Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB-Quarterly or Transition Report
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) of THE SECURITIES
EXCHANGE ACT OF 1934
For the thirty-nine weeks ended March 28, 1998
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 or 15(d) of THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _______
Commission file number 0-22638
STARLOG FRANCHISE CORPORATION
(Exact name of small business issuer as specified in its charter)
New Jersey 22-3219281
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
945 Brighton Street, Union, New Jersey 07083
(Address of principal executive offices including zip code)
(908)-964-2813
(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 ___ No _X_
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes ___ No _X_
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common
stock as of the latest practicable date. Common Stock, $.001 par value-
24,237,636 shares outstanding as of May 15, 1998.
1
<PAGE>
Starlog Franchise Corporation and Subsidiaries
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 28, 1998 (Unaudited) and
June 28, 1997 (Audited) 3
Consolidated Statements of Operations (Unaudited) for the
Thirty-nine Weeks Ended March 28, 1998 and
March 29, 1997 4
Consolidated Statements of Operations (Unaudited) for the
Thirteen Weeks Ended March 28, 1998 and
March 29, 1997 5
Consolidated Statements of Cash Flows (Unaudited) for the
Thirty-nine Weeks Ended March 28, 1998 and
March 29, 1997 6
Consolidated Statements of Stockholders' Equity (Unaudited) 7
Notes to Consolidated Financial Statements - March 28, 1998 8
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Part II. Other Information
Item 1. Legal Proceedings 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
2
<PAGE>
STARLOG FRANCHISE CORPORATION
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 28, June 28,
1998 1997
---- ----
ASSETS (Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 216,901 $ 131,720
Accounts receivable, net of allowance
or doubtful accounts of $0 and
$7,000 respectively 223,079 50,461
Inventories, net of reserves of
$255,000 and $420,000 respectively 964,216 793,417
Prepaid expenses and other current assets 1,641 17,632
----------- -----------
Total Current Assets 1,405,837 993,230
Property and Equipment, net 227,797 690,528
Reorganization Value in Excess of Amounts
Allocated to Identifiable Assets 153,391 543,986
Other Assets 5,686 13,875
----------- -----------
$ 1,792,711 $ 2,241,619
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,065,085 $ 596,466
Other liabilities, including reserves 460,265 206,432
Loans due to stockholders and affilities 267,616 1,010,000
Current maturities of long-term debt 199,750 152,820
----------- -----------
Total Current Liabilities 1,992,716 1,965,718
Long-Term Liabilities:
Long-term debt 3,003,341 653,180
Trade & Notes payable subject to compromise -- 316,507
----------- -----------
Total Liabilities 4,996,057 2,935,405
----------- -----------
Stockholders' Equity (Deficit):
Common stock, $.001 par value; authorized
40,000,000 shares, issued and
outstanding 24,237,636 and 3,613,636
shares respectively 24,238 24,238
Additional paid-in capital 575,612 575,612
Accumulated deficit (3,803,196) (1,293,636)
----------- -----------
Net Stockholders' Equity (3,203,346) (693,786)
----------- -----------
$ 1,792,711 $ 2,241,619
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
STARLOG FRANCHISE CORPORATION
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
Thirty-nine Weeks Thirty-nine Weeks
Ended Ended
March 28, March 29,
1998 1997
----------------- -----------------
Operating Revenues:
Retail sales $ 3,803,752 $ 1,510,125
Sales to franchisees and joint
ventures -- 413,671
Franchise fees, royalty revenues
and other 6,686 51,645
------------ ------------
Total Revenue 3,810,438 1,975,441
Costs and Expenses:
Cost of sales 1,940,560 767,595
Depreciation and amortization 177,663 180,965
Selling, general and administrative 2,959,025 1,900,450
------------ ------------
Total Costs and Expenses 5,077,248 2,849,010
------------ ------------
Profit (Loss) from Operations (1,266,810) (873,569)
Other Income (Expense):
Interest and dividend income 2,799 13,691
Interest Expense (183,945) (15,375)
Loss on Sale or Abandonment (701,734) --
Write-off of Reorganization Value -
Starlog & Sumon (513,261) --
------------ ------------
Total Other Income (Expense) (1,396,141) (1,684)
------------ ------------
Net Profit (Loss) for twenty-six
weeks $ (2,662,951) $ (875,253)
============ ============
Portion of (loss) applicable to
period up to emergence from
bankruptcy (153,391) (243,135)
Portion of Profit (loss) applicable
to period subsequent to bankruptcy (2,509,560) (632,118)
Net income (loss) per common share $ (.1097) $ (.0439)
============ ============
Weighted average number of common
shares outstanding 24,237,636 19,937,636
============ ============
See accompanying notes to consolidated financial statements.
4
<PAGE>
STARLOG FRANCHISE CORPORATION
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
Thirteen Weeks Thirteen Weeks
Ended Ended
March 28, March 29,
1998 1997
-------------- --------------
Operating Revenues:
Retail sales $ 1,441,129 $ 557,002
Sales to (Returns from) franchisees and
joint ventures -- (82,129)
Franchise fees, royalty revenues and other 3,939 3,379
------------ ------------
Total Revenue 1,445,068 478,252
Costs and Expenses:
Cost of sales 710,591 79,345
Depreciation and amortization 64,366 65,291
Selling, general and administrative 1,269,433 966,081
------------ ------------
Total Costs and Expenses 2,044,390 1,110,717
------------ ------------
Profit (Loss) from Operations (599,322) (632,465)
Other Income (Expense):
Interest and dividend income -- 1,580
Interest Expense (83,652) (11,300)
Loss on sale or abandonment (269,832) --
Write-off of Reorganization Value -
Starlog & Sumon (513,261) --
------------ ------------
Total Other Income (Expense) (866,745) (9,720)
------------ ------------
Net Profit(Loss) for thirteen weeks $ (1,466,067) $ (642,185)
============ ============
Portion of (loss) applicable to period
up to emergence from bankruptcy (153,391) --
Portion of profit (loss) applicable
to period subsequent to bankruptcy (1,312,676) (642,185)
Net income (loss) per common share $ (.0605) $ (.0322)
============ ============
Weighted average number of common shares
outstanding 24,237,636 19,937,636
============ ============
See accompanying notes to consolidated financial statements.
5
<PAGE>
STARLOG FRANCHISE CORPORATION
and SUBSIDIARIES
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
Thirty-nine Weeks Thirty-nine Weeks
Ended Ended
March 28, March 29,
1998 1997
----------------- -----------------
Cash Flows From Operating Activities:
Net (Loss) applicable to period up to
emergence from bankruptcy $ (153,391) $ (243,135)
Net Profit (Loss) applicable to period
subsequent to bankruptcy (2,509,560) (632,118)
Adjustments to reconcile net loss to
net cash used in operations
Depreciation and amortization 177,663 152,820
Write-off of organization costs -- 28,145
Write-off of Reorganization Value-
Starlog & SUMON 513,261 --
Loss on sale or abandonment of assets 701,734 --
Changes in operating assets and
liabilities:
(Increase) in accounts receivable (172,618) (101,143)
Reduction in reserves and other
liabilities 253,833 (244,436)
Decrease (increase) in inventories (170,799) (199,013)
(Increase) in prepaid expenses and
other current assets 15,991 6,919
(Decrease) increase in accounts
payable and accrued liabilities 468,619 (98,658)
(Increase) in other working capital 8,189 (7,127)
----------- -----------
Net cash used in operating
activities (867,078) (1,337,746)
----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment,net 42,118 (12,784)
Acquisition deposits - KCK and SUMON
respectively (200,000) (50,000)
----------- -----------
Net cash used in investing
activities (157,882) (62,784)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of convertible
debt -- 75,000
Proceeds from loans from stockholders 1,854,707 1,078,842
Net effect of liabilities subject to
compromise of acquired company (928,573) --
Issuance of new unsecured notes, net
of discount 484,007 306,000
Payments on loans from stockholders (200,000) (50,000)
Conversion of convertible debt into
stock (100,000) (200,000)
----------- -----------
Net cash from financing
activities 1,110,141 1,209,842
----------- -----------
Increase in cash and cash equivalents 85,181 (190,688)
Cash at beginning of period 131,720 305,527
----------- -----------
Cash at end of period $ 216,901 $ 114,839
=========== ===========
See accompanying notes to consolidated financial statements.
6
<PAGE>
STARLOG FRANCHISE CORPORATION
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional Accumulated Net
Number of Par Value Paid-in Earnings Stockholders'
Shares Amount Capital (Deficit) Equity
---------- ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at July 1, 1995 (Audited) 3,613,636 $ 3,614 $ 7,636,711 $(6,860,381) $ 779,944
Net Loss -- -- -- (2,360,493) (2,360,493)
---------- ----------- ----------- ----------- -----------
Balances at June 29, 1996 (Audited) 3,613,636 3,614 7,636,711 (9,220,874) (1,580,549)
Cancellation of founders' stock (1,676,000) (1,676) (4,606) -- (6,282)
Conversion of debt into new stock 18,000,000 18,000 182,000 -- 200,000
Net income prior to emergence from bankruptcy -- -- -- 6,865 6,865
Recapitalization at date of emergence
from bankruptcy -- -- (7,609,883) 9,214,009 1,604,126
Issuance of common stock at $.09 share
for Goal Post Distributing Acquisition 4,300,000 4,300 371,390 -- 375,690
Net loss subsequent to emergence
from bankruptcy -- -- -- (1,293,636) (1,293,636)
---------- ----------- ----------- ----------- -----------
Balances at June 28, 1997 (Audited) 24,237,636 $ 24,238 $ 575,612 $(1,293,636) $ (693,786)
Net loss - KCK (prior to emergence from bankruptcy) -- -- -- (153,391) (153,391)
Acquisition of KCK Corporation -- 12,607 -- (208,248) (195,641)
Recapitalization at date of emergence
from bankruptcy -- (12,607) -- 361,639 349,032
Net loss - thirty-nine weeks (subsequent to
emergence from bankruptcy) -- -- -- (2,509,560) (2,509,560)
---------- ----------- ----------- ----------- -----------
Balances at March 28, 1998 (Unaudited) 24,237,636 $ 24,238 $ 575,612 $(3,803,196) $(3,203,346)
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
STARLOG FRANCHISE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 28, 1998
Note 1 - Principal Business Activity and Summary of Significant Accounting
Policies
(a) Principal Business Activity
The current principal business activities of Starlog Franchise Corporation
and its wholly-owned subsidiaries (Company) are the operating of retail
candy stores and both wholesale and retail distribution of novelty gifts,
trading cards and collectibles. The Company has decided to withdraw from
the franchising and owning of Starlog and SUMON stores which sell a
variety of Holographic artwork, science fiction, fantasy, horror and
media-related comic books, books, magazines, games, toys, videos, apparel
and related merchandise.
In early 1998, the Company has decided to withdraw from the Starlog and
SUMON retail stores and concentrate on its candy store and gift, trading
card and novelty business. At June 8, 1998 the Company had closed all of
these stores with the exception of its Paramus, NJ location. Accordingly,
management has written-off or fully reserved any remaining assets to net
realizable value by incurring a charge-off in the third fiscal quarter
ended March 28, 1998.
(b) Consolidation and Acquisition
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries SUMON, LLC (in process of
being dissolved), Goal Post Distributing, Inc.(acquired in June 1997) and
KCK Corporation (newly acquired in November 1997). All significant
intercompany transactions and balances have been eliminated in
consolidation. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations, and cash flows of the Company
at March 28, 1998 and for all periods presented, have been made.
These statements have been prepared by the Company and are unaudited.
Additionally, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. It is suggested that
these consolidated financial statements are read in connection with the
financial statements and notes thereto included in the Company's Annual
report on Form 10-KSB for the fiscal year ended June 28, 1997. There have
been no changes of significant accounting policies since June 28, 1997.
8
<PAGE>
(c) Inventories
Inventories, consisting of finished goods, are stated at the lower of
cost, determined by the first-in, first-out method, or market. Inventories
relating to the closed Starlog and SUMON stores have been written-down to
estimated net realizable value.
(d) Depreciation and Amortization
Depreciation and amortization of property and equipment is provided for by
the straight-line method over the estimated useful lives of the related
assets or life of the lease; whichever is shorter. Property and Equipment
of the former Starlog and SUMON stores have been written-off since these
assets have either been sold or abandoned.
(e) Organization Costs
Organization costs relating to the Starlog operations were previously
written-off at the time of reorganization.
(f) Reorganization Values in Excess of Amounts Allocated to Identified
Assets
The Company accounted for the restructuring using the principles of Fresh
Start Reporting as required by SOP 90-7, "Financial Reporting by Entities
in Reorganization under the Bankruptcy Code." Pursuant to such principles,
in general, the Company's assets and liabilities were revalued to reflect
their reorganization value, which approximates fair value at the date of
reorganization. The balance of such assets at the date of emergence from
bankruptcy was being amortized over 15 years at the rate of $3,414 per
month. The balance of approximately $513,000 at March 28, 1998 was
written-off when management decided to withdraw from the Starlog and SUMON
business.
(g) Revenue Recognition
The Company generally recognizes revenue on the date the merchandise is
purchased by a customer.
(h) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results may differ from those estimates.
(i) Fair Value of Financial Instruments
The carrying values of all financial instruments approximate their fair
values.
(j) Seasonality
9
<PAGE>
The Company's sales are seasonal in nature based, in part, on gift and
candy buying during holiday periods such as Easter, Halloween and
Christmas.
(k) Reclassifications
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation. (l) Earnings Per Share
Net loss per share of common stock has been computed using the weighted
average number of shares of common stock outstanding. For purposes of this
computation, shares of common stock issuable upon the exercise of options
to purchase common stock have been excluded from the weighted average
number of shares outstanding, as their inclusion would be anti-dilutive.
Outstanding shares of the prior period have been restated to reflect the
issuance of 18,000,000 new shares and cancellation of 1,676,000 founder's
shares during the period.
Note 2 - Petition for Relief under Chapter 11 and Emergence
On November 13, 1995, the Company (Debtor) filed petitions for relief
under Chapter 11 of the Federal bankruptcy laws in the United States
Bankruptcy Court for the Middle District of Florida. Under Chapter 11,
certain claims against the Debtor in existence prior to the filing of the
petitions for relief under the federal bankruptcy laws are stayed while
the Debtor continues business operations as Debtor-in-possession. These
claims are reflected in the June 29, 1996 consolidated balance sheet as
"liabilities subject to compromise." Additional claims (liabilities
subject to compromise) may arise subsequent to the filing date resulting
from rejection of executory contracts, including leases and from the
determination by the Court (or agreed to by parties in interest) of
allowed claims for contingencies and other disputed amounts. Claims
secured against the Debtor's assets (secured claims) also are stayed
although the holders of such claims have the right to move the court for
relief from the stay. Secured claims are secured by liens on the Debtor's
tangible assets. The Debtor received approval from the Bankruptcy Court to
pay certain of its pre-petition obligations, including employee wages. On
August 29, 1996, the Company emerged from Chapter 11 bankruptcy with the
approval of the Court.
In November 1997, the Company acquired KCK Corporation (KCK) (which prior
to the acquisition, KCK had filed a Chapter 11 Bankruptcy Petition in the
United States Bankruptcy Court for the Western District of North
Carolina.) for approximately $200,000 in Super Priority financing. The
Company also issued 500,000 warrants to purchase common stock at between
$.25 - $.50 per share. The warrants expire on September 30, 1998 (200,000
warrants) and September 30, 1999 (300,000 warrants). KCK is a retailer
which owns and operates 13 candy stores under the trade name "Candy
Candy"and "Candico". The plan of reorganization was approved by the Court
on March 19, 1998.
10
<PAGE>
Note 3 - Other Liabilities & Restructured Reserves
On December 31, 1996 the Company acquired, for $50,000, SUMON, LLC a
manufacturer (through Lazer Wizardry) and retailer (through Hologram
stores) of Holographic artwork. After it became known that certain
unrecorded liabilities existed, the Company decided to put this new
Subsidiary into Chapter 11 bankruptcy on February 3, 1997. Subsequently,
the court disallowed the bankruptcy. At March 28, 1998 the liabilities of
SUMON exceed the assets of SUMON by approximately $613,000. This company
is in the process of being dissolved. Any unrecovered investment and
advances to SUMON by the Company, were written-off in the third quarter
ending March 28, 1998.
Note 4 - Income Taxes
The Plan of Reorganization, approved by the United States Bankruptcy Court
(Note 2), provided for the issuance of new Common Stock to satisfy the
Company's indebtedness and resulted in an "ownership change" under Section
382 of the United States Tax Code. As a result, total usage of the
Company's net operating loss carryforwards (which occurred prior to
emergence from bankruptcy), noted below, will be limited to approximately
$20,000 annually or $300,000 over the next 15 years. In addition, deferred
deductions described below, that become deductible for tax purposes during
the five-year period following the effective date of the bankruptcy are
also subject to the annual limitation. Net operating carryforwards and
future deductions exceeding the annual limitation will expire unutilized.
NOL's, which resulted subsequent to emergence from bankruptcy, will not be
fully available for future utilization. The Company accounts for income
taxes pursuant to the Statement of Financial Accounting Standards No. 109.
Note 5 - Commitments and Contingencies
The Company has entered into various non-cancelable operating leases for
office, warehouse and retail store space and equipment expiring at various
times through January 2004. The leases provide for minimum annual rentals
plus escalation charges. In addition, the Company's retail store leases
provide for additional rental payments based upon sales volume.
An employment agreement between the Company's President, the Company and
Hope was entered into on August 15, 1996. The term of the agreement is for
a period of five years, commencing on April 1, 1996, but can be terminated
at any time by either party. The agreement provides the President annual
compensation of $80,000 with a $10,000 increase upon confirmation of the
Company's Plan of Reorganization and $10,000 increases annually commencing
on January 1, 1997, not to exceed $140,000 in total base compensation. The
agreement also provides for an annual bonus based upon certain Company
financial performance, a $500 per month automobile allowance and certain
other benefits. Additionally, the agreement as in effect on June 8, 1998
provides an option to purchase up to 3,000,000 shares of the Company's
common stock at $.06 per share, subject to certain provisions.
11
<PAGE>
Note 6 - Stockholders' Equity
Prior to the issuance of the secured convertible debenture (see Note 1[l])
and as an inducement to the Hope Group, the Company's founder and former
Chairman of the Board, his son and (former) President of the Company and
the former Chairman, as Trustee for his daughter, assigned 1,676,000
shares and their voting rights (surrendered shares) of the Company's
Common Stock to the Company in care of its current president. Upon
confirmation of the Plan of Reorganization the surrendered shares were
retired and options issued pursuant to the 1993 Employee and Director
Stock Option Plan were canceled. No options to purchase the Company's
common stock have ever been exercised.
The number of shares issued and outstanding before shares reserved for
warrants to be issued as above noted is 24,237,636. The Company increased
its authorized shares to 40,000,000 shares in January 1997.
Note 7 - Going Concern
As shown in the accompanying consolidated financial statements, the
Company had incurred recurring losses from operations. These past losses
have contributed to the Company's working capital deficiency an resulting
negative cash flow. Although the Company has recently raised debt capital
from existing stockholders, the Company's ability to continue as a going
concern will require the continuation of profitable operations, conversion
of debt capital into permanent equity, or the obtaining of additional
permanent equity.
12
<PAGE>
STARLOG FRANCHISE CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with the
enclosed consolidated financial statements and notes thereto appearing elsewhere
in this report.
Results of Operations
Thirty-nine weeks ended March 28, 1998 ("1998") compared to the
Thirty-nine weeks ended March 29, 1997 ("1997").
The Company's total revenues for the 1998 period of $3,810,438 were earned
primarily from retail sales of the Company owned Starlog and SUMON stores
($1,043,053), both wholesale and retail sales of the Goal Post Distributing
(Goal Post) unit ($1,194,238), and retail sales of the newly acquired KCK
Corporation (KCK)($1,573,147). Total revenues for the 1997 period of $1,975,441
reflects retail sales of the Starlog and SUMON stores ($1,510,125), franchise
fees and royalty revenues ($51,645), and the gross profit earned by the
Company's distribution center on sales to its franchised Starlog stores
($413,671). There were no franchised operations for the 1998 period.
Total revenues increased by $1,834,997 or 93% in the 1998 period from the 1997
period primarily due to the new Goal Post and KCK units. Net losses increased to
$2,662,951 for the 1998 period from $875,253 in the 1997 period. Losses incurred
in the winding down of both Starlog and SUMON store operations and related
absorption of store closing costs of Starlog and SUMON ($2,643,648) was offset
by $134,088 in profits on the new Goal Post unit. The newly acquired KCK unit
lost $153,391 due primarily to write-downs of assets ($282,650) in connection
with it's Chapter XI bankruptcy. The 1998 loss included a consolidated loss on
sale or abandonment of property and equipment of $701,734 relating to these
store closings and write-offs of Reorganization Value of $513,261.
Revenues in the 1997 period were negatively impacted due to the Company's
inability to acquire its core inventory products significantly in advance of the
holiday season, negative cash flow and lack of adequate working capital.
Cost of Sales, as a percentage of total sales, increased to 51% in the 1998
period compared with 40% in the 1997 period as a result of lower gross profits
being realized during the inventory liquidation at the Company's Starlog and
SUMON units and expected lower gross profits at the Company's Goal Post unit.
Gross Profits at the Company's newly acquired KCK unit were higher than
anticipated but were offset by write-downs related to reorganization.
Selling, general and administrative expenses were steady in the 1998 period
compared with the 1997 period for the existing Starlog and SUMON units except
for closing costs (payroll and rents) for units in the process of being closed
as described above. Interest expense increased to $183,945 in the 1998 period
from $15,375 in the 1997 period offset by lower interest income of $2,799 in the
1998 period compared to $13,691 in the 1997 period, primarily from franchisees.
As a result of these continuing difficulties with the Company's Starlog and
SUMON store operations, the Company has decided to withdraw from that business.
Accordingly, management brought any remaining assets down to net realizable
value by incurring a charge-off in the third fiscal quarter ended March 28,
1998.
13
<PAGE>
Thirteen weeks ended March 28, 1998 ("1998") compared to the
Thirteen weeks ended March 29, 1997 ("1997").
The Company's total revenues for the 1998 period of $1,445,068 were earned
primarily from retail sales of the Company owned Starlog and SUMON stores
($357,842), both wholesale and retail sales of the Goal Post Distributing (Goal
Post) unit ($353,362), and retail sales of the newly acquired KCK Corporation
(KCK) ($733,864). Total revenues for the 1997 period of $478,252 reflects retail
sales of the Starlog and SUMON stores ($557,002), franchise fees and royalty
revenues ($3,379) offset by sale returns received from its franchised Starlog
stores ($82,129). There were no franchised operations for the 1998 period.
Total revenues increased by $966,816 or 202% in the 1998 period from the 1997
period (normally a seasonally slow period) due primarily to the addition of both
the new Goal Post and KCK units. Net losses amounted to $1,466,067 for the 1998
period compared with a loss of $642,185 in the 1997 period. Losses were also
incurred in the winding down of both Starlog and SUMON store operations and
related absorption of store closing costs of Starlog and SUMON ($1,451,829) and
a loss of $12,667 from the new Goal Post unit. The newly acquired KCK unit lost
$1,571 in the quarter. The 1998 loss included a consolidated loss on sale or
abandonment of property and equipment of $269,832 relating to these store
closings and write-offs of Reorganization Value of $513,261.
Revenues in the 1997 period were negatively impacted due to the Company's
inability to acquire its core inventory products significantly in advance of the
holiday season, negative cash flow and lack of adequate working capital.
Cost of Sales, as a percentage of total sales, increased to 49% in the 1998
period compared with abnormally low 17% in the 1997 period. Lower gross profits
were realized during the inventory liquidation at the Company's Starlog and
SUMON units while the Company expected lower gross profits at the Company's Goal
Post unit during the seasonally slower quarter. Gross Profits at the Company's
newly acquired KCK unit were higher than anticipated but were offset by
inventory write-downs related to bankruptcy reorganization.
Selling, general and administrative expenses were steady in the 1998 period
compared with the 1997 period for the existing Starlog and SUMON units except
for closing (additional payroll and rent) and write-down costs for units being
closed. Interest expense increased to $83,652 in the 1998 period from $11,300 in
the 1997 period offset by no interest income in the 1998 period compared with
$1,580 in the 1997 period, primarily from franchisees.
As a result of these continuing difficulties with the Company's Starlog and
SUMON store operations, the Company has decided to withdraw from that business.
Accordingly, management brought any remaining assets down to net realizable
value by incurring a charge-off in the third fiscal quarter ended March 28,
1998.
Liquidity and Capital Resources
The Company's working capital deficit was $586,879 at March 28, 1998 compared to
a deficit of $735,758 at March 29, 1997 as a direct result of continuing
operating losses ($2,662,951), acquisition of KCK Corporation ($200,000),
planned increases in inventory ($170,799) and receivables ($172,618) from new
acquisitions. These negative cash flows
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were offset by additional net borrowings ($1,854,707), increased vendor support
($468,619), and reductions in reserves and other liabilities ($253,833). The
borrowings were made possible by the personal guarantees and direct loans by the
Company's majority stockholders'.
During the 1997 period, the Company had net cash used in operating activities of
$1,337,746 primarily as a result of a net loss of $875,253 and the remaining
portion of approximately $463,000 as a direct result of acquisitions and
recapitalization activities upon Starlog's emergence from bankruptcy effective
September 7, 1996.
The continuation of the business as a going concern will be contingent upon
obtaining additional working capital and permanent capital as required and the
ability to generate sufficient cash from operations and financing sources to
meet obligations as they come due.
Part II Other Information
Item 1. Legal Proceedings
There have been no significant changes in the legal matters reported in the
Company's Annual Report on form 10-KSB dated June 4, 1998.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
No exhibits
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
Starlog Franchise Corporation
Dated: June 8, 1998
By: /s/ John Jack Fitzgerald
---------------------------------
John (Jack) Fitzgerald
President
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