<PAGE>
As filed with the Securities and Exchange Commission on October 18, 1996
Registration No. 333-11535
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
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. 59-2824411
----------------- ----------------- -------------------
(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
<PAGE>
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. [ ]
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 Front Cover Pages
Prospectus . . . . . . . . . . .
Inside Front and Outside Back Cover Pages
Cover Pages of Prospectus . . . .
Summary Information and Risk Prospectus Summary; Risk
Factors . . . . . . . . . . . . . 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, Directors, Executive Officers
Promoters and Control Persons . . and Significant Employees;
Principal Stockholders; Certain
Transactions
Security Ownership of Certain Principal Stockholders; Selling
Beneficial Owners and Management
Stockholders; Certain
Transactions
Description of Securities . . . . Description of Capital Stock;
Plan of Distribution
Interests of Named Experts and Legal Matters
Counsel . . . . . . . . . . . . .
Disclosure of Commission Position Disclosure of Commission
on Indemnification for Securities Position on Indemnification for
Act Liabilities . . . . . . . . . Securities Act Liabilities
Organization Within Last Five *
Years . . . . . . . . . . . . . .
Description of Business . . . . . Prospectus Summary; Risk
Factors; Summary Selected
Financial Data; Management's
Discussion and Analysis;
Business
<PAGE>
Management's Discussion and Management's Discussion and
Analysis or Plan of Operation . . Analysis
Description of Property . . . . . Business - Properties
Certain Relationships and Related Certain Transactions
Transactions . . . . . . . . . .
Market for Common Equity and Market for Common Equity and
Related Stockholder Matters . . . Related Stockholder Matters
Executive Compensation . . . . . Executive Compensation
Financial Statements . . . . . . Summary Selected Financial
Data; Financial Statements
Changes in and Disagreements With *
Accountants on Accounting and
Financial Disclosure . . . . . .
*Inapplicable or none.
<PAGE>
Subject to Completion October 18, 1996
PROSPECTUS
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 regarding the Selling Stockholders and the
plan of distribution of the Shares offered hereby, see "The Offering" and "Plan
of Distribution."
<PAGE>
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 Legal Proceedings".
The Common Stock of the Company is listed on the NASDAQ SmallCap
Market under the symbol "SRGC." On October 8, 1996, the last reported sale
price of Common Stock on the NASDAQ SmallCap Market was $0.1875 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 October , 1996.
- 2 -
<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.
- 3 -
<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"), for
shares of the Company's Common Stock.
Building Blocks operates a specialty educational and developmental toy
store chain presently consisting of 9 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 established Building Blocks Franchise Corp. ("BBFC") in July 1996 as a
wholly-owned subsidiary and BBFC began actively marketing franchises under an
agreement between BBFC and Building Blocks. At October 15, 1996 BBFC had sold
franchises for two stores to be located in Dallas, Texas and Chicago, Illinois.
Building Blocks currently intends to close certain of its stores and consolidate
their inventories at its other stores prior to the 1996 holiday season, to
aggressively pursue, together with BBFC, sales of Building Blocks-operated
stores to franchisees and, in any event, to phase out the operation of Building
Blocks-operated stores by Spring 1997. BBFC will continue to market franchises
both for existing Building Blocks stores and for new locations. See
"Management's Discussion and Analysis."
Building Blocks merchandising has 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.
As used herein, "the Company" includes the Company and its
subsidiaries unless otherwise indicated.
The principal executive offices of the Company are located at 1720
Post Road East, Suite 112, Westport, Connecticut 06880. Telephone: (203) 256-
4380.
- 4 -
<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 Legal
Proceedings," "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 dependence of the Company upon the success of a plan
to phase out Building Blocks' company-operated toy stores and to rely on
franchising for future income, and others. See "Risk Factors" and "Management's
Discussion and Analysis" for a further discussion of these factors.
- 5 -
<PAGE>
RISK FACTORS
1. LACK OF ADEQUATE WORKING CAPITAL; PLANS TO CONSOLIDATE AND
SUBSEQUENTLY PHASE OUT OPERATIONS OF BUILDING BLOCKS-OPERATED STORES AND PHASE
IN ALL FRANCHISED STORE PROGRAM, AND PLANS TO SEEK A BUSINESS COMBINATION WITH
AN OPERATING COMPANY: The Company had anticipated the sale by the end of
September 1996 of at least two franchises of Building Blocks' operated stores
and their fixtures and inventories. These transactions did not occur and
Building Blocks does not currently have adequate working capital to fund normal
build-ups of holiday season inventories. Management has determined to close
certain Building Blocks-operated stores and to consolidate their inventories at
certain of its other operated stores for the 1996 holiday season. In addition,
BBFC intends to aggressively market franchises for the stores that will be
operated through the holiday season to franchisees who would assume the store
leases and purchase the fixtures and inventories on hand, and to continue
marketing franchises for new locations. Building Blocks intends, in any event,
to phase out the operation of the remaining Building Blocks-operated stores by
the Spring of 1997. The Company, which has a net operating loss carryforward of
approximately $10,515,000, also intends to seek a business combination with an
operating company (a "Business Combination"). Absent a Business Combination,
the ability of the Company to continue in operation without an infusion of
additional working capital will depend upon the ability of BBFC to generate
positive cash flow from franchise sales, which, in turn, could be adversely
affected by Building Blocks' financial condition and the closing or transfer to
franchisees of the Building Blocks-operated stores. It is expected that cash
generated from the winding down of Building Blocks-operated stores will be
applied to reduce Building Blocks' accounts payable and other obligations and
will not be available to the Company to fund BBFC's operations. BBFC will rely
upon cash currently held by the Company and revenues received from franchisees.
There can be no assurance that such sources will be adequate or that BBFC will
be able to obtain any additional working capital that may be required. See
"Business" and "Management's Discussion and Analysis."
2. FUTURE DEPENDENCE ON FRANCHISING PROGRAM AND/OR BUSINESS
COMBINATION. Absent a Business Combination, the Company's ability to generate
profits and positive cash flow from operations will be dependent upon the
success of the BBFC franchising program. 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 is attractive to potential franchisees, there can be no assurance that
BBFC will be able to sell a substantial number of franchises. BBFC is competing
with
- 6 -
<PAGE>
numerous franchisors of a variety of retail stores, many of which have greater
financial and marketing resources than the Company, and many of which have a
substantial number of successful franchised stores. Management believes that
the Company's status as a publicly traded company and its net operating loss
carryforward ("NOL") will be attractive to a privately held operating company.
However, there can be no assurance that the Company will be able to locate a
potential party to a Business Combination or negotiate a Business Combination on
terms satisfactory to the Company or at all. In addition, the use of the
Company's NOL to offset profits after a business combination is subject to
satisfaction of a number of highly technical rules. Any such Business
Combination is expected to result in an increase in the number of outstanding
shares of Common Stock, which increase may be substantial.
3. HISTORY OF LOSSES. The Company has incurred substantial losses
from the operation of its Building Blocks subsidiary. For the year ended June
30, 1996 the Company had a loss from operations of $3,378,668, of which $570,000
represented a non-cash charge related to the Settlement Agreement. 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.
See "Business," "Management's Discussion and Analysis" and Financial Statements.
The report of the Company's auditors on the Company's June 30, 1996
financial statements contains a "going concern" explanatory paragraph.
4. COMPARABILITY OF RESULTS AND SEASONALITY. The Company's 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 or annual period have
not necessarily been indicative of the results that may be achieved for future
fiscal periods. In light of the Company's current business plan, prior period
results are not indicative of future period results. Any future franchise
income of the Company will be subject to fluctuation arising from the timing of
franchise sales and the seasonality of franchised businesses which will affect
the timing of the receipt of franchise fees.
5. COMPETITION. The retail toy market is an intensely competitive
market. While Building Blocks stores compete for consumer expenditures with
large mass merchandisers, such as Toys 'R Us and the toy departments of discount
stores
- 7 -
<PAGE>
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."
USE OF PROCEEDS
Under certain circumstances, the Company may 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 are qualified in their entirety
by, and should be read in conjunction with, the Company's Financial Statements
and the Notes thereto appearing elsewhere in this Prospectus:
For the 52 Weeks For the 53 Weeks
Ended June 30, 1996 Ended July 2, 1995
------------------- --------------------
Income Statement Data:
Net sales . . . . . $7,126,444 $5,629,643
Gross profit . . . 2,989,954 2,343,370
Restructuring and
other expenses . . (660,767) (2,788,626)
Loss from operations (2,973,634) (5,808,837)
Net loss . . . . . (3,378,668) (5,499,339)
Net loss per share (.39) (.63)
Balance Sheet Data
(at end of period):
Cash and cash
equivalents . . . $ 387,006 $2,913,188
Working capital
(deficit) . . . . (310,135) 1,828,606
Total assets . . . 3,002,678 6,307,673
Stockholders' equity 324,222 3,702,890
- 9 -
<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 June 30, 1996 ("fiscal 1996"). 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. Building Blocks Franchise
Corp. ("BBFC"), formed subsequent to June 30, 1996, has been marketing
franchises for Building Blocks 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, the Company's results for fiscal 1996
reflect a liability for a non-cash obligation of $570,000 incurred in connection
with the Settlement Agreement and charges of approximately $660,000 to reflect
actual and estimated costs associated with Building Blocks' decision to close
certain of its stores.
Results of operations for the year ended June 30, 1996 are not
indicative of future results because of the Company's current business plans as
described under "Liquidity and Capital Resources," below.
LIQUIDITY AND CAPITAL RESOURCES
The matters discussed under this caption that are forward looking
statements involve risks and uncertainties. Such risks and uncertainties
include, without limitation, the impact which the economy, competition, or
unusual weather could have on Building Blocks' operating results for the 1996
holiday season; the timing, extent and terms of BBFC's franchise sales,
including the possible sales of existing Building Blocks-operated stores to
franchisees; the outcome of certain negotiations currently ongoing with respect
to the settlement of rent arrearages and disputed additional claims arising from
the closing of four indoor regional mall stores between June and October
1996; and the results of Building Blocks' program to phase out the operation of
Building Blocks-operated stores described below.
In the Company's quarterly report for the period ended March 31, 1996,
management projected that the Company would require between $500,000 and
$1,250,000 of additional working capital to fund operations through March of
1997. Between June
- 10 -
<PAGE>
and October 1996, four Building Blocks-operated stores which were operating
in indoor regional malls in Massachusetts, New York, Connecticut and
New Jersey were closed and Building Blocks has been negotiating with the
landlords of such premises for the settlement of approximately $330,000 of
rent arrearages and of $470,000 of additional claims which the Company is
actively disputing. 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 rights and interests in stock and warrants
to purchase stock of CM Franchise Corp. On September 30, 1996, the Company
transferred the stock and warrants to the lender. BBFC and Building Blocks
had anticipated the completion at the end of September 1996 of at least two
transfers to franchisees of the leases, and the sale for cash of the fixtures
and inventories, for Building Blocks-operated stores. Such transactions were
expected to be completed in late September. These transactions, together with
the above-described transactions, would have provided substantially all of the
working capital required to finance planned holiday season inventory
build-ups, and, management believes, would have enabled Building Blocks to
arrange for any needed additional holiday season working capital. These
franchise transactions did not occur, and Building Blocks does not have
adequate working capital to finance additional inventories.
Management intends to close certain of Building Blocks' stores before
the 1996 holiday season and to consolidate inventories from these stores at its
other stores. BBFC and Building Blocks are also actively seeking other
potential franchisees to acquire Building Blocks-operated stores and their
leases, fixtures and inventories. BBFC is, simultaneously, pursuing the sale of
franchises for new locations.
The Company's present plan contemplates that any Building Blocks-
operated stores in operation after January 1997 will be transferred to
franchisees, and, in any event, will be phased out by the Spring of 1997 and
that the Company will thereafter limit its retail toy activities to franchising
by BBFC. The Company's ability to generate adequate cash flow to sustain its
planned activities beyond December 31, 1996, is therefore dependent upon the
success Building Blocks achieves in its plans to transfer Building Blocks-
operated stores to franchisees and upon BBFC's ability to sell additional
franchises, which, in turn, may be affected by Building Blocks' financial
condition and the closing or franchising of Building Blocks-operated stores. It
is expected that cash generated by Building Blocks will be applied to reduce its
accounts payable and other obligations and will not be available to fund BBFC's
operations. BBFC will rely upon cash currently held by the Company and
franchise revenues.
- 11 -
<PAGE>
There can be no assurance as to the ultimate outcome of any of the
foregoing matters, and the Company may require additional working capital, in
amounts which could be substantial. There can be no assurance that any working
capital will be available on acceptable terms or at all.
The Company is also seeking opportunities for a business combination
with an operating company (a "Business Combination"). The Company intends to
attempt to negotiate a Business Combination for stock of the Company. There are
no agreements or understandings with respect to any Business Combination.
Management believes that the Company's status as a publicly traded company and
its net operating loss carryforward ("NOL") will be attractive to a privately
held operating company. However, there can be no assurance that the Company
will be able to locate a potential party to a Business Combination or negotiate
a Business Combination on terms satisfactory to the Company or at all. In
addition, the use of the Company's NOL to offset profits after a business
combination is subject to a number of highly technical rules.
As a result of these matters, the report of the Company's auditors on
the Company's June 30, 1996 financial statements contains a "going concern"
explanatory paragraph.
RESULTS OF OPERATION FISCAL 1996 COMPARED TO FISCAL YEAR 1995
RESULTS OF OPERATIONS
In addition to the Building Blocks acquisition on April 13, 1993, the
Company established, in May 1993, 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 operations. Also included in fiscal 1996 and 1995 operations, are the
general and administrative costs and other expenses associated with the
Company's corporate overhead, and interest income from cash and cash equivalent
balances. As described in Note 4 to the Consolidated Financial Statements
("Equity Investment"), the Company acquired 25% of the common stock of CM
Franchise Corp. on December 14, 1995. The Company's proportion of the operating
results in CM Franchise Corp. is included in the results of operations.
OPERATIONS
Net sales, substantially all of which were generated by Building
Blocks, were $7,126,444 in fiscal 1996, an increase of 26.6% versus $5,629,643
in fiscal 1995. This increase in net sales is due principally to the increase
in the number of stores operated by the Company. Thirteen stores were in
operation at June 30, 1996. Six of these stores were fully comparable. That
- 12 -
<PAGE>
is, they were fully operational during the entire two fiscal years. Sales for
these six stores increased 5.7% or $196,351 from fiscal year-end July 2, 1995 to
fiscal year-end June 30, 1996.
Cost of sales as a percentage of net sales remained virtually
unchanged from 58.4% in fiscal 1995 to 58.0% in fiscal 1996. Cost of sales in
dollars increased from $3,286,273 in fiscal 1995 to $4,136,490 in fiscal 1996 to
support higher sales due to a net increase in the number of stores.
Selling expenses consist primarily of payroll, occupancy and
advertising expenses associated with the Building Blocks stores. Selling
expenses were $3,159,280 (44.3% of net sales) and $2,438,024 (43.3% of net
sales) in fiscal years 1996 and 1995, respectively. This 29.6% increase in
dollars is due to the net increase in the number of stores operated by the
Company. As stores mature, selling costs as a percentage of sales typically
decrease. Conversely, the opening of new stores results in selling costs as a
percentage of net sales increasing due to high advertising and promotional
expenses. Additionally, occupancy costs increase when new stores are opened.
General and administrative 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.
General and administrative expenses were $2,143,541 (30.1% of net sales) in
fiscal 1996, representing a decrease of $782,016 or 26.7% when compared with
$2,925,557 (52.0% of net sales) for fiscal 1995. This decrease is attributable
to various cost reduction measures undertaken by the Company. These reductions
include the elimination of the Real Estate Division and the reduction of
administrative payroll and consulting fees. These reductions, combined with the
increase in sales, resulted in a strong improvement in these expenses measured
as a percentage of net sales.
ONE-TIME AND RESTRUCTURING ITEMS
Effective June 29, 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 the Company were parties to an advisory
agreement under which HVM was entitled to receive a fee of 3.5% of the Company's
net sales through June 2011. These fees will now 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.
During the fourth quarter of fiscal 1995 the Company implemented or
developed plans for several programs designed to
- 13 -
`
<PAGE>
restructure its operations. The Company recorded approximately $653,000 in
charges in fiscal 1995 related to the expected costs of restructuring. 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.
For the year ended June 30, 1996, the Company recorded restructuring
and other expense charges of $660,767 for the disposition of fixed assets and
other costs related to the closing or expected closings of certain mall stores.
The Company had been a defendant in a lawsuit with a former officer
who was suing the Company for various alleged claims (see "Item 3 - Legal
Proceedings"). In fiscal 1995, the Company had taken a reserve of $250,000
related to estimated legal fees as a result of its defense in this matter. As a
result of the settlement of this lawsuit, the Company recorded a noncash expense
of $570,000, which appears as "Legal Settlement-Noncash" in the accompanying
consolidated statement of operations for the year ended June 30, 1996.
- 14 -
<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
RECENT DEVELOPMENTS
Building Blocks is operating a specialty educational and developmental
toy store chain presently consisting of 9 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 established Building Blocks Franchise Corp. ("BBFC") in July 1996 as a
wholly-owned subsidiary and BBFC began actively marketing franchises under an
agreement between BBFC and Building Blocks. At September 20, 1996 BBFC had sold
franchises for two stores to be located in Dallas, Texas and Chicago, Illinois.
In order to reduce its negative cash flow, Building Blocks closed
three stores between June and September and adopted a business plan which
contemplated that it would (i) not open any new company-owned stores; (ii)
reduce the number of such stores currently in operation by not renewing leases
as they expired or by transfers of such leases to certain franchisees, as
purchasers of such stores; and (iii) in the future, rely primarily upon the
franchising program to generate revenue and profit. The Company anticipated
completing transfers of at least two store locations and their leases, fixtures
and inventories by the end of September 1996. These transactions did not occur
and Building Blocks will be unable to fund normal build-ups of holiday season
inventories. Building Blocks therefor determined to close certain of its mall
stores and consolidate their inventories at its other stores prior to the 1996
holiday season (one of which stores was closed in October 1996); to continue
to aggressively pursue, together with BBFC, sales of Building Blocks-operated
stores to franchisees and, in any event, to phase out the operation of
Building Blocks-operated stores by Spring 1997. BBFC will continue to market
franchises both for existing Building Blocks stores and for new locations.
See "Management's Discussion and Analysis."
- 15 -
<PAGE>
The Company is also seeking opportunities for a business combination
with an operating company.
STORE OPERATIONS
Building Blocks' merchandising has 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 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.
It is expected that BBFC franchisees will operate their stores using
substantially the same merchandise and marketing approaches.
- 16 -
<PAGE>
SUPPLIERS
No supplier to Building Blocks accounted for more than 10% of its
purchases of inventory in the year ended June 30, 1996. In view of Building
Blocks' present business plan, management believes that the loss of any 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 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.
EMPLOYEES
As of September 15, 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. This lease expires on November 30, 1996, and
payments thereunder are approximately $3,400 per month.
- 17 -
<PAGE>
As of October 15, 1996, Building Blocks operated 9 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
Queens, NYC
Massachusetts--
Burlington
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 each of the
9 stores in operation currently average approximately $6,000 per month.
During fiscal 1996, the Company began negotiating for the termination
or revision of its leases at six mall locations. As of October 15, 1996, the
Company had closed four of these locations and renegotiated the lease terms for
the stores in the Nanuet and Burlington locations. The Company is in arrears in
its rent for the four closed locations. The Company is presently attempting to
negotiate settlements of its rent arrearages and the termination of its leases
for the four closed locations. In addition, the Company intends to close
certain stores in October 1996. See "Other Legal Proceedings" and "Management's
Discussion and Analysis."
FRANCHISING PROGRAM
BBFC 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. In addition to marketing
franchises to new
- 18 -
<PAGE>
locations, BBFC is also marketing franchises for Building Blocks-operated
stores.
SETTLEMENT OF LEGAL PROCEEDINGS
On August 22, 1996, the Company, the Selling Stockholders and certain
other parties entered into a definitive 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 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 October 15, 1996, landlords at four mall stores which were
closed between June and October 1996 had instituted legal proceedings against
Building Blocks for rent arrearages in the aggregate amount of approximately
$330,000 and additional
- 19 -
<PAGE>
damages of approximately $470,000 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;
Westland Properties, Inc. v. Building Blocks, Inc., Superior Court - Fairfield,
Connecticut, commenced June 24, 1996); and Fashion Mall Partners, L.P. v.
Building Blocks, Inc., City Court-Westchester, New York, commenced
September 26, 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
four malls and believes, although there can be no assurance, that it can
reach settlements which will be within Building Blocks' anticipated use of
its expected cash resources as set forth in "Management's Discussion and
Analysis-Liquidity and Capital Resources." At June 30, 1996, all unpaid rents
were accrued on the Company's financial statements, and no provision was made
with respect to the damage claims.
- 20 -
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
The following table sets forth certain information as of October 8,
1996 concerning the directors and executive officers of the Company.
Name Age Position
---- --- --------
Arnold B. Becker 61 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. Since January 1996, Mr. Becker has been Chairman of Arnold Becker Group,
Inc., a management consulting firm specializing in services to retailers. From
1980 until February 1996, Mr. Becker was the President of Vendamerica, Inc., the
U.S. investment arm of Vendex International, N.V., a large Dutch multi-
divisional retailing and services company. In that capacity Mr. Becker was
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.
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
- --------------------
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>
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.
SEYMOUR W. ZISES has been a director of the Company since June 1991,
and 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
- 22 -
<PAGE>
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.
Value of Unexercised
Number of Unexercised In-The-Money Options
Options at June 30, 1996 at June 30, 1996
------------------------ -------------------------
Name Exercisable Unexercisable Exercisable* Unexercisable*
------------ ----------- ------------- ----------- -------------
Jonathon Heller 43,333 66,667 -- --
_______________________
* None of the foregoing options were in-the-money at June 30, 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 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
- 24 -
<PAGE>
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 3.5% 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 3.5% 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 June 29, 1995 the Company acquired the Adviser 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, in fiscal 1995, 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.
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
- 26 -
<PAGE>
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 A. 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 brother-in-
law of Nancy Zises. Selig A. Zises is the father of Lynn Zises.
Effective January 1, 1994, the Company entered into a consulting
agreement with Seymour W. 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. 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 had 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 rights and
interests was due on September 30, 1996, and such rights and interests were
transferred to Mr. Zises on that date.
- 27 -
<PAGE>
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 October 8,
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.
Amount and
Nature of
Name and Address Beneficial Percent of
Title of Class of Beneficial Owner Ownership Class(1)
-------------- ------------------- --------- --------
Common Stock Arnold B. Becker 50,000(2) *
Common Stock Daniel Glass 50,000(2) *
Common Stock Kevin R. Greene(3) 247,000(3) 2.5%
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 477 Madison Avenue
Stock New York, New York
10022
Common Stock All directors and 1,398,044(2)(3)(4) 14.3%
officers as a group (7
persons)
- --------------------
* Less than 1%.
(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 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, 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
- 29 -
<PAGE>
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 W.
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 W. 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 bid prices on the NASDAQ SmallCap System as reported by
NASDAQ for the periods indicated. The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
Period High Low
------ ---- ---
July 4, 1994 - October 2, 1994 1 5/16 1 3/16
October 3, 1994 - January 1, 1995 1 3/8 3/4
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 5/8
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
SmallCap System, 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 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, concessions or fees 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
- 32 -
<PAGE>
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 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
- 34 -
<PAGE>
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 periods 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 Certified Public Accountants . . . . . . . . . . . . F-1
Consolidated Balance Sheet as at June 30, 1996 . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations 53 Weeks
ended July 2, 1995 and 52 Weeks ended June 30, 1996 . . . . . . . . . . . . F-3
Consolidated Statements of Stockholders'
Equity 53 Weeks ended July 2, 1995 and
52 Weeks ended June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Cash Flows 53 Weeks
ended July 2, 1995 and 52 Weeks ended June 30, 1996 . . . . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-6
- 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.
and subsidiary as of June 30, 1996, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the 52 weeks ended June 30,
1996 and the 53 weeks ended July 2, 1995. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Specialty Retail
Group, Inc. and subsidiary at June 30, 1996, and the results of their operations
and their cash flows for the 52 weeks ended June 30, 1996 and the 53 weeks ended
July 2, 1995 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated 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 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
New York, NY
September 20, 1996
F-1
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Consolidated Balance Sheet
June 30, 1996
-------------
Assets
Current:
Cash and cash equivalents $387,006
Inventory 1,281,777
Other current assets 129,538
---------
Total current assets 1,798,321
Property and equipment, net (Note 3) 778,326
Goodwill, net of accumulated amortization of $223,925 143,032
Equity investment (Notes 4 and 12) 179,744
Other assets, primarily security deposits 103,255
---------
$3,002,678
==========
Liabilities and Stockholders' Equity
Current:
Accounts payable $1,252,432
Accrued liabilities 856,024
----------
Total current liabilities 2,108,456
----------
Legal settlement - equity to be issued (Note 5) 570,000
----------
Commitments and contingencies (Note 5)
Stockholders' equity (Notes 6 and 7):
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 (10,515,403)
Treasury stock, 240,500 shares (175,664)
-----------
Total stockholders' equity 324,222
----------
$3,002,678
----------
----------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Consolidated Statements of Operations
52 weeks ended 53 weeks ended
June 30, 1996 July 2, 1995
-------------- -------------
Net sales $7,126,444 $5,629,643
Cost of sales 4,136,490 3,286,273
------------ ------------
Gross profit 2,989,954 2,343,370
Operating costs:
Selling 3,159,280 2,438,024
General and administrative 2,143,541 2,925,557
Restructuring and other expenses (Note 10) 660,767 2,788,626
------------ ------------
Loss from operations (2,973,634) (5,808,837)
Other income (expense):
Interest income, net of interest expense of
$-0- and $28,316 110,437 338,498
Loss on equity investment (Note 4) (44,406) -
Legal settlement - noncash (Note 5) (570,000) -
Other income 124,955 -
------------ ------------
Loss before income tax expense (3,352,648) (5,470,339)
Income tax expense (Note 8) 26,020 29,000
------------ ------------
Loss from operations $(3,378,668) $(5,499,339)
------------ ------------
------------ ------------
Per share amounts:
Net loss $ (.39) $ (.63)
------------ ------------
------------ ------------
Weighted average number of common shares
outstanding 8,674,738 8,660,063
------------ ------------
------------ ------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
<TABLE><CAPTION>
52 weeks ended June 30, 1996 and 53 weeks ended July 2, 1995
- ------------------------------------------------------------
Stock
Preferred stock Common stock subscription
--------------- ------------ Additional note and
Number of Number of paid-in interest
shares Amount shares Amount capital receivable
------------ --------- ---------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 3, 1994 2,394,130 $2,394 8,807,248 $8,807 $10,940,903 $(1,335,203)
Interest on subscription
note receivable
(Note 6) - - - - 132,647 (132,644)
Note redemption (Note 6) - - (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 - - - - - -
------------ --------- ---------- --------- ----------- ------------
Balance, July 2, 1995 2,394,130 2,394 8,674,738 8,675 11,004,220 -
Net loss - - - - - -
------------ --------- ---------- ------ ----------- ------------
Balance, June 30, 1996 2,394,130 $2,394 8,674,738 $8,675 $11,004,220 $ -
<CAPTION>
Retained
earnings Total
(accumulated Treasury stockholders'
deficit) stock equity
------------- ---------- ------------
<S> <C> <C> <C>
Balance, July 3, 1994 $ (1,637,396) $ - $7,979,505
Interest on subscription
note receivable
(Note 6) - - 3
Note redemption (Note 6) - - -
Shares repurchased - (175,664) (175,664)
HVM acquisition - - 1,398,385
Net loss (5,499,339) - (5,499,339)
------------- --------- ------------
Balance, July 2, 1995 (7,136,735) (175,664) 3,702,890
Net loss (3,378,668) - (3,378,668)
------------- --------- ------------
Balance, June 30, 1996 $ (10,515,403) $(175,664) $324,222
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Note 9)
52 weeks ended 53 weeks ended
June 30, 1996 July 2, 1995
-------------- --------------
Cash flows from operating activities:
Net loss $(3,378,668) $ (5,499,339)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 307,248 492,962
Loss on disposal of equipment 699,674 575,782
Loss on investment in equity acquisition 44,406 -
Legal settlement - stock to be issued 570,000 -
Increase (decrease) in:
Inventory 120,099 (777,776)
Other current assets (11,213) 179,419
Other assets (45,116) (1,124)
Increase (decrease) in:
Accounts payable and accrued liabilities (496,330) 1,346,279
------------- -----------
Total adjustments 1,188,768 1,815,542
------------ -----------
Net cash used in operating activities (2,189,900) (3,683,797)
------------- -----------
Cash flows from investing activities:
Expenditures for property and equipment (112,132) (1,944,527)
Equity investment (Note 4) (224,150) -
------------- -----------
Net cash used in investing activities (336,282) (1,944,527)
------------- -----------
Cash flows from financing activities:
HVM acquisition (Note 10) - 1,398,388
Repurchase of treasury stock - (175,664)
Repayment of notes payable - (317,632)
------------- -----------
Net cash provided by financing
activities - 905,092
------------- -----------
Net decrease in cash and cash equivalents (2,526,182) (4,723,232)
Cash and cash equivalents, beginning of year 2,913,188 7,636,420
------------- -----------
Cash and cash equivalents, end of year $ 387,006 $2,913,188
------------- -----------
------------- -----------
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. Business and General
Summary of
Significant Specialty Retail Group, Inc. (the "Company") is a
Accounting Policies holding company engaged in the operation and
franchising of retail specialty toy stores. The
Company is also exploring opportunities for business
combinations.
Building Blocks, Inc. ("Building Blocks" or the
"Subsidiary") operates a specialty educational and
developmental toy store chain which, at June 30,
1996, consisted of ten stores located in Connecticut,
New York, and Massachusetts.
Subsequent to June 30, 1996, the Company formed a
wholly-owned subsidiary, Building Blocks Holdings,
Inc., which formed Building Blocks Franchise Corp.
("Building Blocks Franchise"). Building Blocks
Franchise grants franchises to qualified candidates
for the operation of Building Blocks retail stores.
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. Fiscal 1996 and 1995 consisted
of 52 and 53 weeks, respectively.
Principles of Consolidation
The consolidated financial statements include the
accounts of the Company and the Subsidiary. 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 an original 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 on
the first-in, first-out (FIFO) basis.
F-6
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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.
Revenue Recognition
Revenue from sales of the Company's products is
recognized at the time of sale.
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 is to
evaluate 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 deferring store
pre-opening costs, expensing such amounts 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 $1,093,000 and
$843,000, respectively, for the 52 weeks ended June 30,
1996 and the 53 weeks ended July 2, 1995. 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
$116,000 and $176,000 for the 52 weeks ended
June 30, 1996 and the 53 weeks ended July 2, 1995,
respectively.
F-7
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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 1996 and 1995
computations as their effect would be antidilutive or
immaterial during these periods.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents,
other current assets, accounts payable and accrued
liabilities approximate fair value because of the short
maturity of these items.
F-8
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Long-Lived Assets
During 1995, Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" ("SFAS 121"), was issued. SFAS 121
requires the Company to review long-lived assets and
certain identifiable assets related to those assets for
impairment whenever circumstances and situations change
such that there is an indication that the carrying
amounts may not be recoverable. If the undiscounted
future cash flows of the enterprise are less than their
carrying amounts, their carrying amounts are reduced to
fair value and an impairment loss is recognized. The
adoption of this pronouncement in fiscal 1997 is not
expected to have a significant impact on the Company's
financial statements.
Stock Options
The Company accounts for all transaction under which
employees receive shares of stock or other equity
instruments in the Company or the Company incurs
liabilities to employees in amounts based on the price
of its stock in accordance with the provisions of
Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company does not
anticipate adopting the fair value method encouraged by
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation."
Presentation of Prior Year Data
Certain reclassifications have been made to conform
prior year data with the current presentation.
2. Going Concern The accompanying financial statements have been
prepared assuming that the Company will continue as a
going concern; they do not include adjustments relating
to the recoverability of recorded asset amounts and
classification of recorded assets and liabilities. The
Company has incurred losses of approximately
$10,515,000 from inception through June 30, 1996,
including significant losses in the last two fiscal
years. This condition raises substantial doubt about
the Company's ability to continue as a going concern.
F-9
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Management intends to close certain of Building Blocks'
stores before the 1996 holiday season and to
consolidate inventories from these stores at its other
stores. Building Blocks Franchise and Building Blocks
are also actively seeking other potential franchisees
to acquire Building Blocks-operated stores and their
leases, fixtures and inventories. Building Blocks
Franchise is, simultaneously, pursuing the sale of
franchises for new locations. At September 20, 1996,
franchises had been sold for Dallas, Texas and Chicago,
Illinois.
The Company's present plan contemplates that any
Building Blocks-operated stores in operation after
January 1997 will be transferred to franchisees or will
otherwise be phased out by the Spring of 1997 and that
the Company will thereafter limit its retail toy
activities to franchising by Building Blocks Franchise.
The Company's ability to generate adequate cash flow to
sustain its planned activities beyond December 31, 1996
is therefore dependent upon the success Building Blocks
achieves in its plans to transfer Building
Blocks-operated stores to franchisees and upon Building
Blocks Franchise's ability to sell additional
franchises which, in turn, may be affected by Building
Blocks' financial condition and the closing or
franchising of Building Blocks-operated stores. It is
expected that cash generated by Building Blocks will be
applied to reduce its accounts payable and other
obligations and will not be available to fund Building
Blocks Franchise's operations. Building Blocks
Franchise will rely upon cash currently held by the
Company and franchise revenues.
F-10
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
There can be no assurance as to the ultimate outcome of
any of the foregoing matters, and the Company may
require additional working capital, in amounts which
could be substantial. There can be no assurances that
any working capital will be available on acceptable
terms or at all.
The Company is also seeking opportunities for a
business combination with an operating company (a
"Business Combination"). The Company intends to attempt
to negotiate a Business Combination for stock of the
Company. There are no agreements or understandings with
respect to any Business Combination. Management
believes that the Company's status as a publicly-traded
company and its net operating loss carryforward ("NOL")
will be attractive to a privately-held operating
company. However, there can be no assurance that the
Company will be able to locate a potential party to a
Business Combination or negotiate a Business
Combination on terms satisfactory to the Company or at
all.
June 30, 1996
3. Property and
Equipment Leasehold improvements $656,892
Equipment 231,608
Furniture and fixtures 393,035
---------
1,281,535
Less: Accumulated depreciation and
amortization (503,209)
----------
$778,326
----------
----------
F-11
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
4. Equity Investment On December 14, 1995, the Company acquired 25% of the
common stock of CM Franchise Corp. ("CM"), a franchisor
of specialty carpet retailers operating under the
registered trademark of "Carpet Master" for a total
consideration of $224,150. In addition, as part of the
transaction, the Company also obtained an option to
purchase an additional 12.5% of CM's common stock. The
Company has accounted for this transaction using the
equity method. Following is a summary of the Company's
investment in CM for the year ended June 30, 1996:
Purchase of 25% interest in CM $224,150
Less: 25% share in net loss of
investee (44,406)
---------
Balance in equity investment at
June 30, 1996 $179,744
---------
---------
This investment has been pledged as collateral (see
Note 12).
5. Commitments, Legal Settlement - Noncash
Contingencies and
Other The Company was a party defendant in a lawsuit with an
individual (the "Plaintiff") who was an officer and
director of the Company when it operated a medical
laboratory business which it sold in 1991. The
Plaintiff 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
and interference with respect to the inspection of
corporate records. The Plaintiff claimed he was
entitled to a termination payment of approximately
$1,400,000 pursuant to an employment agreement with the
Company. The Company vigorously defended itself against
the Plaintiff's allegations and vigorously prosecuted
its counterclaims. During the fourth quarter of fiscal
1995, the Company recorded a liability of $250,000
related to legal fees for this matter.
F-12
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
During August 1996, the Company settled this
litigation, without admitting liability, by issuing an
aggregate of 650,000 shares of the Company's common
stock to the plaintiff and his designee. The Company
also agreed to guarantee up to $160,000 for 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.
As a result of this settlement, the Company recorded a
noncash expense of $570,000 which appears as "Legal
Settlement - noncash" in the accompanying consolidated
statement of operations for the year ended June 30,
1996. The $570,000 noncash expense is based on the
market value of the Company's common stock when the
parties reached an agreement to settle.
Other Legal Proceedings
At September 20, 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 $470,000 for breaches of the underlying
leases. Building Blocks is actively defending these
damages 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 use of its expected
cash resources after completion of the plan described
in Note 2. The Company has accrued substantially all
rent in arrears through June 30, 1996. No amount has
been accrued for damages pending the outcome of the
settlement negotiations. 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 $114,000 of rent it has
withheld.
F-13
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Lease Commitments
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.
As of June 30, 1996, the Company is committed for
aggregate future rentals (exclusive of taxes,
insurance, common area charges and maintenance) for the
next five fiscal years and thereafter under
noncancellable operating leases for various facilities
as follows:
Fiscal
------
1997 $1,067,347
1998 746,380
1999 693,729
2000 615,854
2001 527,984
Thereafter 1,888,661
---------
$5,539,955
----------
----------
The above table excludes the commitments related to the
leases for the three mall stores which were closed
during the period June through September 1996. As
noted above, the Company is engaged in settlement
discussions with the landlords of these three stores.
Rent expense, excluding executory costs, for all
operating leases approximated $1,214,000 and $1,020,000
for the fiscal years ended June 30, 1996 and July 2,
1995, respectively.
The Company's real estate advisory and consulting
division results of operations for fiscal 1996 and 1995
were not material.
F-14
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
6. Stock Effective June 29, 1995, the Company acquired
Transactions Healthcare Venture Management Corp. ("HVM"), an
affiliate of ILM Acquisition, L.P. ("IALP"), for
2,685,071 shares of common stock. As a result of the
acquisition, the Company will consolidate payment to
HVM of a 3.5% consulting fee on revenues through 2011.
The cost of the acquisition has been charged to other
expenses in fiscal 1995 (see Note 10).
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 interest accrued thereon
of $467,407. IALP retained ownership of 2,394,130
shares of the Registrant's Series A-1 preferred stock.
7. 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 June 30, 1996, an aggregate of 610,000
shares remain available for future grant of options
under the Plans.
F-15
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Nonqualified stock option activity has been as follows:
Number of Exercise price
shares per share
---------- --------------
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
Granted 130,000 $.75 to $1.00
Expired/cancelled (100,000) $1.00 to $1.50
Exercised - -
-------- ----------------
Outstanding at June 30,
1996 590,000 $.75 to $2.3125
========= ================
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 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 590,000 shares, 466,667 were fully vested at
June 30, 1996.
F-16
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
8. Income Taxes The components of the income tax provision are as
follows:
Year ended June 30, 1996 July 2, 1995
------------- ------------
Current income taxes:
Federal $ - $ -
State 26,020 29,000
------ ------
26,020 29,000
------ ------
Deferred income taxes:
Federal (3,542,000) (2,362,000)
State (1,041,000) (705,000)
----------- ---------
(4,583,000) (3,067,000)
----------- -----------
Valuation allowance 4,583,000 3,067,000
---------- -----------
Total $26,020 $ 29,000
---------- -----------
---------- -----------
Temporary differences and carryforwards which give rise
to deferred tax assets are as follows:
52 weeks ended 53 weeks
June 30, ended July 2,
1996 1995
-------------- ------------
Deferred tax assets:
Depreciation $ 43,000 $ 44,000
Straight-line rent 119,000 78,000
Federal and state income
tax operating loss
carryforwards 4,583,000 2,945,000
--------- ---------
4,745,000 3,067,000
Valuation allowances 4,745,000 3,067,000
--------- ---------
$ - $ -
--------- ---------
--------- ---------
F-17
<PAGE>
` Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
At June 30, 1996, there were operating loss
carryforwards of approximately $10,049,000 available
for Federal and state income tax purposes expiring over
the next five to fifteen years, depending on the
jurisdiction, which may provide future benefit for
income taxes.
9. Supplemental The Company paid approximately $35,000 and $23,000 for
Disclosures of income taxes during the 52 weeks ended June 30, 1996
Cash Flow and the 53 weeks ended July 2, 1995, respectively, and
Information $28,000 for interest during the 53 weeks ended July 2,
1995.
10. Restructuring As discussed in Note 1, the Company's policy is to
and Other accrue store-closing expenses when the decision is made
Expenses to close a location. Accordingly, for the year ended
June 30, 1996, the Company recorded restructuring and
other expense charges of $660,767 for the disposition
of fixed assets and other costs related to the closing
or expected closings of certain mall stores.
Effective June 29, 1995, the Company acquired
Healthcare Venture Management Corp. ("HVM") for
2,685,071 shares of common stock and, as a result of
the acquisition, the consulting agreement with HVM,
whereby HVM is entitled to receive 3.5% of the
Company's revenues through 2011, is consolidated in the
Company's results. HVM's only asset was its consulting
agreement with the Company. Other expenses during the
year ended July 2, 1995 include a charge of
approximately $1.5 million in connection with the
issuance of these 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 pay, litigation
and the closing of certain stores.
11. Related Party Effective January 1, 1994, the Company entered into a
Transactions consulting agreement with Seymour W. 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.
F-18
<PAGE>
Specialty Retail Group, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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. The Notes were guaranteed
by Selig A. Zises, who is a significant investor in the
maker of the Notes and may be deemed to be the
beneficial owner of the Company's outstanding Series A-
1 Preferred Stock.
12. Subsequent Event 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
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. The
Company intends to transfer the rights and interests in
satisfaction of the debt on that date.
F-19
<PAGE>
No dealer, sales representative
or any other person has been
authorized to give any
information or to make any
representations in connection SPECIALTY RETAIL GROUP, INC.
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 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 863,333 Common Stock
sell or a solicitation of an
offer to buy any securities by (Par Value, $.001 per share)
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
circumstances, create any
implication that there has been
no change in the affairs of the __________
Company or that information
contained herein is correct as of PROSPECTUS
any time subsequent to the date __________
of this Prospectus.
TABLE OF CONTENTS Page
----
Prospectus Summary . . . . . . .
Risk Factors . . . . . . . . . .
Use of Proceeds . . . . . . . . .
Summary Selected Financial Data
Management's Discussion and
Analysis . . . . . . . . . . . .
Business . . . . . . . . . . . .
Directors, Executive Officers and
Significant Employees . . . . . .
Executive Compensation . . . . .
Certain Transactions . . . . . .
Principal Stockholders . . . . .
Market For Common Equity and
Related Stockholder Matters . . .
Description of Capital Stock . .
Selling Stockholders . . . . . .
Plan of Distribution . . . . . .
Disclosure of Commission Position
on Indemnification
For Securities Act Liabilities
Experts . . . . . . . . . . . . .
Legal Matters . . . . . . . . . .
Index to Financial Statements . .
Financial Statements . . . . . .
Until November , 1996
(40 days after the date of this
Prospectus), all dealers
effecting transactions in the
registered securities, whether or
not participating in this
distribution, may be required to October , 1996
deliver a Prospectus. This is in
addition to the then obligation
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
IN PROSPECTUS
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.
II-1
<PAGE>
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 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 $6,750,000 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.
II-2
<PAGE>
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 that 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.
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
Number Description
------ -----------
3.1 Articles of Incorporation (incorporated by reference to Exhibit 2.2
to Form 8-K dated April 12, 1995)
3.2 Amended and Restated By-Laws (incorporated by reference to Exhibit
3.2 to Form 10-KSB for the year ended July 2, 1995)
4.1 Specimen Stock Certificate
5 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 Registrant (incorporated by
reference to Exhibit 10.3 to Form 10-KSB for the year ended June
30, 1996)
10.2 Registration Rights Agreement dated as of August 22, 1996 by and
between the Selling Stockholders and Registrant (incorporated by
reference to Exhibit
II-3
<PAGE>
10.4 to Form 10-KSB for the year ended June 30, 1996)
10.3 Escrow Agreement dated August 22, 1996 by and among the Selling
Stockholders, Registrant and the Escrow Agent (incorporated by
reference to Exhibit 10.5 to Form 10-KSB for the year ended June
30, 1996)
10.4 Escrow Agreement dated August 22, 1996 by and among the Selling
Stockholders, Registrant and the Escrow Agent (incorporated by
reference to Exhibit 10.6 to Form 10-KSB for the year ended June
30, 1996)
10.5 Employment Agreement dated as of April 1, 1996 between Building
Blocks and Steven E. Glass (incorporated by reference to Exhibit
10.7 to Form 10-KSB for the year ended June 30, 1996)
10.6 Option Agreement dated April 12, 1996 between Registrant and Steven
E. Glass (incorporated by reference to Exhibit 10.8 to Form 10-KSB
for the year ended June 30, 1996)
10.7 Option Agreement dated October 2, 1995 between Registrant and
Steven E. Glass (incorporated by reference to Exhibit 10.9 to Form
10-KSB for the year ended June 30, 1996)
10.8 Agreement dated July 29, 1996 between Registrant and Selig A. Zises
(incorporated by reference to Exhibit 10.10 to Form 10-KSB for the
year ended June 30, 1996)
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)
10.11 Option Agreement dated March 7, 1994 with Jonathon Heller
(incorporated by reference to Exhibit 10.11 to Form 10-KSB for the
year ended July 2, 1995)
10.12 Heller Option Agreement dated March 1, 1995 with Jonathon Heller
(incorporated by reference to Exhibit 10.10 to Form 10-KSB for the
year ended July 2, 1995)
21 Subsidiaries of Registrant (incorporated by reference to Exhibit 21
to Form 10-KSB for the year ended June 30, 1996)
II-4
<PAGE>
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)
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.
II-5
<PAGE>
(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.
(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-6
<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 amendment to
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Westport, State of Connecticut, on October 10,
1996.
SPECIALTY RETAIL GROUP, INC.
By: /s/ KEVIN R. GREENE
--------------------------------------------
Chairman and Chief
Executive Officer
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.
/s/ ARNOLD B. BECKER October 17, 1996
- --------------------------
Arnold B. Becker, Director
, 1996
- --------------------------
Daniel Glass, Director
/s/ KEVIN R. GREENE October 10, 1996
- --------------------------
Kevin R. Greene, Chairman of
the Board and Chief Executive
Officer and Principal
Accounting Officer; Director
, 1996
- --------------------------
C. Anthony Wainwright, Director
/s/ SEYMOUR W. ZISES October 13, 1996
- --------------------------
Seymour W. Zises, Director
II-7
<PAGE>
Index to Exhibits
-----------------
Exhibit
Number Description
- ------ -----------
4.1 Specimen Stock Certificate
5 Opinion and Consent of Goodkind Labaton Rudoff &
Sucharow LLP
23.2 Consent of BDO Seidman, LLP
<PAGE>
EXHIBIT 4.1
[EAGLE LOGO]
COMMON STOCK COMMON STOCK
Number Shares
SRG
SPECIALTY RETAIL GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA
CUSIP: 84751D 10 6
SEE REVERSE FOR CERTAIN INSTRUCTIONS
THIS IS TO CERTIFY THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES, PAR VALUE $.001 PER SHARE, OF THE COMMON
STOCK OF
SPECIALTY RETAIL GROUP, INC.
transferable in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. The Common Stock is issued subject to all of the
provisions of the Articles of Incorporation, as amended, and the holder hereof,
by accepting this certificate, assents to and is bound by all of such
provisions, as now or hereafter amended. This certificate is not valid until
countersigned by the Transfer Agent.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
Signature Signature
[CORPORATE SEAL]
President Secretary
<PAGE>
EXHIBIT 5
October 13, 1996
Board of Directors
Specialty Retail Group, Inc.
Gentlemen:
In connection with the registration on Form SB-2 under the Securities
Act of 1933 of 863,333 shares of presently outstanding Common Stock (the
"Stock") of Specialty Retail Group, Inc. (the "Company") to be sold by the
Selling Stockholders named in the Form SB-2 Registration Statement, we have
examined the corporate records of the Company and such other documentation as we
may deem necessary in the circumstances. Based upon such examination, we are of
the opinion that:
A. The Company is a corporation duly organized and validly
existing under the laws of the State of Florida.
B. The 863,333 shares of Stock which are being registered under
the said Registration Statement and which are presently issued and outstanding
are validly issued, fully paid, and nonassessable with no personal liability
attached to the ownership thereof.
Pursuant to the provisions of Section 7 of the Securities Act of 1933,
we hereby consent to the use of our name in the prospectus included in such
Registration Statement and to the filing of this opinion as an exhibit to said
Registration Statement.
Very truly yours,
/s/ GOODKIND LABATON RUDOFF & SUCHAROW LLP
------------------------------------------
GOODKIND LABATON RUDOFF & SUCHAROW LLP
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Specialty Retail Group, Inc.
Westport, Connecticut
We hereby consent to use in the Prospectus constituting a part of this
Registration Statement of our report dated September 20, 1996, relating to the
consolidated financial statements of Specialty Retail Group, Inc. which are
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 reference to us under the caption "Experts" in
the Prospectus.
/s/BDO Seidman, LLP
-------------------
BDO Seidman, LLP
New York, New York
October 15, 1996
