1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (MARK ONE) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For Quarterly Period Ended June 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 Commission File Number: 0-26804 PLANET POLYMER TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- (Exact name of small business issuer as specified in its character) CALIFORNIA 33-0502606 - -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation I.R.S. Employer or organization) Identification No. 9985 Businesspark Ave., Suite A, San Diego, California 92131 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (619) 549-5130 - -------------------------------------------------------------------------------- (Issuer's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. [ X ] YES [ ] NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding at June 30, 1998 ----- ---------------------------- Common Stock, no par value 5,319,008 2 PLANET POLYMER TECHNOLOGIES, INC. FORM 10-QSB QUARTERLY REPORT QUARTER ENDED JUNE 30, 1998 INDEX PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1 Consolidated Balance Sheet (Unaudited) June 30, 1998 2 Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, 1998 and 1997 3 Consolidated Statements of Operations (Unaudited) Six Months Ended June 30, 1998 and 1997 4 Consolidated Statement of Shareholders' Equity (Unaudited) Six Months Ended June 30, 1998 5 Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 1998 and 1997 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 1 Legal Proceedings 12 Item 2 Changes in Securities 12 Item 3 Defaults upon Senior Securities 12 Item 4 Submission of Matters to a Vote of Security Holders 12 Item 5 Other Information 12 Item 6 Exhibits and Reports on Form 8K 12 SIGNATURES 13 3 PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET --------------- JUNE 30, ASSETS 1998 ------------ Current assets: Cash and cash equivalents $ 933,569 Accounts receivable, net of allowance for doubtful accounts of $10,000 308,950 Inventories, net 360,659 Prepaid expenses 66,107 Deferred income taxes 16,014 ------------ Total current assets 1,685,299 Restricted cash 108,277 Property, plant and equipment, net 793,962 Goodwill, net 560,019 Patents and other, net 325,433 ------------ Total assets $ 3,472,990 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 188,876 Notes payable 96,263 ------------ Total current liabilities 285,139 Other liabilities 351,597 Deferred income taxes 9,721 ------------ Total liabilities 646,457 ------------ Shareholders' equity: Preferred Stock, no par value Authorized shares 4,250,000 No shares issued or outstanding -- Series A Convertible Preferred Stock, no par value Authorized shares 750,000 Issued and outstanding 500,000 804,435 Liquidation preference $2 per share Common Stock, no par value Authorized shares 20,000,000 Issued and outstanding 5,319,008 10,979,206 Accumulated deficit (8,957,108) ------------ Total shareholders' equity 2,826,533 ------------ Total liabilities and shareholders' equity $ 3,472,990 ============ The accompanying notes are an integral part of the consolidated financial statements. 2 4 PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS --------------- THREE MONTHS ENDED JUNE 30, ------------------------------- 1998 1997 ----------- ----------- Sales $ 462,378 $ 868,402 Cost of sales 477,951 640,673 ----------- ----------- Gross profit (15,573) 227,729 ----------- ----------- Operating expenses: General and administrative 218,668 263,231 Marketing 69,088 7,765 Research and development, net 162,176 70,867 ----------- ----------- Total operating expenses 449,932 341,863 ----------- ----------- Loss from operations (465,505) (114,134) Other income, net 8,269 8,973 ----------- ----------- Loss before income taxes (457,236) (105,161) Income taxes (1,653) 14,027 ----------- ----------- Net loss $ (455,583) $ (119,188) =========== =========== Loss per share (Basic and Diluted) $ (0.09) $ (0.02) =========== =========== Shares used in per share computations 5,311,746 5,271,269 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 3 5 PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS --------------- SIX MONTHS ENDED JUNE 30, ------------------------------- 1998 1997 ----------- ----------- Sales $ 1,052,184 $ 1,740,257 Cost of sales 993,940 1,288,794 ----------- ----------- Gross profit 58,244 451,463 ----------- ----------- Operating expenses: General and administrative 441,914 516,068 Marketing 127,782 194,117 Research and development, net 274,541 177,219 ----------- ----------- Total operating expenses 844,237 887,404 ----------- ----------- Loss from operations (785,993) (435,941) Other income, net 19,167 30,649 ----------- ----------- Loss before income taxes (766,826) (405,292) Income taxes 1,915 29,094 ----------- ----------- Net loss $ (768,741) $ (434,386) =========== =========== Loss per share (Basic and Diluted) $ (0.14) $ (0.08) =========== =========== Shares used in per share computations 5,304,842 5,271,269 =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 4 6 PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY --------------- SERIES A PREFERRED STOCK COMMON STOCK ------------------------ ------------------------ ACCUMULATED SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 500,000 $ 804,435 5,300,144 $10,940,967 $(8,158,369) $ 3,587,033 Issuance of Common Stock as a dividend on Convertible Preferred Stock on March 15, 1998 -- -- 10,169 14,999 (14,999) -- Issuance of Common Stock as a dividend on Convertible Preferred Stock on June 15, 1998 -- -- 8,695 14,999 (14,999) -- Fair Market Value of Stock Options granted to a scientific advisor -- -- -- 8,241 -- 8,241 Net loss for the six months ended June 30, 1998 -- -- -- -- (768,741) (768,741) ----------- ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1998 500,000 $ 804,435 5,319,008 $10,979,206 $(8,957,108) $ 2,826,533 =========== =========== =========== =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements. 5 7 PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS --------------- SIX MONTHS ENDED JUNE 30, ------------------------------ 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss $ (768,741) $ (434,386) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 104,731 85,959 Compensation expense -- non-cash 8,241 (62,667) Gain on disposal of assets -- (375) Changes in assets and liabilities: Accounts receivable 77,107 103,716 Inventories, net 81,774 83,921 Prepaid expenses 17,651 13,424 Other assets 5,859 7,503 Accounts payable and accrued expenses (19,967) (105,159) Other liabilities 6,199 -- ----------- ----------- Net cash used by operating activities (487,146) (308,064) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment (52,098) (621) Proceeds from the sale of property and equipment -- 3,000 Cost of patents and other (9,598) (9,536) ----------- ----------- Net cash used by investing activities (61,696) (7,157) ----------- ----------- Cash flows from financing activities: Payments on short-term borrowings -- (48,935) Proceeds from equipment lease 11,317 -- Payments on long-term debt (45,311) -- ----------- ----------- Net cash used by financing activities (33,994) (48,935) ----------- ----------- Net decrease in cash and cash equivalents (582,836) (364,156) Cash and cash equivalents at beginning of period 1,516,405 1,640,392 ----------- ----------- Cash and cash equivalents at end of period $ 933,569 $ 1,276,236 =========== =========== Supplemental disclosure of non-cash activity: Stock options granted to a consultant $ -- $ 704 Stock options granted to a scientific advisor 8,241 -- Issuance of Common Stock dividend on Preferred Stock 29,998 -- The accompanying notes are an integral part of the consolidated financial statements. 6 8 PLANET POLYMER TECHNOLOGIES, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying unaudited financial statements of Planet Polymer Technologies, Inc. (the "Company" or "Planet") have been prepared in accordance with the interim reporting requirements of Form 10-QSB, pursuant to the rules and regulations of the Securities and Exchange Commission. 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, all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1998 are not necessarily indicative of results that may be expected for the year ending December 31, 1998. For additional information, refer to the Company's financial statements and notes thereto for the year ended December 31, 1997 contained in the Company's Form 10-KSB for the fiscal year ended December 31, 1997. Certain items shown in the June 30, 1997 financial statements have been reclassified to conform with the current period presentation. 2. Shareholders' Equity On June 15, 1998 the Company issued to the holder of Series A Preferred Stock a dividend of 8,695 shares of Common Stock valued at approximately $14,999. 3. Stock Option Plan On April 29, 1998, the Company's Board of Directors granted non-statutory stock options to purchase 10,000 shares of Common Stock at an exercise price of $1.75 per share to a scientific advisor of the Company under the 1995 Stock Option Plan. These options vest ratably over the one-year term of the agreement and expire on April 28, 2008. In connection with this transaction, the Company recorded a charge to income, for the three months ended June 30, 1998, of approximately $8,241, based on the Black Scholes option-pricing model. As of June 30, 1998, none of these options have been exercised. On May 21, 1998, the Company's Board of Directors granted non-statutory stock options to purchase an aggregate of 36,000 shares of Common Stock at an exercise price of $2.00 per share to outside directors under the 1995 Stock Option Plan. These options vest fully as of the date of grant and expire on May 20, 2008. As of June 30, 1998, none of these options have been exercised. 7 9 PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PLANET POLYMER TECHNOLOGIES, INC. Except for the historical information contained herein, the discussions in this report contain forward looking statements that involve certain risks and uncertainties. The Company's actual results could differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and in the Company's Form 10-KSB for the fiscal year ended December 31, 1997. OVERVIEW Planet Polymer Technologies, Inc. (the "Company" or "Planet") is a specialty chemical Company that designs, develops, manufactures and markets degradable and recycled polymer materials. The Company's proprietary polymer materials, which are marketed under the trademarks EnviroPlastic(R) and Aquadro(TM), can be used to produce films, coatings and injection molded parts that serve as environmentally compatible alternatives to conventional plastics. The Company emerged from the development stage as a result of its acquisition of Deltco of Wisconsin, Inc., a Wisconsin corporation ("Deltco"), effective January 1, 1996. Prior to this acquisition, substantially all of the Company's resources had been devoted to the development and commercialization of its EnviroPlastic(R) and Aquadro(TM) technologies and products. Deltco is a manufacturer and reprocessor of thermoplastic scrap resins and is located in Ashland, Wisconsin. The Company maintains Deltco as a wholly owned subsidiary, and uses its plant, equipment and other physical property in the manner in which it was used prior to the acquisition. During this quarter, Planet continued to focus on internally-funded, rather than customer-funded product development. The Company will continue to participate in customer-funded development when appropriate, but believes internally-funded development is advantageous as to certain technologies and applications. Additionally, during this quarter, the president of Deltco resigned to pursue other career opportunities. His responsibilities have been reassigned and the Company does not expect his departure to have a material impact on operations. The Company continues to focus on commercializing its AQUAMIM(TM), EnviroPlastic(R) and Aquadro(TM) technologies and growing Deltco's manufacturing business. The Company expects that research and development and marketing expenses may increase significantly in the future as the Company's products are commercialized and continued efforts are focused on Deltco's resins. The Company does not expect that general and administrative expenses will increase significantly in the next three months. Planet has incurred operating losses since its inception and has an accumulated deficit of approximately $9.0 million as of June 30, 1998. The Company expects to incur additional losses for the foreseeable future. 8 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) PLANET POLYMER TECHNOLOGIES, INC. RESULTS OF OPERATIONS Revenue The Company's revenues decreased from approximately $868,000 for the three months ended June 30, 1997 to approximately $462,000 for the three months ended June 30, 1998 and from approximately $1,740,000 for the six months ended June 30, 1997 to approximately $1,052,000 for the six months ended June 30, 1998. This decrease was primarily attributed to declines in both sales volume and sales price of approximately 17% and 17%, respectively, for the three months ended June 30, 1998 and from approximately 16% and 13%, respectively, for the six months ended June 30, 1998 for Deltco's recycled polypropylene due to price decreases in virgin polypropylene. Since Deltco's recycled polypropylene is generally a lower cost substitute for virgin polypropylene such price decreases lessened demand for Deltco's recycled material. The price decreases in virgin polypropylene were substantially related to the low cost of oil and a decrease in demand for polypropylene in Asia. The Company expects this trend to continue for the foreseeable future. Cost of Sales Cost of sales decreased from approximately $641,000 for the three months ended June 30, 1997 to approximately $478,000 for the three months ended June 30, 1998 and from approximately $1,289,000 for the six months ended June 30, 1997 to approximately $994,000 for the six months ended June 30, 1998. The decrease was primarily attributable to lower sales volume at Deltco, offset by additional costs at Deltco associated with the qualifying of additional suppliers of scrap resin, write-offs of obsolete inventory and an inventory reserve of approximately $33,000 to reflect market values less than cost. General and Administrative Expenses General and administrative expenses decreased from approximately $263,000 for the three months ended June 30, 1997 to approximately $219,000 for the three months ended June 30, 1998 and from approximately $516,000 for the six months ended June 30, 1997 to approximately $442,000 for the six months ended June 30, 1998. This decrease was primarily attributable to decreased costs of outside services. Marketing Expenses Marketing expenses increased from approximately $8,000 for the three months ended June 30, 1997 to approximately $69,000 for the three months ended June 30, 1998. This increase was primarily attributable to a $63,000 downward revision, during the three months ended June 30, 1997, to the December 31, 1996 estimated fair value of non-cash incentive compensation expense of stock granted to the president of Deltco. 9 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) PLANET POLYMER TECHNOLOGIES, INC. RESULTS OF OPERATIONS, CONTINUED Marketing expenses decreased from approximately $194,000 for the six months ended June 30, 1997 to approximately $128,000 for the six months ended June 30, 1998. This decrease was primarily attributable to the $63,000 revision previously discussed and reductions in outside services, sales and marketing personnel and international travel expenditures, offset by increased marketing efforts in North America. Research and Development Expenses, Net The Company's net research and development expenses increased from approximately $71,000 for the three months ended June 30, 1997 to approximately $162,000 for the three months ended June 30, 1998 and from approximately $177,000 for the six months ended June 30, 1997 to approximately $275,000 for the six months ended June 30, 1998. This increase was primarily due to lower research and development revenue at Planet and increases in costs associated with advancing AQUAMIM(TM), EnviroPlastic(R) CRT and Aquadro(TM) technologies. 10 12 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) PLANET POLYMER TECHNOLOGIES, INC. LIQUIDITY AND CAPITAL RESOURCES Since its inception, Planet has financed its operations primarily through the sale of equity securities and revenue from customer development agreements. The Company has raised approximately $4 million (net of issuance costs) from the private sale of Common Stock. In September 1995, the Company completed its initial public offering ("IPO") in which it sold an aggregate of 1,150,000 shares of Common Stock and received net proceeds of approximately $5.6 million. In January 1996, the Company used $1,125,000 in cash and issued 96,775 shares of restricted Common Stock valued at approximately $508,000 to acquire Deltco in a purchase transaction. In connection with the purchase, the Company has one outstanding debt agreement related to a Small Business Administration loan collateralized by a certificate of deposit and inventory at Deltco. As of June 30, 1998 the loan balance was approximately $139,000. The Company has no material commitments for capital expenditures. The Company recognizes the need to ensure that its operations will not be impacted by the year 2000 issue. Thus, the Company has developed a plan to modify its information technology in recognition of the year 2000 issue. The plan calls for updating existing software and hardware to newer versions that incorporate corrections to eliminate the problem. The plan was postponed during the second quarter due to time constraints caused from production trials and internal planning for the commercialization of AQUAMIM(TM). The Company has estimated that the total cost of updating the Company's technology in order to be year 2000 compliant will be approximately $35,000. The Company does not expect the year 2000 issue and the plan to resolve it to have a significant impact on its operations. However, there is no guarantee that the Company will address all year 2000 issues in a timely fashion or that the systems of other companies on which Planet's systems rely will be timely converted and would not have an adverse effect on the Company's systems. For example, to the extent that customers would be unable to order products or pay invoices or suppliers would be unable to manufacture or deliver product, the Company's operations would be affected. The Company used approximately $487,000 for operations for the six months ended June 30, 1998. Such funds were used for research and development activities, marketing efforts and administrative support. The Company used approximately $62,000 for investing activities for the six months ended June 30, 1998. Such funds were used for the preparation of patents and for the purchase of equipment. The Company used approximately $34,000 for financing activities for the six months ended June 30, 1998. Such funds were used for the repayment of debt, partially offset by proceeds from an equipment lease. The Company believes that its existing sources of liquidity and anticipated revenue, including revenues generated from Deltco, will satisfy the Company's projected working capital and other cash requirements through at least March 1999. There can be no assurance, however, that changes in the Company's plans or other events affecting the Company's operating expenses will not result in the expenditure of such resources before such time. The Company expects that it will need to raise substantial additional funds to continue its current and planned operations and establish large-scale manufacturing capabilities. The Company intends to seek additional funding from existing and potential customers or through public or private equity or debt financing. There can be no assurance that additional financing will be available on acceptable terms, or at all. 11 13 PART II - OTHER INFORMATION PLANET POLYMER TECHNOLOGIES, INC. Item 1 - Legal Proceedings: None Item 2 - Changes in Securities: None Item 3 - Defaults upon Senior Securities: None Item 4 - Submission of Matters to a Vote of Security Holders: The Annual Meeting of Shareholders of Planet Polymer Technologies, Inc. (the "Annual Meeting") was held on May 22, 1998 in San Diego, California. Proposal 1 - Election of Directors Each of the candidates listed below were duly elected to the Board of Directors at the Annual Meeting by the tally indicated. Candidate Votes in Favor Votes Withheld --------- -------------- -------------- Robert J. Petcavich, Ph.D 4,999,436 14,328 Michael M. Coleman, Ph.D 5,000,436 13,328 Thomas M. Connelly 5,000,361 13,403 H.M. Busby 4,131,822 881,942 Thomas A. Landshof 4,996,311 17,453 Proposal 2 - Ratification of Selection of Independent Auditors Votes in Favor Votes Against Votes Abstained -------------- ------------- --------------- 5,004,436 2,778 6,550 Item 5 - Other Information: Pursuant to the recent changes in the proxy rules, unless a shareholder who wishes to bring a matter before the shareholders at the Company's 1999 annual meeting notifies the Company of such a matter prior to March 3, 1999, management will have discretionary authority to vote all shares for which it has proxies in opposition to such matter. Item 6 - Exhibits and Reports on Form 8-K: (a) Exhibits: Exhibit Number Description -------------- ----------- 11.1 Statement of Computation of Common and Common Equivalent Shares 27.1 Financial Data Schedule (b) Reports on Form 8-K: None 12 14 SIGNATURES In accordance with the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 12, 1998 Planet Polymer Technologies, Inc. /s/ Robert J. Petcavich ----------------------------------------------- Robert J. Petcavich President, Chief Executive Officer and Director (On behalf of Registrant and as Registrant's Principal Financial and Accounting Officer) 13