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 September 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 or organization) I.R.S. Employer 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 September 30, 1998 ----- --------------------------------- Common Stock, no par value 5,332,491 2 PLANET POLYMER TECHNOLOGIES, INC. FORM 10-QSB QUARTERLY REPORT QUARTER ENDED SEPTEMBER 30, 1998 INDEX PAGE NO. -------- PART I - FINANCIAL INFORMATION Item 1 Consolidated Balance Sheet (Unaudited) September 30, 1998 2 Consolidated Statements of Operations (Unaudited) Three Months Ended September 30, 1998 and 1997 3 Consolidated Statements of Operations (Unaudited) Nine Months Ended September 30, 1998 and 1997 4 Consolidated Statement of Shareholders' Equity (Unaudited) Nine Months Ended September 30, 1998 5 Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 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 13 Item 2 Changes in Securities 13 Item 3 Defaults upon Senior Securities 13 Item 4 Submission of Matters to a Vote of Security Holders 13 Item 5 Other Information 13 Item 6 Exhibits and Reports on Form 8K 13 SIGNATURES 14 3 PLANET POLYMER TECHNOLOGIES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET --------------- SEPTEMBER 30, ASSETS 1998 ------------ Current assets: Cash and cash equivalents $ 510,250 Accounts receivable, net of allowance for doubtful accounts of $10,000 169,796 Inventories, net 498,556 Prepaid expenses 85,693 Deferred income taxes 16,014 ------------ Total current assets 1,280,309 Restricted cash 108,277 Property, plant and equipment, net 755,780 Goodwill, net 552,019 Patents and other, net 328,342 ------------ Total assets $ 3,024,727 ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 144,956 Notes payable 104,377 ------------ Total current liabilities 249,333 Other liabilities 324,626 Deferred income taxes 9,721 ------------ Total liabilities 583,680 ------------ 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 5,332,491 10,994,206 Accumulated deficit (9,357,594) ------------ Total shareholders' equity 2,441,047 ------------ Total liabilities and shareholders' equity $ 3,024,727 ============ 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 SEPTEMBER 30, ---------------------------------- 1998 1997 ------------ ------------ Sales $ 204,367 $ 709,514 Cost of sales 216,990 555,291 ------------ ------------ Gross profit (12,623) 154,223 ------------ ------------ Operating expenses: General and administrative 187,962 225,286 Marketing 57,107 58,384 Research and development, net 136,086 109,115 ------------ ------------ Total operating expenses 381,155 392,785 ------------ ------------ Loss from operations (393,778) (238,562) Other income, net 8,291 8,683 ------------ ------------ Loss before income taxes (385,487) (229,879) Income taxes -- 20,000 ------------ ------------ Net loss $ (385,487) $ (249,879) ============ ============ Loss per share (Basic and Diluted) $ (0.07) $ (0.05) ============ ============ Shares used in per share computations 5,321,206 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 --------------- NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1998 1997 ------------ ------------ Sales $ 1,256,551 $ 2,449,771 Cost of sales 1,210,930 1,844,084 ------------ ------------ Gross profit 45,621 605,687 ------------ ------------ Operating expenses: General and administrative 629,877 741,355 Marketing 184,887 252,501 Research and development, net 410,627 286,335 ------------ ------------ Total operating expenses 1,225,391 1,280,191 ------------ ------------ Loss from operations (1,179,770) (674,504) Other income, net 27,458 39,333 ------------ ------------ Loss before income taxes (1,152,312) (635,171) Income taxes 1,915 49,094 ------------ ------------ Net loss $ (1,154,227) $ (684,265) ============ ============ Loss per share (Basic and Diluted) $ (0.22) $ (0.13) ============ ============ Shares used in per share computations 5,311,705 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) -- Issuance of Common Stock as a dividend on Convertible Preferred Stock on September 15, 1998 -- -- 13,483 15,000 (15,000) -- Fair Market Value of Stock Options granted to a scientific advisor -- -- -- 8,241 -- 8,241 Net loss for the nine months ended September 30, 1998 -- -- -- -- (1,154,227) (1,154,227) ----------- ----------- ----------- ----------- ----------- ----------- Balance at September 30, 1998 500,000 $ 804,435 5,332,491 $10,994,206 $(9,357,594) $ 2,441,047 =========== =========== =========== =========== =========== =========== 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 --------------- NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1998 1997 ------------ ------------ Cash flows from operating activities: Net loss $ (1,154,227) $ (684,265) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 157,054 128,404 Compensation expense -- non-cash 8,241 (60,555) Gain on disposal of assets -- (56) Changes in assets and liabilities: Accounts receivable 216,261 196,924 Inventories, net (56,122) 24,454 Prepaid expenses (1,935) (19,503) Other assets 3,068 14,678 Accounts payable and accrued expenses (58,426) 5,943 Other liabilities 952 -- ------------ ------------ Net cash used by operating activities (885,134) (393,976) ------------ ------------ Cash flows from investing activities: Purchases of property and equipment (52,098) (15,893) Proceeds from the sale of property and equipment -- 4,140 Cost of patents and other (15,852) (18,177) ------------ ------------ Net cash used by investing activities (67,950) (29,930) ------------ ------------ Cash flows from financing activities: Proceeds from preferred stock and warrants, net -- 897,500 Payments on short-term borrowings -- (71,005) Proceeds from equipment lease 15,677 -- Payments on long-term debt (68,748) -- ------------ ------------ Net cash (used) provided by financing activities (53,071) 826,495 ------------ ------------ Net (decrease) increase in cash and cash equivalents (1,006,155) 402,589 Cash and cash equivalents at beginning of period 1,516,405 1,640,392 ------------ ------------ Cash and cash equivalents at end of period $ 510,250 $ 2,042,981 ============ ============ Supplemental disclosure of non-cash activity: Stock options granted to a consultant $ -- $ 2,816 Stock options granted to a scientific advisor 8,241 -- Issuance of Common Stock dividend on Preferred Stock 44,998 -- 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 nine month period ended September 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 September 30, 1997 financial statements have been reclassified to conform with the current period presentation. 2. Shareholders' Equity On September 15, 1998 the Company issued to the holder of Series A Preferred Stock a dividend of 13,483 shares of Common Stock valued at approximately $15,000. 3. Stock Option Plan On July 1, 1998, the Company's Board of Directors granted incentive stock options to purchase 12,500 shares of Common Stock at an exercise price of $1.625 per share to an employee under the 1995 Stock Option Plan. These options become vested and exercisable on December 31, 1998 and expire on June 30, 2008. As of September 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. Planet is also focusing on its AQUAMIM(TM) technology, a novel water debinding metal injection molding feedstock, which can be used to injection mold metal parts for use in various industrial and consumer products. 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. 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. 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 $9.4 million as of September 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 $710,000 for the three months ended September 30, 1997 to approximately $204,000 for the three months ended September 30, 1998 and from approximately $2,450,000 for the nine months ended September 30, 1997 to approximately $1,257,000 for the nine months ended September 30, 1998. These decreases were primarily attributed to declines in both sales volume and sales price of approximately 40% and 38%, respectively, for the three months ended September 30, 1998 and from approximately 25% and 17%, respectively, for the nine months ended September 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, a decrease in demand for polypropylene in Asia and the General Motors strike. The Company expects this trend to continue for the foreseeable future. Cost of Sales Cost of sales decreased from approximately $555,000 for the three months ended September 30, 1997 to approximately $217,000 for the three months ended September 30, 1998 and from approximately $1,844,000 for the nine months ended September 30, 1997 to approximately $1,211,000 for the nine months ended September 30, 1998. These decreases were primarily attributable to lower sales volume at Deltco, offset by write-offs of obsolete inventory and a write-down of inventory to market. General and Administrative Expenses General and administrative expenses decreased from approximately $225,000 for the three months ended September 30, 1997 to approximately $188,000 for the three months ended September 30, 1998 and from approximately $741,000 for the nine months ended September 30, 1997 to approximately $630,000 for the nine months ended September 30, 1998. These decreases were primarily attributable to decreased costs of outside services. Marketing Expenses Marketing expenses decreased from approximately $58,000 for the three months ended September 30, 1997 to approximately $57,000 for the three months ended September 30, 1998 and from approximately $253,000 for the nine months ended September 30, 1997 to approximately $185,000 for the nine months ended September 30, 1998. The year to date decrease was primarily attributable to reductions in outside services and sales and marketing personnel. The Company also incurred 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 Research and Development Expenses, Net The Company's net research and development expenses increased from approximately $109,000 for the three months ended September 30, 1997 to approximately $136,000 for the three months ended September 30, 1998 and from approximately $286,000 for the nine months ended September 30, 1997 to approximately $411,000 for the nine months ended September 30, 1998. These increases were primarily due to the addition of research and development personnel and increased costs associated with advancing AQUAMIM(TM), EnviroPlastic(R) CRT and Aquadro(TM) technologies, including customer production trials and efficacy and safety testing. Additionally, offsetting research and development revenue decreased from approximately $96,000 to approximately $55,000 for the nine months ended September 30, 1998 as compared to the nine months ended September 30, 1997. 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 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 September 30, 1998 the loan balance was approximately $117,000. 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 that results from computer applications being written along two digits rather than four to define the application year. As a result of the year 2000 issue, computer applications may recognize a date using "00" as the year 1900 rather than the year 2000, resulting in system failures or miscalculations causing disruption of operations. The Company has reviewed its material computer applications for year 2000 compliance and is working with vendors and suppliers to make its computer applications year 2000 compliant. 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 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, if such plans cannot be completed on a timely basis, the year 2000 issue could have a material adverse impact on the Company's business, financial condition and results of operations. Because of the many uncertainties associated with year 2000 compliance issues, and because the Company's assessment is necessarily based on information from third party vendors and suppliers, there can be no assurance as to whether such assessment is correct or as to the materiality or effect if such assessment is not correct. 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 $885,000 for operations for the nine months ended September 30, 1998. Such funds were used for research and development activities, working capital, marketing efforts and administrative support. The Company used approximately $68,000 for investing activities for the nine months ended September 30, 1998. Such funds were used for the purchase of equipment and for the preparation of patents. The Company used approximately $53,000 for financing activities for the nine months ended September 30, 1998. Such funds were used for the repayment of debt, partially offset by proceeds from an equipment lease. 11 13 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED) PLANET POLYMER TECHNOLOGIES, INC. LIQUIDITY AND CAPITAL RESOURCES, CONTINUED 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 January 1999. Such time period has been shortened from previous estimates as a result of decreases in the Company's revenues associated with declines in both sales volumes and sales prices for Deltco's recycled polypropylene. There can be no assurance, however, that future revenue decreases or changes in the Company's plans or other events affecting the Company's operating expenses will not result in the expenditure of the Company's resources. The Company expects that it will need to raise substantial additional funds to continue its current and planned operations. 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. 12 14 PART II - OTHER INFORMATION PLANET POLYMER TECHNOLOGIES, INC. Item 1 - Legal Proceedings: In November 1998, the Company initiated litigation against Brian To, a former director of the Company, Tarrenz Management Consultants, Inc., and Tarrenz, Inc. entities owned by Brian To, in the Superior Court of the State of California for the County of San Diego. The complaint alleges breach of fiduciary duty, fraud, conversion, negligent misrepresentation and breach of contract, recission, constructive trust, and negligence arising from services the defendants performed for or on behalf of the Company. The Company is seeking actual and consequential damages in excess of $1 million, as well as punitive and exemplary damages. It is too early to determine the impact, if any, of this proceeding on the Company, its financial condition or the results of the Company's operations. Item 2 - Changes in Securities: None Item 3 - Defaults upon Senior Securities: None Item 4 - Submission of Matters to a Vote of Security Holders: None Item 5 - Other Information: None 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 13 15 PLANET POLYMER TECHNOLOGIES, INC. 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: November 9, 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) 14