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 thirteen weeks ended September 26, 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
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
(Exact name of small business issuer as specified in its charter)
New Jersey 22-3219281
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
22 Meridian Road, Eatontown, NJ 07724
-----------------------------------------------------------
(Address of principal executive offices including zip code)
(732) 380-0991
-----------------------------------------------
(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, $.01 par value- 2,516,764
shares outstanding as of November 1, 1999.
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Index
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item I. Financial Statements
Consolidated Balance Sheets-September 26, 1998 (Unaudited) and
June 27, 1998 (Audited) 3
Consolidated Statements of Operations (Unaudited) for the
Thirteen Weeks Ended September 26, 1998 and
September 27, 1997 4
Consolidated Statements of Cash Flows (Unaudited) for the
Thirteen Weeks Ended September 26, 1998 and
September 27, 1997 5
Consolidated Statements of Stockholders' Equity (Unaudited) 6
Notes to Consolidated Financial Statements-September 26, 1998 7
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
</TABLE>
2
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 26, June 27,
1998 1998
---- ----
ASSETS (Unaudited) (Audited)
------ ----------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 94,518 $ 60,132
Marketable securities -- --
Accounts receivable, net of allowance for doubtful accounts
of $ 0 and $7,000 respectively -- --
Inventories, net of reserves of $326,000 and $420,000 respectively 174,204 104,013
Prepaid expenses and other current assets 5,314 8,896
----------- -----------
Total Current Assets
274,036 173,041
Property and Equipment, net 245,860 238,000
Reorganization Value in Excess of Amounts Allocated to Identifiable Assets 509,527 510,379
Other Assets 3,191 --
----------- -----------
$ 1,032,614 $ 921,420
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable and accrued liabilities 1,207,282 1,313,558
Other liabilities, including reserves 349,842 304,640
Loans due to stockholders and affilities 398,264 398,264
Current maturities of long-term debt 346,677 346,677
----------- -----------
Total Current Liabilities 2,302,065 2,363,139
Long-Term Liabilities:
Long-term debt 880,769 890,900
Liabilities subject to compromise -- --
----------- -----------
Total Liabilities 3,182,834 3,254,039
Stockholders' Equity (Deficit):
Common stock, $.01 par value; authorized 40,000,000 shares, issued
and outstanding 2,423,764 shares 24,298 20,938
Additional paid-in capital 2,962,552 2,545,912
Accumulated deficit (5,137,070) (4,899,469)
------------ ------------
Net Stockholders' Equity (2,150,220) (2,332,619)
$ 1,032,614 $ 921,420
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks
Ended Ended
September 26, September 27,
1998 1997
---- ----
<S> <C> <C>
Operating Revenues:
Retail sales $ 744,589 $ 536,544
Sales to franchisees and joint ventures -- --
Franchise fees, royalty revenues and other -- 1,709
------------------------------
Total Revenue 744,589 538,253
Costs and Expenses:
Cost of sales 269,107 370,014
Depreciation and amortization 20,880 56,648
Selling, general and administrative 632,027 587,381
------------------------------
Total Costs and Expenses 922,014 1,014,043
------------------------------
Profit (Loss) from Operations (177,425) (475,790)
Other Income (Expense):
Other Income 2,117 146
Interest Expense (62,293) (21,242)
Loss on sale or abandonment -- (101,162)
-------------------------------
Total Other Income (Expense) (60,176) (122,258)
-------------------------------
Net Profit (Loss) before extraordinary items $ (237,601) $ (598,048)
===============================
Extraordinary Items - Gain on extinguishment of debt $ -- $ --
-------------------------------
Net Gain(Loss) $ (237,601) $ (598,048)
===============================
Net income (loss) per common share (0.098) (0.247)
===============================
Weighted average number of common shares outstanding 2,429,870 2,423,764
===============================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks
Ended Ended
September 26, September 27,
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net Profit (Loss) $ (237,601) $ (598,048)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization 20,880 56,648
Write-off of organization costs -- --
Loss on sale or abandonment of assets -- 101,162
Gains from extinguishment of debt --
Changes in operating assets and liabilities:
(Increase) in accounts receivable -- (42,250)
Increase in marketable securities -- (1,200,000)
Decrease (increase) in inventories (70,191) 63,645
(Increase) in prepaid expenses and other
current assets 3,582 (1,326)
(Decrease) increase in accounts payable and
accrued liabilities (106,276) 353,266
(Decrease) in reserves and other liabilities 45,202 (191,136)
(Increase) in other working capital (18,059) 21,786
-------------------------------
Net cash used in operating
activities (362,463) (1,436,253)
-------------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (13,020) (57,063)
Acquisition deposit -- --
-------------------------------
Net cash used in investing
activities (13,020) (57,063)
-------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of stock inprivate placement 420,000 --
Proceeds from loans from stockholders -- 1,500,000
Issuance of new unsecured notes, net of discount -- --
Payments on loans from stockholders/debtors (10,131)
Conversion of convertible debt into stock -- --
-------------------------------
Net cash from financing
activities 409,869 1,500,000
-------------------------------
Increase in cash and cash equivalents 34,386 6,684
Cash at beginning of period 60,132 131,720
-------------------------------
Cash at end of period $ 94,518 $ 138,404
-------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
RETAIL ENTERTAINMENT GROUP, INC.
(formerly Starlog Franchise Corporation)
CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY
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 June 29, 1996 (Audited) $ 361,364 $ 3,614 $ 7,636,711 $ (9,220,874) $ (1,580,549)
Cancellation of founders' stock (167,600) (1,676) (4,606) -- (6,282)
Conversion of debt into new stock 1,800,000 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 430,000 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) $ 2,423,764 $ 24,238 $ 575,612 $ (1,293,636) $ (693,786)
Conversion of debt into additional
Paid-in capital 2,000,000 2,000,000
Consideration received and retirement
of treasury shares (330,000) (3,300) (29,700) (33,000)
Net loss -- -- -- (3,605,833) (3,605,833)
---------------------------------------------------------------------------------------
Balances at June 27, 1998 (Audited) $ 2,093,764 $ 20,938 $ 2,545,912 $ (4,899,469) $ (2,332,619)
=======================================================================================
Issuance of common stock at $.01 share
form private placement 336,000 3,360 416,640 420,000
Net loss -- -- -- (86,106) (86,106)
---------------------------------------------------------------------------------------
Balances at September 26, 1998 (Unaudited) $ 2,429,764 $ 24,298 $ 2,962,552 $ (4,985,575) $ (1,998,725)
=======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
September 26, 1998
(1) Summary of Significant Accounting Policies
(a) Principal Business Activity
The principal business activity of Retail Entertainment Group,
Inc. (Company) (formerly Starlog Franchise Corporation) is the
retail distribution of bulk candy under the name of "Candy
Candy!" or Candico (the "Candico Stores"). Previously, the
Company operated Starlog stores that included various science
fiction and other products. During fiscal year 1998, the Company
changed its name from Starlog Franchise Corporation to Retail
Entertainment Group, Inc.
(b) Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries,
Candico Entertainment, Inc. (Candico), Goal Post Distributing,
Inc., Sumon, LLC and Shuttlecart Enterprises. All significant
intercompany transactions and balances have been eliminated in
consolidation.
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 January 31, 1999. There
have been no changes of significant accounting policies since
January 31, 1999.
(c) Sale of Operations of Goal Post Distributors, Inc.
In April 1998, the Company's Board of Directors approved the
sale of substantially all of the net assets of Goal Post
Distributing, Inc. (Goal Post), a wholly-owned subsidiary, back
to its original owner, effective June 27, 1998. Under this
resale agreement, the Company received 330,000 shares of its own
common stock (post 1-for-10 reverse split) in exchange for the
net assets of Goal Post and a $50,000 promissory note payable to
the previous owner. The common stock received was accounted for
as treasury stock using the cost method. Subsequently, the
Company retired all of the common shares held in treasury. The
cost of the re-acquired shares in excess of par value has been
charged to additional paid-in capital. As a result of the sale
of Goal Post, certain warrants granted to management of Goal
Post have been canceled.
The Company incurred a loss as a result of the sale of Goal Post
of approximately $265,000, which has been reported in the
accompanying consolidated statements of operations as part of
loss on disposal of discontinued operations.
7
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(d) Discontinued Operations Reporting
1.Starlog Franchise Corporation, Sumon, LLC, Goal Post
Distributors, Inc. and Shuttlecart Enterprises
On April 25, 1998, the Company's Board of Directors
approved the closing of the remaining Starlog and Hologram
stores (Sumon, LLC) and Goal Post Distributors, Inc. As a
result, the Company closed five of the remaining six
Starlog stores by June 27, 1998 with the last store closing
October 1998. In January 1999, the Company also approved
the closing of Shuttlecart Enterprises. The results of
operations of each subsidiary are reported in the
accompanying reclassified consolidated statements of
operations and accumulated deficit under discontinued
operations. During fiscal year 1998, the Company wrote down
certain assets of the retail operations to their net
realizable values and the cost of disposing these
operations are also reported in the accompanying
reclassified consolidated statements of operations and
accumulated deficit under discontinued operations. In
addition, the leases of four of the six Starlog stores
expired leaving the Company with no ongoing liability
resulting from such closings and the remaining two leases
were renegotiated resulting in a liability of approximately
$27,000.
(e) Inventories
Inventories, consisting of finished goods, are stated at their
net realizable value using the lower of cost or market, and
determined by the first-in, first-out method (FIFO).
(f) Depreciation and Amortization
Depreciation and amortization of property and equipment is
calculated using the straight-line method over the estimated
useful lives of the related assets or life of the lease,
whichever is shorter.
(g) Revenue Recognition
The Company recognizes revenue when goods or services are
provided.
(h) Estimates
The preparation of the consolidated 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) Seasonality
The Company's sales are seasonal in nature based, in part, on
gift buying during holiday periods such as Halloween, Christmas,
Easter and Valentine's Day.
(j) Reclassifications
Certain amounts in the 1998 consolidated financial statements
have been reclassified to conform with the 1999 presentation.
Such reclassifications had no effect on reported total net loss.
8
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(k) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash
equivalents.
(l) Earnings Per Share
In the fourth quarter of fiscal year 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, Earnings
Per Share, (SFAS 128). In February 1998, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 98
related to SFAS 128. SFAS 128 replaced the calculation for
primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share,
basic earnings per share exclude any dilutive effects of
options, warrants and convertible securities. Diluted earnings
per share is similar to the previously reported fully diluted
earnings per share. The Company had options and warrants at
January 31, 1999, resulting in diluted earnings per share.
Certain of the Company's options and warrants were not included
in computing dilutive net income (loss) per common share because
their effects were anti-dilutive. At June 27, 1998, the Company
had no common stock equivalents resulting in diluted earnings
per share, and the Company's options and warrants were not
included in computing dilutive net income (loss) per common
share because their effects were anti-dilutive.
(m) Income Taxes
The Company has adopted Statement of Financial Accounting
Standards (SFAS 109), Accounting for Income Taxes. Under the
asset and liability method of SFAS 109 deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Valuation allowances are
established when necessary to reduce deferred tax assets to
amounts expected to be realized.
(2) Management Agreement and Acquisition of Entity in Chapter 11
(a) Management Agreement and Funding
In October 1997, the Company entered into an agreement with KCK
Corporation (Debtor) and the U.S. Bankruptcy Court to manage and
provide certain funding while the debtor reorganized under the
federal bankruptcy laws. The Company was the debtor's approved
post-petition lender of an allowed secured super-priority
administrative claim of $200,000. KCK Corporation filed
voluntary petitions for relief under Chapter 11 of the Federal
Bankruptcy Laws in July 1997.
9
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(b) Emergence and Acquisition
The United States Bankruptcy Court for the Middle District of
North Carolina, confirmed the Debtor's Plan of Reorganization
(the Plan) on March 26, 1998 (the Confirmation Date), allowing
the debtor to emerge from Chapter 11 Bankruptcy effective March
28, 1998 (the Effective Date). On March 28, 1998, the Company
acquired all of the assets and liabilities of KCK Corporation
and effectively owned KCK. The debtor operated under the
protection of Chapter 11 following a voluntary petition for
reorganization filed July 22, 1997 and amended on March 19,
1998. The Company was the Debtor's approved post-petition lender
of an allowed secured, super-priority administrative claim in
the amount of $200,000 plus accrued, but unpaid, interest.
Pursuant to the Plan, the Company converted $100,000 of its loan
into equity of the Debtor and received 1,000 shares of newly
issued stock in the Debtor which constituted 100% of the
Debtor's issued and outstanding stock. The remaining $100,000
obligation would be paid over a period not to exceed five years.
Arrangements satisfactory to the Debtor and the Company have
been made for the Debtor's substantial compliance of its
obligations to the Company under the Plan.
(3) Management and Option Agreement
On November 24, 1998, the Company entered into a management and option
agreement with Hope Associates, LLC, (Hope Associates) a related party,
whereby the Company will manage certain retail candy stores (Candy Candy
Acquisition Corporation) belonging to Hope Associates, and in exchange
grant to Hope Associates 500,000 common stock warrants at $1.25 per share
expiring in November 2002. The Company will receive quarterly
compensation, based upon a specified formula as noted in the agreement,
for its services with respect to the agreement. In addition, the Company
has the right and option to purchase, effective the date of the
agreement, until November 30, 2001, all of the outstanding common stock
of Candy Candy Acquisition Corporation. The exercise price for the option
is equal to the cost of the Candy Candy Acquisition Corporation plus the
outstanding balance of any Hope loans and any additional capital
contributions or loans made by Hope to the Company and Candy Candy
Acquisition Corporation.
(4) Commitments and Contingencies
The Company has entered into various non-cancelable operating leases for
office, warehouse and retail store space expiring at various dates
through 2006. Certain of the leases provide for minimum annual rentals
plus additional rental payments based upon sales volume.
The Company entered into a trademark license agreement with Starlog
Communications International, Inc. (SCI), an entity related by common
ownership for the exclusive right to use the name, registered trademark
and logos "Starlog" and "Starlog: The Cosmic and Science Fiction
Universe." For the years ended June 27, 1998 and June 28, 1997, no
amounts were due under the terms of this agreement. On July 1, 1998, the
Company terminated its license agreement with SCI and transferred certain
of its assets worth an immaterial amount in connection with the
dissolution.
(continued)
10
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
Commitments and Contingencies (continued)
The Company is party to various claims and legal actions arising in the
ordinary course of business. Management does not believe that the outcome
of such claims and legal actions will have a material effect on financial
position or results of operations of the Company.
(5) Stockholders' Equity
On May 10, 1998, the Company's Board of Directors and shareholders
approved a one-for-ten reverse stock split of the outstanding shares of
Retail Entertainment Group, Inc. (formerly Starlog Franchise Corporation)
to shareholders of record on July 9, 1998. In addition to the reverse
split, the Company reduced the number of shares of common stock
authorized from 40,000,000, with a .001 par value, to 6,000,000 shares
with a .01 par value. Shareholders' equity has been restated to give
retroactive recognition to the reverse stock split in prior periods. The
total number of shares outstanding following the reverse split was
2,093,764.
In September 1998, Hope Associates, LLC (Hope Associates), the Company's
majority shareholder, assumed $1,750,000 of debt owed by the Company to
BSB Bank and forgave $250,000 of debt owed to them by the Company. The
transaction resulted in a contribution of $2,000,000 to additional
paid-in-capital. The members of Hope Associates had personally guaranteed
the amounts due to BSB Bank.
Effective June 27, 1998, the Company entered into an agreement for the
sale of Goal Post Distributors, Inc., a wholly owned subsidiary, back to
its original owner. The sale of Goal Post resulted in a loss of
approximately $265,000. In addition, in exchange for Goal Post, the
Company received as consideration 330,000 shares of the Company's own
common stock valued at $.10 per share. The shares were accounted for as
treasury shares and resulted in a charge to common stock and additional
paid-in-capital of approximately $33,000. The shares were subsequently
retired and accounted for using the cost method.
In November 1998, the Company issued approximately 336,000 shares of
common stock at $1.25 per share pursuant to private placements under
Regulation D of U.S. Securities laws. The proceeds of approximately
$420,000 will be used to provide for working capital and repay certain
debts to affiliates.
None of the Company's outstanding options or warrants have been
exercised.
(6) Going Concern
As shown in the accompanying consolidated financial statements, the
Company has incurred recurring losses from operations. These losses have
contributed to the Company's working capital deficiency and resulting
cash flow problems. Although the Company's cash flows increase during the
holiday season, it has not been profitable on a year round basis. The
Company has raised cash through various debt financing from affiliates,
however, its ability to continue as a going concern will require the
attainment of profitable operations for extended periods, conversion of
debt into permanent equity or obtaining additional permanent equity. The
Company is currently pursuing various debt and equity opportunities.
(7) Year 2000 Issue (Unaudited)
The Company does not expect the Year 2000 issue to have a significant
effect on operations. Management of the Company does not expect major
vendors or customers to be unable to sell to, provide services to, or
purchase from the Company because of the Year 2000 issue.
11
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(8) Subsequent Events
In February 1999, the Company granted an additional option to purchase
50,000 shares of the Company's common stock at $1.25 per share, expiring
on February 9, 2004. Of these options granted, 10,000 would be currently
vested and the remaining 40,000 will vest at 10,000 per year in
subsequent years.
In July 1999, the Company issued approximately 87,000 shares of common
stock at $1.25 per share pursuant to private placements under Regulation
D of U.S. Securities laws. The proceeds of approximately $108,000 will be
used to provide for working capital and repay certain debts to
affiliates.
12
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(formerly Starlog Franchise Corporation)
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
Thirteen weeks ended September 26, 1998 ("1998") compared to the
Thirteen weeks ended September 27, 1997 ("1997").
The Company's revenues for the 1998 period were earned primarily from retail
sales of the Company owned Candico stores ($717,137), one Starlog store
($19,551) and Shuttlecart ($7,901). The 1997 period revenues earned primarily
from retail sales of the Company owned Starlog and SUMON stores ($227,297) and
both wholesale and retail sales of the newly acquired Goal Post Distributing
unit ($310,956). There were no franchised operations for the 1997 period.
Total revenues increased by 39% to $744,589 in the 1998 period from $538,253 in
the 1997. This was primarily due to the shift in business strategy to
concentrate on the specialty retail sale of bulk candy. The Company exited from
the unprofitable operations of Starlog and Goal Post, as well as, Sumon-Hologram
Stores in the April - June 1998 period. Net losses decreased to $237,601 in the
1998 period from $598,048 in the 1997. The 1998 results are due to higher
margins on candy (64%). The 1997 loss was primarily due to the winding down of
both Starlog and SUMON store operations and related absorption of store closing
costs ($656,427 offset by $58,379 in profits on the new Goal Post unit). The
1997 loss included a consolidated loss on sale or abandonment of property and
equipment of $101,162 relating to these closings.
Cost of Sales, as a percentage of total sales, decreased to 36% in the 1998
period compared with 69% in the 1997 period as a result of company strategy to
concentrate on bulk candy business. The 1997 lower gross profits due to the
liquidation of inventory at the Company's Starlog and SUMON units and normally
lower gross profits at the Company's new Goal Post unit.
Selling, general and administrative expenses were up 8% in 1998 from 1997.
However, on a % to sales basis expenses were down 25 basis points. In the 1997
period expenses included closing and write-down costs for units in the process
of being closed as described above. Interest expense increased to $62,293 in the
1998 period from $21,242 in the 1997 period offset by lower Other income of
$2,117 in the 1998 period compared to $146 in the 1997.
As a result of these continuing difficulties with the Company's Starlog and
SUMON store operations, the Company decided to start to withdraw from that
business in the 1st quarter of 1997. 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 $2,028,029 at September 26, 1998
compared to a working capital surplus of $583,394 at September 27, 1997. The
1998 deficit was due to reserves of $830,800 for Starlog and Sumon stores. The
1997 surplus was a direct result of continuing operating losses, offset by
positively impacted cash flows from additional borrowings ($1,500,000),
increased vendor support ($353,266) and a planned reduction in inventory
($63,645). The 1997 borrowings were made possible by the personal guarantees and
direct loans by the Company's majority stockholders. The 1998 period was
negatively impacted in cash flow by increases in accounts receivable ($42,250)
and purchases of property and equipment ($57,063) from its Goal Post unit. Most
of the Company's borrowings were placed in marketable securities until utilized
by the Company in its operations.
13
<PAGE>
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 27, 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.
RETAIL ENTERTAINMENT GROUP, INC.
Dated: December 17, 1999
By: /s/ John Fitzgerald
----------------------------
John (Jack) Fitzgerald
President
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 94,518
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 174,204
<CURRENT-ASSETS> 274,036
<PP&E> 245,860
<DEPRECIATION> 0
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0
0
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<NET-INCOME> (237,601)
<EPS-BASIC> (0.035)
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</TABLE>
