U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended: January 31, 1999
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
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 in Its charter)
New Jersey 22-3219281
(State or other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
22 Meridian Road, Eatontown New Jersey 07724
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including
Area Code: (732)-380-0991
Securities registered under
section 12(b) of the Act: None
Securities registered under
section 12(g) of the Act: Common Stock, $.01 Par Value
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 past 90 days.
YES NO X
------ ------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $1,699,625
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the closing sale price of such stock,
as of November 1, 1999 is $6,292,175.
Check whether issuer has filed all documents and reports required to be filed by
Section 12, 13, 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by the Court. Yes No X .
---- ----
As of November 1, 1999, the Issuer had 2,516,870 shares of Common Stock, $.01
par value, outstanding.
<PAGE>
ITEM 1. BUSINESS
Overview
The Company changed its focus in the prior fiscal year ended June 27, 1998 to
concentrate on the specialty retail sale of bulk candy. Previously, the Company
operated Starlog stores that included various science fiction and other products
under licensed names. The Company will continue to offer such merchandise as
part of its candy operation and not as a stand-alone business.
Effective July 9, 1998, the Company instituted a 1-for-10 reverse stock split,
which reduced its outstanding shares of common stock from 20,937,640 to
approximately 2,093,764 (including rounding up of fractional shares).
Subsequently, the Company issued approximately 423,000 shares pursuant to
private placements. Share numbers have been adjusted to reflect such reverse
stock split, unless stated to the contrary.
Candico
Candico, Inc. is a retail candy company currently operating 13 stores trading
under the name Candy Candy! or Candico (the "Candico Stores"). Several of these
stores have been successfully operating for more than 10 years.
The typical Candico store is between 600 and 800 square feet and is located in a
high traffic enclosed shopping mall. The Candico stores create visual excitement
with an array of colorful candy-filled towers. Candy is an impulse purchase and
this bright contemporary look creates a consumer magnetism. The stores are
professionally designed and utilize creative lighting effects and proprietary
acrylic fixtures to create an upbeat buying atmosphere. In-store sound systems
with continuous programmed music are also an integral part of the formula.
Because sales are directly proportional to mall foot traffic, prime retail
locations are critical.
The Candico stores sell approximately 300 bulk candy items displayed in acrylic
bins designed to ensure freshness and cleanliness. Bulk candy is sold with a
singular pricing strategy at $7.76 per pound in most stores. This pricing
formula enables the stores to enjoy a high gross margin targeted at almost 70%.
The one-price concept also allows the customer to randomly shop the store and
fill his bag with a wide variety of his favorite candies, promoting higher
average sales per customer.
There is no typical customer as the appeal of the Candico stores and product is
universal. Children and teens comprise the largest segment of the stores'
customer profile; however, adults of all ages frequent the stores. A wide
selection of sugar-free candies promotes destination shopping for health
conscious and diabetic customers.
In additon to the bulk candy items, the Candico stores stock approximately 125
"count goods" (individual wrapped novelties such as Pop Rocks, Pez and
Warheads). The typical layout includes two fixtures selling hand-made, specialty
lollipops (such as Mickey Mouse pops selling for several dollars each), two
fixtures selling gift and seasonal items, and a checkout counter offering a
large display of non-sports gaming and trading cards.
The Candico stores average about 100,000 transactions a year with the average
transaction averaging approximately $3.50. The stores are open 7 days a week (72
hours). A typical store is staffed by a manager, a lead, full time sales person,
working 30 hours a week and three part time workers who, among the three,
average an additional 32 hours a week. Additional staffing is required during
busy times such as Christmas and Easter. Generally, there are two sales persons
at the store. The cost of a Candico store can range from $50,000 - $175,000 for
lease improvements and equipment. Initial inventories average between $12,000
and $15,000.
There are approximately 15 major distributors of bulk candy from whom the
Company can obtain product. The Company typically concentrates its purchases
between two suppliers to ensure good pricing.
Competition
The candy industry is a multi billion dollar industry with most retail sales
taking place in the mass markets.
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Specialty candy retailing is very fragmented. It is basically divided into two
segments: specialty chocolates and bulk candies.
The chocolate retail segment is very regional with such names as See's (West
Coast) and Fannie Mae (Chicago, Philadelphia and Baltimore). Godiva Chocolatier,
a division of Campbell Soup, with its upscale specialty chocolates and elegant
packaging, operates a chain of company-owned stores located primarily in
regional malls. Escalating occupancy cost and wages have rendered the full
service chocolate business marginally profitable except in high traffic and high
volume locations.
The bulk self-service candy segment is even more fragmented than the chocolate
segment. The dominant mall retailer of bulk candy is Sweet Factory
(approximately 240 stores) headquartered in San Diego. Other active companies in
this field are Candy Express and Candy Headquarters. Candy Barrel, a similar
concept headquartered in Reno, NV, merchandises its product in wooden barrels,
rather than acrylic bins and consequently sells only wrapped and prepackaged
candies.
Plans for Expansion of Candico
The Company intends to expand its successful bulk candy operation and add to its
profitability by adding selected, fast-moving items from its science
fiction/fantasy/ memborabilia product line to the candy stores. The Company also
intends to develop Candy Carousels which will involve small, relatively
inexpensive, easy to assemble and transport, candy kiosks. These 400 square foot
octagonal "carousels" will be located in enclosed shopping malls and are
designed to allow the Company to expand its operations at a far lower per site
cost than traditional stores.
On November 24, 1998, Candy Candy Acquisition Corporation ("CCAC") purchased 8
additional candy stores which it contracted the Company to manage. CCAC is a
whole owned subsidiary of Hope Associates, LLC which owns more than 50% of the
Company's common stock. Hope has granted the Company an option to purchase these
stores at its cost as well as an agreement to manage these stores. In July 1999
one of these stores was transferred back to the seller in settlement of a
dispute. (See ITEM 12. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)
Goal Post
Goal Post Distributors, Inc. ("Goal Post") is an international wholesale
distributor of sports, comics, science fiction, movie & television trading
cards, gaming cards, hobby supplies, collectibles and other toys. It also
produces a catalog that is mailed to over 8,500 accounts worldwide.
Goal Post was founded in 1991 to service the growing market of card, comics, and
collectibles shops and small to medium specialty store chains. Rapidly
expanding, first reaching $1,000,000 in annual sales in 1993, Goal Post grew to
service more than 4,000 existing customers and $5,000,000 in sales by 1996. Goal
Post was acquired by the Company at the end of June 1997.
Because the Goal Post Division was operating at a loss, effective June 27, 1998
the Company sold the Goal Post business and related assets back to Kevin
VanderKelen, who had originally sold this business to the Company. Under this
resale agreement, Mr. VanderKelen transferred back to the Company 330,000 of the
430,000 Company's shares originally received by Mr. VanderKelen and the Company
gave Mr. VanderKelen a promissory note for $50,000 (See ITEM 12. "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" below).
Stores
In October 1997, The Company acquired 14 KCK stores ("Candico") of which 1 store
(Princeton Market) was closed in December 1997. The remaining 13 KCK stores are
located throughout the Eastern U.S. in Connecticut, New Jersey, Maryland,
Virginia, Georgia and Florida. The Company acquired KCK on the date of its
reorganization, and emerged from Chapter 11 bankruptcy in late March 1998.
Thereafter, the Company merged KCK into Candico Entertainment, Inc., thus
changing its name. (See ITEM 2 "PROPERTIES" below for a listing of
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these locations and certain lease terms). In November 1998, a subsidiary of Hope
Associates (which owns more than 50% of the outstanding shares of the Company)
purchased 8 more candy stores which it granted the Company the right to manage
and the option to purchase at Hope Associates' cost. In July 1999 one of these
stores was transferred back to the seller in settlement of a dispute. (See ITEM
12. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)
The Company at various times has opened 15 Starlog Stores and 6 Sumon/Hologram
Stores, all of which have been closed.
The ongoing operations of the Company is contingent on the Company's ability to
continue as a going concern, which should be appraised in conjunction with the
Company's history of operating losses and lack of working capital. See Item 6
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS". The Company filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code on November 13, 1995 and emerged from
bankruptcy on August 28, 1996. See Item 3 "LEGAL PROCEEDINGS".
Background / History
The Company was started with one Starlog store in 1992 by the founder of the
Starlog Group, the publisher of several science fiction and horror magazines.
Its original goal was to capitalize on the steadily growing niche market for
science fiction and fantasy literature, apparel and collectibles through a
network of stores. In November 1993 the Company raised $5.5 million through its
initial public offering. Following the offering, the Company's then management
rapidly expanded its operations, opening nine stores in 15 months.
Lacking experience in retail chain operations, the original management made,
what can now be seen, as several critical errors. First, the Company expanded
rapidly based on experience with only one store and without adequate research to
determine proper store size, inventory levels, occupancy factors and start-up
costs. As a result, stores opened during the first year proved to be too large,
with high start-up costs and annual rent commitments which were too high to
permit profitable operation. Additionally, these original stores were found to
be too geographically dispersed for efficient management control. As a result,
during their first fiscal year as a public company, losses were suffered
totaling $3.2 million and were continuing at a rate of approximately $800,000 a
quarter.
Shortly after the Company's current Chief Executive Officer, Mr. John
Fitzgerald, joined the Company he recognized these problems and started taking
steps to reorganize the Company. In June 1995 Mr. Fitzgerald was appointed
President and Chief Operating Officer. In November 1995, the Company filed a
voluntary petition for Chapter 11 Bankruptcy. While in Bankruptcy the Company
was able to rid itself of its most expensive store leases. In an effort to
salvage some of the start-up expenses invested in the stores and to determine if
they could be profitable with more favorable lease terms, the Company
renegotiated much more favorable terms for the leases of eight of the stores and
attempted to operate them. The Company emerged from Chapter 11 in August 1996
and secured working capital from Hope Associates, LLC. ("Hope Associates"),
which in exchange, owned at that time approximately 90% of the Company's
outstanding Common Stock.
Subsequently, in November 1996 the Company's original executive management and
Board of Directors resigned and were replaced by a new Board formed by Hope
Associates' principals and Mr. Fitzgerald. Additionally, the founder of the
Company relinquished substantially all of his stock in the Company.
Following the Chapter 11 reorganization, the Company acquired two new
businesses, KCK Corporation (now Candico, Inc.), in March 1998 (See "BUSINESS-
Candico" above) and, and Goal Post Distributors, Inc. in June 1997 (See
"BUSINESS- Goal Post" above).
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Elimination of Unprofitable Starlog and Hologram Stores.
After reviewing the results of the last six Starlog and remaining Hologram
Stores, the Company determined in April 1998 that these stores could not operate
profitably, even with the more favorably renegotiated lease terms. During the
period from October 1997 through January 1998, the six Starlog stores had been
suffering operating losses of more than $25,000 a month, greatly offsetting the
operating profits of the Company's other divisions.
As a result, the Company closed five of the last six unprofitable Starlog stores
and all of the remaining Hologram stores. The last Starlog store was closed in
October 1998. The leases for four of the six Starlog stores, and all of the
Hologram stores were expired and the Company had no on-going liability resulting
from such closings. In the case of two Starlog stores, the Company was able to
terminate the leases by making payments of $12,000 and $15,000 in October 1998.
Termination of License to Use Starlog Name.
On July 1, 1998, the Company was able to terminate its License Agreement with
Starlog Group, Inc. to use the "Starlog" trademark in return for making royalty
payments. The Company transferred to Starlog Group, Inc. certain assets worth an
immaterial amount in connection with such termination.
Financial Information about Industry Segments
From inception through the period ended January 31, 1999, the Company and its
subsidiaries have operated in the same industry segment.
Employees
As of November 1, 1999, the Company had 58 employees. This includes the
Company's President, General Merchandising Manager, CFO, 1 MIS Manager, 2
District Operations Managers, 1 Warehouse Manager, 1 Merchandising
Manager/Buyer, Financial Manager, an Administrative Assistant and 48 retail
store employees, of which 16 are full time and 32 are part time.
ITEM 2. PROPERTIES
On September 30, 1996 the Company's executive offices and distribution center
were relocated from Clearwater, Florida to a facility at 945 Brighton Street,
Union, New Jersey. This facility consisted of approximately 6,500 square feet
leased at a monthly rental of $3,000. This lease terminated on January 31, 1999
and was extended month to month until July 1999. In July 1999, the Company moved
its headquarters to it current address of 22 Meridian Road, Eatontown New
Jersey. This facility consists of approximately 9,300 square feet lease at a
monthly rental of $4,600. This lease terminates on October 31, 2004.
Candico Stores
The following table sets forth the locations of the 13 KCK stores where the
Company currently holds a leasehold interest.
<TABLE>
<CAPTION>
Location Retail Square Lease Termination Minimum Monthly
Footage Rent
<S> <C> <C> <C>
Harbor Place, Baltimore, MD 742 04/30/04 $5,874(1)
Crystal Mall, Waterford, CT 646 01/31/04 $4,166-4,583(2)
Bayside Marketplace, Miami, FL 636 09/10/00 $3,975(3)
Bridgewater Commons, Bridgewater, NJ 836 12/31/03 $6,667(4)
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Tampa Bay Center, Tampa, FL 913 04/30/01 $1,140 (5)
Rockaway Town Sq. Rockaway, NJ 535 10/31/06 $4,458-$4904(6)
Jacksonville Landing, Jacksonville, FL 563 02/28/00 $1,173(7)
Woodbridge Center, Woodbridge, NJ 889 Month-to-Month $3,334(8)
Macon Mall, Macon, GA 662 02/14/03 $2,917(9)
Pembroke Lakes Mall, Pembroke, FL 700 01/31/06 $4,000(10)
Coolsprings Galleria, Franklin, TN 893 03/15/02 $3,333(11)
Coliseum Mall, Hampton, VA 630 06/30/00 $1,837(12
The Avenues Mall, Jacksonville, FL 821 03/09/02 $3,417(13)
</TABLE>
(1) Plus 10% of annual Gross Sales over $704,900, plus an annual Merchant's
Association Contribution of $4,080.
(2) Plus 10% of annual Gross Sales over $500,000 for the period ending 1/31/99
and $550,000 for the balance of the lease term.
(3) Plus 8% of annual Gross Sales over a "breakpoint" which is $596,250 for
the last three years of the lease ending 9/10/99 plus CAM, taxes and
extras.
(4) Plus 8% of annual Gross Revenues over $1,000,000.
(5) Plus 8% of annual Gross Sale over $25,000.
(6) Plus 10% of annual Gross Revenue, a $4,253 environment charge, a $802
promotional charge, both subject to adjustment.
(7) Plus 8% of annual Gross Sales in excess of $175,937, plus a Merchants'
Association Contribution Rate equal to the greater of 1% of Gross Sales or
$1,689 per annum.
(8) Plus 10% of annual Gross Sales over $333,375.
(9) Plus 8% of annual Gross Sales in excess of $437,500, plus tenant's pro
rata share of real estate taxes, Common Area Maintenance, Insurance, and
Merchant association advertising.
(10) Plus 8% of annual Gross Sales over $600,000.
(11) Plus 8% of annual Gross Sales in excess of $500,000 per annum.
(12) Plus 10% of annual Gross Receipts, plus tenants pro-rata share of Common
Area Charges and Insurance charges.
(13) Plus 8% of annual Gross Sales in excess of $468,750. Plus Merchants
Association Marketing Fund, Media Fund and General Promotional charges of
approximately $900 per month, subject to escalation.
At various times, the Company had 15 Starlog Stores and 6 Hologram stores, all
of which have been closed. Leases for all but 8 of the 15 Starlog Stores were
rejected when the Company was in Chapter 11 (See Item 3 "LEGAL PROCEEDINGS").
All but two of the remaining eight leases expired pursuant to their terms. The
Company was able to terminate the other two by making payments of $12,000 and
$15,000 in October 1998.
In the case of the various Sumon-Hologram Stores, all the leases were rejected
pursuant a Chapter 11 bankruptcy petition (See Item 3 "LEGAL PROCEEDING")
In addition to the foregoing, beginning in November 1998 the Company manages 7
stores owned by CCAC, a subsidiary of Hope Associates, LLC. Pursuant to its
agreement with Hope, the Company has the right to acquire these stores or CCAC
at Hope's cost. CCAC is in the process of obtaining approval of the assignment
of the leases to these stores from the respective landlords. No assurances can
be given that such consent will be given. (See ITEM 12. "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS" below)
ITEM 3. LEGAL PROCEEDINGS
On November 13, 1995, the Company and its subsidiaries filed petitions for
voluntary reorganization under Chapter 11 of the United States Bankruptcy code
in the Bankruptcy Division of the District Court of the United States for the
Middle District of Florida. The Plan of Reorganization was filed on February 29,
1996, and subsequently amended on May 28, 1996. In July 1996 the Plan was
submitted to creditors and stockholders for their vote of approval and on August
28, 1996 the Plan was confirmed by the Court and the Company emerged from
bankruptcy. The major provisions of the Plan were as follows:
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Hope Associates, the secured lender, reduced its secured claims against the
Company by $200,000 (leaving it a secured claim of $500,000, all of which was
post-petition financing) in exchange for 1,800,000 shares (post one-for-ten
reverse split) of the Common Stock of the Company. The 167,600 (post one-for-ten
reverse split) shares of Common Stock of the Company whose voting rights had
been assigned to the Company in care of Jack Fitzgerald by the Company's founder
and Chairman of the Board, his son and former President of the Company and the
former Chairman as Trustee for his daughter as inducement for the secured
lender, were canceled.
Holders of general unsecured claims received newly issued new warrants to
purchase shares of the Company's Common Stock at the rate of $2.50 (post
one-for-ten reverse split) per share, which were distributed at the rate of one
warrant for each $0.70 of claim. The remaining 30 percent of the claims of
unsecured creditors (totaling $390,000) is to be paid in equal monthly
installments over 60 months. [Such payments were expected to commence during the
third fiscal quarter of 1998.]
Common stock equity owners retained their stock but it was significantly
diluted. Hope Associates, the secured lender, owned approximately 90% of the
Company's outstanding stock before exercise of the creditor warrants and 86% if
such warrants were exercised. The equity ownership of the "old stockholders" of
the Company was diluted, after the Chapter 11, to slightly more than 9.3%. Such
amount was further diluted by the shares issued to the owner of Goal Post
Distributors in consideration of the Company's acquisition of that business in
June 1997.
During 1996, the Company and Hope Associates engaged in negotiations with
Charles Huttoe ("Huttoe") to provide financing to the Company and acquire the
ownership of the shares of the Company's Common Stock owned by Hope. In
September, 1996, pursuant to an agreement between Huttoe, Hope Associates and
its members, Huttoe provided working capital to the Company aggregating $650,000
prior to completion of any written agreement, and on October l7, 1996 an
associate of Huttoe caused a bank loan to Hope Associates in the amount of
$500,000 to be paid in full in alleged compliance with the Sales Agreement. On
November 7, 1996, the SEC filed a complaint in federal court against Huttoe and
others alleging unregistered distribution of the stock of Systems of Excellence,
Inc. and manipulation of its stock price. In November 1996, the Court issued a
temporary restraining order temporarily freezing assets and accounts of Huttoe
and various third party accounts into which payments were made from allegedly
Huttoe-controlled accounts. The SEC amended its complaint to include as "relief
defendants" the Company, Hope Associates and Hope's members and sought to
recover from the relief defendants the sums advanced by Huttoe as working
capital to the Company ($650,000) and the bank loan to Hope Assoc. LLC
($500,000). The SEC made no allegations of wrongdoing as to the Company, Hope
Associates or Hope's owners. After negotiations with the SEC an agreement was
reached and approved by the Company whereby the Company agreed to repay $500,000
of the $650,000 received from Huttoe (plus interest computed at the rate of
5.55% per annum) in four annual installments, the first three of which to be in
the amount of $114,916, and the fourth to comprise the remaining balance of
principal and interest. The first such annual installment was paid in April
1998. Hope Associate's members have also agreed to personally guarantee $250,000
of the $500,000 owed by the Company to the SEC.
The Company acquired SUMON, LLC, doing business as the Hologram Company and
Lazer Wizardry, on December 31, 1996 for a combination of cash and assumption of
liabilities valued at $50,000 and options to purchase common stock of the
Company. The operations acquired consisted of a six store specialty retailer of
holographic artwork and gifts and a wholesale distributor of holographic artwork
and gifts. On February 3, 1997, the purchase price was adjusted down to zero
because of certain matters that were not disclosed by the seller. Subsequently,
SUMON, LLC filed for Chapter 11 Reorganization in the Bankruptcy Court for the
Middle District of Florida. The bankruptcy was dismissed and the company was
basically liquidated by fiscal year end June 27, 1998.
The Company acquired KCK Corporation and subsequently merged KCK into Candico
Entertainment, Inc. (Candico) thus changing its name. The purchase price was $10
cash, plus $200,000 in cash loaned to KCK, and warrants to purchase 50,000
shares (after giving effect to the reverse stock split) at $2.50. As part of the
purchase agreement and Plan of Reorganization, the Company converted $100,000 of
it's loan into equity of the debtor
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thereby owning 1,000 shares of newly owned stock in KCK (see Item 7. "Financial
Statements" and notes thereto below). The warrants expired unexercised on
September 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended January 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The Common Stock of the Company had previously been quoted on the NASDAQ Small
Cap Market under the symbol "SIFI". The stock was removed from their listing
upon the Company's filing for bankruptcy but continued to trade under that
symbol. Effective July 9, 1998, the Company amended its Articles of
Incorporation so as to change its name to its current name "Retail Entertainment
Group, Inc." and effected a one-for-ten reverse stock split. In September 1998,
the Company changed its trading symbol to "RETN".
The following table sets forth the high and low closing bid prices of the
Company's Common Stock from for the last two fiscal periods, as reported by
NASDAQ. Bid quotations represent high and low prices quoted between dealers, do
not reflect retail markup, markdown or commission, and do not necessarily
represent actual transactions.
Sales Prices
------------------------------
High Low
Fiscal Year 1997
- ----------------
Quarter ended September 30, 1996 ............. $ .9375 $ .050
Quarter ended December 31, 1996 .............. $ .5625 $ .125
Quarter ended March 31, 1997 ................. $ .3758 $ .125
Quarter ended June 28, 1997 .................. $ .5800 $ .130
Fiscal Year 1998
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Quarter ended September 30, 1997 ............. $ .79 $ .33
Quarter ended December 31, 1997 .............. $ .65 $ .25
Quarter ended March 31, 1998 ................. $ .54 $ .20
Quarter ended June 27, 1998 .................. $ .49 $ .10
Fiscal Year 1999
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Quarter ended September 30, 1998 $ 4.00 $ 1.100
Quarter ended December 31, 1998 $ 3.50 $ 1.125
Month ended January 31, 1999 $ 1.125 $ 1.125
On November 1, 1999, the closing price of the Company's Common Stock was $ 2.50
per share. However, such price does not necessarily reflect the price that would
result upon the sale or purchase of a significant number of shares.
On November 1, 1999, the Company had 107 holders of record of its Common Stock.
The Company reasonably believes that it has a significantly larger number of
beneficial holders of its Common Stock.
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The Company has not paid any cash dividends on its Common Stock to date and does
not anticipate paying any in the foreseeable future. The Board of Directors
intends to retain earnings, if any, to support the growth of the Company's
business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report.
Results of Operations
The Company dramatically changed its focus in the fiscal year ended June 27,
1998 to concentrate on the specialty retail sale of bulk candy and gifts.
Previously, the Company operated Starlog stores that included various science
fiction and other products under licensed names. These stores were unprofitable
and all but one was closed during Fiscal Year ended June 27, 1998.
The Fiscal Year (31 Weeks) ended January 31, 1999 ("1999"), compared to the
Fiscal Year (52 Weeks) ended June 27, 1998 ("1998") and Fiscal Year (52 Weeks)
ended June 28, 1997 ("1997") follow:
The Company's revenues for 1999, 1998 and 1997 were earned from the following
sources: Retail sales for its Candy stores, Gains from Vendor Settlements,
Starlog and Hologram Stores, franchise fees and royalties and sales of
merchandise to its franchisees. During the second quarter of 1998, the Company
managed and operated thirteen Candy Stores (after closing one store and
reopening another). The Company owned and operated six Starlog Stores for the
first three fiscal quarters of 1998 and closed all but one of these stores by
the fourth fiscal quarter of 1998. (The last Starlog store was closed during
October 1998). The Company owned and operated six Hologram Stores during part of
1998, and closed all of them by fiscal year end 1998. The Company acquired the
Goal Post Distributing, Inc. in late June 1997 and sold the company back at the
end of June 1998. During fiscal year ended June 28, 1997, the Company owned and
operated six Starlog Stores (after opening three and closing three) and acquired
six Hologram stores. The Company operated eight Starlog stores during fiscal
year ended June 29, 1996.
Total revenues from continuing operations for 1999 of $1,699,625 were for the
31-week period ending January 31, 1999. This compares to $2,230,922 that was for
the 52-week period ending June 27, 1998. On an annualized basis [note:
annualized = period / 31 x 52] revenues for the same period were $2,850,984 an
increase of 28% over 1998 revenues from continuing operations. The annualized
revenues for the period ending January 31,1999 reflect a decreased of 41% from
the $4,831,947 for 1998, which includes revenues of approximately $2,598,540
from discontinued operations. Total revenues for 1998 increased by 104% to
$4,831,947 from $2,367,722 for 1997. There were sales of merchandise to four
franchisees in 1997. Net sales for the Hologram stores totaled $458,757 since
they were acquired on December 31, 1996. All of the Hologram stores had been
closed by fiscal year end June 27, 1998. All Starlog stores were closed during
fiscal year 1998, except for one store, which closed in October 1998.
Franchise fees and royalties earned from franchisees for 1999, 1998 and 1997
were $ 0, $ 0 and $58,945, respectively. Sales of merchandise to franchisees
were $0 in 1999, $ 0 in 1998 and $413,671 in 1997.
Consolidated cost of sales as a percentage of sales decreased to 31% in 1999
compared with 55% in 1998 and 41% for 1997. The increased gross margin % in 1999
is due to the acquisition of Candico Candy Stores and the discontinuance of
unprofitable operations in fiscal year 1998. This has resulted in the new
direction of the company exiting unprofitable operations for profitable
operations. The decreased gross profit margin in 1998 was due to the acquisition
on a new trading card business (Goal Post) with lower margins and the
liquidation of the Hologram and Starlog store operations at distressed prices
for merchandise sold. The gross profit margin increase for 1997 is a direct
result of increased margins on sales of merchandise to franchisees, ample
product for sale
-8-
<PAGE>
during the holiday season and positive physical inventory counts as a direct
result of selling inventory that previously had been fully reserved due to
anticipated obsolescence, but never materialized.
Consolidated selling, general and administrative expenses (excluding
depreciation and amortization) when annualized decreased in 1999 to $2,285,265
from $4,020,646 in 1998 and $2,470,409 for 1997. The 1998 period included
approximately $1,972,943 in S.G. & A. applicable to the newly acquired Goal Post
and Candy store operations. In 1997, $471,917 of additional S.G. & A. was
attributable to the SUMON/Hologram stores acquired on December 31, 1996. A
decrease S, G & A was due to a conscientious effort to reduce costs. The
Company's selling, general and administrative expenses for 1999, 1998 and 1997
consisted primarily of salaries, rent, franchise related selling expenses,
travel, telephone and utilities, professional fees, insurance, depreciation and
amortization, and the selling, general and administrative expenses of the retail
Candico and Goal Post operations, Starlog and Hologram stores. In 1998 the
provision for bad debts increased to approximately $100,000 of which
approximately $84,000 in 1998 and $5,000 in 1997 was applicable to the Goal Post
operation. Depreciation and amortization decreased to $94,996 in 1999 from
$350,238 in 1998 mainly due to write-offs of liquidated and discontinued
operations.
The Company showed a consolidated net profit of $230,095, primarily due to gains
from extinguishment of debt of $707,388. The Candico Candy Stores reported a net
loss of $1,440 for the period. In 1998 the Company reported a loss of
$3,605,833. The total 1998 loss included write-offs of $673,039 applicable to a
loss on sale or abandonment of assets and $513,261 related to reorganization
value both of which related to discontinued operations. The Company showed a
consolidated net loss of $1,286,771 for Fiscal year 1997 including income from
forgiveness of debt of $250,000, applicable to the period up to emergence from
bankruptcy.
1999 fiscal year reflects a provision for bad debt of $0. 1998 fiscal year
reflects a provision for bad debts of approximately $100,000 of which $84,000 is
applicable to the Goal Post operation. The 1997 period reflects drawdowns in its
previously established valuation reserves of $50,000 applicable to inventory and
$428,886 applicable to usage of lease renegotiation and bankruptcy contingency
reserves. This was partially offset by additions of $62,112 to the allowance for
bad debts required by the bankruptcy of two franchisees in the United Kingdom.
Liquidity and Capital Resources
The Company had a working capital deficit at January 31, 1999 of $1,695,932
compared to a working capital deficit at June 27, 1998, of $2,190,098 and a
working capital deficit of $972,488 at June 28, 1997. The current ratio was .14
to 1 in 1999, .07 to 1 in 1998 and .51 to 1 in 1997. The Company is seeking to
raise additional capital through private placements. Without such capital the
Company does not believe that it has sufficient capital to continue to operate
its business. There is no assurance that the Company will be successful in
raising such capital.
During Fiscal 1999, the Company had net cash used in operations of $564,574.
This resulted primarily from a net gain from forgiveness of debt of $707,388.
The Company's expenditures for property and equipment for Fiscal 1999 were
approximately $44,000 (mainly new property and equipment related to the
renovation of one Candico store).
During Fiscal 1998, the Company had net cash used in operations of $1,125,579.
This resulted primarily from a net loss of $3,605,833 less approximately
$1,454,203 in non-cash expenses, gains and losses, including depreciation and
amortization, recording of Reorganization Value in Excess of Assets Allocated
applicable to KCK offset by the write-off of Reorganization Value applicable to
Starlog, less write-downs of Trade and other Claims from the emergence from
bankruptcy. Decreases in inventories and increases in accounts payable and
accruals and reserves for closed stores applicable to Starlog operations offset
the decrease in cash. The Company's expenditures for property and equipment for
Fiscal 1998 were approximately $98,000 (mainly new leasehold improvements
related to the renovation of one Candico store).
-9-
<PAGE>
In March 1998 the Company acquired KCK Corporation (which prior to the
acquisition, KCK had filed a Chapter 11 Bankruptcy Petition in the United States
Bankruptcy Court for the Middle District of North Carolina Winston-Salem
Division). The plan of reorganization was approved by the Court and KCK emerged
from bankruptcy effective March 28, 1998, the effective date of acquisition.
As of the Confirmation Date, KCK adopted Fresh Start Reporting in accordance
with the American Institute of Certified Public Accountants Statement of
Position 90-7 (SOP 90-7) -- "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code."
The Reorganization Value (the approximate fair value) of the Company is based on
the consideration of many factors and various valuation methods, including
discounted cash flows and price/earnings and other applicable ratios and
valuation techniques believed by management and its financial advisors to be
representative of the Company's business and industry. The excess of the
Reorganization Value over the fair value of net assets and liabilities is
reported as excess Reorganization Value and is amortized over a fifteen-year
period.
KCK Corporation is a retailer that owned and operated 14 candy stores under the
trade name Candy Candy, and Candico. The Company acquired KCK Corporation, in
March, 1998, in exchange for $10.00 cash for 1,000 shares of stock, $200,000
super-priority financing and warrants to purchase 50,000 shares of common stock
(40,000 shares at a strike price of $2.50 per share if exercised by September
28, 1998 or for $4.00 per share if exercised thereafter and 10,000 shares at a
strike price of $5.00 a share). All warrants expire on October 1, 1999.
Effective the date of acquisition $100,000 of super-priority financing was
converted to equity.
The Independent Auditors Report, which accompanies and is part of the Company's
audited financial statements as of January 31, 1999 and June 27, 1998 and are
included as part of this Annual Report, is qualified by the following statement:
"The accompanying consolidated financial statements have been prepared assuming
that Retail Entertainment Group, Inc. (formerly Starlog Franchise Corporation)
and Subsidiaries will continue as a going concern. As discussed in Note 12 to
the consolidated financial statements, the Company has incurred recurring losses
from operations. The Company has not yet shown the ability to generate cash from
operations and as such, this raises substantial doubt about the entity's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
reported asset amounts or the amounts and classification of liabilities that
might result from the outcome of these uncertainties."
ITEM 7. FINANCIAL STATEMENTS
This information appears in a separate section of this Report following Part
III.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
As of January 31, 1999 the Directors and officers of the Company were as
follows:
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<PAGE>
Name Age Position
- --------------------------------------------------------------------------------
Herman Rush 70 Co-Chairman of Board of Directors
Michael Michaelson 76 Co-Chairman of Board of Directors
John (Jack) Fitzgerald 57 President, CEO and Director
Ray Markman 71 Director
Kevin M. VanderKelen(1) 32 Director
Allan R. Lyons 58 Director
Mark Savel(1) 45 Director
Mr. VanderKelen resigned as a member of the Board in May 1999. Mr. Savel
resigned as a member of the Board in September 1998.
Herman Rush was appointed Chairman of the Board in November of 1995. Mr. Rush,
former Chairman and Chief Executive Officer of Coca-Cola Telecommunications,
Inc., Senior Vice President of the Entertainment Business Sector of the
Coca-Cola Company and a member of the Board of Directors of Columbia Pictures
Industries, Inc. and past Chief Operating Officer of Columbus Pictures
Television Group, has more than thirty years experience in executive, production
and marketing positions. In 1992, Mr. Rush formed Katz-Rush Entertainment whose
credits include "The Montel Williams Show" and "The Susan Powter Show." Mr. Rush
began his television career in 1951. Mr. Rush was instrumental in the television
packaging and network placement of such programs as "Voyage to the Bottom of the
Sea", "Lost in Space", "Time Tunnel" and "Land of the Giants".
Michael Michaelson was appointed to the Board of Directors in November of 1995.
Earning a BS degree at New York University in 1948, Mr. Michaelson's career has
been spent in magazine publishing and direct marketing. Mr. Michaelson currently
serves as a member of the Board of Directors of Allied Devices Inc., a publicly
held precision tool company. Mr. Michaelson began his career with Look Magazine.
He then joined Ziff-Davis where he was Vice President, Circulation Director and
a member of the board. In 1961 he became President of Franklin Square
Subscription Agency, where he created the first college student multi-magazine
subscription card, becoming the official agency of the National Association of
College Stores under the name of Campus Subscriptions. In 1979 Mr. Michaelson
sold Campus Subscriptions to Publishers Clearing House where he became Senior
Vice President, Marketing. He left there in 1980 to found GAMES MAGAZINE with
his partner Chip Block. GAMES were sold to PLAYBOY in 1982. He then founded
RAINWATER ENTERPRISES, a consulting firm that has served such clients as Rodale
Press, Hearst Magazines, Fairchild Publications, Meredith Publishing and the
Smithsonian. From 1986 to 1989 Mr. Michaelson was Chairman of the Council on
Economic Priorities. He served in the U.S. Army, 35th Infantry, 25th Division in
the South Pacific as a Company Commander from 1942 to 1946, receiving a Bronze
Star and Purple Heart. From 1986 to 1998, Mr. Michaelson is President and owner
of Rainwater Associates, Inc., providing publishing management and marketing
consultation services.
John (Jack) Fitzgerald was appointed President and Chief Operating Officer of
the Company effective June 1, 1995. Previously, Mr. Fitzgerald served as Vice
President and General Manager of the Company since July 1994. Prior thereto,
from 1990, he owned a consulting firm which developed and implemented retail
concepts such as Candy Candy Inc., The Candy Store in Baton Rouge, LA and
Shop-N-Stop (Sweet 99), the bulk candy concept for K-Mart Stores. Prior thereto,
from 1989, he was Chief Operating Officer and President of Candico Stores, a
bulk candy specialty concept. From 1984 to 1989 he was Executive Vice President
and Chief Operating Officer for J & D Brauner Butcher Block Stores. From 1974 to
1984 he was Vice President of Store Operations for Lechters.
Ray Markman was appointed to the Board of Directors of the Company in November
1995. Mr. Markman is a multi-faceted entrepreneur with a degree in journalism,
advertising and economics at the University of Missouri with post graduate work
at the University of Chicago. Mr. Markman has lectured at the N.Y.U. School of
Management and the Kellogg Executive MBA Program at Northwestern University on
Strategic Planning. He was Executive Vice President at Encyclopaedia Britannica
and a senior executive at the Leo Burnett and McCann-Erickson (Division of
Interpublic Group of Companies) advertising agencies. Mr. Markman was a founder
of two
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<PAGE>
companies that pioneered the distribution of pre-recorded video cassettes to
mass market outlets for such companies as Disney, Hanna/Barbera and the original
Jane Fonda aerobic tapes. He is a member and lecturer at the Direct Marketing
Association and Chairman of the Echo Awards Committee (creative marketing
awards) and a contributing author for a book on direct marketing. Mr. Markman
founded FIND (Foundation for Inventions and New Developments), founded FACT, an
organization devoted to public economic education. He was a Director of Chicago
City Bank, founder and Director of Mayflower Life Insurance Co. and Seago Real
Estate Co., which companies he helped to take public. He is currently President
and founder of Life Planning Company which provides financial planning services
for high net worth individuals, corporations and pension plans.
Mark Savel was appointed to the Board of Directors in November of 1995. Mr.
Savel has been Director of Franchise Development since July 1994. Mr. Savel was
responsible for sales training and the marketing and sales of franchises,
nationally and internationally, for Starlog Franchise Corporation. Since 1978,
Mr. Savel, through his development company, Majic Development Corp., (later
Majic Franchise Development, LLC) was and is an area developer and franchise
sales consultant for a major automotive after market franchiser. Mr. Savel has
held the positions of operations manager, sales trainer, franchise area
development agent and franchise sales consultant. Mr. Savel is currently a
consultant to Lee Myles Associates Corporation and markets franchises for Lee
Myles Transmissions in the Arizona market. Mr. Savel owns two Lee Myles
Franchises in Arizona. Mr. Savel resigned as a director in September 1998.
Kevin M. VanderKelen earned a BA degree in marketing and finance in 2 1/2 years
from the University of Wisconsin. He started his career founding a screen
printing business Body Wraps, Inc. and selling it to employees. He worked for
Metropolitan Life, MetLife Securities, Inc. and VanderKelen Investment Company.
He started a position as a corresponding pricing analyst for several collectible
price guide magazines and includes several nationally published magazine
articles to his credit. He founded Goal Post Distributing in 1991 and developed
a wholesale distribution concept to service retail trading card, comic, and
collectible stores. Goal Post publishes a monthly wholesale catalog and services
an international base in excess of 8,000 customers that achieved sales of
approximately $5,000,000. Mr. VanderKelen resigned from the Company's Board of
Directors in March 1999.
Allan R. Lyons had been a director of the Company from August 1993 until his
resignation on November 15, 1995. Mr. Lyons was reelected to serve as a director
by the Board of Directors effective May 15, 1998. Allan R. Lyons, CPA, is a
senior member of the firm Piaker & Lyons in Vestal, New York, which he joined in
1964. Mr. Lyons is an active investor and has served on a number of Boards. He
is currently a member of the Board of Directors of Ambanc, Inc., Franklin Credit
Management Corporation, Officeland, Inc., and Scoreboard, Inc. Scoreboard, Inc.
filed for Chapter 11 bankruptcy in March 1998. Mr. Lyons is a member of the
American Institute of CPAs, the New York State Society of CPA's and the
International Association for Financial Planning. Mr. Lyons was the Comptroller
and Finance Director of the Town of Vestal from 1970 to 1997 and is on the Board
of Advisor-School of Management -Binghamton University, Treasurer and Trustee of
United Health Services and a member of the Endowment Committee of the United
Jewish Appeal of Broome County, New York.
All directors hold office until the next annual meeting of shareholders and the
election and qualification of their successors. No fees have been paid or
accrued to directors as compensation for their acting in such capacity. The
Company has established an Audit Committee consisting of Allan Lyons and Michael
Michaelson and a Compensation Committee, consisting of Messrs. Michaelson, Rush
and Lyons. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation awarded to, earned by, or paid
for all services rendered to the Company during Fiscal 1999, Fiscal 1998 and
Fiscal 1997 by the Company's Executive Officers but does not
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<PAGE>
include information regarding Executive Officers with annual compensation under
$100,000, except current Chief Executive Officer.
Annual Compensation
<TABLE>
<CAPTION>
Name and Principal Other Annual
Compensation Year Salary $ Bonus $ Compensation $
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John (Jack) Fitzgerald
President CEO, Director 1997 $110,000 -0- (1)
1998 $110,000 -0-
1999 $ 64,166 -0-
</TABLE>
(1) Does not include the cost to the Company of the use of automobiles leased by
the Company, or the cost to the Company of benefits, including premiums for life
and health insurance and any other personal benefits provided by the Company to
such persons in connection with the Company's business since such amounts total
less than (i) $50,000 or (ii) 10% of the Executive Officer's disclosed
compensation.
Contingent Stock Options Granted in Last Fiscal Year:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year-Individual Grant
(a) (b) (c) (d) (e)
% of Total Options
Number of Securities /SARs Granted to
Underlying Options Employees in Fiscal Exercise or Base Expiration
Name /SARs Granted (#) Year Price ($/Sh) Date
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John (Jack) Fitzgerald
President-CEO 0(1) --% -- ---
</TABLE>
(1) On April 1, 1997, the Company granted Mr. Fitzgerald, President and CEO of
the Company an option to acquire 300,000 shares (post one-for-ten reverse
split) of the Company's common stock until March 31, 2003. The option to
acquire 100,000 (post one-for-ten reverse split) of such shares is
currently exercisable. The option to acquire the second 100,000 shares
(post one-for-ten reverse split) is exercisable only if the Company has
$500,000 of annual net profits, before interest, taxes, depreciation and
amortization ("EBITDA"), and the option to acquire the remaining 100,000
shares (post one-for-ten reverse split) will be exercisable only if and
Company has $1,000,000 of annual net profits EBITDA. This option was in
replacement of other options previously granted to Mr. Fitzgerald.
Mr. Kevin VanderKelen, who as a Vice President of the Company and founder of
Goal Post Distributing, Inc., in connection with the original acquisition of
Goal Post was granted an option to purchase up to 100,000 shares (post
one-for-ten reverse split) for prices ranging from $5.00 to $9.00 on a sliding
scale over the next five years provided that certain annual gross sale
projections from $5,000,000 to $9,000,000 were met. This option was terminated
when the Company sold Goal Post back to Mr. VanderKelen effective June 27, 1998.
None of the Company's outstanding options or warrants were exercised during the
Fiscal Year ended June 27, 1998 or since then, through November 1, 1999, by any
of the name Executive Officers or any other parties. The Company has no
long-term incentive plans.
No fees have been paid or accrued to any directors in consideration for them
acting as such.
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<PAGE>
Employment Agreements
The Company originally entered into an employment agreement with Jack Fitzgerald
commencing July 11, 1994. This agreement was subsequently amended as of August
15, 1996. As amended the agreement provides for a five year term, and a salary
of $100,000 per year, increasing by $10,000 a year up to $140,000, plus other
benefits and a monthly car allowance of $500. In addition Mr. Fitzgerald is
eligible for a discretionary bonus of up to 50% of his base salary. Under the
1996 Agreement, Mr. Fitzgerald was to receive an option to purchase, for $.06
per share, such number of shares as equals 5% of the issued and outstanding
shares, each year for three years, subject to certain limitations. At the April
1, 1997 Board meeting, it was agreed to amend Mr. Fitzgerald's employment
agreement as follows: Mr. Fitzgerald's base salary will be increased from
$100,000 to $150,000 when the Company raises $500,000 or more in a currently
proposed private placement. Mr. Fitzgerald's previously granted stock option is
replaced with an option to purchase a total of 300,000 shares of the Company's
common stock (taking into account the reverse split) at $0.60 per shares for a
period of five years, ending March 31, 2003. Under this option, 100,000 of such
shares are immediately exercisable. The right to exercise the option with
respect to the second 100,000 shares will be exercisable only if and after the
Company achieves annual pre-tax profits of $500,000 before interest,
depreciation, taxes, and amortization ("EBITDA") and the right to exercise the
option with respect to the last 100,000 shares will be exercisable only if and
after the Company achieves annual pre-tax profits of $1,000,000 EBITDA.
In connection with the acquisition of Goal Post, the Company entered into an
employment agreement with its President, Mr. Kevin VanderKelen, dated June 29,
1997. This agreement had a term of five years and provides for annual base
salary of $100,000 for the first two years, $115,000 for year 3, $120,000 for
year 4 and $125,000 for year 5. This agreement also granted Mr. VanderKelen with
an option to purchase a total of up to 100,000 shares of the Company's Common
stock (after taking into effect the reverse stock split) as follows. Mr.
VanderKelen's options vest 20,000 shares per year, subject to the Goal Post
division reaching gross sales of $5,000,000 for the 1st measurement year ending
June 29, 1998, $6,000,000 for the 2nd measurement year ending June 29, 1999,
$7,000,000 for the 3rd measurement year ending June 29 2000, $8,000,000 for the
4th measurement year ending June 29, 2001 and $9,000,000 for the 5th measurement
year ending June 29, 2002. The option price ranged from $5.00 to $9.00 per share
for the 20,000 share increments, which would have vested over that period.
Mr. VanderKelen's employment agreement and the related stock option were
terminated when the Company sold Goal Post back to Mr. VanderKelen effective
June 27, 1998. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below)
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth certain information regarding the beneficial
ownership of the Company's common stock as of October 1, 1998 by (i) each person
known by the Company to own beneficially 5% or more of any class of the
Company's voting stock, (ii) each director and executive officer of the Company,
and (iii) all directors and executive officers of the Company as a group. All
percentages in this section were calculated on the basis of outstanding
securities plus securities deemed outstanding under Rule 13d-3 of the Exchange
Act. All shares are expressed post reverse stock split.
Name and Address of Shares of Common Percentage of
Beneficial Owner Stock Held Shares Held
- --------------------------------------------------------------------------------
Hope Associates, LLC(1)(2) 2,700,000 (2) 70.74%
c/o Michael Michaelson
135 E. 71st St., Apt. 3A
New York, NY 10021
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<PAGE>
Kevin VanderKelen(1)(3) 572,668 (3) 22.12%
Goal Post Distributing, Inc.
13949-9 W. Hillsborough
Tampa, FL 33634
(1) Shares outstanding are calculated giving effect to a 1-for-10 reverse
stock split which occurred effective July 9, 1998.
(2) Hope Associates, LLC is a limited liability company. The percentage of
Hope Associates owned by Directors of the Company is as follows: Michael
Michaelson and Herman Rush each own approximately 25.83%; Ray Markman owns
approximately 17.22%; Kevin VanderKelen owns approximately 14.35%; Allan
Lyons owns 13.89% and Mark Savel owns approximately 2.87%. The 2,700,000
shares attributed to Hope Associates includes warrants to purchase 500,000
and 300,000 shares and an option to purchase 500,000 shares for $1.25 per
share. (See Item 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for a
description of the transactions in which the Company granted these
warrants and option to Hope Associates.)
(3) Includes 344,448 shares based on Mr. VanderKelen's ownership of 14.35% of
Hope Associates and a portion of the warrants and the option to purchase a
total of 1,300,000 shares which were granted by the Company in
consideration for certain transactions. Hope Associates holds 1,400,000
shares and Hope and/or its members hold warrants and an option to purchase
an additional 1,300,000 shares. (See Item 12 CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS")
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Shares of Common Percentage of
Name of Director or Executive Officer Stock Held Shares Held
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Jack Fitzgerald(1)(2)
President, CEO, Director 100,000 3.87%
Kevin M. VanderKelen(1)(3)
Director 572,668 22.12%
Herman Rush(1)(4)
Co-Chairman of the Board 740,669 25.58%
Michael Michaelson(1)(5)
Co-Chairman of the Board 740,448 25.58%
Mark Savel(1)(6)
Director of Franchise Development
and Director 54,530 2.15%
Ray Markman(1)(7)
Director 493,658 17.83%
Allan R Lyons(1)(8)
Director 448,149 16.47%
ALL DIRECTORS AND OFFICERS AS A GROUP
(EIGHT PERSONS) (9) 3,160,181 80.47%
- -------------------------------------------------------------------------------------------
</TABLE>
-15-
<PAGE>
(1) All shares expressed after giving effect to a 1 for 10 Reverse Stock Split
which occurred effective July 9, 1998. Based on a total number of
outstanding shares of 2,516,870. Based on a total number of shares
outstanding and options and warrants which were exercisable on November 1,
1999. (See Item 12 "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
(2) Includes 100,000 shares pursuant to currently exercisable options.
(3) Includes 100,000 out of 430,000 shares received by Mr. VanderKelen in June
1997 in connection with the sale to the Company of the assets of Goal Post
Distributors, Inc. (330,000 of which were returned to the Company upon the
resale of Goal Post), 200,000 shares purchased by Mr. VanderKelen from the
Company for $250,000, and 344,448 shares based on Mr. VanderKelen's 14.35%
ownership interest in Hope Associates and a portion of the warrants and
the option to purchase a total of 1,300,000 shares which were granted by
the Company in consideration for certain transactions. Hope Associates
holds 1,400,000 shares and Hope and/or its members hold warrants and an
option to purchase an additional 1,300,000 shares. (See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" below.)
(4) Based on Mr. Rush's approximately 25.83% interest in Hope Associates and a
portion of the warrants and the option to purchase a total of 1,300,000
shares which were granted by the Company in consideration for certain
transactions. Hope Associates holds 1,400,000 shares and Hope and/or its
members hold warrants and an option to purchase an additional 1,300,000
shares.. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below.)
Includes warrants to purchase 181 shares held by Royal Animated Art, Inc
of which Mr. Rush owns 66 2/3% of the shares. Royal Animated Art received
the warrants in October 1997 along with the other creditors of Company as
part of the Chapter 11 proceedings.
(5) Based on Mr. Michaelson's approximately 25.83% interest in Hope Associates
and a portion of the warrants and the option to purchase a total of
1,300,000 shares which were granted by the Company in consideration for
certain transactions. Hope Associates holds 1,400,000 shares and Hope
and/or its members hold warrants and an option to purchase an additional
1,300,000 shares. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
below.)
(6) Based on Mr. Savel's approximately 2.87% interest in Hope Associates and a
portion of the warrants and the option to purchase a total of 1,300,000
shares which were granted by the Company in consideration for certain
transactions. Hope Associates holds 1,400,000 shares and Hope and/or its
members hold warrants and an option to purchase an additional 1,300,000
shares. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below.)
(7) Based on Mr. Markman's approximately 17.22% interest in Hope Associates
and a portion of the warrants and the option to purchase a total of
1,300,000 shares which were granted by the Company in consideration for
certain transactions. Hope Associates holds 1,400,000 shares and Hope
and/or its members hold warrants and an option to purchase an additional
1,300,000 shares. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS"
below.)
(8) Based on Mr. Lyons' approximately 13.89% interest in Hope Associates and a
portion of the warrants and the option to purchase a total of 1,300,000
shares which were granted by the Company in consideration for certain
transactions. Hope Associates holds 1,400,000 shares and Hope and/or its
members hold warrants and an option to purchase an additional 1,300,000
shares. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" below.)
Additionally includes 20,000 shares held by Vestal Venture Capital and
30,000 shares held by Lyonshare Venture Capital, two investment
partnerships. Mr. Lyons is the Managing Partner of these entities and can
vote the shares of the Company held by them. However, he has no ownership
interest in such entities or the shares held by them.
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<PAGE>
(9) Based on shares held by Mr. VanderKelen, currently exercisable options
held by Mr. Fitzgerald and another director, the shares held by Hope
Associates, and warrants and an option Held by Hope Associate and or its
members to purchase 1,300,000 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the bankruptcy reorganization of the Company, 1,800,000 (post
one-for-ten reverse split) shares of Common Stock were issued to Hope, resulting
in the beneficial ownership of a majority of the Company's Common Stock by
certain present officers and directors. Hope subsequently surrendered 200,000
(post one-for-ten reverse split) of its shares to the Company reducing its
holdings to 1,600,000 (post one-for-ten reverse split) shares effective July 9,
1998 (of which 200,000 have since been transferred).
In connection with the acquisition of Goal Post Distributing Inc. in June 1997,
430,000 shares of Common Stock (after giving effect to the 1-for-10 reverse
stock split) were issued to Kevin VanderKelen, and in connection with an
employment agreement with Mr. VanderKelen the Company granted Mr. VanderKelen an
option to acquire up to 100,000 additional shares (also after giving effect to
the reverse stock split), subject to the Goal Post Division reaching certain
revenue goals (See Item 11 "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT"). Additionally, Mr. VanderKelen acquired an additional 200,000 (post
reverse split) shares of the Company from the Company at about the time of the
Goal Post acquisition for $250,000.
Effective June 27, 1998, the Company sold the Goal Post business and assets back
to Mr. VanderKelen. In connection with this resale, Mr. VanderKelen transferred
to the Company 330,000 of the 430,000 (post one-for-ten reverse split) Company
shares which he had received when he sold Goal Post to the Company, and the
Company gave Mr. VanderKelen a promissory note for $50,000. Also in connection
with this transaction, Mr. VanderKelen agreed to the cancellation of his
employment agreement and the stock options granted under such agreement.
During fiscal year 1998, the Company borrowed $1,250,000 from BSB Bank in the
form of a note payable. The Company also renewed a previous note due to BSB Bank
in the amount of $500,000. Subsequently, the members of Hope Associates, LLC, a
majority stockholder, personally guaranteed the line of credit from BSB Bank &
Trust Co. to the Company in the amount of $1,750,000 and forgave an additional
$250,000 due to them by the Company. Hope Associates, LLC assumed the total
obligation for the BSB loan, so that the Company will not be a party to the
loan, nor will it have any guarantee or liability. The $2,000,000 was recorded
as additional paid-in-capital. In consideration for such assumption, the Company
will pay an investment fee to Hope Associates in the amount of approximately
$20,000 a month. The Company also granted the members of Hope Associates a
warrant to purchase, until May 3, 2003, 500,000 shares of the Company's common
stock (after giving effect to a proposed reverse stock split) for $1.25 per
share.
In April 1998, various of the Directors have made the Company bridge loans
totaling $128,090 as follows: Mr. Rush $39,974, Mr. Michaelson $39,974, Mr.
Lyons $21,492, and Mr. Markman $26,650. Such loans are evidenced by demand notes
and bear 10% interest. It is intended that such loans be repaid from the
proceeds of a proposed private placement of the Company's Common Stock.
Additionally, Mr. Rush loaned the Company $100,000 in March 1997 which is still
outstanding. Rainwater Enterprises Ltd., a company owned by Mr. Michaelson,
loaned the Company $100,000 in February 1997, which has been repaid. Mr.
VanderKelen also loaned the Company $60,174 pursuant to a demand note bearing
interest at 10%, which amount was forgiven following the fiscal year 1998.
Pursuant to an agreement dated November 24, 1998, Candy Candy Acquisition
Corporation ("CCAC") acquired eight candy stores (the "Jonford Stores") (of
which one was subsequently sold back to the seller) from Jonford Corporation
("Jonford") for $549,000, of which $225,000 was payable at the time of sale, and
the balance of $324,000 which was in the form of a promissory note, payable in
12 quarterly installments of $27,000. CCAC is a wholly owned subsidiary of Hope
Associates, which owns over 50% of the Company's shares and was formed for the
purpose of making this acquisition. Hope made this acquisition because the
Company did not have the funds or access to sufficient credit to make the
acquisition itself.
-17-
<PAGE>
However, in connection with this acquisition, CCAC entered into a "Management
and Option Agreement" (M&O Agreement") with the Company. Pursuant to the M&O
Agreement the Company was retained to manage the eight Jonford Stores and the
Company was granted an option to acquire these stores exercisable until November
30, 2001 for the price invested by Hope Associates in CCAC in making this
acquisition and supplying necessary working capital to run the Jonford Stores.
The M&O Agreement provides that in consideration for managing the stores, the
Company will receive Six percent (6%) of Gross Sales from the Jonford Stores and
fifty percent (50%) of the "Excess Margin" (amount by which cost of goods sold
are less than 38% of sales price). In consideration for the foregoing, the
Company granted to those members of Hope Associates who funded such acquisition
a Warrant to purchase 500,000 shares at $1.25 a share, exercisable until
November 30, 2002. At the time of this acquisition, certain members of Hope
loaned or caused to be loaned to the Company $300,000 of working capital due
upon demand, and received an additional warrant to purchase 300,000 shares at
$1.25 a share, exercisable until November 30, 2002.
In July 1999, in order to settle certain disputes between CCAC and Jonford, the
parties entered an amendment of the Jonford Agreement whereby CCAC resold to
Jonford one of the eight Jonford Stores and paid Jonford approximately $14,000
and balance due on the Promissory Note was reduced from $298,000 to $108,000.
From time to time the Members of Hope Associates, LLC have made direct loans to
the Company or have personally guaranteed working capital loans by outside
banking facilities to the Company on terms no less favorable to the Company than
could have been obtained from unrelated third parties, if such funds would have
been available at all considering the Company's financial circumstances.
Compliance with 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
Officers, Directors and persons who own more than ten percent of a registered
class of the Company's equity securities, to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. Officers,
Directors and ten percent shareholders are required by regulation to furnish the
Company with copies of all Section 16(a) forms that they file. Based solely on
the Company's copies of such forms received or written representations from
certain reporting persons that no Form 5's were required for those persons, the
Company believes that, during the time period November 10, 1993 to June 27,
1998, all filing requirements applicable to its Officers, Directors and greater
than ten percent beneficial owners were complied with.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a complete list of exhibits which are incorporated herein or
filed herewith as part of this Report.
<TABLE>
<CAPTION>
Filed Herewith (X)
or Incorporated By
No. Exhibit Reference
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3.1 Certificate of Incorporation of the Registrant. (1)
3.2 By-Laws of the Registrant, as amended. (1)
3.3 Amendment to Certificate of Incorporation of Registrant filed July 9, 1998. (5)
3.4 By-Laws of SF Stores, Inc. (1)
10.10 Employment Agreement dated as of July 1, 1994 between the Registrant and Jack (3)
Fitzgerald.
10.33 Notice of Confirmation of Plan of Reorganization dated August 28, 1996. (3)
</TABLE>
-18-
<PAGE>
<TABLE>
<S> <C> <C>
10.34 Notices of Commencement of Case Under Chapter 11 of the Bankruptcy Code dated (3)
November 13, 1995.
10.35 Agreement of Asset Acquisition and Corporate Reorganization dated June 28, 1997 (4)
between the Registrant and Goal Post Distributing, Inc.
10.36 Employment Agreement made as of June 29, 1997 between the Registrant and Kevin (4)
M. VanderKelen
10.37 Employment Agreement made as of August 15, 1998 between the Registrant and John (4)
(Jack) J. Fitzgerald.
10.38 Purchase of Corporation through Stock Purchase, dated September 28, 1997 (4)
between the registrant and KCK Corporation
10.39 Orders dated November 26, 1997 of United States District Court for the District (4)
of Columbia, incorporating agreements relating to repayment of sums received
from Charles O. Huttoe
10.40 Form of Warrant to Purchase Shares (5)
10.41 Agreement of Asset Acquisition dated November 24, 1998 relating to certain (5)
stores owned by Jonford Corporation
10.42 Management and Option Agreement dated November 24, 1998 (5)
10.43 Sale Agreements relating to resale of Goal Post effective June 27, 1998 (5)
10.44 Assumption Agreement, as of April 1, 1998 (5)
22.1 Subsidiaries of Registrant (5)
</TABLE>
(1) Incorporated by reference from the Company's Registration Statement
on Form SB-2 for November 10, 1993 (No. 33-68692-NY).
(2) Incorporated by reference from the Company's Annual Report on Form
10K- SB for the Fiscal year ended June 30, 1994.
(3) Incorporated by reference from the company's Annual Report on Form
10K-SB for the Fiscal year ended June 29, 1996.
(4) Incorporated by reference from the company's Annual Report on Form
10K-SB for the Fiscal year ended June 28, 1997
(5) Incorporated by reference from the company's Annual Report on Form
10K-SB for the Fiscal year ended June 27, 1998
Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the period ended June
27, 1998.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: December 7, 1999
RETAIL ENTERTAINMENT GROUP, INC.
BY: /s/ John Fitzgerald December 7, 1999
----------------------------------
John (Jack) Fitzgerald Date
President, CEO & CFO
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/John Fitzgerald President, Chief Executive Officer Date: December 7, 1999
- --------------------------- and Director
John (Jack) Fitzgerald
/s/ Michael Michaelson Director Date: December 7, 1999
- ---------------------------
Michael Michaelson
/s/ Herman Rush Director Date: December 7, 1999
- ---------------------------
Herman Rush
/s/ Ray Markman Director Date: December 7, 1999
- ---------------------------
Ray Markman
/s/ Allan R. Lyons Director Date: December 7, 1999
- ---------------------------
Allan R. Lyons
</TABLE>
-20-
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Consolidated Financial Statements
January 31, 1999 and June 27, 1998
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
Retail Entertainment Group, Inc.
(Formerly Starlog Franchise Corporation):
We have audited the accompanying consolidated balance sheets of Retail
Entertainment Group, Inc. (formerly Starlog Franchise Corporation) and
Subsidiaries as of January 31, 1999 and June 27, 1998, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the seven-months ended January 31, 1999 and the year ended June 27, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Retail
Entertainment Group, Inc. (formerly Starlog Franchise Corporation) and
Subsidiaries at January 31, 1999 and June 27, 1998, and the results of its
operations and cash flows for the seven-months ended January 31, 1999 and the
year ended June 27, 1998 in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that Retail Entertainment Group, Inc. (formerly Starlog Franchise Corporation)
and Subsidiaries will continue as a going concern. As discussed in Note 15 to
the consolidated financial statements, the Company has incurred recurring losses
from operations. The Company has not yet shown the ability to generate cash from
operations, as such, this raises substantial doubt about the entity's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
reported asset amounts or the amounts and classification of liabilities that
might result from the outcome of these uncertainties.
December 3, 1999
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Consolidated Balance Sheets
January 31, 1999 and June 27, 1998
ASSETS
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
<S> <C> <C>
Current assets:
Cash $ 42,469 $ 60,132
Accounts receivable, net of allowance for
doubtful accounts of $-0- and $100,000
for 1999 and 1998, respectively 5,400 --
Inventories, net of reserves of $-0- and
$12,500 for 1999 and 1998, respectively 199,862 104,013
Prepaid expenses and other current assets 18,255 8,896
--------- --------
Total current assets 265,986 173,041
Property and equipment, net 195,408 238,000
Reorganizational value in excess of amounts
allocated to identifiable assets, net 476,696 510,379
Other assets 2,891 --
--------- --------
$ 940,981 $921,420
========= ========
</TABLE>
<PAGE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
<S> <C> <C>
Liabilities:
Current liabilities:
Accounts payable and accrued expenses $ 722,557 $ 1,313,558
Notes payable - affiliates 638,088 398,264
Current portion of long-term debt 456,444 346,677
Due to Candy Candy Acquisition Corporation 144,829 --
Other liabilities, including restructuring reserves -- 304,640
----------- -----------
Total current liabilities 1,961,918 2,363,139
Long-term liabilities:
Long-term debt 661,587 890,900
----------- -----------
Total liabilities 2,623,505 3,254,039
----------- -----------
Stockholders' deficit:
Common stock, $.01 par value; authorized 6,000,000
shares, issued and outstanding 2,429,764 and 2,093,764
shares for 1999 and 1998, respectively 24,298 20,938
Additional paid-in capital 2,962,552 2,545,912
Accumulated deficit (4,669,374) (4,899,469)
----------- -----------
Net stockholders' deficit (1,682,524) (2,332,619)
----------- -----------
$ 940,981 $ 921,420
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Consolidated Statements of Operations
Seven-Months Ended January 31, 1999 and
The Year Ended June 27, 1998
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
<S> <C> <C>
Net sales $ 1,699,625 $ 2,230,922
----------- -----------
Total revenues 1,699,625 2,230,922
Cost of sales 530,550 839,143
----------- -----------
Gross profit 1,169,075 1,391,779
Selling, general and administrative 1,536,313 1,570,740
----------- -----------
Loss from operations (367,238) (178,961)
Other income (expense):
Interest and other income 5,213 8,839
Interest expense (127,405) (215,221)
Management fee revenue 56,852 --
----------- -----------
Loss before discontinued operations (432,578) (385,343)
Discontinued operations:
Loss from operations of discontinued operations (19,695) (2,034,190)
Loss on disposal of discontinued operations (25,020) (1,186,300)
----------- -----------
Loss before extraordinary items (477,293) (3,605,833)
Extraordinary items -
Gain on extinguishment of debt 707,388 --
----------- -----------
Net income (loss) $ 230,095 $(3,605,833)
=========== ===========
Basic and diluted net income (loss) per share of common stock:
Before discontinued operations $ (.20) $ (.16)
----------- -----------
Discontinued operations (.02) (1.33)
Extraordinary items .32 --
----------- -----------
Net income (loss) $ .10 $ (1.49)
=========== ===========
</TABLE>
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Consolidated Statements of Operations - Continued
Seven-Months Ended January 31, 1999 and
The Year Ended June 27, 1998
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
<S> <C> <C>
Earnings per common share - assuming dilution
Loss before discontinued operations $ (.13) $ (.16)
Discontinued operations (.01) (1.33)
Extraordinary items .21 --
---------- ---------
Net income (loss) .07 (1.49)
========== =========
Weighted number of common shares outstanding 2,223,232 2,422,859
========== =========
Weighted average number of common shares outstanding -
dilutive options and warrants $3,283,232 $ --
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Consolidated Statements of Stockholders' Deficit
Seven-Months Ended January 31, 1999 and Year Ended June 27, 1998
<TABLE>
<CAPTION>
Common Stock
-------------------------
Par Additional Net
Number of Value Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at June 28, 1997 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 2,093,764 20,938 2,545,912 (4,899,469) (2,332,619)
Issuance of common stock 336,000 3,360 416,640 -- 420,000
Net income -- -- -- 230,095 230,095
---------- ---------- ---------- ----------- -----------
Balances at January 31, 1999 2,429,764 $ 24,298 $2,962,552 $(4,669,374) $(1,682,524)
========== ========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Consolidated Statements of Cash Flows
Seven-Months Ended January 31, 1999 and Year Ended June 27, 1998
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ 230,095 $(3,605,833)
Adjustments to reconcile net loss to net cash from
operating activities:
Net effects from purchase of Candico Entertainment, Inc.
and sale of Goal Post Distributors, Inc.:
Depreciation and amortization 94,996 237,103
Accretion of interest 9,800 30,800
Gain on forgiveness of debt (707,388) --
Loss on disposal of property and equipment and
other assets 25,020 921,345
Loss on sale of Goal Post Distributors, Inc. -- 264,955
Changes in operating assets and liabilities:
Increase in accounts receivable (5,039) (18,295)
Decrease (increase) decrease in inventories (95,849) 652,538
Decrease (increase) in prepaid expenses and other
current assets (12,611) 13,224
Increase in accounts payable and accrued expenses 56,213 596,883
Increase (decrease) other liabilities (304,640) 98,208
Decrease in trade and other miscellaneous claims -- (316,507)
Increase in related party payables 144,829 --
---------- -----------
Net cash used in operating activities (564,574) (1,125,579)
---------- -----------
Cash flows from investing activities:
Business acquisitions, net of acquired cash -- (46,817)
Purchases of property and equipment (43,743) (98,101)
Decrease in other assets -- 13,875
---------- -----------
Net cash used in investing activities (43,743) (131,043)
---------- -----------
Cash flows from financing activities:
Proceeds from long-term borrowings - bank -- 1,250,000
Proceeds from notes payable - affiliates 300,000 188,264
Payments to unsecured creditors (5,743) (70,000)
Net payments on long-term debt (123,603) (110,802)
Payments to affiliates -- (100,000)
Proceeds from long-term debt -- 27,572
Proceeds from common stock private placement 420,000 --
---------- -----------
Net cash provided by financing activities $ 590,654 $ 1,185,034
---------- -----------
</TABLE>
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Consolidated Statements of Cash Flows - Continued
Seven-Months Ended January 31, 1999 and Year Ended June 27, 1998
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
<S> <C> <C>
Decrease in cash $ (17,663) $ (71,588)
Cash at beginning of year 60,132 131,720
------------ ------------
Cash at end of year $ 42,469 $ 60,132
============ ============
</TABLE>
Supplemental schedule of non-cash financing activities:
On June 27, 1998, the Company received 330,000 shares of its own common stock at
$.10 per share and issued a $50,000 note payable for the sale of Goal Post
Distributing, Inc.
Interest paid was approximately $107,400 and $188,100 for the seven-months ended
January 31, 1999 and the year ended June 27, 1998, respectively.
See accompanying notes to consolidated financial statements.
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
January 31, 1999 and June 27, 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.
(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 (see Note 3).
(continued)
<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 (see
Note 3).
(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 and Easter.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(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.
(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.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(n) Risks and Uncertainties
(1) Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
significant concentrations of credit risk, consist principally of
cash and cash equivalents. The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents
approximate their fair values. The balances, at times, may exceed
federally insured limits.
(2) Concentrations of Financial Risk
The Company is dependent upon funding of Hope Associates, LLC
(Hope Associates) which owns greater than 50% of the Company's
outstanding common stock.
(o) Recent Accounting Pronouncements
(1) Comprehensive Income
The Company adopted SFAS No. 130, Reporting Comprehensive Income
(SFAS 130). Under SFAS 130 changes in net assets of an entity
resulting from transactions and other events and circumstances
from non-owner sources are reported in the financial statements
for the period in which they are recognized. Because there were
no such changes, adoption of SFAS 130 did not impact the
consolidated financial statements of the Company.
(2) Segment Reporting
The Company adopted SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. The Company currently
operates as a single segment and will evaluate additional segment
disclosure requirements as it expands its operations.
(3) Derivative Instruments and Hedging Activities
In June 1998, SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, was released. The statement requires the
recognition of all derivatives as either assets or liabilities in
the balance sheet and the measurement of those instruments at
fair value. The accounting for changes in the fair value of a
derivative depends on the planned use of the derivative and the
resulting designation. The Company is required to implement the
statement in the first quarter of fiscal 2000. The Company has
not used derivative instruments and believes the impact of
adoption of this statement will not have a significant effect on
the consolidated financial statements.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(o) Recent Accounting Pronouncements - Continued
(4) Long-Lived Assets
The Company has adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, (SFAS 121). SFAS 121 requires that long-lived assets
and certain identifiable intangibles held and used by an entity
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest) is less than the carrying
amount of the asset, an impairment loss is recognized.
Measurement of that loss would be based on the fair value of the
asset. SFAS 121 also generally requires long-lived assets and
certain identifiable intangibles to be disposed of to be reported
at the lower of the carrying amount or the fair value less cost
to sell.
(5) Accounting for Stock-Based Compensation
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (SFAS 123). Accordingly, no
compensation costs have been recognized for the Company's granted
stock options and warrants. Had compensation and other cost for
the Company's granted stock options and warrants been determined
based on the fair value at the grant date or issuance for awards
in 1998 and 1999 consistent with the provisions of SFAS 123, the
impact on operations would have been immaterial.
(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.
(continued)
<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. The following are the major
provisions under the Plan:
1. Thomas W. Gray and Sidney A. Crawley reorganized note of $65,000
is a secured claim allowed by the court with interest of 10% per
year, payable in 60 equal monthly installments totaling $2,655.89
per month. Payments will begin on the first day of the month
following the Effective Date, none of which has been paid.
2. All allowed administrative expenses shall be paid in full, in
cash, on the Effective Date. All administrative expenses were paid
except for approximately $36,000.
3. Allowed tax claims shall be paid over a period not exceeding six
years after the date of assessment of such claim, in quarterly
payments with interest at 7% per year amortized over that period
beginning on the effective date and ending on the date which is
six years after the date of assessment. The amount of these claims
was $10,000 and was paid prior to June 27, 1998.
4. NationsBank allowed secured claim of $147,542.46. NationsBank
shall receive a note in the amount of its allowed secured claim
payable in equal monthly installments amortized based over six
years with interest at 9%, due in three years. The monthly
payments are due on the first day of each month beginning with the
first month following the Effective date. Subsequent to the
approval of the plan, KCK's former owners paid the claim to
NationsBank, and, the Company agreed to pay the entire amount to
the original owners under the same terms. The amount is shown as
note payable to NB Services, Inc. in the accompanying consolidated
balance sheets.
5. Johnson County Bank allowed secured claim in the amount of
$211,464.67. Johnson County Bank shall receive a note in the
amount of its allowed secured claim which shall be payable in
equal monthly installments over six years at 9% interest, due in
three years. The monthly payments shall be due on the first day of
each month beginning with the first month following the Effective
Date. This claim has been fully guaranteed by KCK Corporation's
former owners.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(b) Emergence and Acquisition - Continued
6. Holders of general unsecured claims will receive $70,000 for pro
rata payment. The payment was made to an escrow agent. The same
unsecured creditors also received a reorganization note in the
total amount of $60,000, none of which has been paid.
Subsequently, the Court also approved a motion filed by the debtor
for a dividend distribution to unsecured creditors. No dividend
distributions have been made as of June 27, 1998.
7. The Company issued to Nick Tricarico, Thomas W. Gray and Sidney A.
Crawley, a total of 50,000 common stock warrants. Each individual
was offered 5,000 warrants (15,000) at a strike price of $5.00 per
share to be exercised prior to September 30, 1999 and the
remaining warrants (35,000) issued at a strike price of $2.50 per
share if exercised prior to September 30, 1998 or at $4.00 per
share if exercised prior to September 30, 1999.
(c) Fresh Start Reporting
As of the Confirmation Date, the Debtor adopted Fresh Start Reporting
in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7 (SOP 90-7) -- "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code."
The Reorganization Value (the approximate fair value) of the Debtor
was based on the consideration of many factors and various valuation
methods, including discounted cash flows and price/earnings and other
applicable ratios and valuation techniques believed by management and
its financial advisors to be representative of the Debtor's business
and industry. The excess of the Reorganization Value over the fair
value of net assets and liabilities are reported as Reorganization
Value in excess of allocated amounts and will be amortized over a
fifteen-year period. The balance of such assets at the date of
emergence from bankruptcy was approximately $519,000.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(c) Fresh Start Reporting - Continued
The restructured and acquired balance sheet as of March 28, 1998
(effective date of emergence) is as follows:
<TABLE>
<CAPTION>
Restructured and acquired
ASSETS Balance Sheet
------ -------------------------
<S> <C>
Current assets:
Cash $ 166,167
Due from affiliates 7,797
Inventories, net of reserves 205,715
Prepaid expenses and other assets 4,623
----------
Total current assets 384,302
Property and equipment, net 90,661
Reorganization value in excess of amounts allocable 519,030
$ 993,993
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT:
--------------------------------------
Post Petition Liabilities:
Current liabilities:
Accounts payable and accrued expenses 201,120
Other liabilities, including reserves 14,761
Notes payable - unsecured creditors 130,000
----------
Total current liabilities 345,881
Long-term liabilities:
Secured notes payable - Johnson County Bank 211,465
Secured notes payable - Gray & Crawley 65,000
Super priority note payable to SFC 100,000
Secured notes payable - NB Services, Inc. 147,542
----------
Total liabilities 869,888
Stockholders' deficit:
Common stock 10
Additional paid-in capital 124,095
----------
Net stockholders' equity 124,105
----------
$ 993,993
==========
</TABLE>
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(c) Fresh Start Reporting - Continued
During the current year, while under the Company's management and
prior to emergence from bankruptcy, KCK operations were as follows:
<TABLE>
<CAPTION>
KCK Operations for the
period October 1, 1997
through March 28, 1998
----------------------
<S> <C>
Revenue $ 1,551,879
Cost of sales 493,029
-----------
Gross profit 1,058,850
General and administrative expenses:
Rent 360,598
Depreciation and amortization 150,841
Office and salary expense 519,142
-----------
Total general and administrative expenses 1,030,581
-----------
Operating income 28,269
Other income (expense):
Other income 5,316
Interest expense (9,480)
-----------
Net other income (expense) (4,164)
-----------
Net income $ 24,105
===========
</TABLE>
These amounts are included in the Company's consolidated financial
statements for the year ended June 27, 1998.
(d) Merger
Effective June 17, 1998, KCK Corporation (KCK) merged with Candico
Entertainment, Inc. and subsequently changed its name to Candico
Entertainment, Inc. (Candico). Each of the 1,000 shares outstanding of
KCK was converted into one share of Candico.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(3) Discontinued Operations
For the seven-months ended January 31, 1999 and year ended June 27, 1998,
the Company recorded a net loss of $19,695 and $2,034,190, respectively, as
part of discontinued operations in the accompanying consolidated statement
of operations. For financial reporting purposes, the assets, liabilities,
results of operations and cash flows of Starlog Franchise Corporation,
Sumon, LLC, Goal Post Distributors, Inc. and Shuttlecart Enterprises are
included in the Company's consolidated financial statements. A summary of
these assets and liabilities as of January 31, 1999 and June 27, 1998 are
as follows:
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
Assets:
<S> <C> <C>
Cash and cash equivalents $ -- $ 85
Accounts receivable, net -- --
Inventory -- --
Other current assets -- 29
Property, plant and equipment -- --
-------- ---------
Total assets - discontinued operations $ -- 114
======== =========
Liabilities:
Accounts payable and accrued liabilities $ 11,433 393,206
Other current liabilities -- 421,462
Long-term liabilities -- --
-------- ---------
Total liabilities - discontinued operations 11,433 814,668
-------- ---------
Net assets (liabilities) of discontinued
operations $(11,433) $(814,554)
======== =========
</TABLE>
Certain amounts in 1998 have been reclassified for comparative purposes.
The 1998 liabilities of discontinued operations were paid and/or
renegotiated and recorded as an extraordinary gain in the accompanying
consolidated statement of operations under extraordinary items.
The remaining liabilities of discontinued operations are expected to be
paid in fiscal period ended January 31, 2000. The repayment will come from
cash from continuing operations or other financing sources.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(4) Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
January 31, 1999 June 27, 1998 Useful Life
---------------- ------------- -----------
<S> <C> <C> <C>
Trade show exhibition displays $ -- 44,048 3 years
Computer equipment and software 119,207 119,207 3-5 years
Furniture, fixtures and equipment 275,939 281,994 3-7 years
Leasehold improvements 79,206 91,463 Life of lease
--------- --------- or 10 years
474,352 536,712
Less accumulated depreciation
and amortization (278,944) (298,712)
--------- ---------
$ 195,408 $ 238,000
========= =========
</TABLE>
Depreciation and amortization related to property and equipment totaled
approximately $95,000 and $237,000 for the seven-months ended January 31,
1999 and year ended June 27, 1998, respectively.
Approximately $30,000 of net property and equipment reported in prior year
was disposed of in the current period as part of discontinued operations.
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
<S> <C> <C>
Accounts payable $ 482,551 $1,001,631
Accrued professional fees 130,000 95,000
Accrued payroll 29,239 39,788
Accrued taxes 60,233 59,367
Accrued interest 20,000 16,000
Accrued rents -- 83,727
Other 534 18,045
--------- ----------
$ 722,557 $1,313,558
========= ==========
</TABLE>
Approximately $815,000 of accounts payable and accrued expenses reported in
the prior year related to discontinued operations (see Note 3).
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(6) Notes Payable - Affiliates
During 1997, two members of Hope provided $200,000 working capital
financing to the Company. One of the members was repaid $100,000 during
fiscal year 1998.
On March 5, 1998, Hope Associates, LLC provided $60,000 of working capital
to the Company for operating needs. Interest accrues at the rate of 10% per
year payable with principal 90 days after issuance. Interest after default
shall be at the rate of 18% per year. At June 27, 1998, none of the note
has been repaid.
In April 1998, certain members of Hope provided funds totaling $188,264
which remained outstanding at June 27, 1998. All of the notes are due upon
demand and bear interest at 10% per year. During the current period,
$60,174 was forgiven and is reported as an extraordinary gain on
extinguishment of debt in the accompanying consolidated statements of
operations.
On June 27, 1998, the Company sold the remaining net assets of Goal Post
Distributing, Inc. (Goal Post) to its original owner (see Note 1). As part
of the terms of the sale, the Company agreed to pay $50,000 to the former
owner of Goal Post. The $50,000 is recorded as part of notes payable -
affiliates and is due upon demand.
In November 1998, Hope Associates, LLC (Hope Associates) and certain of its
members, loaned the Company $300,000 in working capital to be used to
purchase inventories and pay current overhead expenses. The note will
accrue interest at 10% with interest payable monthly, due upon demand. In
conjunction with the money received from Hope Associates, the Company
granted to the members of Hope Associates 300,000 common stock warrants at
an exercise price of $1.25 expiring November 30, 2002.
(7) Related Party Transactions
The Company paid Hope Associates, LLC ("Hope Associates") $60,000 in
management fee expenses per an agreement requiring payments of $20,000 per
month depending on excess cash flows (see Note 12), which is included in
selling, general, and administrative expenses in the accompanying
consolidated statements of operations. It also incurred an additional
$144,829 of expenses in connection with Candy Candy Acquisition
Corporation, which is also included in selling, general, and administrative
expenses in the accompanying consolidated statements of operations. The
Company earned management fee revenues of $56,852 related to a management
agreement with Hope Associates allowing the Company to manage eight candy
stores previously acquired by Hope Associates (see note 8). The revenues
are reported as management fee revenues in other income in the accompanying
consolidated statements of operations.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(8) 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.
(9) Long-Term Debt
Amounts due to unrelated entities at January 31, 1999 and June 27, 1998
consists of the following:
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
<S> <C> <C>
Note payable to Securities Exchange Commission due in annual
installments through January 2002, with interest
payable annually at 5.5%. $ 303,820 396,180
Notes payable to unsecured creditors due in monthly installments
through June 2002 with interest payable monthly at 12% (net
of unamortized portion imputed interest of $43,400). 346,600 336,800
Note payable to Johnson County Bank due in monthly installments
through May 2001 with interest at 9%. This note is fully guaranteed
by Gray and Crawley. 206,777 218,765
Note payable to NB Services, Inc. due in monthly
installments through May 2001 with interest
at 9%. 148,491 160,832
Note payable to Gray and Crawley due in monthly
installments through April 2003 with interest at 10%. 58,086 65,000
Notes payable to unsecured creditors due in monthly
installments through May 2003 with interest at 10%. 54,257 60,000
----------- -----------
</TABLE>
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(9) Long-Term Debt - Continued
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- --------------
<S> <C> <C>
Total $1,118,031 $1,237,577
Less current installments of long-term debt 456,444 346,677
---------- ----------
Long-term debt, excluding current installments $ 661,587 $ 890,900
========== ==========
</TABLE>
The aggregate of future maturities of long-term indebtedness are as
follows:
Fiscal Year Ending June:
------------------------
2000 $ 456,444
2001 268,185
2002 356,098
2003 29,467
2004 7,837
-----------
$ 1,118,031
===========
During fiscal year 1998, the Company borrowed $1,250,000 from BSB Bank in
the form of a note payable. The Company also renewed a previous note due to
BSB Bank in the amount of $500,000. Subsequently, in September 1998, Hope
Associates, LLC, a majority stockholder, assumed the $1,750,000 notes
payable to BSB Bank and forgave an additional $250,000 due to them by the
Company, all of which was recorded as a contribution to capital (see Note
12). In consideration for such assumption and contribution, the Company
will pay a monthly fee to Hope Associates of approximately $20,000 per
month. Subsequently, Hope Associates agreed to waive certain monthly
management fees until the Company is able to operate profitably and obtain
excess cash flows. In connection with the above transactions the Company
also granted the members of Hope Associates a warrant to purchase 500,000
shares of the Company's common stock at an exercise price of $1.25 per
share. The warrant expires May 3, 2003. The warrants estimated at fair
market value at date of issuance was not material to the Company's
financial statements.
(10) Income Taxes
The Plan of Reorganization of the Company was approved by the United States
Bankruptcy Court on August 28, 1996, 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 of
$7,900,000 that 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 (NOL) 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. (continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(10) Income Taxes - Continued
The Company accounts for income taxes pursuant to the Statement of
Financial Accounting Standards No. 109. The approximate amounts of deferred
assets at January 31, 1999 and June 27, 1998, respectively, resulting from
temporary differences and carryforwards were as follows:
<TABLE>
<CAPTION>
January 31, 1999 June 27, 1998
---------------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 9,220,900 9,300,000
Expenses recognized for financial
reporting purposes not yet deductible:
Other -- 100,000
----------- -----------
9,220,900 9,400,000
Effective federal and state tax rate 40% 40%
----------- -----------
Total deferred tax asset 3,688,360 3,760,000
Valuation allowance for deferred tax asset (3,688,360) (3,760,000)
----------- -----------
Net deferred tax asset $ -- --
=========== ===========
</TABLE>
(11) 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.
At January 31, 1999, aggregate approximate future minimum rental payments
required under operating leases are as follows:
Fiscal Year Ending June:
------------------------
2000 $ 607,721
2001 449,720
2002 429,089
2003 358,165
2004 304,113
Thereafter 265,652
----------
$2,414,460
Rent expense charged to operations for the years ended January 31, 1999 and
June 27, 1998 was approximately $501,923 and $1,116,000, respectively.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(11) Commitments and Contingencies - Continued
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 entered into an employment agreement with the President and CEO
commencing July 11, 1994 and subsequently amended August 15, 1996. As
amended, the agreement provided for a five-year term and a salary of
$100,000 per year, increasing by $10,000 a year up to $140,000, plus other
benefits including a discretionary bonus of up to 50% of his base salary.
In April 1998, the Board of Directors amended the employment agreement to
provide a base salary of $150,000 when the Company raises $150,000 or more
in a currently proposed private placement of common stock. The employment
agreement also granted certain other stock options (see Note 14).
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.
(12) 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 (see Note 9). The members of Hope Associates had personally
guaranteed the amounts due to BSB Bank.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(12) Stockholders' Equity - Continued
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 (see Note 1).
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
during the seven-months ended January 31, 1999 or the fiscal year ended
June 27, 1998.
(13) Earnings Per Share Disclosure
<TABLE>
<CAPTION>
Seven-Months
Ended
January 31, 1999
-----------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Income available to common
stockholders $ 230,095 -- $ --
---------
Basic EPS
Income available to common stockholders 230,095 2,223,232 .10
Effect of Dilutive Securities
Warrants and options -- 1,060,000 --
--------- --------- -----
Diluted EPS
Income available to common stockholders
plus assumed conversions $ 230,095 3,283,232 $ .07
========= ========= =====
</TABLE>
Options and warrants to purchase 144,000 shares of common stock were
outstanding during the period but were not included in the computation of
diluted EPS because their exercise price was greater than the average
market price of the common shares.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(14) Stock Options and Warrants
On April 1, 1997 and subsequently revised in April 1998, the Company
granted the President and CEO an option to acquire 300,000 (post
one-for-ten reverse split) shares of the Company's common stock until March
31, 2003. The option to acquire 100,000 (post one-for-ten reverse split) of
such shares is currently exercisable. The option to acquire the second
100,000 (post one-for-ten reverse split) shares is exercisable only if and
after the Company has $500,000 of annual net profits, before interest,
taxes, depreciation and amortization (EBITDA) and the option to acquire the
remaining 100,000 shares will be exercisable only if and after the Company
has $1,000,000 of annual net profits EBITDA. This option is in replacement
of other options previously granted. None of the options have been
exercised. The Company has no other long-term incentive plans.
Aggregate Stock Option Activity
The following tables summarize information about the aggregate stock option
and warrant activity (post one-for-ten reverse split) for the seven-months
ended January 31, 1999:
<TABLE>
<CAPTION>
Weighted-
average
Number exercise
of shares price
--------- ---------
<S> <C> <C>
Outstanding, beginning of year 744,000 $ 1.52
Granted 800,000 1.25
Exercised -- --
Forfeited -- --
--------- ------
Outstanding, end of year 1,544,000 1.39
--------- ------
Options and warrants vested, end of year 1,544,000 $ 1.39
========= ======
</TABLE>
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
--------------------------------------- -------------------------------------
Weighted-
Weighted- average Weighted-
average remaining average
Average Number exercise contractual Number exercise
Exercise Price outstanding price life (years) exercisable price
-------------- ----------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$.60 - 2.50 194,000 $ 1.52 5 194,000 $ 1.52
1.25 - 5.00 550,000 1.53 3 550,000 1.53
1.25 800,000 1.25 - 800,000 1.25
---------- ------ -- ---------- ------
1,544,000 $ 1.43 8 1,544,000 $ 1.43
========== ====== == ========== ======
</TABLE>
These tables do not include options and warrants in which certain events or
contingencies must be met prior to grant.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(14) Stock Options and Warrants - Continued
Accounting for Stock-Based Compensation
The Company accounts for its stock option plans under Accounting Principles
Board Opinion No. 25 (APB 25), under which no compensation expense has been
recognized. In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), which was effective for fiscal years
beginning after December 15, 1995. SFAS 123 allows companies to continue
following the accounting guidance of APB 25, but requires pro forma
disclosure of net income and earnings per share for the effects on
compensation expense had the accounting guidance of SFAS 123 been adopted.
The pro forma disclosures are required only for options granted in fiscal
years beginning after December 15, 1994.
The Company adopted the disclosure-only provisions of SFAS 123 for the
seven-months ended January 31, 1999 and the year ended June 27, 1998.
Accordingly, no compensation cost has been recognized for the Company's
granted stock options and warrants. Had compensation and other costs for
the Company's granted stock options and warrants been determined based on
the fair value at the grant date or issuance for awards in 1999 and 1998,
consistent with the provisions of SFAS 123, the impact on net operations
would have been immaterial.
(15) 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.
(16) Huttoe Financing
During the confirmation process, the Company and Hope engaged in
discussions with Charles Huttoe (Huttoe) to provide post confirmation
financing to the Company and to acquire the ownership of the 18,000,000
shares of the Company's common stock owned by Hope. In September, 1996,
Huttoe, Hope and its members, but not the Company, entered into an
agreement (Sales Agreement) pursuant to which, Huttoe was to make certain
payments to Hope's bank and to Hope's members and was to purchase the
membership interests in Hope from its members, thus indirectly obtaining
Hope's 18,000,000 shares into the Company. The position of the Company,
Hope and the members of Hope is that the purchase of the Hope membership
interests has not been consummated.
(continued)
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(16) Huttoe Financing - Continued
In September, 1996, Huttoe provided working capital to the Company
aggregating $650,000. There was no written agreement between the Company
and Huttoe regarding these funds. Subsequent to the above, David Goldstein
(Goldstein), who had been acting as the attorney for Huttoe with respect to
these matters, announced that the Sale Agreement had been assigned to him.
However, it is the position of Starlog, Hope and its members that this
purported assignment is legally ineffective.
October 1996, a bank loan to Hope was paid in full from an account of
Goldstein's in alleged compliance with the Sale Agreement. In addition, the
sum of $200,000 has been deposited from Goldstein's account into escrow
with an attorney for Hope for payment to the members of Hope to acquire
their membership interests in alleged compliance with the Sale Agreement.
In November 1996, the Securities and Exchange Commission (SEC) filed a
complaint in the U.S. District Court for the District of Columbia (Court)
against Huttoe and others, but not including Goldstein, alleging "massive
unregistered distribution" of the "stock of Systems of Excellence, Inc.
(SOE) and manipulation of the SOE stock price." In November 1996, the Court
issued a temporary restraining order temporarily freezing assets and
accounts of Huttoe and various third party accounts into which payments
were made from allegedly "Huttoe controlled" accounts. The order
specifically covered the Company's account which received the $650,000 as
well as the attorney escrow account holding the aforementioned $200,000.
The $200,000 has not been paid to the members of Hope and the transfer of
membership interest from Hope has not occurred.
During fiscal year 1998, the Company and the SEC reached agreement for the
repayment of $500,000 of the $650,000 of funds provided by Huttoe. The
Company will repay this amount over five years with interest (see Note 8).
The $150,000 difference between the amount funded by Huttoe and the amount
to be repaid to the SEC is reflected in the Consolidated Statements of
Operations as gain on extinguishment of debt for the year ended June 28,
1997.
(17) 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.
(18) 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 15,000 will vest at 5,000 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.
