As filed with the Securities and Exchange Commission on September 6, 1996
Registration No. 33-______
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
SPECIALTY RETAIL GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 5945 No. 59-282441
----------------- ----------------- ------------------
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
1720 Post Road East, Suite 112
Westport, Connecticut 06880
(203) 256-4380
--------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Specialty Retail Group, Inc.
1720 Post Road East, Suite 112
Westport, Connecticut 06880
(203) 256-4380
--------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to
EDMOND M. COLLER, ESQ.
Goodkind Labaton Rudoff &
Sucharow LLP
100 Park Avenue
New York, New York 10017
Approximate date of commencement of proposed sale to the public: From time
to time or at one time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
[ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
number of the earlier effective registration statement for the same offering.
[ ]
If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of each Amount to Maximum Maximum
Class of be Offering Aggregate Amount of
Securities to registered Price Per Offering Registration
be Registered (shares) Security(1) Price(1) Fee
------------- ---------- ----------- -------- ----------
Common Stock 863,333 $.34375 $296,771 $103
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(c) under the Securities Act of 1933 based on the average of the
high and low sales prices of Specialty Retail Group, Inc. Common Stock,
$.001 par value per share, as reported on the NASDAQ SmallCap Market on
August 23, 1996.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
SPECIALTY RETAIL GROUP, INC.
Cross Reference to Information Required by Part I of Form SB-2
Location or Caption in
Item in Form SB-2 Prospectus
Front of Registration Statement
and Outside Front Cover of
Prospectus . . . . . . . . . . . Front Cover Pages
Inside Front and Outside Back
Cover Pages of Prospectus . . . . Cover Pages
Summary Information and Risk
Factors . . . . . . . . . . . . . Prospectus Summary; Risk
Factors
Use of Proceeds . . . . . . . . . Use of Proceeds
Determination of Offering Price . Plan of Distribution
Dilution . . . . . . . . . . . . *
Selling Security-Holders . . . . Selling Stockholders
Plan of Distribution . . . . . . Plan of Distribution
Legal Proceedings . . . . . . . . Business - Settlement of Legal
Proceedings; Business - Other
Legal Proceedings; Principal
Stockholders
Directors, Executive Officers,
Promoters and Control Persons . . Directors; Executive Officers
and Principal Employees;
Principal Stockholders; Certain
Transactions
Security Ownership of Certain
Beneficial Owners and Management Principal Stockholders; Selling
Stockholders; Certain
Transactions
Description of Securities . . . . Description of Capital Stock;
Plan of Distribution
Interests of Named Experts and
Counsel . . . . . . . . . . . . . Legal Matters
Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities . . . . . . . . . Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities
Organization Within Last Five
Years . . . . . . . . . . . . . . *
Description of Business . . . . . Prospectus Summary; Risk
Factors; Selected Financial
Data; Management's Discussion
and Analysis; Business
<PAGE>
Management's Discussion and
Analysis or Plan of Operation . . Management's Discussion and
Analysis
Description of Property . . . . . Business-Properties
Certain Relationships and Related
Transactions . . . . . . . . . . Certain Transactions
Market for Common Equity and
Related Stockholder Matters . . . Market for Common Equity and
Related Stockholder Matters
Executive Compensation . . . . . Executive Compensation
Financial Statements . . . . . . Summary of Selected Financial
Data; Financial Statements
Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure . . . . . . *
*Inapplicable or none.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION, SEPTEMBER 6, 1996
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
863,333 Shares
SPECIALTY RETAIL GROUP, INC.
Common Stock
(Par Value, $.001 per share)
The 863,333 shares of Common Stock, $.001 par value per share (the
"Common Stock"), of Specialty Retail Group, Inc., a Florida corporation (the
"Company"), covered by this Prospectus (the "Shares") were issued in connection
with the settlement of certain litigation and include 650,000 Shares which were
issued to, and are being offered by, certain holders of the Company's Common
Stock (the "Selling Stockholders") and 213,333 Shares (the "Escrow Shares")
issued in the name of an Escrow Agent to be held in escrow to secure performance
by the Company of certain provisions of the agreement of settlement, and which
may be sold by the Selling Stockholders under certain conditions. See "Business
- - Settlement of Legal Proceedings."
___________________
FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE CONSIDERED IN
CONNECTION WITH THE PURCHASE OF THESE SECURITIES, SEE "RISK FACTORS" COMMENCING
ON PAGE 6.
___________________
The Selling Stockholders may sell the Shares from time to time in one
or more transactions. The Shares may be sold on the NASDAQ SmallCap Market,
through registered brokers or dealers, or otherwise, at market prices then
prevailing, or in negotiated transactions. In addition, any Shares that qualify
for sale pursuant to Rule 144 of the Securities Act of 1933, as amended, may be
sold under Rule 144 rather than pursuant to this Prospectus. The Shares may
also be offered in one or more underwritten offerings, on a firm commitment or
best efforts basis. The underwriters in an underwritten offering, if any, and
the terms and conditions of any such offering will be described in a supplement
to this Prospectus. For information
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<PAGE>
regarding the Selling Stockholders and the plan of distribution of the Shares
offered hereby, see "The Offering" and "Plan of Distribution."
Under certain circumstances, the Company will receive a portion of the
proceeds from the sale of the Shares by the Selling Stockholders. See "Use of
Proceeds" and "Business - Settlement of Legal Proceedings". The Company has
agreed to bear certain expenses (other than underwriting discounts and
commissions and brokerage commissions and fees and expenses for any counsel,
accountants or other experts of the Selling Stockholders) in connection with the
registration and sale of the Shares being offered by the Selling Stockholders.
See "The Offering" and "Business - Settlement of Certain Litigation".
The Common Stock of the Company is listed on the NASDAQ SmallCap
Market under the symbol "SRGC." On September __, 1996, the last reported sale
price of Common Stock on the NASDAQ SmallCap Market was $____ per share.
The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the distribution
of the Shares may be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act of 1933 (the "Securities Act"), and any commissions
received by them and any profit on the resale of the Shares purchased by them
may be deemed to be underwriting commissions or discounts under the Securities
Act. See "Plan of Distribution" herein for a description of indemnification
arrangements between the Company and the Selling Stockholders.
___________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The date of this Prospectus is September __, 1996.
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<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission" or "SEC") a registration statement on Form SB-2 (herein, with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Common Stock offered hereby. This Prospectus does not contain
all the information set forth in the Registration Statement, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. The omitted information may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and copies of such material can be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. For further information with
respect to the Company and the Shares offered hereby, reference is made to the
Registration Statement and the documents incorporated by reference therein. See
"Incorporation of Certain Documents by Reference" herein.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the Commission's New York Regional Office at 7 World Trade Center, 13th Floor,
New York, New York 10007 and Chicago Regional Office at 500 West Madison Street,
Room 3190, Chicago, Illinois 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
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<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information and consolidated financial statements and notes thereto
appearing elsewhere in this prospectus.
______________________
The Company
The Company was organized under the laws of Florida in 1987. The
Company originally operated a clinical laboratory which it sold as of December
31, 1991 to Cardinal Testing Laboratories, Inc. ("Cardinal Transaction"). As a
result of the Cardinal Transaction, the Company received approximately $6
million. On April 13, 1993, the Company acquired all of the issued and
outstanding capital stock of Building Blocks, Inc. ("Building Blocks"), in
exchange for shares of the Company's Common Stock.
Building Blocks operates a specialty educational and developmental toy
store chain presently consisting of 10 stores. The stores are located in New
York, Connecticut and Massachusetts. In early 1996 the Company determined to
pursue expansion of the Building Blocks chain through franchising. The Company
has established Building Blocks Franchise Corp. ("BBFC") as a second-tier
wholly-owned subsidiary and BBFC is marketing franchises under an agreement
between BBFC and Building Blocks. At September 1, 1996 BBFC had sold franchises
for two stores to be located in Dallas, Texas and Chicago, Illinois. Building
Blocks' business plan currently contemplates that it will not open any new
company-owned stores; will reduce the number of such stores currently in
operation by not renewing leases as they expire or by transfers to franchisees;
and will, in the future, rely primarily upon the franchising program to generate
revenue and profit.
Building Blocks merchandising focuses on high quality educational and
developmental toys. Its specialty toy mix consists of children's toys and
accessories that the Company deems to be distinctive and top quality items. A
substantial portion of Building Blocks' merchandise is comprised of toys
typically found in the specialty toy segment rather than in the mass marketed
toy segment.
The principal executive offices of the Company are located at 1720
Post Road East, Suite 112, Westport, Connecticut 06880. Telephone: (203) 256-
4380.
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<PAGE>
The Offering
Pursuant to the terms of a Settlement Agreement, the Company issued
650,000 Shares to the Selling Stockholders and 213,333 shares in the name of an
Escrow Agent to be held in escrow to secure performance by the Company of
certain obligations under the Settlement Agreement. Pursuant to the Settlement
Agreement, the Company agreed to use its best efforts to prepare and file with
the Commission a registration statement under the Securities Act to enable the
Selling Stockholders to resell the Shares, including the Shares held by the
Escrow Agent which they will receive in the event the Company fails to perform
the obligations secured by such Shares. See "Business-Settlement of
Litigation," "Selling Stockholders," "Plan of Distribution."
The following table sets forth the number of Shares being offered
hereby by the Selling Stockholders. The Selling Stockholders have had no
material relationship with the Company or any of its affiliates during the past
three years. To the Company's knowledge, neither of the Selling Stockholders
owns any shares of Common Stock other than the 325,000 Shares issued to him
pursuant to the settlement and 366 shares of Common Stock owned of record by
Peter Sayet.
Minimum Number Maximum Number
Name of Shares of Shares
---- -------------- --------------
Peter Sayet 325,000 (1)
Howard Green 325,000 (1)
Total 650,000 863,333 (1)
(1) Under the terms of the settlement, the Shares issued to the Escrow Agent
secure the Company's obligations to make certain cash payments to one or
both of the Selling Stockholders, depending upon the proceeds realized by
them from the sale of the 650,000 shares owned by them. Consequently, any
or all of the 213,333 shares held in escrow may be issued to either of the
Selling Stockholders.
Risk Factors
- ------------
An investment in the Company involves a high degree of risk. These
risks include an historic lack of profitability, the inadequate cash resources
of Building Blocks and the related need for additional financing, dependence on
the success of the franchising program, and others. See "Risk Factors" and
"Management's Discussion and Analysis" for a further discussion of these
factors.
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<PAGE>
RISK FACTORS
The securities being offered hereby involve a high degree of risk and
are, therefore, speculative in nature and should not be purchased by anyone who
cannot afford a loss of his or her entire investment. Prospective investors,
prior to making an investment in the Company, should carefully consider the
risks and speculative factors inherent in and affecting the business of the
Company, including the following:
1. History of Losses; Anticipated Losses for Fiscal 1996: The
-----------------------------------------------------
Company has incurred substantial losses from the operation of its Building
Blocks subsidiary. For the year ended July 3, 1994 the Company had a loss from
operations of $1,387,000. For the year ended July 2, 1995, the Company had a
loss of $5,499,339, of which approximately $1,500,000 represented the value of
shares issued in connection with the acquisition of a corporation which has a
consulting agreement with the Company. For the nine-month period from July 3,
1995 through March 31, 1996, the Company had a net loss of $909,584. In
addition, the Company expects to report a loss from operations for the fourth
quarter of fiscal 1996. See "Business", "Management's Discussion and Analysis"
and Financial Statements.
2. Need for Additional Financing of Building Blocks. Management
------------------------------------------------
believes that Building Blocks will require approximately $500,000 of
short-term working capital to finance holiday season inventories between
October and mid-December, which financing management believes would be
repayable in January out of cash generated from holiday sales and franchise
program receipts. Thereafter, management believes that Building Blocks will
need approximately $200,000 of additional working capital to supplement cash
flow expected to be generated from the franchise program and savings
anticipated from reductions in the number of stores operated by Building Blocks
to adequately finance the Company's operations through June 30, 1997.
However, Building Blocks is currently attempting to negotiate settlements of
some $200,000 of rent arrearages and of claims which it is actively disputing
for additional damages of some $400,000, arising under the leases for three
indoor regional mall stores closed between June and September, 1996. In the
event Building Blocks is compelled to make payments materially greater than
anticipated in respect of these leases, or if the franchise program or the
operations of Building Blocks does not meet management's estimates, Building
Blocks may require additional working capital, in an amount which could be
substantial. Management is currently engaged in discussions with certain of the
principal beneficial owners of the Company's capital stock who are considering
providing the Company with working capital to meet Building Blocks' anticipated
needs. No commitments have been made and there can be no assurance that such
working capital will be made available on acceptable terms or at all. See
"Business -- Franchise Program," and "Business-Properties."
3. Dependence on Success of Franchising Program. The Company's
--------------------------------------------
ability to generate profits and positive cash flow from
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<PAGE>
operations is materially dependent upon the success of its franchising program
which is in its early stages. While the Company believes that the relatively low
cost of entry, the nature of the specialty retail toy business and the potential
for profitable owner-operation of a franchised Building Blocks store will prove
attractive to potential franchisees, there can be no assurance that BBFC will be
able to sell a substantial number of franchises. The Company is competing with
numerous franchisors of a variety of retail stores, substantially all of which
have greater financial and marketing resources than the Company, and many of
which have a substantial number of successful franchised stores.
4. Quarterly Results and Seasonality. The Company's quarterly
---------------------------------
results of operations have fluctuated depending on, among other things, the
timing of store openings and closings and related pre-opening and other startup
expenses, net sales contributed by new stores, and increases or decreases in
sales at stores open more than one year. In addition, approximately 40% of
Building Blocks' sales have occurred in the last quarter of each calendar year.
Consequently, the results of operations of any quarterly period are not
necessarily indicative of the results that may be achieved for a full fiscal
year or any future quarter. Future income of the Company will also be subject
to fluctuation arising from the timing of franchise sales and the seasonality of
the franchised businesses which will affect the timing of the receipt of
franchise fees.
5. Competition. The retail toy market is an intensely competitive
-----------
market. Building Blocks' competitors generally have substantially greater
resources than Building Blocks. While Building Blocks stores compete for
consumer expenditures with large mass merchandisers, such as Toys 'R Us and the
toy departments of discount stores which feature discounted prices, because of
Building Blocks' merchandising, customer service and store format, its stores
compete more directly with smaller "mom and pop" stores and regional chains such
as "Learning Express," "Noodle Kidoodle" and "Zainy Brainy," which offer similar
product selection and pricing in a larger store layout.
6. No Dividends. To date, the Company has not paid any dividends on
------------
its Common Stock and does not expect to declare or pay any dividends in the
foreseeable future. See "Description of Capital Stock -- Dividends."
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<PAGE>
USE OF PROCEEDS
Under certain circumstances, the Company will receive a portion of the
proceeds from the sale of the Shares by the Selling Stockholders. Any such
proceeds will be used for working capital. See "The Offering" and "Business -
Settlement of Legal Proceedings."
- 8 -
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
The following summary financial data is qualified in its entirety by,
and should be read in conjunction with, the Company's Financial Statements and
the Notes thereto appearing elsewhere in this Prospectus:
<TABLE>
<CAPTION>
For the 52 Weeks For the 53 Weeks For the Nine For the Nine
Ended Ended Months Ended Months Ended
July 3, 1994 July 2, 1995 April 2, 1995(1) March 31, 1996(1)
---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net sales . . . . . . . $3,462,569 $5,629,643 $4,159,811 $5,728,735
Gross profit . . . . . 659,715 2,343,370 1,920,287 2,588,627
Loss from operations .
(1,827,680) (3,020,211) (1,971,885) (1,093,871)
Restructuring and Other
Expenses (2,788,626)
Net loss . . . . . . . ($1,387,800) ($5,499,339) ($1,676,047) ($909,584)
Net loss per share . . ($.18) ($.63) ($.19) ($.10)
Balance Sheet Data
(at end of period):
Cash, cash equivalents
and investment in short
term notes . . . . . . $7,636,240 $2,913,188 $4,203,739 $649,870
Working capital . . . . 7,073,944 1,828,606 3,773,085 747,535
Total assets . . . . . 9,463,825 6,307,673 8,188,335 4,394,662
Stockholders Equity . . 7,979,505 3,702,890 6,127,796 2,793,662
</TABLE>
(1) The information for the periods ended April 2, 1995 and March 31, 1996 is
unaudited but includes all adjustments that management considers necessary to
fairly present such information. The results for the nine months ended March
31, 1996 are not indicative of the results to be expected for the full year
ended June 30, 1996. See "Management's Discussion and Analysis."
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Set forth below is a summary of the significant factors affecting the
operating results, financial condition and liquidity/cash flows of Specialty
Retail Group, Inc. (the "Company") for the 53 weeks ended July 2, 1995 ("fiscal
1995") and the 52 weeks ended July 3, 1994 ("fiscal 1994"), and for the nine
months ended March 31, 1996 and April 2, 1995. This discussion should be read
in conjunction with the financial statements and notes thereto.
The operating subsidiary of the Company is Building Blocks, Inc.
("Building Blocks"), which the Company acquired on April 13, 1993, and which
operates a chain of specialty retail toy stores. Due to the seasonal nature of
the toy industry and the effects of store openings and closings in comparable
year periods, comparisons between results of operations for such periods may not
be meaningful or possible. In addition, results of operations for the nine
months ended March 31, 1996 will not be indicative of future results because of
the Company's current plans with respect to the development of the Building
Blocks chain through franchising and the planned reduction of the number of
Company-owned stores.
In addition, the Company's results for the fourth quarter of the year
ended June 30, 1996 ("fiscal 1996") and for fiscal 1996 will reflect a liability
for a non-cash obligation of $570,000 incurred in connection with the Settlement
Agreement and charges of approximately $350,000 to reflect actual and estimated
costs associated with the Company's decision to close certain of its mall
stores.
Fiscal 1995 Compared to Fiscal 1994
- -----------------------------------
Results of Operations
- ---------------------
In addition to the Building Blocks acquisition, in May 1993 the
Company established a real estate consulting division (the "Real Estate
Division") which it discontinued in fiscal 1995. The revenues and operating
costs associated with the Real Estate Division are included in fiscal 1995 and
1994 operations. Also included in fiscal 1995 and 1994 operations are the
general and administrative costs and other expenses associated with the
Company's corporate overhead, and income from cash and cash equivalent balances.
Operations
- ----------
Net sales, substantially all of which were generated by Building
Blocks, were $5,629,643 in fiscal 1995, an increase of
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<PAGE>
62.6% versus $3,462,569 in fiscal 1994. This increase in net sales is due
principally to the increase in the number of stores operated by the Company.
Cost of sales were $3,286,273 (58.4% of net sales) in fiscal 1995
versus $1,802,854 (52.1% of net sales) in fiscal 1994 representing an increase
of 82.3%. Such increase is largely due to the increase in sales associated with
the opening of additional stores. The increase in fiscal 1995 in the percentage
of sales represented by cost of sales reflects, primarily, approximately
$235,000 of miscellaneous inventory adjustments and mark-downs associated with
inventory clearance sales related to store closings and to reduce slow moving
inventory.
Selling expenses were $2,438,024 (43.3% of net sales) and $1,324,811
(38.3% of net sales) in fiscal years 1995 and 1994 respectively. Such amounts
represent an increase of 84.0%, also due to the increase in the number of stores
operated by the Company. The increase in fiscal 1995 in the percentage of net
sales represented by selling expense resulted primarily from the larger number
of new stores relative to total stores in fiscal 1995. New stores typically
incur a higher level of selling expense as a percentage of sales. Selling
expenses include the payroll, occupancy and advertising for the Building Blocks
stores.
General and administrative expenses were $2,925,557 in fiscal 1995,
representing an increase of 35.3% over the $2,162,584 for fiscal 1994. Such
expenses represent salaries and related expenses associated with the corporate
staff, as well as the expenses associated with Building Blocks' corporate
operations and the Real Estate Division. Such increase is due primarily to an
increase in personnel associated with the expansion in the number of Building
Blocks stores. Additionally, during fiscal 1995 there were increased legal fees
associated with the litigation instituted by Peter Sayet.
One-Time and Restructuring Items
- --------------------------------
Effective July 3, 1995 the Company acquired Healthcare Venture
Management, Corp. ("HVM") for 2,685,071 shares of Common Stock valued at
$1,398,385 and $80,000 in cash. HVM and SRG were parties to an advisory
agreement under which HVM was entitled to receive a fee of 3.5% of SRG's net
sales through June 2011. These fees will now be retained in SRG's consolidated
results. The exchange of shares has been treated as a tax-free merger, and the
Company took a one-time charge of $1.5 million related to the transaction.
During the fourth quarter of fiscal 1995 the Company implemented or
developed plans for several programs designed to restructure its operations.
The Company recorded approximately
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<PAGE>
$653,000 in charges in fiscal 1995 related to the expected costs of restruc-
turing. These charges include the estimated costs of closing certain stores,
severance and other personnel-related costs and related professional fees. In
addition the Company recorded pretax charges of approximately $256,000 for costs
associated with a restructuring of the management organization.
During the fourth quarter of fiscal 1995, the Company recorded a pre-
tax charge of $157,000, representing the write-off of 50% of the remaining
balance of cost in excess of net assets purchased in recognition of the
permanent impairment of those intangible assets. Prior to the write-off, cost
in excess of purchased assets was being amortized on a straight line basis over
15 years. Such remaining intangible assets will continue to be amortized in a
similar manner.
Nine Months Ended March 31, 1996 Compared to the Nine Months
- -------------------------------------------------------------
Ended April 2, 1995
- -------------------
Results of Operations
- ---------------------
In addition to the Building Blocks acquisition, in May 1993 the
Company established a real estate consulting division (the "Real Estate
Division") which it discontinued in 1995. The revenues and operating costs
associated with the real estate division are included in the three months and
nine months ended April 2, 1995. Also included in both the three months and
nine months ended March 31, 1996 and April 2, 1995 are the general and
administrative costs and other expenses associated with the Company's corporate
overhead, and income from interest on cash and cash equivalent balances.
Effective December 14, 1995, in consideration of $224,150, the Company acquired
25% of the common stock of CM Franchise Corp. and certain options to acquire
additional shares at the same price per share. The Company's proportion of the
operating results in CM Franchise Corp. from the effective date through March
31, 1996 was immaterial and is not included in the results of operations.
Operations
- ----------
Net sales, substantially all of which were generated by Building
Blocks, were $5,728,735 for the nine months ended March 31, 1996 versus
$4,159,811 for the nine months ended April 2, 1995, representing an increase of
34.7%. The increase is primarily due to the increase in the number of stores
operated by Building Blocks. Of the thirteen stores operated during the entire
nine month period, nine were in operation for the entire comparable prior year
period (the "comparable stores"). Comparable store sales for the period
increased 8.7% from
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<PAGE>
$3,421,811 to $3,718,198. Due to the seasonality of the toy industry and the
closing of three stores since March 31, 1996, net sales for the nine months
ended March 31, 1996 are not reflective of the expected net sales of the Company
for the full fiscal year ended 1996 or the fourth quarter of such year.
Cost of sales increased 40.3% to $3,142,108 (54.8% of net sales)
during the nine months ended March 31, 1996 versus $2,239,524 (53.8% of net
sales) for the nine months ended April 2, 1995, representing the cost of
additional inventory to support the increased sales by Building Blocks.
Selling expenses were $2,217,220 (38.7% of net sales) for the nine
months ended March 31, 1996 versus $1,792,305 (43.1% of net sales) for the
corresponding period in the prior year. Such amounts include payroll, occupancy
and advertising expenses for the Building Blocks stores. The increase in fiscal
1996 resulted primarily from the increase in the number of stores operated by
the Company and the substantial advertising expenditures associated with new
store openings. As these new stores matured, selling expense as a percentage of
sales decreased.
General and administrative expenses were $1,463,278 (25.5% of net
sales) in the nine months ended March 31, 1996, representing a decrease of 30.3%
from $2,099,867 (50.5% of net sales) in the prior year. This decrease is
attributable to various cost reduction measures undertaken by the Company,
including the elimination of its Real Estate Division and reduction in corporate
payroll. These reductions, combined with the increase in sales, resulted in the
improvement in these expenses measured as a percentage of net sales.
Liquidity and Capital Resources
- -------------------------------
The matters discussed under this caption that are forward looking
statements are based upon current management expectations that involve risks and
uncertainties. Such risks and uncertainties include, without limitation, the
impact which changes in the economy, competition, vendor selling terms, or
unusual weather could have on the Company's operating results for the 1996
holiday season, both the timing and extent of franchise sales which may result
from the Company's franchising program, and the ultimate outcome of certain
negotiations currently ongoing with respect to the settlement of rent arrearages
and disputed additional claims arising from the closing of three indoor regional
mall stores between June and September 1996.
In the nine months ended March 31, 1996, cash used in operating
activities totaled $1,897,117 which reflects the expenses incurred by the
Company for its corporate overhead,
- 13 -
<PAGE>
including increased expenditures associated with the implementation of its
franchising program, as well as to finance increases between June 30, 1995 and
March 1996 of working capital at Building Blocks due to the growth in its number
of Building Blocks stores.
At March 31, 1996, the Company had cash and cash equivalents of
$49,870, and held short term notes of $600,000, all of which were paid by July
1996. In May 1996, management projected that the Company would require between
$500,000 and $1,250,000 to fund operations through March of 1997. In May and
August, 1996 BBFC sold 2 franchises for which it received an aggregate of
$50,000. In July 1996 the Company received $224,150 under an agreement which
provided that the Company would either repay such amount or transfer to the
lender all of its stock in CM Franchise Corp. and all of its rights in warrants
to purchase shares of CM Franchise Corp. (for which it originally paid the same
$224,150). Payment of the advance or transfer of the interests is due to occur
on September 30, 1996. See "Certain Transactions." Since March 31, 1996, the
Company has closed three Building Blocks stores which were operating at a loss
in indoor regional malls in Massachusetts, Connecticut and New Jersey and has
been negotiating with the landlords for the settlement of approximately
$200,000 of rent arrearages and additional claims which the Company is actively
disputing, of some $400,000 under these leases.
Management currently believes that Building Blocks will require
approximately $500,000 of short-term working capital to finance holiday season
inventories between October and mid-December, which financing management
believes would be repayable in January out of cash generated from holiday sales
and franchise program receipts. Based upon its expectations regarding the
franchising program, its plans to reduce losses by closing two additional mall
stores in 1997 and by transferring one or more of its other stores to
franchisees, and its expectations as to the terms upon which it will be able to
settle claims for rent arrearages and damages as described under
"Business - Properties" and "Business - Other Legal Proceedings", management
believes that Building Blocks will require approximately $200,000 of additional
working capital to adequately support its operations through June 30, 1997.
However, there can be no assurance that the franchise program will meet
management's expectations, that anticipated results of operations will be
realized or that Building Blocks will not be required to make materially
greater payments than contemplated in connection with the resolution of its
lease negotiations. In any of such events, the Company will require additional
working capital, in amounts which may be substantial, in order to fund
operations. Management is currently engaged in discussions with certain of the
principal beneficial owners of the Company's capital stock who are considering
providing the Company with working capital to meet Building Blocks' anticipated
needs. No commitments have been made and there can be no assurances that such
working capital will be made available on acceptable terms or at all.
- 14 -
<PAGE>
The Company is also seeking opportunities to acquire businesses with
positive cash flow and/or adequate working capital. The Company intends to
attempt to negotiate acquisitions for stock of the Company. There are no
agreements or understandings with respect to any such acquisition, nor can there
by any assurance that the Company will be successful in identifying or
negotiating any agreements for the acquisition of such business.
- 15 -
<PAGE>
BUSINESS
Overview
The Company was organized under the laws of Florida in 1987. The
Company originally operated a clinical laboratory which it sold as of December
31, 1991 to Cardinal Testing Laboratories, Inc. ("Cardinal Transaction"). As a
result of the Cardinal Transaction, the Company received approximately $6
million. On April 13, 1993, the Company acquired all of the issued and
outstanding capital stock of Building Blocks, Inc. ("Building Blocks") for
shares of the Company's Common Stock.
Building Blocks
Operations
- ----------
Building Blocks operates a specialty educational and developmental toy
store chain presently consisting of 10 stores. The stores are located in
Connecticut, New York and Massachusetts. In early 1996 the Company determined
to pursue expansion of the Building Blocks chain through franchising. The
Company has established Building Blocks Franchise Corp. ("BBFC") as a second-
tier wholly-owned subsidiary and BBFC is actively marketing franchises under an
agreement between BBFC and Building Blocks. At September 1, 1996 BBFC had sold
franchises for two stores to be located in Dallas, Texas and Chicago, Illinois.
Building Blocks' business plan currently contemplates that it will not open any
new company-owned stores; will reduce the number of such stores currently in
operation by not renewing leases as they expire or by transfers to franchisees;
and will, in the future, rely primarily upon the franchising program to generate
revenue and profit. Building Blocks also plans to engage in the marketing and
distribution of private label toys.
Building Blocks' merchandising is focused on high quality educational
and developmental toys. Its specialty toy mix consists of children's toys and
accessories that the Company deems to be distinctive and top quality items. A
substantial portion of Building Blocks' merchandise is comprised of toys
typically found in the specialty toy segment rather than in the mass marketed
toy segment.
Building Blocks' stores offer a friendly environment for both children
and parents. A customer entering a store is surrounded with bright colors and
prominently audible children's music. Also, many toys are displayed for the
parent and child to investigate and use. Stores regularly schedule special
attractions in the stores, including craft classes, musicians, children's
authors, storytellers, animated characters, seasonal
- 16 -
<PAGE>
parties and others. In addition, unlike the mass merchandising toy chains,
Building Blocks stores offer free gift wrapping, delivery service and over-the-
phone ordering.
The Company believes that the fixtures used in Building Blocks stores
promote the children's "hands-on" environment. Large wooden blocks filled with
merchandise are the main theme used in store fixtures. All departments are
clearly signed and floor layouts are designed to achieve an easy customer flow
throughout the store. Building Blocks has received industry awards for store
design and merchandising.
Marketing is conducted primarily through direct mail, a "Kids Club"
program, and print and radio advertising. Management believes that Building
Blocks' advertising conveys a message to the customer that Building Blocks sells
quality and durable developmental toys and offers superior customer service.
Management believes that the stores project themselves to the community as a
resource for expert advice on age-appropriate toys and children's activities.
Building Blocks stores' business is highly seasonal with approximately
40% of its sales occurring in the last calendar quarter of each year.
Suppliers
- ---------
No supplier to Building Blocks accounted for more than 10% of its
sales in the nine months ended March 31, 1996. Management believes that if
Building Blocks were to lose any vendor, alternate sources for products could be
found and that supplies are generally readily available from multiple sources.
Management believes that the loss of any one supplier would not have a material
adverse impact on the operations of Building Blocks.
Competition
- -----------
The toy market is an intensely competitive market. However, the
specialty toy market is a fragmented market with various regional stores.
Building Blocks' competitors generally have substantially greater resources than
Building Blocks. Although Building Blocks stores compete for consumer
expenditures with large mass merchandisers, such as Toys 'R Us, as well as the
toy departments of discount stores, where pricing policies typically involve
selling toys at discounted prices, management believes that Building Blocks'
merchandising, customer service and store format strategies differentiate its
stores from such larger competitors. Building Blocks stores compete more
directly with smaller "mom and pop" stores and regional chains such as "Learning
Express," "Noodle Kidoodle" and "Zainy Brainy," which
- 17 -
<PAGE>
offer similar product selection and pricing in a larger store layout.
Trademarks
- ----------
The Company and Building Blocks do not have any patents. The Building
Blocks logo is registered as a service mark with the United States Patent and
Trademark Office and United States trademark applications are pending for the
Building Blocks name for retail toy store services and for certain marketing
slogans and product line names used by Building Blocks.
Employees
- ---------
As of September 1, 1996, the Company and Building Blocks had an
aggregate of 69 employees, 32 of whom were full-time. Neither the Company nor
Building Blocks is a party to any collective bargaining agreement and both the
Company and Building Blocks believe that their relationship with their employees
are satisfactory.
Properties
- ----------
The Company leases approximately 2,500 square feet of executive office
space in Westport, Connecticut. The Company expects to relocate its office to
Stamford, Connecticut and is currently negotiating for approximately 3,500
square feet of office space.
As of September 1, 1996, Building Blocks operated 10 store locations.
These stores average approximately 1,750 square feet. The store locations are
as follows:
Connecticut--
Stamford
Westport
Ridgefield
Greenwich
New York--
Third Ave., NYC
Lexington Ave., NYC
Nanuet*
White Plains
Queens, NYC
Massachusetts--
Burlington*
* Scheduled to close in 1997.
- 18 -
<PAGE>
The store leases expire at various dates between July 1997 and January
2006. Most of the leases require Building Blocks to pay taxes, insurance and
maintenance charges, in addition to a base rent. Lease expenses for the 10
stores in operation currently average $4,000 per month.
During fiscal 1996, the Company began negotiating for the termination
or revision of its leases at six mall locations. As of September 1, 1996, the
Company had closed three of these locations and re-negotiated the lease terms
for the stores in the Nanuet and Burlington locations. The Company is in
arrears in its rent for the three closed locations and for one other location.
The Company is presently attempting to negotiate settlements of its rent
arrearages and the termination of its leases for the three closed locations and
a modification of its lease for the fourth location. See "Other Legal
Proceedings" and "Management's Discussion and Analysis."
Franchising Program
- -------------------
In early 1996, the Company began marketing franchises for Building
Blocks stores. Building Blocks Franchise Corp. ("BBFC"), a second-tier
subsidiary of the Company, has been actively marketing Building Blocks
franchises for new locations. As of September 1, 1996, two franchises had been
sold for stores to be located in Dallas, Texas and Chicago, Illinois, each of
which is expected to open in the fall of 1996. Each of the two franchises sold
by BBFC provides for an initial franchise fee of $25,000, an ongoing royalty of
5% of net sales, and ongoing contributions to an advertising fund. It is also
expected that Building Blocks will make certain of its company-operated stores
available to interested franchisees.
Settlement of Legal Proceedings
- -------------------------------
On August 22, 1996, the Company, the Selling Stockholders and certain
other parties entered into an Agreement of Settlement and Compromise (the
"Settlement Agreement"), with respect to a lawsuit commenced by Peter Sayet
entitled Sayet v. Institute for Laboratory Medicine, Inc., et al., in which Mr.
-------------------------------------------------------
Sayet claimed damages of approximately $1,400,000 arising from events occurring
at the time his employment with the Company terminated in 1992, when it operated
under the name Institute for Laboratory Medicine, Inc. Pursuant to the
requirements of the Settlement Agreement, the Company also entered into a
Registration Rights Agreement dated August 22, 1996 with the Selling
Stockholders (the "Registration Rights Agreement") pursuant to which the Company
has filed the Registration Statement covering the Shares. Pursuant to the
Registration Rights Agreement, the Company agreed to use its best efforts to
prepare and file with the Commission a registration statement to permit the
transfer or resale of the Shares and agreed to
- 19 -
<PAGE>
maintain the effectiveness of the registration statement until the earlier of
the disposition of the Shares or the expiration of the applicable Rule 144
holding period.
Pursuant to the terms of the Settlement Agreement, in the event that
the Selling Stockholders sell any Shares for more than $1.00 per Share, the
Company shall receive 67% of such excess (the "Company Proceeds"). The
Settlement Agreement also provides for a "Price Protection Pool" which shall be
equal to the sum of: (i) $160,000 and (ii) 25% of the Company Proceeds. If,
after the sale of all of the 650,000 Shares by the Selling Stockholders, in bona
fide open market transactions, the Selling Stockholders realize gross proceeds
of less than $650,000 (the "Shortfall") the Company will be required to either
pay the Shortfall, up to the amount of the Price Protection Pool, to the Selling
Stockholders or suffer the transfer to the Selling Stockholders of Shares having
a market value equal to the shortfall, up to a maximum of 213,333 Shares (which
Shares are included in this Prospectus. The aforesaid 213,333 shares have been
issued to and registered in the name of an Escrow Agent. The transfer of the
required number of escrowed Shares would be in complete satisfaction of the
Company's payment obligation under the Settlement Agreement.
Other Legal Proceedings
- -----------------------
At September 1, 1996, landlords at three mall stores which were closed
between June and September 1996 had instituted legal proceedings against
Building Blocks for rent arrearages in the aggregate amount of approximately
$200,000 and additional damages of approximately $400,000 for breaches of the
underlying leases (Westland Garden State Plaza Limited Partnership v. Building
Blocks, Inc., Superior Court of New Jersey, Bergen County commenced
June 4, 1996; General Growth Properties - Natick Limited Partnership v. Building
Blocks, Inc., District Court, Middlesex, Massachusetts, commenced
August 12, 1996; and Westland Properties, Inc. v. Building Blocks, Inc.,
Superior Court - Fairfield, Connecticut, commenced June 24, 1996). Building
Blocks is actively defending these damage claims and believes that such claims
are subject to substantial reduction. Management is engaged in settlement
discussions with the landlords of these three malls and believes, although
there can be no assurance, that it can reach settlements which will be within
Building Blocks' anticipated working capital requirements as set forth in
"Management's Discussion and Analysis-Liquidity and Capital Resources."
Building Blocks is also attempting to renegotiate the terms of a lease on a
fourth mall store. Building Blocks has received a notice of default from the
landlord of this store with respect to approximately $100,000 of rent it has
withheld.
- 20 -
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information as of August 31,
1996 concerning the directors and executive officers of the Company.
Name Age Position
---- --- --------
Arnold B. Becker 61 Director
Tony Coelho2,3 54 Director
Daniel Glass1 39 Director
Kevin R. Greene2,3 37 Chairman of the Board
C. Anthony
Wainwright1 63 Director
Seymour W. Zises2,3 43 Director
Steven E. Glass 35 President and Chief Executive Officer of Building
Blocks ("BB") and Building Blocks Franchise Corp.
("BBFC"); Secretary of the Company
Helen M. Trent 49 Vice President of Franchise Development
of BBFC and Secretary of BBFC
Directors are elected annually for a one-year term. Nonemployee and
non-affiliated Directors receive an annual fee of $2,500 per year plus $500 for
each meeting attended.
Arnold B. Becker has been a director of the Company since March 7,
1994. Mr. Becker has been the President of Vendamerica, Inc., the U.S.
investment arm of Vendex International, N.V. a large Dutch multi-divisional
retailing and services company, since 1980. In that capacity Mr. Becker has
been responsible for implementing Vendex's strategy of taking large minority
equity positions in well managed, fast growing retailers in the United States
for investment purposes. He is a Director of Western Beef, Inc. and Software,
Etc.
Tony Coelho has been a director of the Company since June 1991. Since
July, 1995, Mr. Coelho has been Chairman and Chief Executive Officer of Coelho
Associates, LLC, a New York investment consulting and brokerage firm. From 1989
through June, 1995, he was a Managing Director of Wertheim Schroder & Co.,
Incorporated, a New York-based international investment
- --------------------
1 Member of Audit Committee.
2 Member of Compensation Committee which also administers the
Company's Stock Option Plans.
3 Member of Executive Committee.
- 21 -
<PAGE>
banking and securities firm. He also served as President and CEO of Wertheim
Schroder Investment Services. He is a director of Circus Circus Enterprises,
Inc., a lodging and gaming company; Crop Growers Corporation, an insurance
company; ICF Kaiser International Inc., an engineering and consulting firm;
Service Corporation International, a company which owns and operates funeral
homes and cemeteries; Tanknology Environmental, Inc., a company which provides
underground storage tank testing services; and Tele-Communication, Inc., a
company which provides cable television and other communications services. Mr.
Coelho serves as chairman and CEO of ETC, a Washington-based education training
and communication subsidiary of Tele-Communication, Inc. Mr. Coelho is a former
U.S. Representative from California and Majority Whip of the U.S. House of
Representatives. He received his Bachelor of Arts degree in 1964 from Loyola
Marymount University in Los Angeles.
Daniel Glass has been a director of the Company since March, 1993.
Mr. Glass is President of Universal Records, a division of MCA Music
Entertainment Group, with which he has been associated since August 1995. From
April 1993 to September 1994, he was President and Chief Executive Officer of
EMI Records Group. From April 1989 to April 1993, Mr. Glass was Senior Vice
President and General Manager of SBK Records. From 1983 to April 1989, Mr.
Glass was Senior Vice President of Promotion of Chrysalis Records. Mr. Glass is
the brother of Steven E. Glass.
Kevin R. Greene has been the Chairman of the Board of Specialty Retail
Group, Inc. since June 1995. He is the Chairman and Chief Executive Officer of
Value Investing Partners, Inc., which he founded in 1991. From 1986 to 1991 Mr.
Greene was a Senior Manager of McKinsey & Company, a firm of international
management consultants. From 1982 through 1984, Mr. Greene was in institutional
sales and commodities research at E.F. Hutton & Co., a U.S.-based investment
bank. Mr. Greene holds a B.A. in Economics from Georgetown University, an
M.P.P. in International Trade and Finance from Harvard University, and an M.B.A.
in Finance from New York University. Mr. Greene is a director of New World
Coffee, Inc., which operates a chain of gourmet coffee restaurants.
C. Anthony Wainwright has been a director of the Company since March
1993. Since June, 1995 Mr. Wainwright has been Chairman of Harris, Drury,
Cohen, an advertising agency. From 1989 to May 1995, Mr. Wainwright was
Chairman of CME*KHBB, an international advertising agency. From 1980 to 1989,
Mr. Wainwright was President and Chief Operating Officer of The Bloom Companies,
a Dallas, Texas based advertising agency. Mr. Wainwright is also a director of
American Woodmark Corporation, Del Webb Corporation and Gibson Greeting Cards,
Inc. Mr. Wainwright received his B.A. in journalism from the University of
Colorado in 1955.
- 22 -
<PAGE>
Seymour W. Zises has been a director of the Company since June 1991,
is currently President and Chief Executive Officer of Family Management
Corporation, a registered investment advisory firm in New York City which he
established in September 1989. Mr. Zises also serves as President and Chief
Executive Officer of Forest Hill Capital Corporation, a merchant banking
concern. Mr. Zises is also an officer and director of RCL Capital Corp., Inc.,
a merchant banking concern, and Disc Graphics, Inc., a product packaging design
company. Prior to his founding Family Management, he was an independent
financial service representative licensed with Integrated Resources Equity
Corporation. Mr. Zises was one of several individual general partners or an
officer or shareholder of a corporate general partner of six real estate limited
partnerships which filed petitions for bankruptcy under Chapter 11 of the United
States Bankruptcy Code between 1990 and February 1993. Mr. Zises serves on the
Board of Trustees of Beth Israel Medical Center in New York City. Mr. Zises is
a graduate of New York University.
Steven E. Glass has been associated with the Company as an employee or
consultant since September, 1995 and has been President and Chief Executive
Officer of Building Blocks since April, 1996. From June 1993 until March 1995,
Mr. Glass was Director of Special Projects for EMI Records where he supervised
strategic sales and marketing projects for television, film and children's
music, including the implementation and direction of EMI's "Barney Music"
division. Prior to joining EMI Mr. Glass spent 13 years in municipal
government, including his last position as Special Assistant to the Borough
President of Brooklyn, with responsibility for various business and commercial
development projects. Mr. Glass is the brother of Daniel Glass.
Helen M. Trent has been Vice President of BBFC since June 1996. Ms.
Trent has over 20 years of experience in national and regional franchising.
From November, 1993 until joining BBFC she was Vice President, Franchise
Development for Huntington Learning Centers, Inc. From 1990 until she joined
Huntington Learning Centers, Inc., Ms. Trent was a franchising consultant,
providing sales and marketing advice to, and developing brochures, advertising
and other materials for, national and regional franchisors. Ms. Trent's prior
experience includes service as a franchising executive for Mr. Sign Franchising
Corp., Burger King and Jack in the Box Restaurants.
- 23 -
<PAGE>
EXECUTIVE COMPENSATION
Except for Jonathon Heller, no person who was an operating officer of
the Company at June 30, 1996 received annual salary and bonus which, in the
aggregate, exceeded $100,000 for the fiscal year ended June 30, 1996. In June
1995, Kevin R. Greene became Chairman of the Board of Directors of the
Company. Through June 30, 1996, Mr. Greene received no cash or other
compensation other than the $2,500 per year and $500 per meeting paid to
directors who are not employees or beneficial owners of 10% or more of the
outstanding capital stock of the Company.
<TABLE>
<CAPTION>
Long-Term Compensation
----------------------
Awards Payouts
------ -------
Securities
Underlying All Other
Annual Compensation Options/SARS Compensation
------------------- ------------ ------------
Name and Fiscal Year Other Annual
Principal Position Ended Salary $ Compensation # $
------------------ ----------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Jonathon Heller, June 30, 1996 $108,401 -- -- --
Co-President of
Building Blocks
July 2, 1995 $ 95,692 -- -- --
July 3, 1994 $ 30,288 -- -- --
</TABLE>
Aggregated Option/SAR Exercises in
Last Fiscal Year and Fiscal Year End Option Values
- --------------------------------------------------
The Company has no SAR's outstanding. No stock options were
exercised by any executive officer during the fiscal year ended June 30, 1996.
The following table sets forth certain information as to the number
and value of unexercised stock options held by the named officer at June 30,
1996.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-The-Money Options
Options at June 30, 1996 at June 30, 1996
------------------------ -------------------------
Name Exercisable Unexercisable Exercisable* Unexercisable*
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Jonathon Heller 43,333 66,667 -- --
</TABLE>
_______________________
* None of the foregoing options were in-the-money at July 2, 1996.
Steven E. Glass, the President and Chief Executive Officer of
Building Blocks, is employed pursuant to an employment agreement which became
effective April 1, 1996
- 24 -
<PAGE>
and expires in February 1998. The agreement provides for a signing bonus of
$10,000 and an annual salary of $112,500 the first year and $135,000 thereafter,
a bonus of 5% of pre-tax profits before certain extraordinary items, an
expenditure by the Company of up to $1,000 a month to provide a leased vehicle
and certain related automobile expenses for Mr. Glass, and reimbursement of all
business-related expenses.
Mr. Glass has also been granted options to acquire 110,000 shares of
Common Stock at $.75 per share and 20,000 shares of Common Stock at $1.00 per
share.
- 25 -
<PAGE>
CERTAIN TRANSACTIONS
Effective June 1991, the Company retained the services of Healthcare
Venture Management Corp. (the "Adviser"), an affiliate of ILM Acquisition, L.P.
("IALP"), as an adviser in connection with certain financial consulting services
pursuant to a 20 year advisory agreement approved by the Company's shareholders
(the "Advisory Agreement"). The Advisory Agreement originally provided that,
for its services as adviser, the Company would pay the Adviser a monthly
advisory fee in an amount equal to 3-1/2% of the Company's revenues from its
billings for its products and services during such month.
As a result of the Cardinal Transaction, from December 31, 1991 and
until April 13, 1993, the Company did not have any revenues from billings for
products and services, and, accordingly, the Adviser did not receive an advisory
fee. In June 1992, the Board of Directors amended the advisory agreement to
provide that until June 30, 1995, the monthly advisory fee payable pursuant to
the June 20, 1991 Advisory Agreement would be an amount equal to 3-1/2% of the
net revenues from the Company's billings for its products and services during
the immediately preceding calendar month, less $20,834 per month. Because of
this amendment to the Advisory Agreement, no advisory fees were paid through
June 30, 1995.
Effective July 3, 1995 the Company acquired the Advisor for 2,685,071
shares of Common Stock valued at $1,398,385 and $80,000 in cash. As a result of
the acquisition the fees payable under the Advisory Agreement will be retained
in the Company's consolidated results. The transaction was treated as a tax-
free merger, and the Company took a one-time charge of $1.5 million related to
the transaction.
In connection with IALP's acquisition of a controlling interest in the
Company in June 1991, the Company received from IALP $1,000,000 in cash and a
$1,000,000 five year promissory note, accruing interest at 10% per annum, which
was secured by the Common Stock and Preferred stock of the Company acquired by
IALP. On June 29, 1995 the Company purchased the 2,817,581 shares of Common
Stock held by IALP at a price of $.52 per share. The purchase was paid for
through the cancellation by the Company of the $1,000,000 Promissory Note from
IALP and of interest accrued thereon of $467,407. IALP retained ownership of
2,394,130 shares of the Registrant's Series A-1 Preferred Stock.
- 26 -
<PAGE>
As a result of the acquisition of the Advisor, (i) Lynn Zises acquired
an aggregate of 9.7% of the Company's then outstanding common stock and 7.4% of
the Company's then outstanding voting stock, (ii) Nancy Zises acquired directly
and as custodian for her minor child an aggregate of 9.9% of the Company's then
outstanding common stock and 7.6% of the Company's then outstanding voting
stock, and (iii) Cathy Zises acquired directly and as custodian for her minor
children an aggregate of 11.2% of the Company's then outstanding common stock
and 8.7% of the Company's then outstanding voting stock.
By virtue of its ownership of all of the outstanding shares of Series
A-1 Preferred Stock, IALP controls approximately 20.4% of the voting power of
the Company. Selig A. Zises, a brother of Seymour W. Zises, is the beneficial
owner of all of the shares of Series A-1 Preferred Stock held by IALP as a
result of his ownership of all of the voting securities of the general partner
of IALP. Family members of Seymour W. Zises are indirect beneficial owners of
limited partnership interests in IALP. Seymour W. Zises disclaims any
beneficial ownership of any Preferred Stock of the Company.
Each of Selig Zises, Cathy Zises, Lynn Zises and Nancy Zises disclaims
being a control person of the Company and disclaim that any two or more of them
constitute a group. Seymour W. Zises is the husband of Cathy Zises, the brother
of Selig Zises, the uncle of Lynn Zises and the bother-in-law of Nancy Zises.
Selig Zises is the father of Lynn Zises.
Effective January 1, 1994, the Company entered into a consulting
agreement with Seymour Zises, a director of the Company, under which Mr. Zises
rendered consulting services to the Company in connection with its pursuit and
evaluation of opportunities to expand its specialty retail operations. Mr.
Zises received a fee of $5,000 per month and reimbursement of expenses. The
agreement was terminated as of January 31, 1995.
On November 17, 1995, the Company invested in a series of Promissory
Notes (the "Notes") for an aggregate of $1,000,000. The Maker of the Notes was
a corporation engaged in the finance industry. The Notes were automatically
renewed for 90 day maturities unless the Company determined not to renew.
$400,000 of the original Notes were repaid during the quarter ended March 31,
1996. The remaining Notes, each for $300,000, matured, and were paid in April
1996 and June 1996. The Notes bore interest at a rate of 15% compounded
annually and payable monthly.
- 27 -
<PAGE>
The Notes were guaranteed by Selig A. Zises, who is a significant investor in
the Maker of the Notes.
In July 1996, pursuant to an agreement negotiated between Selig A.
Zises and Kevin R. Greene, Chairman of the Board of the Company, the Company
received $224,150 from Mr. Zises to cover a working capital shortfall. Under
the agreement with Mr. Zises the Company has the right to either repay the
advance without interest or to transfer to him all of the Company's rights and
interests in the common stock of CM Franchise Corp. and in warrants to purchase
additional shares of such Common Stock it acquired in December 1995 for a total
of $224,150. Payment of the advance or transfer of the aforesaid interests
is due on September 30, 1996.
Reference is made to "Executive Compensation" for information as to
certain compensation arrangements with, and options granted to present and
former officers and directors of the Company.
- 28 -
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of September 1,
1996, regarding the beneficial ownership of the Company's Common Stock by (i)
all persons known by the Company to own beneficially more than 5% of its
outstanding Common Stock or its outstanding Series A-1 Preferred Stock, (ii)
each director and officer of the Company and (iii) all directors and officers of
the Company as a group. Unless otherwise stated, the Company believes that the
beneficial owners of the shares listed below have sole investment and voting
power with respect to such shares.
<TABLE>
<CAPTION>
Amount and
Nature of
Name and Address Beneficial Percent of
Title of Class of Beneficial Owner Ownership Class(1)
-------------- ------------------- --------- --------
<S> <C> <C> <C> <C>
Common Stock Arnold B. Becker 50,000(2) *
Common Stock Tony Coelho 50,000(2) *
Common Stock Daniel Glass 50,000(2) *
Common Stock Kevin R. Greene(3) 997,000(3) 9.7%
Common Stock C. Anthony Wainwright 50,000(2) *
Common Stock Cathy Zises(4) 944,377 10.1%
477 Madison Avenue
New York, New York 10022
Common Stock Lynn Zises 796,317 8.5%
477 Madison Avenue
New York, New York 10022
Common Stock Nancy Zises 833,332 8.9%
477 Madison Avenue
New York, New York 10022
Common Stock Seymour W. Zises(4) 944,377 10.1%
Common Stock Steven E. Glass 56,667(2) *
Series A-1 ILM Acquisition L.P.(4) 2,394,130 100%
Preferred Stock 477 Madison Avenue
New York, New York 10022
Common Stock All directors and officers as
a group (7 persons) 2,204,794(2)(3)(4) 20.8
</TABLE>
- --------------------
* Less than 1%.
<TABLE>
<S> <C>
(1) Based upon 9,324,738 shares of Common Stock outstanding, which does not include 213,333 shares held
by an Escrow Agent or shares of Common Stock issuable upon the exercise of the options described
below in footnote (2). However, in computing the respective percentages of the Common Stock
beneficially owned by the holders described
</TABLE>
- 29 -
<PAGE>
in footnote (2), and in calculating the percentage of the Common Stock
owned by all officers and directors as a group, the shares of Common Stock
subject to options described in footnote (2) were deemed outstanding.
(2) The total for each of Arnold Becker, Tony Coelho, Daniel Glass, Steven E.
Glass, and C. Anthony Wainwright represents the number of shares of Common
Stock purchasable pursuant to currently exercisable options held by him.
All such options were granted pursuant to the Company's Amended and
Restated 1991 Non-Qualified Stock Option Plan or the Company's 1994 Stock
Option Plan, except an option for 110,000 shares granted to Steven E. Glass
(of which 36,667 shares are currently exercisable).
(3) The shares reported for Mr. Greene include 775,000 shares of Common Stock
issuable upon exercise of currently exercisable options and warrants held
by Mr. Greene and 218,250 shares of Common Stock issuable upon exercise of
a warrant held by Value Investing Partners, Inc. of which Mr. Greene is the
principal stockholder.
(4) The Shares reported for Cathy Zises include 148,060 shares held by her as
custodian for her minor children. Cathy Zises is the wife of Seymour
Zises. The shares reported for Seymour W. Zises are the shares held
directly or as custodian by Cathy Zises. Mr. Zises may be deemed the
beneficial owner of such shares. Mr. Zises disclaims such beneficial
ownership. Shares of Series A-1 Preferred Stock owned by ILM Acquisition,
L.P. ("IALP") represent all of the Company's issued and outstanding Series
A-l Preferred Stock. Selig A. Zises, a brother of Seymour W. Zises, is the
beneficial owner of all of the shares of Series A-1 Preferred Stock held by
IALP as a result of his ownership of all of the voting securities of the
general partner of the general partner of IALP. Family members of Seymour
W. Zises are indirect beneficial owners of limited partnership interests in
IALP. Seymour Zises disclaims any beneficial ownership of any of the
Preferred Stock of the Company.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock has been quoted on the NASDAQ SmallCap System since
July 1, 1994 and has traded under the symbol "SRGC". The following table sets
forth the high and low sales prices on the NASDAQ SmallCap System as reported by
NASDAQ for the periods indicated:
Period High Low
------ ---- ---
July 4, 1994 - October 2, 1994 1 5/16 1 3/16
October 3, 1994 - January 1, 1995 1 3/8 5/8
January 2, 1995 - April 2, 1995 1 5/8
April 3, 1995 - July 2, 1995 7/16 1/4
July 3, 1995 - October 1, 1995 7/8 1/4
October 2, 1995 - January 1, 1996 5/8 1/4
January 2, 1996 - March 31, 1996 31/32 5/16
April 1, 1996 - June 30, 1996 1 1/4 19/32
On September 1, 1996, there were 240 holders of record of the
Company's Common Stock and one holder of record of the Company's Series A-1
Preferred Stock.
The Company has never paid dividends on the Common Stock or on the
Series A-1 Preferred Stock and does not anticipate paying any dividends in the
foreseeable future.
- 30 -
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital of the Company consists of 100,000,000 shares
of Common Stock, par value $.001 per share, and 10,000,000 shares of Series A-1
Preferred Stock, par value $.001 per Share.
Holders of Common Stock are entitled to one vote for each share held
on all matters voted on by shareholders of the Company and do not have
cumulative voting rights relating to the election of directors. Holders of
Common Stock are entitled to receive such dividends if, as and when declared by
the board of directors and out of funds legally available. Upon the
liquidation, dissolution or winding-up of the Company, holders of Common Stock
will be entitled to receive pro rata assets of the Company, if any, remaining
after payment of all debts and liabilities.
SELLING STOCKHOLDERS
The following table sets forth the number of Shares being offered
hereby by the Selling Stockholders. Neither of the Selling Stockholders has had
any material relationship with the Company or any of its affiliates during the
past three years. To the Company's knowledge, the Selling Stockholders do not
have beneficial ownership of any shares of capital stock of the Company other
than the Shares being offered hereby.
Percentage of
Name Number of Shares Outstanding Stock
---- ---------------- -----------------
Peter Sayet(1) 325,000 3.5%
Howard Green(1) 325,000 3.5%
_____________________
(1) Subsequent to the sale of all of the foregoing shares, Messrs. Sayet and
Green may, under the terms of the Settlement Agreement between the Company and
Mr. Sayet, become beneficial owners of an aggregate of 213,333 shares held by an
Escrow Agent.
- 31 -
<PAGE>
PLAN OF DISTRIBUTION
The Selling Stockholders have not advised the Company of any specific
plans for the distribution of the Shares, but it is anticipated that the Selling
Stockholders may, from time to time, offer for sale and sell or distribute the
Shares to be offered by it hereby (a) in transactions executed on the Nasdaq
National Market, or any securities exchange on which the shares may be traded,
through registered broker-dealers (who may act as principals, pledgers or
agents) pursuant to unsolicited orders or offers to buy, (b) in negotiated
transactions, or (c) through other means, including pursuant to the exemption
provided by Commission Rule 144, if available. The Shares may be sold from time
to time in one or more transactions at market prices prevailing at the time of
sale or a fixed offering price, which may be changed, or at varying prices
determined at the time of sale or at negotiated prices. Such prices will be
determined by the Selling Stockholders or by agreement between the Selling
Stockholders and its underwriters, dealers, brokers or agents. The Shares may
also be offered in one or more underwritten offerings. The underwriters in an
underwritten offering, if any, and the terms and conditions of any such offering
will be described in a supplement to this Prospectus.
In connection with distribution of the Shares, the Selling
Stockholders may enter into hedging or other option transactions with broker-
dealers in connection with which, among other things, such broker-dealers may
engage in short sales of the Shares pursuant to this Prospectus in the course of
hedging the positions they assume with the Selling Stockholders. The Selling
Stockholders may also sell Shares short pursuant to this Prospectus and deliver
the Shares to close out such short positions. The Selling Stockholders may also
enter into option or other transactions with broker-dealers which may result in
the delivery of Shares to such broker-dealers who may sell such Shares pursuant
to this Prospectus. The Selling Stockholders may also pledge the Shares to a
broker-dealer and upon default the broker-dealer may effect the sales of the
pledged Shares pursuant to this Prospectus.
Any underwriters, dealers, brokers or agents participating in the
distribution of the Shares may receive compensation in the form of underwriting
discounts, concessions, commissions or fees from the Selling Stockholders and/or
purchasers of Shares, for whom they may act. Such discounts, concessions,
commissions or fees will not exceed those customary for the type of transactions
involved. In addition, the Selling Stockholders and any such underwriters,
dealers, brokers or agents that
- 32 -
<PAGE>
participate in the distribution of Shares may be deemed to be underwriters under
the Securities Act, and any profits on the sale of Shares by them and any
discounts, commissions or concessions received by any of such persons may be
deemed to be underwriting discounts and commissions under the Securities Act.
Those who act as underwriter, broker, dealer or agent in connection with the
sale of the Shares will be selected by the Selling Stockholders and may have
other business relationships with the Company and its subsidiaries or affiliates
in the ordinary course of business.
Pursuant to the settlement, the Selling Stockholders (and any
underwriter and selling broker participating in the distribution of Shares)
are entitled to indemnification by the Company against liability (including
liability under the Securities Act and the Exchange Act) arising by reason of
any untrue statement or omission or alleged omission (other than a statement
provided by the Selling Stockholders) contained in the registration statement of
which this Prospectus is a part.
- 33 -
<PAGE>
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
The Company's By-laws provide that the Company will indemnify its
directors, officers, employees and agents to the fullest extent permitted by
Florida law.
In addition, the Company's Articles of Incorporation provide that no
director of the Company shall be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for approving a
dividend, stock repurchases or other distributions to stockholders that would
result in personal liability to the directors under Florida law, or (iv) for any
transaction in which the director derived an improper personal benefit.
Section 607.014 of Chapter 607 of the Florida Statutes provides that
to the extent specified in or authorized by the articles of organization, a by-
law adopted by shareholders or a resolution adopted by the holders of the
majority of shares of stock entitled to vote on the election of directors, a
corporation can indemnify directors, officers, and other employees or agents of
the corporation except as to any matter as to which such person shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that the action was in the best interests of the corporation. The
Company's Articles of Incorporation provide, in part, that the Company shall
indemnify any person who is or was a party or is threatened to be made a party
to any threatened, pending or completed action, suit, proceeding, or claim, by
reason of the fact that such person is or was a director or officer of the
Company or while a director or officer is or was serving at the request of the
Company as a director, trustee, officer, employee or other agent of another
organization, including service in any capacity with respect to employee benefit
plans, against all liabilities, costs, expenses (including attorneys' fees and
expenses), judgments, fines, penalties and amounts paid in settlement incurred
in connection with the defense or disposition of or otherwise in connection with
or resulting from any such action, suit, proceeding or claim.
Pursuant to the Settlement Agreement, the directors and officers of
the Company are entitled to indemnification by the Selling Stockholders against
liability (including liability under the Securities Act and
- 34 -
<PAGE>
the Exchange Act) arising by reason of any statement contained in the
registration statement that the Selling Stockholders provided to the Company in
writing explicitly for use in this registration statement, being false or
misleading or omitting to state a material fact necessary to be stated in order
that the statements made in this registration statement, in the circumstances in
which they are made, not be misleading.
Insofar as indemnification of liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the provisions described under Item 15 above, or
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with any of the securities being registered, the Company will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
- 35 -
<PAGE>
EXPERTS
The financial statements included in this Prospectus have been audited
by BDO Seidman, LLP, independent certified public accountants, to the extent
and for the period set forth in their report appearing elsewhere herein, which
report contains an explanatory paragraph regarding uncertainties as to the
ability of the Company to continue as a going concern, and are included in
reliance upon such report given upon the authority of said firm as experts
in auditing and accounting.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Goodkind Labaton Rudoff & Sucharow LLP, New York, New York.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Balance Sheet July 2, 1995 . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations 53 Weeks
ended July 2, 1995 and 52 Weeks ended July 3, 1994 . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders'
Equity 53 Weeks ended July 2, 1995 and
52 Weeks ended July 3, 1994 . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows 53 Weeks
ended July 2, 1995 and 52 Weeks ended July 3, 1994 . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-6
Condensed Consolidated Balance Sheet March 31, 1996 (unaudited) . . . . . . F-16
Condensed Consolidated Statements of Operations
nine month periods ended March 31, 1996
and April 2, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . F-17
Condensed Consolidated Statements of Cash Flows
nine month periods ended March 31, 1996 and
April 2, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . F-18
Notes to the Condensed Consolidated Financial
Statements nine month periods ended March 31,
1996 and April 2, 1995 (unaudited) . . . . . . . . . . . . . . . . . . . . F-19
- 36 -
<PAGE>
Report of Independent Certified Public Accountants
To The Board of Directors and Stockholders of
Specialty Retail Group, Inc.
We have audited the consolidated balance sheet of Specialty Retail Group, Inc.
as of July 2, 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the 53 weeks ended July 2, 1995 and the
52 weeks ended July 3, 1994. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Specialty Retail
Group, Inc. at July 2, 1995, and the results of its operations and its cash
flows for the 53 weeks ended July 2, 1995 and the 52 weeks ended July 3, 1994
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company has suffered recurring losses from operations
which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to those matters also are described in
Note 10. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, NY
September 14, 1995, Except
for Note 10, which is as of
September 5, 1996
F-1
<PAGE>
SPECIALTY RETAIL GROUP, INC.
CONSOLIDATED BALANCE SHEET
JULY 2, 1995
Assets (Note 1)
Current:
Cash and cash equivalents $2,913,188
Inventory 1,401,876
Other current assets 118,325
----------
Total current assets 4,433,389
Property and equipment, net (Note 3) 1,618,190
Goodwill, net of accumulated amortization 155,332
Other assets, primarily security deposits 100,762
----------
$6,307,673
==========
Liabilities and Stockholders' Equity
Current:
Accounts payable $1,520,332
Accrued liabilities 1,084,451
----------
Total current liabilities 2,604,783
==========
Commitments and contingencies (Note 4)
Stockholders' equity:
Series A-1 preferred stock, $.001 par value - shares
authorized 10,000,000; issued and outstanding
2,394,130 2,394
Common stock, $.001 par value - shares authorized
100,000,000; issued and outstanding 8,674,738 8,675
Additional paid-in capital 11,004,220
Accumulated deficit (7,136,735)
Treasury stock, 240,500 shares (175,664)
----------
Total stockholders' equity 3,702,890
$6,307,673
==========
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
<TABLE>
Specialty Retail Group, Inc.
Consolidated Statements of Operations
<CAPTION>
53 weeks ended 52 weeks ended
July 2, 1995 July 3, 1994
------------- -------------
<S> <C> <C>
Net sales $5,629,643 $3,462,569
Cost of sales 3,286,273 1,802,854
---------- ----------
Gross profit 2,343,370 1,659,715
========== ==========
Operating costs:
Selling 2,438,024 1,324,811
General and administrative 2,925,557 2,162,584
---------- ----------
Loss from operations (3,020,211) (1,827,680)
========== =========
Interest income, net of interest expense of $28,316 and $33,959 338,498 157,226
Restructuring and other expenses (Note 9) (2,788,626) -
Other income - 193,654
---------- ---------
Loss before income tax expense (benefit) (Note 7) (5,470,339) (1,476,800)
Income tax expense (benefit) (Note 7) 29,000 (89,000)
---------- ---------
Loss from operations (5,499,339) (1,387,800)
========== ==========
Per share amounts:
Loss from operations $(.63) $(.18)
---------- ---------
Weighted average number of common shares outstanding 8,660,063 7,848,336
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
SPECIALTY RETAIL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
53 WEEKS ENDED JULY 2, 1995 AND 52 WEEKS ENDED JULY 3, 1994
<CAPTION>
Stock
Preferred stock Common stock Subscription Retained
--------------- ------------ note and earnings
Number of Number of Additional interest (accumulated
shares Amount shares Amount paid-in capital receivable deficit)
--------- ------ --------- ------ --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1993 .. 2,394,130 $2,394 5,723,914 $5,724 $ 4,493,127 $(1,214,660) $ (249,596)
Interest on subscription
note receivable ..... -- -- -- -- 120,543 (120,543) --
Private placement, net of
expenses ............ -- -- 3,000,000 3,000 6,176,190 -- --
Exercise of options ..... -- -- 83,334 83 151,043 -- --
Net loss ................ -- -- -- -- -- -- (1,387,800)
--------- ------ --------- ------ ------------ ----------- ----------
BALANCE, JULY 3, 1994 ... 2,394,130 2,394 8,807,248 8,807 10,940,903 (1,335,203) (1,637,396)
Interest on subscription
note receivable
(Note 5) ............ -- -- -- -- 132,647 (132,644) --
Note redemption (Note 5) -- -- (2,817,581) (2,817) (1,465,030) 1,467,847 --
Shares repurchased ...... -- -- -- -- -- -- --
HVM acquisition ......... -- -- 2,685,071 2,685 1,395,700 -- --
Net loss ................ -- -- -- -- -- -- (5,499,339)
--------- ------ --------- ----- ----------- ----------- ----------
BALANCE, JULY 2, 1995 ... 2,394,130 $2,394 8,674,738 $8,675 $11,004,220 $ -- $(7,136,735)
========= ====== ========= ====== =========== =========== ==========
<CAPTION>
Total
Treasury stockholders'
stock equity
------------ ---------------
<S> <C> <C>
BALANCE, JUNE 30, 1993 .. $ -- $3,036,989
Interest on subscription
note receivable ..... -- --
Private placement, net of
expenses ............ -- 6,179,190
Exercise of options ..... -- 151,126
Net loss ................ -- (1,387,800)
---------- ------------
BALANCE, JULY 3, 1994 ... -- 7,979,505
Interest on subscription
note receivable
(Note 5) ............ -- 3
Note redemption (Note 5) -- --
Shares repurchased ...... (175,664) (175,664)
HVM acquisition ......... -- 1,398,385
Net loss ................ -- (5,499,339)
---------- ------------
BALANCE, JULY 2, 1995 ... $(175,664) $3,702,890
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Specialty Retail Group, Inc.
Consolidated Statements of Cash Flows (Note 8)
53 weeks ended 52 weeks ended
July 2, 1995 July 3, 1994
-------------- --------------
Cash flows from operating activities:
Net loss $(5,499,339) $(1,387,800)
------------ ------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 492,962 181,284
Increase in inventory (777,776) (273,619)
Decrease in other current assets 179,419 3,299
Increase in other assets (1,124) (38,000)
Increase in accounts payable and accrued
liabilities 1,438,095 63,176
--------- --------
Total adjustments 1,331,576 (63,860)
Net cash used in operating activities (4,167,763) (1,451,660)
----------- -----------
Cash flows from investing activities:
Expenditures for property and equipment (1,460,561) (493,053)
----------- ----------
Cash flows from financing activities:
Net proceeds from sale of shares - 6,330,316
HVM acquisition (Note 8) 1,398,388 -
Repurchase of treasury stock (175,664) -
Repayment of notes payable (317,632) (137,947)
----------- ----------
Net cash provided by financing
activities 905,092 6,192,369
---------- ---------
Net increase (decrease) in cash and cash
equivalents (4,723,232) 4,247,656
Cash and cash equivalents, beginning of year 7,636,420 3,388,764
--------- ---------
Cash and cash equivalents, end of year $2,913,188 $7,636,420
========== ==========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Specialty Retail Group, Inc.
Notes to Consolidated Financial Statements
1. Business and Summary General
of Significant
Accounting Policies Specialty Retail Group, Inc. (the "Company")
utilizes its resources to focus on the specialty
retail business, through appropriate acquisitions
and other opportunities.
Building Blocks, Inc. ("Building Blocks" or the
"Subsidiary") operates a specialty educational and
developmental toy store chain which, at July 2,
1995, consisted of fourteen stores located in
Connecticut, Massachusetts, New York and New Jersey.
Fiscal Year
The Company has elected its fiscal year to be based
on a 52/53-week fiscal year ending on the Sunday
closest to June 30, commencing in 1994. Fiscal 1995
and 1994 consisted of 53 and 52 weeks, respectively.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and, its subsidiary,
Building Blocks. All significant intercompany
balances and transactions have been eliminated in
consolidation.
Cash Equivalents
Cash equivalents consist principally of treasury
securities and highly liquid money market accounts
purchased with a maturity of three months or less.
Such accounts are carried at cost plus accrued
interest, which approximates market.
Inventories
Inventories are principally stated at the lower of
cost, determined by the retail inventory method, or
market.
Property and Equipment
Property and equipment are stated at cost.
Depreciation is provided on the straight-line method
over the estimated useful lives of approximately 3
to 7 years for furniture, fixtures and equipment.
Leasehold improvements are amortized over 10 years
or the related lease term, whichever is shorter.
Expenditures for major improvements are capitalized
and expenditures for repairs and maintenance are
charged to expense as incurred. When assets are
retired or sold, the cost and related accumulated
depreciation is removed from the accounts with any
resulting gain or loss reflected in operating
results.
F-6
<PAGE>
Specialty Retail Group, Inc.
Notes to Consolidated Financial Statements
Goodwill
The excess of purchase price over the fair value of
net assets acquired is being amortized on the
straight-line method over 15 years. The Company's
policy will entail subsequent evaluation of continuing
goodwill for potential impairment of value at each
balance sheet date, by analyzing operating results and
related cash flows, trends and prospects as well as
competitive and economic factors.
Store Opening and Closing Costs
The Company follows the practice of accruing store
opening costs, including pre-opening costs. Such
amounts are expensed over a 12-month period. The costs
associated with store closings are accrued when the
decision is made to close the location.
Deferred Rent
Cash payments for rent obligations were $843,000 and
$423,000, respectively, for the 53 weeks ended July 2,
1995 and the 52 weeks ended July 3, 1994. Accounting
principles require that future rental increments be
accrued on a straight-line basis over the term of the
lease. The noncash additional rental accruals
reflected in the consolidated financial statements
amount to $176,000 and $70,000 for the 53 weeks ended
July 2, 1995 and the 52 weeks ended July 3, 1994,
respectively.
Income Taxes
The Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for
Income Taxes," which calls for the liability method of
accounting for income taxes. Under the liability
method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to
future years to differences between the financial
statement carrying amounts and tax bases of existing
assets and liabilities. Deferred income tax (benefit)
expense is measured by the change in deferred income
tax assets or liabilities during the year. Under SFAS
No. 109, the effect on deferred taxes of a change in
tax rates is recognized in income in the period that
includes the enactment date.
Per Share Data
Per share data is calculated based on the weighted
average number of shares of common stock outstanding
during the period. The Company's outstanding stock
options are excluded from the fiscal 1995 and 1994
computations as their effect would be antidilutive or
immaterial during these periods.
F-7
<PAGE>
Specialty Retail Group, Inc.
Notes to Consolidated Financial Statements
2. Cash and Cash Cash equivalents include treasury bills and
Equivalents interest-bearing deposits of $2,916,000 at July 2,
1995.
At July 2, 1995, all Company cash and cash equivalents
were held with five financial institutions.
Approximately $2.3 million of these funds were in
excess of FDIC, SIPC and other insurance coverages.
3. Property and July 2, 1995
Equipment
Leasehold improvements $1,056,593
Equipment 264,019
Furniture and fixtures 757,718
Less: Accumulated depreciation and (460,140)
amortization -----------
$1,618,190
==========
4. Commitments, The Company is a party defendant in a lawsuit with a
Contingencies and former officer, director and stockholder who alleges
Other breach of contract, fraud, defamation, interference
with stock transfer rights, breach of fiduciary duties
by certain former officers of the Company, conspiracy
to defraud, defame and interfere with stock transfer
rights and to inspect corporate records. The plaintiff
claims he is entitled to a termination payment of
$1,450,000 pursuant to his employment agreement with
the Company, which provides for payment of the
termination payment in the event the plaintiff was
discharged by the Company before his employment
agreement expired. The Company has denied the alleged
claims and has counterclaimed against the plaintiff for
fraud, breach of contract and breach of fiduciary
duties. The counterclaims are based upon allegations
that the plaintiff engaged in wrongful conduct during
his employment with the Company. The parties are
conducting discovery at this time and the case is
scheduled for jury trial on the two week docket
beginning on January 29, 1996.
The Company intends to vigorously defend against the
Plaintiff's allegations and to vigorously prosecute its
counterclaims. The ultimate outcome of this litigation
cannot presently be determined. Accordingly, no
provision for any liability that may result upon
resolution has been made in the consolidated financial
statements.
The Company is a defendant in a separate lawsuit with
the same individual who alleges to enforce his claimed
rights as a dissenter to the sale by the Company of
substantially all of its assets. The suit was dismissed
without prejudice in September 1995.
F-8
<PAGE>
Specialty Retail Group, Inc.
Notes to Consolidated Financial Statements
The Company leases office space and retail stores under
various noncancellable long-term operating lease
agreements for periods ranging from approximately three
to ten years. Most leases require the payment of taxes,
insurance, common area charges and/or maintenance.
Subsequent to July 2, 1995, lease agreements have been
executed on one additional store in New York.
As of July 2, 1995, giving effect to the subsequent
lease transactions mentioned above, the Company is
committed for aggregate future rentals (exclusive of
taxes, insurance, common area charges and maintenance)
under noncancellable operating leases for various
facilities as follows:
1996 $1,081,000
1997 1,059,000
1998 974,000
1999 919,000
2000 947,000
Thereafter 3,860,000
----------
$8,840,000
==========
Rent expense, excluding executory costs, for all
operating leases approximated $1,020,000 and $399,000
for the 53 weeks ended July 2, 1995 and the 52 weeks
ended July 3, 1994, respectively.
During 1995, the Company entered into a severance and
consultation agreement with the former chairman.
Selling, general and administrative expense in 1995
includes approximately $120,000 accrued pursuant to
this agreement. There are no other significant costs
associated with the agreement.
The Company's real estate advisory and consulting
division results of operations for fiscal 1995 and 1994
were not material.
5. Stock Effective June 29, 1995, the Company acquired
Transactions Healthcare Venture Management Corp. ("HVM") for
2,685,071 shares of common stock. Glenn Meyers, former
Chairman of the Company, had an interest in HVM. As a
result of the acquisition, the Company will no longer
be obligated to pay HVM a 3.5% consulting fee on
revenues through 2011. The cost of the buyout has been
charged to other expenses (see Note 9).
F-9
<PAGE>
Specialty Retail Group, Inc.
Notes to Consolidated Financial Statements
Effective June 29, 1995, the Company purchased the
2,817,518 shares of common stock held by IALP
Acquisition Corp. ("IALP"). The purchase was paid for
through the cancellation by the Company of the
$1,000,000 promissory note from IALP and interest
thereon of $467,407.
6. Stock Option In December 1991 and October 1994, the Company
Plans established the 1991 Nonqualified Stock Option Plan and
the 1994 Stock Option Plan (the "Plans") under which a
total of 700,000 and 500,000 shares, respectively, of
the Company's common stock could be issued to officers,
directors, employees and independent contractors of the
Company. The Plans are administered by a committee
appointed by the Board of Directors (the "Committee").
The Committee has authority, subject to the terms of
the Plans, to determine the individuals to whom options
may be granted, the exercise price and the number of
shares of common stock subject to each option, the time
or times during which all or a portion of each option
may be exercised and certain other provisions of each
option. As of July 2, 1995, an aggregate of 640,000
shares remain available for future grant of options
under the Plans.
Nonqualified stock option activity has been as follows:
Number of Exercise price
shares per share
Outstanding at June 30, 1993 483,334 $1.50 to $2.00
Granted 110,000 $2.00 to $2.3125
Expired/cancelled - -
Exercised (83,334) 1.6875 to $2.00
-------- ---------------
Outstanding at July 3, 1994 510,000 $1.50 to $2.3125
Granted 300,000 $1.00 to $1.50
Expired/cancelled (250,000) $1.50 to $2.00
Exercised - -
-------- --------------
Outstanding at July 2, 1995 560,000 $1.00 to $2.3125
======== ================
F-10
<PAGE>
Specialty Retail Group, Inc.
Notes to Consolidated Financial Statements
Pursuant to the Plan, the exercise price of shares is
determined by the Committee at the time of grant but
may not be less than the lesser of (i) the book value
per share of common stock as of the end of the fiscal
year of the Company immediately preceding the date of
grant or (ii) 50% of the fair market value per share of
common stock at the date of grant. All options granted
to date have approximated the then current fair market
value. The maximum term of an option may not exceed 10
years from the date of the grant. Unless otherwise
determined by the Committee, options granted vest and
become exercisable at a rate of at least 33-1/3% per
year from the date of the grant. Of the outstanding
options to purchase 560,000 shares, 315,001 were fully
vested at July 2, 1995.
7. Income Taxes The income tax provision (benefit) for the 53 weeks
ended July 2, 1995 and the 52 weeks ended July 3, 1994
consist of the following:
1995 1994
---- ----
Continuing operations $29,000 $(89,000)
======= =========
The components of the income tax provision (benefit)
attributable to continuing operations is as follows:
Year ended July 2, 1995 July 3, 1994
------------ ------------
Current income taxes:
Federal $ - $(112,000)
State 29,000 23,000
------ ------
29,000 (89,000)
====== ========
Deferred income taxes:
Federal (2,362,000) (445,000)
State (705,000) (141,000)
--------- ---------
(3,067,000) (586,000)
=========== =========
Valuation allowance 3,067,000 586,000
--------- -------
Total $29,000 $(89,000)
========= =========
F-11
<PAGE>
Specialty Retail Group, Inc.
Notes to Consolidated Financial Statements
A reconciliation of the Company's income tax provision
(benefit) applicable to continuing operations and the
amount computed by applying the statutory Federal
income tax rate of 34% to earnings before income taxes
is as follows:
53 weeks ended 52 weeks ended
July 2, 1995 July 3, 1994
------------ ------------
Statutory rate applied to earnings before
income taxes $ - $(502,000)
State income taxes, net 29,000 23,000
Taxable losses that cannot be carried back - 390,000
------- -------
Effective income tax benefit $29,000 $(89,000)
======= =========
Temporary differences and carryforwards which give rise
to deferred tax assets at July 2, 1995 are as follows:
Deferred tax assets:
Depreciation $44,000
Straight-line rent 78,000
Federal and state income tax
operating loss carryforwards 2,945,000
---------
3,067,000
Valuation allowances 3,067,000
$
=========
At July 2, 1995, there were available for Federal and
state income tax purposes operating loss
carryforwards of approximately $6,670,000 and
$6,770,000, respectively, expiring over the next five
to fifteen years, depending on the jurisdiction,
which may provide future benefit for income taxes.
8. Supplemental The Company paid approximately $23,000 for income
Disclosure of Cash taxes during the 53 weeks ended July 2, 1995 and
Flow Information $28,000 and $33,000 for interest for the 53 weeks
ended July 2, 1995 and the 52 weeks ended July 3,
1994, respectively.
F-12
<PAGE>
Specialty Retail Group, Inc.
Notes to Consolidated Financial Statements
9. Restructuring and As discussed in Note 5, effective June 29, 1995, the
Other Expenses Company acquired Healthcare Venture Management Corp.
("HVM") for 2,685,071 shares of common stock and as a
result of the acquisition cancelled the consulting
agreement with HVM whereby HVM was to receive 3.5% of
the Company's revenues in the future. HVM's only
asset was its consulting agreement with the Company.
Other expenses include a charge of approximately $1.5
million in connection with the issuance of the shares
and the cancellation of the consulting agreement. In
addition, other expenses include approximately $1.2
million of costs pertaining to the writedown of
goodwill, severance, litigation and the closing of
certain stores.
10. Going Concern Subsequent to July 2, 1995 the Company continues to
incur losses from operations. Since its inception
the Company has incurred losses of approximately
$8,000,000 through March 31, 1996. For the 53
weeks ended July 2, 1995 the Company had a loss
from operations of $5,499,339. For the 52 weeks
ended July 3, 1994 the Company had a loss from
operations of $1,387,800 and for the nine months
ended March 31, 1996 a loss of $909,584. These
conditions raise substantial doubt about the
Company's ability to continue as a going concern.
Management is currently engaged in discussions
with certain of the principal beneficial owners
of its capital stock who are considering
providing the Company with working capital to
meet anticipated needs.
However, no assurances can be given that the
Company will be successful in raising additional
capital. Furthermore, there is no assurance,
assuming the Company successfully raises additional
funds, that the Company will achieve profitability
or positive cash flow. If the Company is unable
to obtain adequate additional financing, management
will be required to significantly modify its current
plans.
F-13
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
March 31, 1996
ASSETS
Current Assets:
Cash and cash equivalents $ 49,870
Investments in notes $ 600,000
Inventory 1,567,564
Other current assets 131,457
----------
Total current assets 2,348,891
==========
Property and equipment, net 1,542,018
Goodwill, net of accumulated amortization 146,107
Equity investment 224,150
Other assets 133,496
----------
Total assets $4,394,662
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,064,204
Accrued liabilities 537,152
---------
Total current liabilities 1,601,356
=========
Stockholders' equity:
Series A-1 Preferred Stock; 10,000,000 shares 2,394
authorized; $.001 par value; issued and
outstanding, 2,394,130 shares
Common Stock; 100,000,000 shares authorized; $.001 8,675
par value; 8,674,738 issued and outstanding
Additional paid-in capital 11,004,219
Accumulated deficit (8,046,318)
Treasury Stock - 240,500 shares at cost (175,664)
-----------
Total stockholders' equity 2,793,306
-----------
Total liabilities and stockholders' equity $ 4,394,662
===========
See accompanying notes (unaudited)
F-14
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Mar. 31, 1996 Apr. 2, 1995
------------- ------------
<S> <C> <C>
Net sales $5,728,735 $4,159,811
Costs of sales 3,142,108 2,239,524
---------- ----------
Gross profit 2,586,627 1,920,287
Operating costs:
Selling 2,217,220 1,792,305
General and administrative 1,463,278 2,099,867
--------- ---------
Earnings (loss) from operations (1,093,871) (1,971,885)
Other income, net 184,287 295,838
--------- ---------
Earnings (loss) before income taxes (909,584) (1,676,047)
Income tax (provision) benefit 0 0
Net income (loss) ($909,584) ($1,676,047)
========== ============
Per share amounts:
Net income (loss) ($0.10) ($0.19)
======== ========
Weighted average number of
common shares outstanding 8,674,738 8,764,959
========= =========
</TABLE>
See accompanying notes (unaudited)
F-15
<PAGE>
Specialty Retail Group, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
9 Months Ended 9 Months Ended
March 31, 1996 April 2, 1995
(Unaudited) (Unaudited)
---------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($909,584) ($1,676,047)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities
Depreciation and amortization 227,448 217,522
(Increase) in inventory (165,688) (846,096)
(Increase)/decrease in other current assets (13,132) 138,056
(Increase) in other assets (32,734) (58,045)
Increase/(decrease) in accounts payable
and accrued liabilities (1,003,427) 615,397
----------- ----------
Total adjustments (987,533) 66,834
=========== ==========
Net cash used in operating activities 1,897,117 1,609,213
---------- ----------
Cash flows from investing activities:
Expenditures for property and equipment (142,051) (1,608,626)
Equity investment (224,150) 0
----------- ----------
Net cash used in investing activities (366,201) (1,608,626)
----------- -----------
Cash flows from financing activities: 0 (39,178)
Repayment of notes payable (600,000) 0
Investment in notes 0 (175,664)
---------- -----------
Repurchase of treasury stock
Net cash used in financing activities (600,000) (214,842)
----------- -----------
Net decrease in cash and cash equivalents (2,863,318) (3,432,681)
Cash and cash equivalents, beginning of period 2,913,188 7,636,420
---------- ----------
Cash and cash equivalents, end of period $ 49,870 $4,203,739
========== ==========
</TABLE>
See accompanying notes (unaudited)
F-16
<PAGE>
Specialty Retail Group, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
---------------------
The Condensed Consolidated Balance Sheet of Specialty Retail Group, Inc. (the
"Company") as of March 31, 1996 and the Condensed Consolidated Statements of
Operations for the three months and nine months ended March 31, 1996 and January
1, 1995, and the Condensed Consolidated Statements of Cash Flows for the six
months ended March 31, 1996 and April 2, 1995 reflect all adjustments which, in
the opinion of management, are necessary for a fair presentation of the
financial position of the Company as of March 31, 1996 and its results of
operations and cash flows for the periods presented.
2. Equity Investments
------------------
Effective December 14, 1996, the Company acquired 25% of the common stock of
CM Franchise Corp., a franchisor of specialty carpet retailers operating under
the registered trademark of "Carpet Master" for a total consideration of
$220,000. In addition, as part of the transaction, the Company also obtained an
option to acquire an additional 12.5% of CM Franchise Corp.'s common stock. The
Company accounted for this transaction using the equity method.
3. Commitments, Contingencies and Other
------------------------------------
At March 31, 1996, the Company was a party defendant in a lawsuit with a
former officer, director and stockholder who alleged, among other things,
breach of contract, fraud, defamation, interference with stock transfer rights,
breach of fiduciary duties by certain former officers of the Company,
conspiracy to defraud, defame and interfere with stock transfer rights and to
inspect corporate records. The Plaintiff claimed he was entitled to a
termination payment of $1,450,000 pursuant to an employment agreement with the
Company. The Company vigorously defended itself against the Plaintiff's
allegations and vigorously prosecuted its counterclaims. No provision for any
liability that could have resulted upon resolution of this claim was made.
During the fourth quarter of fiscal 1995, the Company took a reserve
of $250,000 related to estimated legal fees as a result of its continuing
defense in this matter, which reserve was substantially exhausted as of March
31, 1996. In August 1996, the Company settled this litigation by issuing
650,000 shares of Common Stock to the plaintiff and his designee and by
guaranteeing up to $160,000, any shortfall from $650,000 realized upon the sale
by the holders of all of the 650,000 shares. The Company may satisfy the
guarantee by a cash payment or by the release to the holders of an additional
213,333 shares of Common Stock being held by an Escrow Agent.
4. Investment in Notes
-------------------
On November 17, 1995, the Company invested in a series of Promissory Notes
(the "Notes") for an aggregate of $1,000,000. The Maker of the Notes is a
corporation engaged in the finance industry. The Notes were automatically
renewed for 90 day maturities unless the Company determined not to renew. The
Company elected not to renew the Note that matured on February 29, 1996.
Accordingly, $400,000 of the original Notes were repaid during the quarter
ended March 31,
F-17
<PAGE>
Specialty Retail Group, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1996. The remaining Notes, each for $300,000, had maturities of April
30, 1996 and June 30, 1996. The Company elected not to renew these Notes
and they were paid when due. The Notes bore interest at a rate of 15%
compounded annually and payable monthly. The Notes were guaranteed by Selig A.
Zises, a significant investor in the Maker of the Notes. Mr. Zises is the
brother of Seymour W. Zises, a director of the Company.
F-18
<PAGE>
No dealer, sales representative or
any other person has been authorized
to give any information or to make any
representations in connection with
this offering other than those
contained in this Prospectus, and, if
given or made, such information or
representations must not be relied
upon as having been authorized by the SPECIALTY RETAIL GROUP, INC.
Company or any underwriter. This
Prospectus does not constitute an
offer to sell or a solicitation of any
offer to buy any securities other than
the securities offered by this
Prospectus, or an offer to sell or a
solicitation of an offer to buy any
securities by any person in any
jurisdiction where such offer or
solicitation is not authorized or is
unlawful. Neither the delivery of
this Prospectus nor any sale made
hereunder shall, under any circum-
stances, create any implication that
there has been no change in the
affairs of the Company or that
information contained herein is
correct as of any time subsequent to
the date of this Prospectus.
TABLE OF CONTENTS Page
----
Prospectus Summary . . . . . . . . 4
863,333 Common Stock
Risk Factors . . . . . . . . . . . 6
(Par Value, $.001 per share)
Use of Proceeds . . . . . . . . . . 7
Summary Selected Financial Data . 9
Management's Discussion and
Analysis . . . . . . . . . . . . 10
Business . . . . . . . . . . . . . 16
Directors, Executive Officers and
Significant Employees . . . . . . . 21
Executive Compensation . . . . . . 24
Certain Transactions . . . . . . . 26
Principal Stockholders . . . . . . 29 ----------
Market For Common Equity and Related PROSPECTUS
Stockholder Matters . . . . . . . 30
----------
Description of Capital Stock . . . 31
Selling Stockholders . . . . . . . 31
Plan of Distribution . . . . . . . 32
Disclosure of Commission Position on
Indemnification
For Securities Act Liabilities . 34
Experts . . . . . . . . . . . . . . 36
Legal Matters . . . . . . . . . . . 36
Index to Financial Statements . . . 36
Financial Statements . . . . . . F-1
Until _________, 1996 (__ days
after the date of this Prospectus),
all dealers effecting transactions
in the registered securities, September ____, 1996
whether or not participating in
this distribution, may be required
to deliver a Prospectus.
This is in addition to the obligations
of dealers to deliver a Prospectus when
acting as Underwriters and with respect
to their unsold allotments or
subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED
Item 24. Indemnification of Directors and Officers
The Company's By-laws provide that the Company will indemnify its
directors, officers, employees and agents to the fullest extent permitted by
Florida law.
The Company's Articles of Incorporation provide that no director of the
Company shall be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for approving a dividend, stock
repurchases or other distributions to stockholders that would result in personal
liability to the directors under Florida Law, or (iv) for any transaction in
which the director derived an improper personal benefit.
Section 607.014 of Chapter 607 of the Florida Statutes provides that to the
extent specified in or authorized by the articles of organization, a by-law
adopted by shareholders or a resolution adopted by the holders of the majority
of shares of stock entitled to vote on the election of directors, a corporation
can indemnify directors, officers, and other employees or agents of the
corporation except as to any matter as to which such person shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that the action was in the best interest of the corporation. The
registrant's Articles of Incorporation provide, in part, that the registrant
shall indemnify any person who is or was a party or is threatened to be made a
party to any threatened, pending or completed action, suit, proceeding, or
claim, by reason of the fact that such person is or was a director or officer of
the registrant or while a director or officer is or was serving at the request
of the registrant as a director, trustee, officer, employee or other agent of
another organization, including service in any capacity with respect to employee
benefit plans, against all liabilities, costs, expenses (including attorneys'
fees and expenses), judgments, fines, penalties and amounts paid in settlement
incurred in connection with the defense or disposition of or otherwise in
connection with or resulting from any such action, suit, proceeding or claim.
Pursuant to the Settlement Agreement, the directors and officers of the
registrant are entitled to indemnification by the Selling Stockholders against
liability (including liability under the Securities Act and the Exchange Act)
arising by reason of any statement contained in the registration statement that
the Selling Stockholders provided to the registrant in writing explicitly for
use in this registration statement, being false or misleading or omitting to
state a material fact necessary to
II-1
<PAGE>
be stated in order that the statements made in this registration statement, in
the circumstances in which they are made, not be misleading.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses payable by the
registrant in connection with the distribution of the securities being
registered hereunder. All of the amounts shown are estimates, except the
Securities and Exchange Commission registration fee. The Selling Stockholders
will bear all selling commissions with respect to the sale of the shares
registered hereby.
Securities and Exchange Commission
Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . $ 100
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . $ 7,500
Printing and Shipping Expenses . . . . . . . . . . . . . . . . . $ 400
Transfer Agent and Miscellaneous
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500
Blue Sky Fees . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,500
========
Item 26. Recent Sales of Unregistered Securities
1. In October 1993, the Company sold an aggregate of 3,000,000 shares of
Common Stock for $76,750,000 to 33 non-United States persons in a
transaction not constituting a "sale" as defined in Rule 901 under the
Securities Act of 1933, as amended (the "Act"). The certificates
representing the shares bore a legend noting that the shares were not
registered under the Act and the purchasers acknowledged their
understanding that the shares could only be transferred if so registered
or exempt from such registration and stop transfer orders were placed
against the certificates by the Company's Transfer Agent.
2. In connection with the foregoing offering, the Company issued a warrant
to purchase 250,000 shares of Common Stock at $2.48 per share. The
warrant Certificate bore a legend indicating the warrant was not
registered under the Act and the holder of the warrant represented its
intention to acquire the warrant for investment and acknowledged its
understanding that the warrant could only be transferred if it was
registered under the Act or pursuant to an exemption from such
registration.
3. Since September 1, 1993 the Company has granted unregistered options to
three (3) persons to purchase shares of its Common Stock. The options
were non-transferable except by will or the laws governing intestacy.
II-2
<PAGE>
4. In August 1996 the Company issued a total of 863,333 shares of Common
Stock to 3 persons. The certificates for the shares contain a legend
and the holders of certificates made representations comparable to those
described in paragraphs 20.
All of the transactions described in paragraphs 2, 3 and 4 were exempt from
registration under the Act as not constituting a "public offering" within
the meaning of Section 4(2) of the Act.
Item 27. Exhibits
Exhibit No. Description
3.1 Articles of Incorporation*
3.2 Amended and Restated By-Laws*
4.1 Specimen Stock Certificate*
5.1 Opinion of Goodkind Labaton Rudoff & Sucharow LLP*
10.1 Agreement of Settlement and Compromise dated August 22, 1996 by
and among the Selling Stockholders and the Registrant*
10.2 Registration Rights Agreement dated as of August 22, 1996 by and
between the Selling Stockholders and Registrant*
10.3 Escrow Agreement dated August 22, 1996 by and among the Selling
Stockholders, the Registrant and the Escrow Agent*
10.4 Escrow Agreement dated August 22, 1996 by and among the Selling
Stockholders, Registrant and the Escrow Agent*
10.5 Employment Agreement dated as of April 1, 1996 between Building
Blocks and Steven E. Glass*
10.6 Option Agreement dated April 12, 1996 between Registrant and
Steven E. Glass*
10.7 Option Agreement dated October 2, 1995 between Registrant and
Steven E. Glass*
10.8 Agreement dated July 29, 1996 between the Registrant and Selig A.
Zises*
10.9 Agreement dated June 29, 1995 between Registrant and ILMA
(incorporated by reference to Exhibit 2.1 to Form 8-K dated June
29, 1995)
10.10 Agreement and Plan of Merger dated June 30, 1995 between Registrant
and HVMC (incorporated by reference to Exhibit 2.2 to Form 8-K
dated June 29, 1995)
21. Subsidiaries of Registrant*
23.1 Consent of Goodkind Labaton Rudoff & Sucharow LLP (included in
Exhibit 5)*
23.2 Consent of BDO Seidman, LLP*
24 Power of Attorney (included in the signature page of this
Registration Statement)
_________________
* To be filed by amendment.
II-3
<PAGE>
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, unless the information required to be
included in such post effective amendment is contained in a
periodic report filed by the registrant pursuant to Section 13 or
15(d) of the Exchange Act and incorporated herein by reference;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement, unless the
information required to be included in such post-effective
amendment is contained in a periodic report filed by the
registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act and incorporated herein by reference; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
(c) Insofar as indemnification of liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with any of the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Westport, State of Connecticut, on September 3, 1996.
SPECIALTY RETAIL GROUP, INC.
By: /s/ KEVIN R. GREENE
----------------------------------------------
Chairman and Chief
Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Kevin R. Greene and Seymour Zises, jointly and
severally, his true and lawful attorneys-in-fact and agents with full powers of
substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be in and about the premises, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed below by the following persons in the capacities and
on the dates indicated.
September , 1996
- --------------------------
Arnold B. Becker, Director
/s/ TONY COELHO September 6, 1996
- --------------------------
Tony Coelho, Director
/s/ DANIEL GLASS September 6, 1996
- --------------------------
Daniel Glass, Director
/s/ KEVEN R. GREENE September 3, 1996
- --------------------------
Kevin R. Greene, Chairman of
the Board and Chief Executive
Officer and Principal
Accounting Officer; Director
September , 1996
- --------------------------
C. Anthony Wainwright, Director
/s/ SEYMOUR W. ZISES September 4, 1996
- --------------------------
Seymour W. Zises, Director
II-6
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description
- -------- -----------
23.2 Consent of BDO Seidman, LLP
Exhibit 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
New York, New York
We hereby consent to use in the Prospectus constituting a part of this
Registration Statement of our report dated September 14, 1995, except for
Note 10, which is as of September 5, 1996, relating to the financial
statements of Specialty Retail Group, Inc. which is contained in that
Prospectus. Our report contains an explanatory paragraph regarding
uncertainties as to the ability of the Company to continue as a
going concern.
We also consent to the references to us under the caption "Experts"
in the Prospectus.
/s/ BDO Seidman, LLP
-------------------------
BDO Seidman, LLP
New York, New York
September 5, 1996
