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 twenty-six weeks ended December 27, 1997
[ ] 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 022638
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.
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Starlog Franchise Corporation and Subsidiaries
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - December 27, 1997 (Unaudited) and
June 28, 1997 (Audited) 3
Consolidated Statements of Operations (Unaudited) for the
Twenty-six Weeks Ended December 27, 1997 and
December 28, 1996 4
Consolidated Statements of Operations (Unaudited) for the
Thirteen Weeks Ended December 27, 1997 and
December 28, 1996 5
Consolidated Statements of Cash Flows (Unaudited) for the
Twenty-six Weeks Ended December 27, 1997 and
December 28, 1996 6
Consolidated Statements of Stockholders' Equity (Unaudited) 7
Notes to Consolidated Financial Statements - December 27, 1997 8
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Part II. Other Information
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8K 16
Signatures 16
2
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STARLOG FRANCHISE CORPORATION
and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 27, June 28,
1997 1997
----------- ---------
ASSETS (Unaudited) (Audited)
Current Assets:
Cash and cash equivalents $ 514,529 $ 131,720
Accounts receivable, net of allowance
for doubtful accounts
of $0 and $7,000 respectively 190,364 50,461
Inventories, net of reserves of
$255,000 and $420,000 respectively 1,094,046 793,417
Prepaid expenses and other current assets 1,564 17,632
----------- -----------
Total Current Assets 1,800,503 993,230
Property and Equipment, net 1,177,298 690,528
Reorganization Value in Excess of Amounts
Allocated to Identifiable Assets 523,502 543,986
Other Assets 17,186 13,875
----------- -----------
$ 3,518,489 $ 2,241,619
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 901,274 $ 596,466
Other liabilities, including reserves 136,162 206,432
Loans due to stockholders and affilities 125,000 1,010,000
Current maturities of long-term debt 114,916 152,820
----------- -----------
Total Current Liabilities 1,277,352 1,965,718
Long-Term Liabilities:
Long-term debt 2,823,484 653,180
Trade & Notes payable subject to compromise 1,308,323 316,507
----------- -----------
Total Liabilities 5,409,159 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 (2,490,520) (1,293,636)
----------- -----------
Net Stockholders' Equity (1,890,670) (693,786)
----------- -----------
$ 3,518,489 $ 2,241,619
=========== ===========
See accompanying notes to consolidated financial statements.
3
<PAGE>
STARLOG FRANCHISE CORPORATION
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
Twenty-six Weeks Twenty-six Weeks
Ended Ended
December 27, December 28,
1997 1996
---------------- ----------------
Operating Revenues:
Retail sales $ 2,362,728 $ 953,123
Sales to franchisees and joint ventures -- 495,800
Franchise fees, royalty revenues and other 2,747 48,266
------------ ------------
Total Revenue 2,365,475 1,497,189
Costs and Expenses:
Cost of sales 1,230,074 688,250
Depreciation and amortization 113,297 115,674
Selling, general and administrative 1,689,593 934,369
------------ ------------
Total Costs and Expenses 3,032,964 1,738,293
------------ ------------
Profit (Loss) from Operations (667,489) (241,104)
Other Income (Expense):
Interest and dividend income 2,799 12,111
Interest Expense (100,293) (4,075)
Loss on sale or abandonment (431,901) --
------------ ------------
Total Other Income (Expense) (529,395) 8,036
------------ ------------
Net Profit (Loss) for twenty-six weeks $ (1,196,884) $ (233,068)
============ ============
Portion of (loss) applicable to period
up to emergence from bankruptcy (271,770) (243,135)
Portion of Profit (loss) applicable to
period subsequent to bankruptcy (925,114) 10,067
Net income (loss) per common share $ (.0494) $ (.0117)
============ ============
Weighted average number of common shares
outstanding 24,237,636 19,937,636
============ ============
See accompanying notes to consolidated financial statements.
4
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STARLOG FRANCHISE CORPORATION
and SUBSIDIARIES
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
Thirteen Weeks Thirteen Weeks
Ended Ended
December 27, December 28,
1997 1996
-------------- --------------
Operating Revenues:
Retail sales $ 1,826,184 $ 677,183
Sales to franchisees and joint ventures -- 422,719
Franchise fees, royalty revenues
and other 1,038 14,907
------------ ------------
Total Revenue 1,827,222 1,114,809
Costs and Expenses:
Cost of sales 860,060 528,310
Depreciation and amortization 56,649 58,500
Selling, general and administrative 1,102,212 460,370
------------ ------------
Total Costs and Expenses 2,018,921 1,047,180
------------ ------------
Profit (Loss) from Operations (191,699) 67,629
Other Income (Expense):
Interest and dividend income 2,653 5,509
Interest Expense (79,051) (2,942)
Loss on sale or abandonment (330,739) --
------------ ------------
Total Other Income (Expense) (407,137) 2,567
------------ ------------
Net Profit(Loss) for thirteen weeks $ (598,836) $ 70,196
============ ============
Portion of (loss) applicable to
period up to emergence from bankruptcy (271,770) --
Portion of profit (loss) applicable
to period subsequent to bankruptcy (327,066) 70,196
Net income (loss) per common share $ (.0247) $ .0152
============ ============
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)
Twenty-six Weeks Twenty-six Weeks
Ended Ended
December 27, December 28,
1997 1996
---------------- ---------------
Cash Flows From Operating Activities:
Net (Loss) applicable to period up
to emergence from bankruptcy $ (271,770) $ (243,135)
Net Profit (Loss) applicable to
period subsequent to bankruptcy (925,114) 10,067
Adjustments to reconcile net loss
to net cash used in operations
Depreciation and amortization 113,297 115,674
Write-off of organization costs -- 19,350
Loss on sale or abandonment of assets 431,901 --
Provision for bad debts -- 12,112
Changes in operating assets and
liabilities:
(Increase) in accounts receivable (139,903) (367,451)
Reduction in reserves and other
liabilities (70,270) --
Decrease (increase) in inventories (300,629) (20,662)
(Increase) in restricted cash -- (43,755)
(Increase) in prepaid expenses
and other current assets 16,068 (2,392)
(Decrease) increase in accounts
payable and accrued liabilities 304,808 (428,566)
Decrease in reserves and other
liabilities -- (301,912)
(Increase) in other working capital (217,212) 102,885
----------- -----------
Net cash used in operating
activities (1,058,824) (1,147,785)
----------- -----------
Cash Flows From Investing Activities:
Purchases of property and equipment (597,583) (3,963)
Acquisition deposit (200,000) (50,000)
----------- -----------
Net cash used in investing
activities (797,583) (53,963)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from issuance of convertible
debt -- 75,000
Proceeds from loans from stockholders 2,132,400 1,200,000
Net effect of liabilities subject to
compromise of acquired company 991,816 --
Issuance of new unsecured notes, net
of discount -- 306,000
Payments on loans from stockholders (885,000) (50,000)
Conversion of convertible debt into
stock -- (200,000)
----------- -----------
Net cash from financing
activities 2,239,216 1,331,000
----------- -----------
Increase in cash and cash equivalents 382,809 129,252
Cash at beginning of period 131,720 305,527
----------- -----------
Cash at end of period $ 514,529 $ 434,779
=========== ===========
See accompanying notes to consolidated financial statements.
6
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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 - twenty-six weeks -- -- -- (1,196,884) (1,196,884)
---------- ----------- ----------- ----------- -----------
Balances at December 27, 1997 (Unaudited) 24,237,636 $ 24,238 $ 575,612 $(2,490,520) $(1,890,670)
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
STARLOG FRANCHISE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 1997
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.
(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 December 27, 1997 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.
(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
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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
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) Re-classifications
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
9
<PAGE>
exercise of options to purchase common stock have been excluded from the
weighted average number of shares outstanding, as their inclusion would be
antidilutive. 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.
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 December 27, 1997 the liabilities
of SUMON exceed the assets of SUMON by approximately $560,000. This
company is in the process of being dissolved. Any unrecovered investment
and advances to SUMON were written-off in the third quarter ending March
28, 1998.
10
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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.
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.
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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.
Note 8 - Subsequent Events
Subsequent to December 27, 1997, 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. The Company is in the process of
closing these stores. 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.
12
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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
Twenty-six weeks ended December 27, 1997 ("1997") compared to the
Twenty-six weeks ended December 28, 1996 ("1996").
The Company's total revenues for the 1997 period of $2,365,475 were earned
primarily from retail sales of the Company owned Starlog and SUMON stores
($565,316), both wholesale and retail sales of the Goal Post Distributing (Goal
Post) unit ($840,876), and retail sales of the newly acquired KCK Corporation
(KCK)($839,283). Total revenues for the 1996 period of $1,497,189 reflects
retail sales of the Starlog stores ($953,123), franchise fees and royalty
revenues ($48,266), and the gross profit earned by the Company's distribution
center on sales to its franchised Starlog stores ($495,800). There were no
franchised operations for the 1997 period.
Total revenues increased by $868,286 or 58% in the 1997 period from the 1996
period primarily due to the addition of the new Goal Post and KCK units. Net
losses increased to $1,196,884 for the 1997 period from $233,068 in the 1996
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
($1,191,819) was offset by $146,755 in profits on the new Goal Post unit). The
newly acquired KCK unit lost $151,820 due primarily to write-downs of assets
($271,770) in connection with it's Chapter XI bankruptcy. The 1997 loss included
a consolidated loss on sale or abandonment of property and equipment of $431,901
relating to these closings and write-downs.
Revenues in the 1996 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 52% in the 1997
period compared with 48% in the 1996 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.
13
<PAGE>
Selling, general and administrative expenses were steady in the 1997 period
compared with the 1996 period for the existing Starlog and SUMON units except
for closing and write-down costs for units in the process of being closed as
described above. Interest expense increased to $100,293 in the 1997 period from
$4,075 in the 1996 period offset by lower interest income of $2,799 in the 1997
period compared to $12,111 in the 1996 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.
Thirteen weeks ended December 27, 1997 ("1997") compared to the
Thirteen weeks ended December 28, 1996 ("1996").
The Company's total revenues for the 1997 period of $1,827,222 were earned
primarily from retail sales of the Company owned Starlog and SUMON stores
($458,019), both wholesale and retail sales of the Goal Post Distributing (Goal
Post) unit ($529,920), and retail sales of the newly acquired KCK Corporation
(KCK)($839,283). Total revenues for the 1996 period of $1,114,809 reflects
retail sales of the Starlog stores ($677,183), franchise fees and royalty
revenues ($14,907), and the gross profit earned by the Company's distribution
center on sales to its franchised Starlog stores ($422,719). There were no
franchised operations for the 1997 period.
Total revenues increased by $712,413 or 64% in the 1997 period from the 1996
period primarily due to the new addition of the Goal Post and KCK units. Net
losses amounted to $598,836 for the 1997 period compared with a profit $70,196
in the 1996 period. Losses were incurred in the winding down of both Starlog and
SUMON store operations and related absorption of store closing costs of Starlog
and SUMON ($535,392) was offset by $88,376 in profits on the new Goal Post unit.
The newly acquired KCK unit lost $151,820 due primarily to write-downs of assets
($271,770) in connection with it's Chapter XI bankruptcy. The 1997 loss included
a consolidated loss on sale or abandonment of property and equipment of $330,739
relating to these closings and write-downs.
Revenues in the 1996 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.
14
<PAGE>
Cost of Sales, as a percentage of total sales, decreased to 47% in the 1997
period compared with 48% in the 1996 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. 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 1997 period
compared with the 1996 period for the existing Starlog and SUMON units except
for closing and write-down costs for units being closed. Interest expense
increased to $79,051 in the 1997 period from $2,942 in the 1996 period offset by
lower interest income of $2,653 in the 1997 period compared to $5,509 in the
1996 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 was $523,151 at December 27, 1997 compared to a
working capital deficit of ($1,120,903) at December 28, 1996 as a direct result
of continuing operating losses of $1,196,884, offset by positive impacted cash
flow from additional net borrowings ($1,247,400), increased vendor support
($304,808) and a planned reduction in inventory ($300,629). These borrowings
were made possible by the personal guarantees and direct loans by the Company's
majority stockholders'. The 1997 period was negatively impacted in cash flow by
continuing operating losses, increases in accounts receivable ($139,903),
purchases of property and equipment ($597,583) at the Goal Post and KCK units
and the acquisition of KCK during the period requiring a $200,000 acquisition
deposit.
During the 1996 period, the Company had net cash used in operating activities of
$1,147,785 primarily as a result of a net loss of $233,068 and the remaining
portion of approximately $915,000 as a direct result of increases in accounts
receivable and inventory relating to acquisitions and the re-capitalization
activities of Starlog upon emergence from bankruptcy effective September 7,
1996.
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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 8K
(a) No exhibits
(b) 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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