WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
---------------------------------
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: May 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ________________.
Commission File No. 0-29776
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.)
P.O. BOX 8580, RED BANK, NEW JERSEY 07701
(Address of principal executive offices)
(732) 936-9660
(Issuer's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of May 31, 2000: 12,527,495
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PLANET ENTERTAINMENT CORPORATION
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets at May 31, 2000
(Unaudited) and August 31, 1999 ................ 1
Consolidated Statements of Operations
for the Three and Nine Months Ended
May 31, 2000 and May, 31, 1999 (Unaudited) ..... 3
Consolidated Statements of Cash Flows
for the Nine Months Ended
May 31, 2000 and May 31, 1999 (Unaudited) ...... 4
Notes to Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis or Plan
of Operation ................................... 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................ 15
SIGNATURES
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PAGE 1 OF 2
PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MAY 31, AUGUST 31,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 178,387 $ 620,975
Marketable securities - available for sale 1,278,447 1,274,272
Accounts receivable, net of allowance for doubtful accounts 4,802,121 5,062,283
of $572,140 and $617,143 for May 31, 2000 and
August 31, 1999, respectively
Accounts receivable, net - related party 180,615 180,615
Inventories 6,985,685 7,165,072
Prepaid expenses and other current assets 182,819 200,767
Note receivable - related party 75,000 100,000
Deferred income taxes 445,000 244,000
----------- -----------
TOTAL CURRENT ASSETS 14,128,074 14,847,984
----------- -----------
PROPERTY AND EQUIPMENT - NET 1,851,943 1,420,786
----------- -----------
OTHER ASSETS:
Record masters - net 6,440,957 6,566,037
Goodwill - net 4,393,408 4,541,899
Investment in joint ventures 9,000 9,000
Organization costs - net -- 27,500
Security deposits and other assets 176,231 124,513
----------- -----------
TOTAL OTHER ASSETS 11,019,596 11,268,949
----------- -----------
$26,999,613 $27,537,719
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
1
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
MAY 31, AUGUST 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 7,428,014 $ 7,418,370
Accrued expenses and other current liabilities 141,842 342,103
Accrued interest expense - related parties 331,442 239,312
Deferred revenue 198,942 211,544
Due to stockholders 245,884 230,884
Note payable - related party 550,000 150,000
Current portion of long-term debt - related parties 594,000 719,000
Accrued officers' salaries & interest 693,083 539,859
Income tax payable 101,728 --
Current portion of capital lease obligations 273,464 58,072
Current portion of notes payable 30,185 19,456
------------ ------------
TOTAL CURRENT LIABILITIES 10,588,584 9,928,600
------------ ------------
LONG-TERM LIABILITIES:
Note payable - line of credit 5,641,902 5,435,035
Note payable - related party - net of current portion -- 400,000
Long-term debt - net of current portion - related parties 250,000 500,000
Notes payable - net of current portion 494,815 49,701
Capital lease obligations - net of current portion 399,774 9,050
Deferred income taxes 173,000 144,000
------------ ------------
TOTAL LONG-TERM LIABILITIES 6,959,491 6,537,786
------------ ------------
TOTAL LIABILITIES 17,548,075 16,466,386
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock, stated value $10,000 per share; 10,000,000 4,550,000 4,650,000
shares authorized; 455 and 465 shares issued and outstanding at
May 31, 2000 and August 31, 1999, respectively
Common stock, $.001 par value; 50,000,000 shares 12,528 12,148
authorized; 12,527,495 and 12,147,803 shares issued and outstanding
at May 31, 2000 and August 31, 1999, respectively
Additional paid-in capital 11,749,493 11,513,499
Accumulated deficit (4,514,930) (4,878,586)
Other comprehensive income (loss) (2,345,553) (225,728)
------------ ------------
9,451,538 11,071,333
------------ ------------
$ 26,999,613 $ 27,537,719
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
2
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------- ----------------------------
MAY 31, MAY 31, MAY 31, MAY 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Net Sales $ 6,856,914 $ 7,381,798 $ 24,926,268 $ 33,740,294
Royalties -- 1,614 1,240 4,066
------------ ------------ ------------ ------------
Total Revenues 6,856,914 7,383,412 24,927,508 33,744,360
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 6,106,537 6,649,250 19,766,468 28,382,204
Selling, general and administrative 1,225,771 1,342,096 3,636,136 5,288,802
Depreciation and amortization 114,683 107,130 499,293 292,621
Interest expense 149,169 117,655 436,499 311,846
Interest expense, related party 30,849 29,712 92,130 85,772
Bad debt expense 30,412 1,380 69,967 1,597
------------ ------------ ------------ ------------
Total Costs and Expenses 7,657,421 8,247,223 24,500,493 34,362,842
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (800,507) (863,811) 427,015 (618,482)
OTHER INCOME:
Interest and dividend income 3 3,626 358 39,123
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION BENEFIT
(BENEFIT) FOR INCOME TAXES (800,504) (860,185) 427,373 (579,359)
PROVISION (BENEFIT) FOR INCOME TAXES (106,273) -- 68,100 --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (694,231) (860,185) 359,273 (579,359)
------------ ------------ ------------ ------------
DISCONTINUED OPERATIONS:
Income (Loss) from Discontinued
Operations (net of an income
tax benefit of $ 0 and $ 0 for
the three months ended
May 2000 and 1999, respectively and
a tax benefit of $3,400 and $ 0
for the nine months ended May 2000
and 1999, respectively) -- (118,725) (20,526) (193,958)
Gain on Disposal of Discontinued
Operations (net of income taxes
of $ 0 and $5,800 for the three
and nine months ended May 2000,
respectively) -- -- 35,777 --
------------ ------------ ------------ ------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS -- (118,725) 15,251 (193,958)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (694,231) $ (978,910) $ 374,524 $ (773,317)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC & DILUTED
Income (Loss) from Continuing
Operations (.06) (.08) .01 (.07)
Income (Loss) from Discontinued
Operations -- (.01) * (.02)
Gain on Disposal of Discontinued
Operations -- -- * --
-- -- -- --
------------ ------------ ------------ ------------
$ (.06) $ (.09) $ .01 $ (.09)
============ ============ ============ ============
*LESS THEN $(.01) PER SHARE
</TABLE>
See accompanying notes to consolidated financial statements
3
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
MAY 31, MAY 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES:
Net income (Loss) $ 374,524 $ (773,317)
Adjustments to reconcile net income to net cash used by
operating activities:
Bad debt expense 69,967 1,597
Depreciation and amortization 514,563 309,891
Marketable securities received for sale of
non-exclusive rights to masters (2,124,000) --
Gain on disposal of discontinued operations,
plus cash included in sale (42,754) --
Deferred taxes (172,000) --
Common stock issued to employees 59,000 --
Changes in:
Accounts receivable 190,195 567,051
Accounts receivable, related party -- 100,843
Prepaid expenses and other current assets 17,948 (135,174)
Inventory 167,159 93,717
Accounts payable and accrued expenses (84,940) (587,049)
Income tax payable 101,728 --
Accrued interest expense, related party 92,130 68,158
Deferred revenue (12,602) (54,187)
Due to customers -- 88,195
Accrued officers' salary 345,577 305,991
----------- -----------
Cash Flows (Used) by Operating Activities (503,505) (14,284)
----------- -----------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Purchase of NEOS net of cash acquired -- (1,627,416)
Purchase of fixed assets (816,561) (672,979)
Refund of prior period fixed asset purchase 685,000 --
Repayments on note receivable 25,000 6,327
Deposit on leased equipment (56,348) 8,171
----------- -----------
Cash Flows (Used) by Investing Activities (162,909) (2,285,897)
----------- -----------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Advances (repayments) from (to) stockholders 15,000 (70,000)
Advances (repayments) from (to) employees -- (75,000)
Proceeds (repayments) from (to) note payable 455,843 52,641
Proceeds (repayments) from (to) note payable, related party -- (375,000)
Proceeds from issuance of preferred/common stock -- 17,627
Stock issuance costs -- (31,625)
Proceeds (repayments) from (to) note payable - line of credit 206,867 (124,971)
Repayment of long-term debt, related party (375,000) (250,000)
Addition to (payment of) capitalized lease obligations (78,884) (120,899)
----------- -----------
Cash Flows Provided (Used) by Financing Activities 223,826 (977,227)
----------- -----------
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See accompanying notes to consolidated financial statements
4
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<S> <C> <C>
NET CHANGE IN CASH AND CASH EQUIVALENTS (442,588) (3,277,408)
CASH AND CASH EQUIVALENTS, beginning of year/period 620,975 3,850,162
----------- -----------
CASH AND CASH EQUIVALENTS, end of year/period $ 178,387 $ 572,754
=========== ===========
CASH PAID FOR INTEREST EXPENSE $ 436,499 $ 311,846
=========== ===========
CASH PAID FOR INCOME TAXES $ 40,482 $ 262,982
=========== ===========
</TABLE>
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capitalized lease obligations totaling $685,000 were incurred during the
nine month period ending
May 31, 2000 when the Company entered into various leases, primarily for
warehousing equipment. This equipment had previously been purchased for
cash.
The holder of the preferred stock converted 10 shares (valued at $100,000)
plus unpaid dividends aggregating $10,869 into 179,692 shares of the
Company's common stock.
The Company transferred 100% of its interests in three subsidiaries to a
former officer and director in the month of February 2000 (see Note 5 of the
Notes to Consolidated Financial Statements).
The Company issued 100,000 shares of common stock to an attorney in lieu of
certain outstanding fee obligations totaling $66,505.
The Company issued 100,000 shares of common stock to an officer valued at
$59,000.
See accompanying notes to consolidated financial statements
5
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MAY 31, 2000 AND MAY 31, 1999
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and in accordance with the instructions for Form 10-QSB. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, the financial statements contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations, and cash flows of
the Company for the interim periods presented.
The results for the three and nine months ended May 31, 2000 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-KSB
filed with the Securities and Exchange Commission.
NOTE 2 - SEGMENT INFORMATION
The Company operated in five business segments until February 2000 when three of
the Companies subsidiaries were sold to a former officer and director of the
Company (see Note 5 of the Notes to Consolidated Financial Statements). The
three subsidiaries comprised the music studio operations (i.e. Maestro and Al
Alberts on Stage) and the record label productions segments (i.e. Higher Ground
Records). The three remaining segments are; music record masters 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 for the
continuing operations:
<TABLE>
<CAPTION>
NET OPERATING DEPRECIATION TOTAL CAPITAL
REVENUES EARNINGS(LOSS) & AMORTIZATION ASSETS EXPENDITURES
----------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Three months ended May 31, 2000;
Rack distribution sales $ 107,713 $ (97,150) $ 4,040 $ 554,658 $ --
One-Stop distribution sales 6,749,201 (321,151) 110,643 17,933,911 681,655
Music record master production -- (382,206) -- 8,511,044 --
----------- ----------- ----------- ----------- -----------
$ 6,856,914 $ (800,507) $ 114,683 $26,999,613 $ 681,655
=========== =========== =========== =========== ===========
Three months ended May 31,
1999;
Rack distribution sales $ 687,439 $ (459,648) $ 15,881 $ 6,485,277 $ 135,000
One-Stop distribution sales 6,694,360 (101,676) 91,249 10,143,639 244,817
Music record master production 1,613 (302,487) -- 7,173,273 --
----------- ----------- ----------- ----------- -----------
$ 7,383,412 $ (863,811) $ 107,130 $23,802,189 $ 379,817
=========== =========== =========== =========== ===========
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6
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MAY 31, 2000 AND MAY 31, 1999
(UNAUDITED)
NOTE 2 - SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
NET OPERATING DEPRECIATION TOTAL CAPITAL
REVENUES EARNINGS(LOSS) & AMORTIZATION ASSETS EXPENDITURES
------------ ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Nine months ended May 31, 2000;
Rack distribution sales $ 608,978 $ (248,973) $ 11,226 $ 554,658 $ --
One-Stop distribution sales 22,165,344 (333,994) 362,987 17,933,911 816,561
Music record master production 2,153,186 1,009,982 125,080 8,511,044 --
------------ ------------ ------------ ------------ ------------
$ 24,927,508 $ 427,015 $ 499,293 $ 26,999,613 $ 816,561
============ ============ ============ ============ ============
Nine months ended May 31, 1999;
Rack distribution sales $ 13,052,377 $ (277,499) $ 114,122 $ 6,485,277 $ 260,693
One-Stop distribution sales 20,687,918 832,017 178,499 10,143,639 407,750
Music record master production 4,065 (1,173,000) -- 7,173,273 --
------------ ------------ ------------ ------------ ------------
$ 33,744,360 $ (618,482) $ 292,621 $ 23,802,189 $ 668,443
============ ============ ============ ============ ============
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NOTE 3 - LOSS OF MAJOR CUSTOMER
The Company lost a major customer which accounted for approximately 22% of the
net sales of its NEOS subsidiary during its fiscal year ended August 31, 1999.
The customer informed the Company in January 1999 that it would no longer
purchase any of the Company's products. Sales to the customer were from the
Company's rack-job division and constituted approximately 68% of the net sales
of the rack division for the fiscal year ended August 31, 1999.
In July 1999, the Company initiated a lawsuit against this customer for
outstanding receivables. Management of the Company believes the lawsuit will
have a favorable outcome.
NOTE 4 - LEGAL ACTION INITIATED
In January 2000, the Company initiated a lawsuit against Maxnet, Inc. ("Maxnet")
in Monmouth County Superior Court in New Jersey. In this lawsuit, the Company is
demanding that Maxnet perform under a July 1999 agreement that called for the
sale of 2,500 musical masters to Maxnet in consideration for the sum of
$1,500,000 to be paid by the issuance of restricted shares in Maxnet stock, plus
$100,000 in master duplication costs.
The Company believes the legal action will result in the successful completion
of performance of the Maxnet Agreement.
7
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PLANET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED MAY 31, 2000 AND MAY 31, 1999
(UNAUDITED)
NOTE 5 - DISCONTINUED OPERATIONS
During the second quarter of fiscal 2000, the Company transferred 100% of its
interests in three subsidiaries-Maestro Holding Corporation (Maestro), Al
Alberts on Stage, Ltd. (Studio), and Higher Ground Records (Higher Ground) to a
former officer and director in lieu of accrued salaries in the amount of $
192,353 at February 29, 2000. As a result of this transaction, the employment
agreement with this individual was terminated and outstanding warrants to
purchase 1,000,000 shares of the Company's common stock were cancelled.
These transactions resulted in an after-tax gain of $ 35,777 which is reflected
in the Statement of Operations for the nine months ended May 31, 2000. Prior
period financial statements were restated as a result of this transaction.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
During the third quarter of fiscal 2000, the Company's wholesale subsidiary
relocated to larger facilities that include warehouse and office space of
approximately 88,000 square feet. The new facility is being leased for five
years at an annual rent of $242,000 with two optional five year extensions.
In conjunction with the relocation, the landlord agreed to lend the Company
monies for leasehold improvements in the amount of $525,000 plus interest at
9.5% per year. The loan is to be repaid over a ten year period. However, if the
Company does not exercise its first five year lease extension, the entire
unamortized balance will become due upon the expiration of the original five
year lease period.
The subsidiary is attempting to sublet or assist the landlord, who is also a
Director of the Company and the former sole shareholder of Northeast One Stop,
in the sale of its former headquarters and warehouse location in Latham, New
York. The lease on that property expires in September 2003.
8
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ITEM 2: 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 October 1996, the Company was
acquired in a reverse merger stock exchange transaction by Ampro Golf Tour,
Inc., a Florida corporation, which as the surviving corporation, changed its
name to Planet Entertainment. In July 1996, the Company acquired from Messrs.
Arnone, Giakas and Venneri, the three original 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 Holding
Corporation (Maestro). Maestro owned exclusive rights to approximately 5,000
master recordings. Maestro was sold in February 2000 to Mr. Venneri, one of the
original controlling shareholders and a former director and officer of the
Company (see Note 5 of the Notes to Consolidated Financial Statements). However,
the Company still retains all rights to exploit the 5,000 masters in all formats
and territories. The Company subsequently acquired exclusive and non-exclusive
rights to an additional 10,000 master records. Effective as of September 1,
1998, the Company acquired NEOS.
The Company has five offices. Planet has its corporate headquarters in
Red Bank, New Jersey. NEOS recently relocated its administrative headquarters
and warehouse to Menands, New York (see Note 6 of the Notes to the Consolidated
Financial Statements), and has three sales offices located in Philadelphia,
Pennsylvania, Coral Springs, Florida and Baltimore, Maryland. 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
9
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order fulfillment center for the small to medium sized retail stores, typically
record stores, that obtain a variety of recorded music and videos. 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 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 May 31, 2000, 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 (see Note 4 of "Notes to Consolidated Financial
Statements") 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 received restricted shares of common stock
from the purchasers.
RESULTS OF OPERATIONS FOR THE COMPANY'S NINE MONTH PERIOD ENDED MAY 31, 2000 AS
COMPARED TO THE NINE MONTH PERIOD ENDED MAY 31, 1999
NET REVENUES. For the nine months ended May 31, 2000 net revenues were
approximately $24,928,000 as compared to approximately $33,744,000 for the nine
month period ended May 31, 1999, which represented a decrease in net revenues
of $8,816,000 or 26%. Net revenues from the One Stop Business for the nine
months ended May 31, 2000 versus the comparable period in the prior year,
respectively, were approximately $22,166,000 as compared to approximately
$20,688,000, an increase of 7%. This increase was due to new customers and
increased volume with existing customers facilitated by greater inventory depth.
Net revenues from the Rack Business for the nine months ended May 31, 2000 were
approximately $ 609,000 as compared to approximately $13,052,000 in the prior
year, a decrease of 95%. This decrease was primarily due to the loss of a major
rack customer (the Meijer account). In the prior nine month period ended May 31,
1999, Meijer accounted for net revenues of approximately $9,682,000 or 29% of
net revenues for the Company (see also Note 3 of the notes to the consolidated
financial statements). As discussed elsewhere in this report, Meijer stopped
ordering products from the Company in January 1999. Net revenues from Planet
operations for the nine months ended May 31, 2000 versus the comparable period
in the prior year, respectively, were approximately $2,153,000 as compared to
approximately $ 4,000, an increase of approximately $ 2,149,000. This increase
was primarily due to a $2,124,000 sale of limited rights to certain masters. The
net revenues from the three subsidiaries that were sold to a former director and
officer of the Company in February 2000 (see Note 5 of the Notes to the
Consolidated Financial Statements) for the nine months ended May 31, 2000 were
insignificant (approximately $26,000).
10
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COST OF SALES. For the nine months ended May 31, 2000, cost of sales
was approximately $19,766,000 or 79.3% of net revenues as compared to the nine
months ended May 31, 1999 cost of sales of approximately $28,382,000 or 84.1% 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 nine months ended May 31, 2000, selling,
general and administrative expenses ("SG&A") were approximately $3,636,000 or
14.6% of net revenues versus SG&A for the comparable period in the prior year of
approximately $5,289,000 or 15.7% of net revenues. This decrease in SG&A
resulted from reductions in NEOS payroll ($989,000) as well as lower
professional and consulting fees ($246,000). The prior year period included high
professional fees ($505,000) due to the NEOS acquisition and related public
filings and stock registration.
INTEREST EXPENSE. For the nine months ended May 31, 2000, interest
expense was approximately $529,000 or 2.1% of net revenues versus the comparable
period in the prior year of approximately $398,000 or 1.2% of net revenues. This
increase was primarily caused by a higher average line-of-credit balance than
the prior year.
NET INCOME (LOSS). For the nine months ended May 31, 2000, net income
was approximately $ 375,000 or 1.5% of net revenues, as compared to a net (loss)
of approximately ($773,000) or (2.3%) of net revenues for the nine months ended
May 31, 1999. Loss from operations for NEOS for the nine months ended May 31,
2000 was approximately ($460,000) as compared to income from operations of
approximately $ 569,000 for the comparable period in the prior year. This
decrease was primarily due to the loss of the Meijer account as described above.
The income (loss) from operations for Planet other than NEOS for the nine months
ended May 31, 2000 was approximately $ 887,000 as compared to an income (loss)
from operations of approximately ($1,187,000) in the comparable period in the
prior year, a $2,074,000 improvement. This improvement is primarily due to the
revenue from the sale of limited rights to certain masters as well as lower
professional fees as discussed above. The after-tax net loss from the three
subsidiaries that were sold to a former director and officer of the Company in
February 2000 (see Note 5 of the Notes to the Consolidated Financial Statements)
for the nine months ended May 31, 2000 was insignificant (approximately
$21,000). However, the one-time after-tax gain from the sale of these
subsidiaries for the nine months ended May 31, 2000 was approximately $ 36,000.
RESULTS OF OPERATIONS FOR THE COMPANY'S THREE MONTH PERIOD ENDED MAY 31, 2000 AS
COMPARED TO THE THREE MONTH PERIOD ENDED MAY 31, 1999
NET REVENUES. For the three months ended May 31, 2000 net revenues were
approximately $6,857,000 as compared to approximately $7,383,000 for the three
month period ended May 31, 1999, which represented a decrease in net revenues
of $ 526,000 or 7%. Net revenues from the One Stop Business for the three months
ended May 31, 2000 versus the comparable period in the prior year, respectively,
were approximately $6,749,000 as compared to approximately $6,694,000, an
increase of 0.8%. Net revenues from the Rack Business for the three months ended
May 31, 2000 were approximately $ 108,000 as compared to approximately $ 687,000
in the prior year, a decrease of 84%. This decrease was primarily due to the
shift in sales efforts to the one stop business since the loss of a major rack
customer in January 1999 (the Meijer account - see also Note 3 of the Notes to
the Consolidated Financial Statements).
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There was no net revenue from Planet operations for the three months ended May
31, 2000 versus approximately $ 2,000 in the comparable period in the prior
year, a decrease of approximately $ 2,000. The net revenues from the three
subsidiaries that were sold to a former director and officer of the Company in
February 2000 (see Note 5 of the Notes to the Consolidated Financial Statements)
for the prior year three month period ended May 31, 1999 were insignificant
(approximately $ 33,000).
COST OF SALES. For the three months ended May 31, 2000, cost of sales
was approximately $6,107,000 or 89.1% of net revenues as compared to the three
months ended May 31, 1999 cost of sales of approximately $6,649,000 or 90.1% of
net revenues. This decrease as a percentage of revenues is primarily due to the
high costs associated with the volume of rack returns in the prior year period.
The prior year rack returns were high due to the loss of a major rack customer,
as described earlier.
OPERATING EXPENSES. For the three months ended May 31, 2000, selling,
general and administrative expenses ("SG&A") were approximately $1,226,000 or
17.9% of net revenues versus SG&A for the comparable period in the prior year of
approximately $1,342,000 or 18.2% of net revenues. This decrease in SG&A
resulted from reductions in NEOS payroll ($138,000) as well as lower
professional and consulting fees ($ 47,000). The prior year period included
elevated professional fees ($130,000) due to the NEOS acquisition and related
public filings and stock registration.
INTEREST EXPENSE. For the three months ended May 31, 2000, interest
expense was approximately $180,000 or 2.6% of net revenues versus the comparable
period in the prior year of approximately $147,000 or 2.0% of net revenues. This
increase was primarily caused by a higher average line-of-credit balance than
the prior year.
NET INCOME (LOSS). For the three months ended May 31, 2000, the net
loss was approximately ($ 694,000) or (10.1%) of net revenues, as compared to a
net loss of approximately ($ 979,000) or (13.3%) of net revenues for the three
months ended May 31, 1999. Loss from operations for NEOS for the three months
ended May 31, 2000 was approximately ($389,000) as compared to a loss from
operations of approximately ($555,000) for the comparable period in the prior
year. This improvement is primarily due to the high costs associated with the
volume of rack returns in the prior year period resulting from the loss of a
major rack customer, as described earlier. The income (loss) from operations for
Planet other than NEOS for the three months ended May 31, 2000 was approximately
($412,000) as compared to an income (loss) from operations of approximately
($309,000) in the comparable period in the prior year. The higher loss from
Planet operations was primarily due to increased interest costs. The prior year
after-tax income (loss) from the three subsidiaries that were sold to a former
director and officer of the Company in February 2000 (see Note 5 of the Notes to
the Consolidated Financial Statements) for the three months ended May 31, 1999
was approximately ($ 119,000).
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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. NEOS's sources of cash include normal operations and its revolving
credit line with Congress Financial Corporation ("CFC").
Cash and cash equivalents as of May 31, 2000 were $178,387 as compared
to the August 31, 1999 cash balance of $620,975, or a reduction of $442,588.
This reduction was the result of purchases of and deposits on equipment as well
as the paydown of accounts payable, and payments on long-term debt. These
outflows were partially offset by collections of accounts receivable, an
increase in accrued salaries, two refunds of prior period asset purchases (a
total of $685,000 converted to leases) and a net drawdown on our line-of-credit.
Net cash flow used by operating activities for the nine month period
ended May 31, 2000 was $503,505. The primary uses of cash were the paydown of
accounts payable ($84,940) and the increase in marketable securities
($2,124,000) as well as deferred taxes ($172,000). These uses of cash were
partially offset by the collection of accounts receivable ($190,195), a decrease
in inventory ($167,159) as well as other non-cash items (i.e. net income,
depreciation, income tax payable, accrued interest, accrued salaries, etc).
As of May 31, 2000, outstanding accounts receivable totaled $4,982,736.
This amount is net of an allowance for bad debts of $572,140. By comparison, the
consolidated accounts receivable balance as of August 31, 1999 was $5,242,898,
net of an allowance of $617,143. The accounts receivable balance at May 29, 2000
includes $368,138 due from a major customer, Meijer, which has stopped
purchasing from the Company. A lawsuit has been initiated against this customer.
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 May 31, 2000, inventory was $6,985,685 versus a balance as of August
31, 1999 of $7,165,072. NEOS accounts for its inventory on a first-in-first-out
basis.
At May 31, 2000, the Company's accounts payable and accrued expense
balance was $7,569,856 versus the balance as of August 31, 1999 of $7,760,473,
primarily due to the paydown of vendor invoices.
NEOS has a revolving credit agreement (the "CFC Credit Agreement") with
CFC. The maximum line of credit available under the CFC Credit Agreement is
$8,500,000 with a separate $1,500,000 line for equipment purchases. Advances
under the CFC Credit Agreement are made on the basis of eligible accounts
receivable and inventory as defined in the agreement. CFC requires NEOS to
maintain working capital of no less than $2,500,000 excluding its borrowings
from CFC. In addition, NEOS must maintain an adjusted net worth of no less than
$600,000. The adjustment to the net worth calculation allows NEOS to add the
balance of any subordinated debt due to the former shareholder of NEOS to the
net worth calculation to meet the required level. Working capital and adjusted
net worth as of May 31, 2000 were $4,994,314 and $ 646,932, respectively. As of
May 31, 2000, NEOS had an aggregate of $5,641,902 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.
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Net cash flow used by investing activities for the nine month period
ended May 31, 2000 was $162,909. Cash outflows that were fixed asset-related
including both equipment purchases ($816,561) and deposits on leased equipment
($56,348) were partially offset by inflows from leasing assets that were
purchased with cash in a prior period ($685,000).
Net cash flow from financing activities for the nine month period ended
May 31, 2000 was $223,826. Cash outlays consisted primarily of the second
$375,000 note payment to the former sole shareholder of NEOS due as part of that
subsidiaries purchase agreement. The primary source of cash was the CFC line of
credit ($206,867) as well as a new note for leasehold improvements in the
Menands facility($525,000).
As of May 31, 2000, the Company had outstanding an aggregate of
$3,204,409 in notes (including accrued interest of $331,442), and accrued
salaries. Such amounts consist of:
(a) $500,000 on the Gulf Coast Music, LLC (Gulf Coast) Note,
(b) $344,000 principal amount 9% demand note to the former owner of NEOS
issued prior to the NEOS Acquisition,
(c) $230,884 principal amount 9% demand note due to a privately held
corporation owned by Messrs. Giakas and Arnone representing working
capital advances made by such entities to the Company,
(d) $10,000 principal amount 10% demand note also due to Messrs. Giakas and
Arnone,
(e) $ 5,000 principal amount 10% demand note also due to Messrs. Giakas and
Arnone,
(f) 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,
(g) $15,000 principal amount 9% demand note to Whelan, Inc., a privately
held corporation owned by Messrs. Arnone and Giakas,
(h) Accrued officers' salaries of $693,083,
(i) $525,000 principal amount 9.5% leasehold improvement note due to the
landlord of the new Menands location.
NEOS has several capital leases in the aggregate amount of $673,238
that are secured by the related equipment and fixtures.
In February 2000, the Company sold all of its interests in three subsidiaries
(Maestro, the Studio, and Higher Ground) to a former officer and director. In
exchange, the buyer agreed to give up any and all claims to existing accrued
salaries (approximately $193,000 at February 29, 2000) and his
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employment agreement as well as warrants to purchase 1,000,000 of the Company's
common stock at $2.00/share. This transaction resulted in a net after tax gain
of approximately $36,000 on the disposal of the net assets of these companies.
These three subsidiaries were either inactive or not profitable at the time of
the sale and had minimal assets. Therefore, the effect on cash is insignificant.
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, that 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.
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
(b) Reports on Form 8-K
During the nine month period ended May 31, 2000, the Company did not
file any reports on Form 8-K.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PLANET ENTERTAINMENT CORPORATION
(Registrant)
BY /s/ JOHN ARNONE
--------------------------------------------
John Arnone
President and Chief Executive Officer
BY /s/ RICHARD BLUESTINE
--------------------------------------------
Richard Bluestine
Chief Financial Officer
Date: As of July 14, 2000
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