ENTERTAINMENT CORPORATION
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<EXCHANGE-RATE> 1
<CASH> 1,162,920
<SECURITIES> 0
<RECEIVABLES> 5,779,216
<ALLOWANCES> 0
<INVENTORY> 7,703,619
<CURRENT-ASSETS> 15,248,257
<PP&E> 1,097,526
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,910,898
<CURRENT-LIABILITIES> 9,733,253
<BONDS> 0
0
5,000,000
<COMMON> 11,976
<OTHER-SE> 4,682,885
<TOTAL-LIABILITY-AND-EQUITY> 25,910,898
<SALES> 26,374,704
<TOTAL-REVENUES> 26,387,860
<CGS> 21,775,346
<TOTAL-COSTS> 26,217,764
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 250,251
<INCOME-PRETAX> 205,593
<INCOME-TAX> 0
<INCOME-CONTINUING> 205,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 205,593
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
