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 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 of
incorporation or organization) (I.R.S. Employer Identification No.)
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, $.01 par value- 2,516,764
shares outstanding as of November 1, 1999.
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Index
Page
Part I. Financial Information
Item I. Financial Statements
Consolidated Balance Sheets - December 26, 1998 (Unaudited) and
June 27, 1998 (Audited) 3
Consolidated Statements of Operations (Unaudited) for the
Twenty-six Weeks Ended December 26, 1998 and
December 27, 1997 4
Consolidated Statements of Operations (Unaudited) for the
Thirteen Weeks Ended December 26, 1998 and
December 27, 1997 5
Consolidated Statements of Cash Flows (Unaudited) for the
Twenty-six Weeks Ended December 26, 1998 and
December 27, 1997 6
Consolidated Statements of Stockholders' Equity (Unaudited) 7
Notes to Consolidated Financial Statements - December 26, 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>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 26, June 27,
1998 1998
ASSETS (Unaudited) (Audited)
------ --------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 53,523 $ 60,132
Accounts receivable, net of allowance for doubtful accounts
of $ 0 and $7,000 respectively 5,400 --
Inventories, net of reserves of $255,000 and $420,000 respectively 170,929 104,013
Prepaid expenses and other current assets 8,274 8,896
------------------------------
Total Current Assets 238,126 173,041
Property and Equipment, net 231,577 238,000
Reorganization Value in Excess of Amounts Allocated to Identifiable Assets 476,696 510,379
Other Assets 2,891 --
------------------------------
$ 949,290 $ 921,420
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 1,232,913 $ 1,313,558
Other liabilities, including reserves 329,572 304,640
Loans due to stockholders and affilities 638,088 398,264
Current maturities of long-term debt 346,677 346,677
------------------------------
Total Current Liabilities 2,547,250 2,363,139
Long-Term Liabilities:
Long-term debt 769,230 890,900
Trade & Notes payable subject to compromise -- --
------------------------------
Total Liabilities 3,316,480 3,254,039
------------------------------
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 24,298 20,938
Additional paid-in capital 2,962,552 2,545,912
Accumulated deficit (5,354,040) (4,899,469)
------------------------------
Net Stockholders' Equity (2,367,190) (2,332,619)
------------------------------
$ 949,290 $ 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>
Twenty-six Weeks Twenty-six Weeks
Ended Ended
December 26, December 27,
1998 1997
---------------------------------------
<S> <C> <C>
Operating Revenues:
Retail sales $ 1,487,873 $ 2,362,728
Sales to franchisees and joint ventures -- --
Franchise fees, royalty revenues and other 2,747
------------------------------------
Total Revenue 1,487,873 2,365,475
Costs and Expenses:
Cost of sales 518,157 1,230,074
Depreciation and amortization 78,711 113,297
Selling, general and administrative 1,233,596 1,689,593
------------------------------------
Total Costs and Expenses 1,830,464 3,032,964
------------------------------------
Profit (Loss) from Operations (342,591) (667,489)
Other Income (Expense):
Interest and dividend income 5,810 2,799
Interest Expense (117,790) (100,293)
Loss on sale or abandonment -- (431,901)
------------------------------------
Total Other Income (Expense) (111,980) (529,395)
------------------------------------
Net Profit (Loss) for twenty-six weeks $ (454,571) $(1,196,884)
====================================
Net income (loss) per common share $ (0.188) $ (0.494)
====================================
Weighted average number of common shares outstanding 2,423,764 2,423,764
====================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks
Ended Ended
December 26, December 27,
1998 1997
--------------------------------------
Operating Revenues:
<S> <C> <C>
Retail sales $ 743,284 $ 1,826,184
Sales to franchisees and joint ventures -- --
Franchise fees, royalty revenues and other -- 1,038
-------------------------------------
Total Revenue 743,284 1,827,222
Costs and Expenses:
Cost of sales 249,050 860,060
Depreciation and amortization 57,831 56,649
Selling, general and administrative 601,569 1,102,212
-------------------------------------
Total Costs and Expenses 908,450 2,018,921
-------------------------------------
Profit (Loss) from Operations (165,166) (191,699)
Other Income (Expense):
Interest and dividend income 3,693 2,653
Interest Expense (55,497) (79,051)
Loss on sale or abandonment -- (330,739)
-------------------------------------
Total Other Income (Expense) (51,804) (407,137)
-------------------------------------
Net Profit(Loss) for thirteen weeks $ (216,970) $ (598,836)
=====================================
Net income (loss) per common share $ (0.090) $ (0.247)
=====================================
Weighted average number of common shares outstanding 2,423,764 2,423,764
=====================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Twenty-six Weeks Twenty-six Weeks
Ended Ended
December 26, December 27,
1998 1997
-------------------------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net (Loss) applicable to period up to emergence from bankruptcy $ (454,571) $ (271,770)
Net Profit (Loss) applicable to period subsequent to bankruptcy -- (925,114)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization 78,711 113,297
Write-off of organization costs -- --
Loss on sale or abandonment of assets -- 431,901
Provision for bad debts -- --
Changes in operating assets and liabilities:
(Increase) in accounts receivable (5,400) (139,903)
Reduction in reserves and other liabilities (100,468) (70,270)
Decrease (increase) in inventories (66,916) (300,629)
(Increase) in restricted cash -- --
(Increase) in prepaid expenses and other current assets 622 16,068
(Decrease) increase in accounts payable and accrued liabilities (80,645) 304,808
Decrease in reserves and other liabilities -- --
(Increase) in other working capital (26,372) (217,212)
------------------------------
Net cash used in operating activities (655,039) (1,058,824)
------------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (38,085) (597,583)
Acquisition deposit -- (200,000)
------------------------------
Net cash used in investing activities (38,085) (797,583)
------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of stock inprivate placement 420,000 --
Proceeds from loans from stockholders 300,000 2,132,400
Net effect of liabilities subject to compromise of acquired company -- 991,816
Issuance of new unsecured notes, net of discount -- --
Payments on loans from stockholders/debtors (33,485) (885,000)
Conversion of convertible debt into stock -- --
------------------------------
Net cash from financing activities 686,515 2,239,216
------------------------------
Increase in cash and cash equivalents (6,609) 382,809
Cash at beginning of period 60,132 131,720
------------------------------
Cash at end of period $ 53,523 $ 514,529
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
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 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 -- -- -- (454,571) (454,571)
-------------------------------------------------------------------------------
Balances at December 26, 1998 (Unaudited) 2,429,764 $ 24,298 $ 2,962,552 $(5,354,040) $(2,367,190)
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
15
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
December 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.
(d) Discontinued Operations Reporting
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.
8
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(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.
(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.
9
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(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.
(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.
10
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(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.
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.
11
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(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.
(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
Twenty-six weeks ended December 26, 1998 ("1998") compared to the Twenty-six
weeks ended December 27, 1997 ("1997").
The Company's revenues for the 1998 period were earned primarily from retail
sales of the Company owned Candico stores ($1,455,919), one Starlog store
($24,053) and Shuttlecart ($7,901). 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
Candico stores (formerly KCK)($839,283).
Total revenues decreased by 37% to $1,487,873 in the 1998 period from $2,362,728
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 $454,571 in the
1998 period from $1,196,8884 in the 1997. The 1998 results are due to higher
margins on candy (65%) and the extraordinary gain on extinguishments of debt
($151,495). 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 35% in the 1998
period compared with 52% in the 1997 period. The lower cost of goods in 1998 is
the result of the company's strategy to concentrate on the bulk candy business.
The 1997 lower gross profits are due to the inventory liquidation at the
Company's Starlog and SUMON units and expected lower gross profits at the
Company's Goal Post unit.
Selling, general and administrative expenses were down 27% in 1998 from 1997.
The deduction in operating expenses was primarily due, as mentioned earlier, the
exiting of unprofitable businesses to concentrate on the bulk candy business. In
the 1998 period expenses included closing and write-down costs for units in the
process of being closed as described above. Interest expense increased to
$117,790 in the 1998 period from $100,293 in the 1997 period offset by lower
Other income of $5,810 in the 1998 period compared to $2,799 in the 1997.
13
<PAGE>
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 26, 1998 ("1998") compared to the
Thirteen weeks ended December 27, 1997 ("1997").
The Company's revenues for the 1998 period were earned from retail sales of the
Company owned Candico stores ($743,284). 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
Candico stores (formerly KCK) ($839,283).
Total revenues decreased by 59% to $743,284 in the 1998 period from $1,826,184
in 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 fourth quarter of 1997. Net losses decreased to $216,970 in the
1998 period from $598,836 in the 1997. The 1998 results are due to higher
margins on candy (66%) and the significant reduction in operating expenses. The
1997 loss was primarily due to the winding down of both Starlog and SUMON store
operations and related absorption of store closing costs ($431,901). The 1998
loss included a consolidated loss on sale or abandonment of property and
equipment of $258,952 relating to these closings.
Cost of Sales, as a percentage of total sales, decreased to 33% in the 1998
period compared with 47% in the 1997 period. Lower gross profits were realized
in 1997 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.
Selling, general and administrative expenses were down 55% in 1998 from 1997.
The deduction in operating expenses was primarily due, as mentioned earlier, the
exiting of unprofitable businesses to concentrate on the bulk candy business. In
the 1997 period expenses included closing and write-down costs for units in the
process of being closed as described above. Interest expense decreased to
$55,497 in the 1998 period from $79,051 in the 1997 period offset by Other
income of $3,693 in 1998 and $2,653 in 1997 period.
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 $2,309,124 at December 26, 1998
compared to a working capital surplus of $523,151 at December 27, 1997. The 1998
deficit was due to loans to stockholders of $638,088 and the absorption of
Candico Debt of $346,677. 1997 surplus was 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
14
<PAGE>
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 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
(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.
RETAIL ENTERTAINMENT GROUP, INC.
Dated: December 17, 1999
By: /s/ John Fitzgerald
--------------------------
John (Jack) Fitzgerald
President
15
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<PERIOD-START> Jun-28-1998
<PERIOD-END> Dec-26-1998
<CASH> 53,523
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