Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB-Quarterly or Transition Report
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) of THE SECURITIES
EXCHANGE ACT OF 1934
For the thirty-nine weeks ended October 31, 1999
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 or 15(d) of THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _______
Commission file number 0-22638
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
(Exact name of small business issuer as specified in its charter)
New Jersey 22-3219281
---------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22 Meridian Road, Eatontown, NJ 07724
-------------------------------------
(Address of principal executive offices including zip code)
(732) 380-0991
--------------
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes No X
--- ---
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes No X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
------------------------------------
State the number of shares outstanding of each of the issuers classes of common
stock as of the latest practicable date. Common Stock, $.01 par value- 2,516,764
shares outstanding as of November 1, 1999.
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Index
-----
Page
----
Part I. Financial Information
Item I. Financial Statements
Consolidated Balance Sheets- October 31, 1999 (Unaudited) and
January 31, 1999 (Audited) 3
Consolidated Statements of Operations (Unaudited) for the
Thirty-nine Weeks Ended October 31, 1999 and
October 25, 1998 4
Consolidated Statements of Operations (Unaudited) for the 5
Thirteen Weeks Ended October 31, 1999 and
October 25, 1998
Consolidated Statements of Cash Flows (Unaudited) for the
Thirteen Weeks Ended October 31, 1999 and
October 25, 1998 6
Consolidated Statements of Stockholders' Equity (Unaudited) 7
Notes to Consolidated Financial Statements- October 31, 1999 8
Item 2. Management's Discussion and Analysis or Plan of Operation 13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1999 1999
---- -----
ASSETS (Unaudited) (Audited)
------ ------------------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 72,546 $ 42,469
Marketable securities - -
Accounts receivable, net of allowance for doubtful accounts
of $ 0 and $0 respectively 5,460 5,400
Inventories, net of reserves of $0 and $0 respectively 208,642 199,862
Prepaid expenses and other current assets 11,821 18,255
------------------------------
Total Current Assets 298,469 265,986
Property and Equipment, net 162,520 195,408
Reorganization Value in Excess of Amounts Allocated to Identifiable Assets 450,745 476,696
Other Assets 2,424 2,891
------------------------------
$ 914,158 $ 940,981
==============================
LIABILITIES & STOCKHOLDERS' EQUITY
----------------------------------
Current Liabilities:
Accounts payable and accrued liabilities $ 1,117,873 $ 722,557
Other liabilities, including reserves 80,726 144,829
Loans due to stockholders and affilities 888,245 638,088
Current maturities of long-term debt 273,160 456,444
------------------------------
Total Current Liabilities 2,360,004 1,961,918
Long-Term Liabilities:
Long-term debt 699,131 661,587
Liabilities subject to compromise - -
------------------------------
Total Liabilities 3,059,135 2,623,505
------------------------------
Stockholders' Equity (Deficit):
Common stock, $.01 par value; authorized 6,000,000 shares, issued
and outstanding 2,423,764 shares 25,168 24,298
Additional paid-in capital 3,070,432 2,962,552
Accumulated deficit (5,240,577) (4,669,374)
------------------------------
Net Stockholders' Equity (2,144,977) (1,682,524)
------------------------------
$ 914,158 $ 940,981
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Thirty-nine Weeks
Ended Ended
October 31, October 24,
1999 1998
-----------------------------------
<S> <C> <C>
Operating Revenues:
Retail sales $ 1,774,430 $ 3,181,511
Sales to franchisees and joint ventures - -
Franchise fees, royalty revenues and other - 3,777
-----------------------------------
Total Revenue 1,774,430 3,185,288
Costs and Expenses:
Cost of sales 578,636 1,626,252
Depreciation and amortization 80,202 255,384
Selling, general and administrative 1,721,064 2,892,412
-----------------------------------
Total Costs and Expenses 2,379,902 4,774,048
-----------------------------------
Profit (Loss) from Operations (605,472) (1,588,760)
Other Income (Expense):
Other Income 79,226 (1,659)
Interest Expense (44,957) (95,329)
Loss on sale or abandonment - (258,952)
-----------------------------------
Total Other Income (Expense) 34,269 (355,940)
-----------------------------------
Net Profit (Loss) before extraordinary items $ (571,203) $ (1,944,700)
===================================
Extraordinary Items - Gain on extinguishment of debt $ - $ (513,261)
-----------------------------------
Net Gain (Loss) $ (571,203) $ (2,457,961)
===================================
Net income (loss) per common share (0.232) (1.014)
===================================
Weighted average number of common shares outstanding 2,465,264 2,423,764
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED STATEMENTS of OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks
Ended Ended
October 31, October 24,
1999 1998
-------------------------------
<S> <C> <C>
Operating Revenues:
Retail sales $ 488,264 $ 760,215
Sales to franchisees and joint ventures - -
Franchise fees, royalty revenues and other - 168,308
-------------------------------
Total Revenue 488,264 928,523
Costs and Expenses:
Cost of sales 158,364 235,120
Depreciation and amortization 18,624 20,880
Selling, general and administrative 483,829 693,416
-------------------------------
Total Costs and Expenses 660,817 949,416
-------------------------------
Profit (Loss) from Operations (172,553) (20,893)
Other Income (Expense):
Other Income 20,399 (2,386)
Interest Expense (18,420) (66,627)
Loss on sale or abandonment - -
-------------------------------
Total Other Income (Expense) 1,979 (69,013)
-------------------------------
Net Profit (Loss) before extraordinary items $ (170,574) $ (89,906)
===============================
Extraordinary Items - Gain on extinguishment of debt $ - $ -
-------------------------------
Net Gain (Loss) $ (170,574) $ (89,906)
===============================
Net income (loss) per common share (0.069) (0.037)
===============================
Weighted average number of common shares outstanding 2,465,204 2,423,764
===============================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
CONSOLIDATED CASH FLOW STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
Thirty-nine Weeks Thirty-nine Weeks
Ended Ended
October 31, October 24,
1999 1998
----------------------------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net Profit (Loss) $ (571,203) $ (2,457,961)
Adjustments to reconcile net loss to net cash used in operations
Depreciation and amortization 80,202 255,384
Write-off of organization costs - 513,261
Loss on sale or abandonment of assets - 408,084
Gains from extinguishment of debt - -
Loss on sale of Goal Post Distributors, Inc. 264,955
Changes in operating assets and liabilities:
(Increase) in accounts receivable - 233,933
Increase in marketable securities - -
Decrease (increase) in inventories (8,780) 186,932
(Increase) in prepaid expenses and other current assets 6,434 11,335
(Decrease) increase in accounts payable and accrued liabilities 395,316 858,866
(Decrease) in reserves and other liabilities (64,103) 330,120
Increase (decrease) in trade and other miscellaneous claims (148,991)
(Increase) in other working capital (69,157) (86,379)
----------------------------------
Net cash used in operating activities (231,291) 369,539
----------------------------------
Cash Flows From Investing Activities:
Purchases of property and equipment (21,361) (131,043)
Acquisition deposit - -
----------------------------------
Net cash used in investing activities (21,361) (131,043)
----------------------------------
Cash Flows From Financing Activities:
Proceeds from issuance of stock inprivate placement 108,750 -
Proceeds from loans from stockholders 156,316 -
Issuance of new unsecured notes, net of discount - -
Payments on loans from stockholders/debtors - (280,802)
Conversion of convertible debt into stock - -
----------------------------------
Net cash from financing activities 265,066 (280,802)
----------------------------------
Increase in cash and cash equivalents 12,414 (42,306)
Cash at beginning of period 60,132 76,683
----------------------------------
Cash at end of period $ 72,546 $ 34,377
----------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Consolidated Statements of Stockholders' Deficit
<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)
==================================================================================
Issuance of common stock 87,000 870 107,880 - 108,750
Net income for Thirty-nine Weeks (571,203) (571,203)
------------- -------------
Balance at October 31, 1999 2,516,764 $ 25,168 $ 3,070,432 $ (5,240,577) $ (2,144,977)
==================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
14
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
October 31, 1999
(1) Summary of Significant Accounting Policies
(a) Principal Business Activity
The principal business activity of Retail Entertainment Group, Inc.
(Company) (formerly Starlog Franchise Corporation) is the retail
distribution of bulk candy under the name of "Candy Candy!" or Candico
(the "Candico Stores"). Previously, the Company operated Starlog stores
that included various science fiction and other products. During fiscal
year 1998, the Company changed its name from Starlog Franchise
Corporation to Retail Entertainment Group, Inc.
(b) Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, Candico
Entertainment, Inc. (Candico), Goal Post Distributing, Inc., Sumon, LLC
and Shuttlecart Enterprises. All significant intercompany transactions
and balances have been eliminated in consolidation.
These statements have been prepared by the Company and are unaudited.
Additionally, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. It is suggested that
these consolidated financial statements are read in connection with the
financial statements and notes thereto included in the Company's Annual
report on Form 10-KSB for the fiscal year ended January 31, 1999. There
have been no changes of significant accounting policies since January
31, 1999.
(c) Sale of Operations of Goal Post Distributors, Inc.
In April 1998, the Company's Board of Directors approved the sale of
substantially all of the net assets of Goal Post Distributing, Inc.
(Goal Post), a wholly-owned subsidiary, back to its original owner,
effective June 27, 1998. Under this resale agreement, the Company
received 330,000 shares of its own common stock (post 1-for-10 reverse
split) in exchange for the net assets of Goal Post and a $50,000
promissory note payable to the previous owner. The common stock
received was accounted for as treasury stock using the cost method.
Subsequently, the Company retired all of the common shares held in
treasury. The cost of the re-acquired shares in excess of par value has
been charged to additional paid-in capital. As a result of the sale of
Goal Post, certain warrants granted to management of Goal Post have
been canceled.
The Company incurred a loss as a result of the sale of Goal Post of
approximately $265,000, which has been reported in the accompanying
consolidated statements of operations as part of loss on disposal of
discontinued operations.
(d) Discontinued Operations Reporting
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.
8
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(e) Inventories
Inventories, consisting of finished goods, are stated at their net
realizable value using the lower of cost or market, and determined by
the first-in, first-out method (FIFO).
(f) Depreciation and Amortization
Depreciation and amortization of property and equipment is calculated
using the straight-line method over the estimated useful lives of the
related assets or life of the lease, whichever is shorter.
(g) Revenue Recognition
The Company recognizes revenue when goods or services are provided.
(h) Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results may differ from those
estimates.
(i) Seasonality
The Company's sales are seasonal in nature based, in part, on gift
buying during holiday periods such as Halloween, Christmas, Easter and
Valentine's Day.
(j) Reclassifications
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform with the 1999 presentation. Such
reclassifications had no effect on reported total net loss.
(k) Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
(l) Earnings Per Share
In the fourth quarter of fiscal year 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, Earnings Per
Share, (SFAS 128). In February 1998, the Securities and Exchange
Commission issued Staff Accounting Bulletin No. 98 related to SFAS 128.
SFAS 128 replaced the calculation for primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share exclude any
dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is similar to the previously reported fully
diluted earnings per share. The Company had options and warrants at
January 31, 1999, resulting in diluted earnings per share. Certain of
the Company's options and warrants were not included in computing
dilutive net income (loss) per common share because their effects were
anti-dilutive. At June 27, 1998, the Company had no common stock
equivalents resulting in diluted earnings per share, and the Company's
options and warrants were not included in computing dilutive net income
(loss) per common share because their effects were anti-dilutive.
9
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(m) Income Taxes
The Company has adopted Statement of Financial Accounting Standards
(SFAS 109), Accounting for Income Taxes. Under the asset and liability
method of SFAS 109 deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts expected to be
realized.
(2) Management Agreement and Acquisition of Entity in Chapter 11
(a) Management Agreement and Funding
In October 1997, the Company entered into an agreement with KCK
Corporation (Debtor) and the U.S. Bankruptcy Court to manage and
provide certain funding while the debtor reorganized under the federal
bankruptcy laws. The Company was the debtor's approved post-petition
lender of an allowed secured super-priority administrative claim of
$200,000. KCK Corporation filed voluntary petitions for relief under
Chapter 11 of the Federal Bankruptcy Laws in July 1997.
(b) Emergence and Acquisition
The United States Bankruptcy Court for the Middle District of North
Carolina, confirmed the Debtor's Plan of Reorganization (the Plan) on
March 26, 1998 (the Confirmation Date), allowing the debtor to emerge
from Chapter 11 Bankruptcy effective March 28, 1998 (the Effective
Date). On March 28, 1998, the Company acquired all of the assets and
liabilities of KCK Corporation and effectively owned KCK. The debtor
operated under the protection of Chapter 11 following a voluntary
petition for reorganization filed July 22, 1997 and amended on March
19, 1998. The Company was the Debtor's approved post-petition lender of
an allowed secured, super-priority administrative claim in the amount
of $200,000 plus accrued, but unpaid, interest. Pursuant to the Plan,
the Company converted $100,000 of its loan into equity of the Debtor
and received 1,000 shares of newly issued stock in the Debtor which
constituted 100% of the Debtor's issued and outstanding stock. The
remaining $100,000 obligation would be paid over a period not to exceed
five years. Arrangements satisfactory to the Debtor and the Company
have been made for the Debtor's substantial compliance of its
obligations to the Company under the Plan.
(3) Management and Option Agreement
On November 24, 1998, the Company entered into a management and option
agreement with Hope Associates, LLC, (Hope Associates) a related party,
whereby the Company will manage certain retail candy stores (Candy
Candy Acquisition Corporation) belonging to Hope Associates, and in
exchange grant to Hope Associates 500,000 common stock warrants at
$1.25 per share expiring in November 2002. The Company will receive
quarterly compensation, based upon a specified formula as noted in the
agreement, for its services with respect to the agreement. In addition,
the Company has the right and option to purchase, effective the date of
the agreement, until November 30, 2001, all of the outstanding common
stock of Candy Candy Acquisition Corporation. The exercise price for
the option is equal to the cost of the Candy Candy Acquisition
Corporation plus the outstanding balance of any Hope loans and any
additional capital contributions or loans made by Hope to the Company
and Candy Candy Acquisition Corporation.
10
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(4) Commitments and Contingencies
The Company has entered into various non-cancelable operating leases
for office, warehouse and retail store space expiring at various dates
through 2006. Certain of the leases provide for minimum annual rentals
plus additional rental payments based upon sales volume.
The Company entered into a trademark license agreement with Starlog
Communications International, Inc. (SCI), an entity related by common
ownership for the exclusive right to use the name, registered trademark
and logos "Starlog" and "Starlog: The Cosmic and Science Fiction
Universe." For the years ended June 27, 1998 and June 28, 1997, no
amounts were due under the terms of this agreement. On July 1, 1998,
the Company terminated its license agreement with SCI and transferred
certain of its assets worth an immaterial amount in connection with the
dissolution.
The Company is party to various claims and legal actions arising in the
ordinary course of business. Management does not believe that the
outcome of such claims and legal actions will have a material effect on
financial position or results of operations of the Company.
(5) Stockholders' Equity
On May 10, 1998, the Company's Board of Directors and shareholders
approved a one-for-ten reverse stock split of the outstanding shares of
Retail Entertainment Group, Inc. (formerly Starlog Franchise
Corporation) to shareholders of record on July 9, 1998. In addition to
the reverse split, the Company reduced the number of shares of common
stock authorized from 40,000,000, with a .001 par value, to 6,000,000
shares with a .01 par value. Shareholders' equity has been restated to
give retroactive recognition to the reverse stock split in prior
periods. The total number of shares outstanding following the reverse
split was 2,093,764.
In September 1998, Hope Associates, LLC (Hope Associates), the
Company's majority shareholder, assumed $1,750,000 of debt owed by the
Company to BSB Bank and forgave $250,000 of debt owed to them by the
Company. The transaction resulted in a contribution of $2,000,000 to
additional paid-in-capital. The members of Hope Associates had
personally guaranteed the amounts due to BSB Bank.
Effective June 27, 1998, the Company entered into an agreement for the
sale of Goal Post Distributors, Inc., a wholly owned subsidiary, back
to its original owner. The sale of Goal Post resulted in a loss of
approximately $265,000. In addition, in exchange for Goal Post, the
Company received as consideration 330,000 shares of the Company's own
common stock valued at $.10 per share. The shares were accounted for as
treasury shares and resulted in a charge to common stock and additional
paid-in-capital of approximately $33,000. The shares were subsequently
retired and accounted for using the cost method.
In November 1998, the Company issued approximately 336,000 shares of
common stock at $1.25 per share pursuant to private placements under
Regulation D of U.S. Securities laws. The proceeds of approximately
$420,000 will be used to provide for working capital and repay certain
debts to affiliates.
None of the Company's outstanding options or warrants have been
exercised.
(6) Going Concern
As shown in the accompanying consolidated financial statements, the
Company has incurred recurring losses from operations. These losses
have contributed to the Company's working capital deficiency and
resulting cash flow problems. Although the Company's cash flows
increase during the holiday season, it has not been profitable on a
year round basis. The Company has raised cash through various debt
financing from affiliates, however, its ability to continue as a going
concern will require the attainment of profitable operations for
extended periods, conversion of debt into permanent equity or obtaining
additional permanent equity. The Company is currently pursuing various
debt and equity opportunities.
11
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(Formerly Starlog Franchise Corporation)
Notes to Consolidated Financial Statements
(7) Year 2000 Issue (Unaudited)
The Company does not expect the Year 2000 issue to have a significant
effect on operations. Management of the Company does not expect major
vendors or customers to be unable to sell to, provide services to, or
purchase from the Company because of the Year 2000 issue.
(8) Subsequent Events
In February 1999, the Company granted an additional option to purchase
50,000 shares of the Company's common stock at $1.25 per share,
expiring on February 9, 2004. Of these options granted, 10,000 would be
currently vested and the remaining 40,000 will vest at 10,000 per year
in subsequent years.
In July 1999, the Company issued approximately 87,000 shares of common
stock at $1.25 per share pursuant to private placements under
Regulation D of U.S. Securities laws. The proceeds of approximately
$108,000 will be used to provide for working capital and repay certain
debts to affiliates.
12
<PAGE>
RETAIL ENTERTAINMENT GROUP, INC.
(formerly Starlog Franchise Corporation)
Item 2. Management's Discussion and Analysis or Plan of Operation
The following discussion and analysis should be read in conjunction with the
enclosed consolidated financial statements and notes thereto appearing elsewhere
in this report.
Results of Operations
Thirty-nine weeks ended October 31, 1999 ("1999") compared to the Thirty-nine
weeks ended October 24, 1998 ("1998").
The Company's revenues for the 1999 period were earned from retail sales of the
Company owned Candico stores ($1,774,430). The Company's total revenues for the
1998 period of $3,181,511 were earned primarily from retail sales of the Company
owned Candico stores ($2,184,473), Starlog and SUMON stores ($311,783), both
wholesale and retail sales of the Goal Post Distributing (Goal Post) unit
($685,255). In April 1998 the Company began the process to exit unprofitable
operations, mainly Starlog, Sumon, and Goal Post Distributing, and concentrate
on the specialty retail sale of bulk candy.
Total revenues decreased by $1,407,081 or 44% in the 1999 period from the 1998
period primarily due to the shift in business strategy to concentrate on the
specialty retail sale of bulk candy. Net losses decreased to $571,203 for the
1999 period from $2,457,961 in the 1998 period. 1998 losses were the result of
winding down of both Starlog and SUMON store operations and related absorption
of store closing costs ($921,345). The 1998 loss included a consolidated loss on
sale or abandonment of property and equipment of $408,084 relating to these
store closings and write-offs of Reorganization Value of $513,261.
Cost of Sales, as a percentage of total sales, decreased to 33% in the 1999
period compared with 51% in the 1998 period as a result of the company strategy
to concentrate on the candy business. The lower gross profits, in 1998, are due
to the inventory liquidation at the Company's Starlog and SUMON units and the
normally lower gross profits at the Company's Goal Post unit.
Selling, general and administrative expenses were down 40% in 1999 from 1998.
The deduction in operating expenses was primarily due, as mentioned earlier, the
exiting of unprofitable businesses to concentrate on the bulk candy business. In
the 1998 period expenses included closing and write-down costs for units in the
process of being closed as described above. Interest expense decreased to
$44,957 in the 1999 period from $95,329 in the 1998 period offset by Other
income of $79,226 from management fees in the 1999 period.
As a result of these continuing difficulties with the Company's Starlog and
SUMON store operations, the Company decided to withdraw from that business in
April 1998. Accordingly, management brought any remaining assets down to net
realizable value by incurring a charge-off in the fiscal year ended June 27,
1998.
Thirteen weeks ended October 31, 1999 ("1999") compared to the
Thirteen weeks ended October 24, 1998 ("1998").
The Company's revenues for the 1999 period were earned from retail sales of the
Company owned Candico stores ($488,264). The Company's total revenues for the
1998 period of $760,215 were earned primarily from retail sales of the Company
owned Candico stores. In April 1998 the Company began the process to exit
unprofitable operations, mainly Starlog, Sumon, and Goal Post Distributing, and
concentrate on the specialty retail sale of bulk candy.
Total revenues decreased by $271,951 or 36% in the 1999 period from the 1998
period. The decrease was due to the closing of Starlog stores and Shuttlecart
Kisok. The company's business strategy is now to concentrate on the specialty
retail sale of bulk candies. Net losses amounted to $170,574 for the 1999 period
compared with a loss of $89,906 in the
13
<PAGE>
1998 period.
Cost of Sales, as a percentage of total sales were 33% in the 1999 period
compared with 31% in the 1998 period.
Selling, general and administrative expenses were down 30% in 1999 from 1998.
The deduction in operating expenses was primarily due, as mentioned earlier, the
exiting of unprofitable businesses to concentrate on the bulk candy business.
Interest expense decreased to $18,420 in the 1999 period from $66,627 in the
1998 period offset by Other income of $20,399 from management fees in the 1999
period.
Liquidity and Capital Resources
The Company's working capital deficit was $2,061,535 at October 31, 1999
compared to a working capital deficit of $2,263,401 at October 24, 1998. The
1999 deficit was due to loans due to stockholders and affiliates of
approximately $888,200, and current maturities of long term debt ($273,000). The
current ratio was .13 to 1 in 1999 compared to .09 to 1 in 1998. 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 the business.
During the 1999 period, the Company had net cash used in operating activities of
$231,291 primarily as a result of a net loss of $571,203 and the remaining
portion of approximately $339,912 as a direct result of decreased vendor
support, increase in reserves.
The continuation of the business as a going concern will be contingent upon
obtaining additional working capital and permanent capital as required and the
ability to generate sufficient cash from operations and financing sources to
meet obligations as they come due.
Part II Other Information
Item 1. Legal Proceedings
There have been no significant changes in the legal matters reported in the
Company's Annual Report on form 10-KSB dated January 31, 1999.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
No exhibits
None
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereto duly authorized.
RETAIL ENTERTAINMENT GROUP, INC.
Dated: December 17, 1999
By: /s/ John Fitzgerald
------------------
John (Jack) Fitzgerald
President
14
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